text:
    Appeal of Durfee Mineral Co.
    Docket No. 1133.
    Promulgated June 9, 1927.
    The terms of a trust agreement, together with a conveyance of property to the trustees named therein, held to have created such an association as is subject to corporation income and profits taxes under the Revenue Act of 1918.

      L. J. Benehenstein, Esg., for the petitioner.

      E. C. Lake, Esq., for the Commissioner.
    This proceeding was initiated by an appeal made in the name of the former trustees of a trust estate created in June, 1919, and dissolved in February, 1920, from the determination of an alleged deficiency in income taxes for the year 1919 in the amount of $91,467.90. A deficiency was computed by the Commissioner under the provisions of section 219 of the Revenue Act of 1918, relating to trusts and trust estates. All the major facts concerning the creation, conduct, and dissolution of the estate were agreed to by stipulation of counsel. This was supplemented by oral testimony produced by the petitioner. At the hearing counsel for the Commissioner substantially abandoned the position previously taken in the' deficiency letter and the Commissioner’s answer, and argued that the Board find that the organization was a joint stock association and therefore taxable as a corporation under the Revenue Act of 1918.

      FINDINGS OF FACT.
    1. The trust estate involved in this appeal was formed by former tenants in common of an undivided interest in a oertain 170 acre tract of oil and mineral land located in Wichita County, Tex. In the fall of 1918 oil was discovered in this district, which discovery caused one of the biggest oil booms in the history of the State of Texas. Prior to this time this parcel of land was practically worthless — not worth a dollar per acre. In fact previous owners had let the property go for taxes. There was also a serious dispute as to the title, as the land lay in the old river bottom of the Red River and there was a question whether the land was in fact within the territorial limits of Texas or of Oklahoma or was a part of the United States public domain. The predecessors, from whom the parties here obtained title, derived their fee through a patent from the State of Texas. A conflict of interests between some of the tenants in common as to their respective interests also embarrassed the situation. The owners were scattered throughout Texas and other States. Upon the discovery of oil near this land there arose a demand for leases or purchase of this land. Owing to this chaotic condition of the ownership it was impossible to consummate any lease or sale. Recognizing the immediate necessity of a single agency with authority, the cotenants finally agreed on some trustees to act for them. On June 26, 1919, these trustees executed a declaration of trust as hereinafter set forth. Thereupon the cotenants deeded the land in question to the said trustees. The declaration of trust was as follows:
    ARTICLES OF ASSOCIATION AND DECLARATION OF TRUST OF DURFEE MINERAL COMPANY
    The State of Texas,

      County of Wichita.

    Know All Men by These Presents :
    That this memorandum of agreement and declaration of trust, this the 26th day of June, A. D. 1919, made and entered into by and between W. D. Gordon. A. E. Borsum, K. O. Barkley, Geo. A. Smoot, and B. A. Cordell, all being residents of the County of Wichita, in the State of Texas, duly elected, chosen and confirmed by all the subscribers to the shares of Durfee Mineral Company, a joint stock association, without personal liability on the part of its members, subscribers, shareholders or trustees, as the trustees of the said association, hereinafter called Trustees, Witnesseth :
    Whereas, it is proposed that the Trustees shall acquire certain property rights and money, and shall employ and manage the same in the manner hereinafter mentioned, and it is likewise proposed that the beneficial interest in the property from time to time held by the Trustees in the business and enterprise conducted by them shall be divided into shares to be evidenced by certificates of interest therefor as hereinafter provided.
    Now Therefore, The Trustees aforesaid, whose election as such Trustees, the election of their successors or associates, and this Declaration of Trust, shall be, and deemed to be ratified, confirmed and accepted by all the future shareholders in this Association by virtue of their acceptance of shares herein, now acting and speaking as well on behalf of their successors in this trust as in their own behalf, hereby declare that they will hold said property, rights and cash, so to be acquired by them as well as all other property which they may acquire as such Trustees, together with the proceeds thereof, in trust, and to manage and dispose of the same for the benefit of the holders from time to time of the certificates of shares issued and to be issued hereunder in the manner and subject to the stipulations herein contained, to wit:
    First : The Trustees, in their collective capacity shall be designated as far as practicable as Durfee Mineral Company, and under that name, so far as practicable shall execute all instruments of writing in the performance of this trust, and conduct all business relative to the performance of this trust as hereinafter more fully stipulated.
    Second : The Trustees shall be five in number, and may by resolution increase their number of elect additional Trustees from among the shareholders of the Association, which additional Trustees shall have the power and authority, and be protected by the same provisions and conditions as the original Trustees hereunder, and shall be deemed to be confirmed and accepted by the original and all future shareholders in the same manner as the original Trustees, and their successors, and upon the death or resignation or discontinuance of office of any Trustee, his successor shall succeed to the same rights and powers, and be subject to the same duties and liabilities and have the same compensation as his predecessor. The Board of Trustees so constituted shall remain in office until its successors are elected, and is a self perpetuating body, and in ease of death, resignation or inability to act of any of said Trustees, the remaining Trustees shall have the power to accept any resignation, and fill any vacancy, even though they are less than a quorum. When any Trustee is elected by the remaining Trustees, the trust estate shall vest in the new Trustees, together with the continuing Trustees, without any further act or conveyance. Said Board of Trustees shall elect its officers and appoint such other officers of the Association and create such other offices as they may deem necessary in furthering the interests of this trust, and fix the salaries of all the officers of this organization. All investments and title to all property shall be made and held under the Declaration of Trust for and on behalf of this Association by the said Board of Trustees, all of whom shall act in the transfer, leasing, or mortgaging of property, or in appointing additional trustees, but a majority may act in attending to any. other business, and the facts recited in such act of transfer, whether lease or deed, shall be conclusive. The Board of Trustees shall be Trustees for and on behalf of the Association, and may, in that capacity, sue and be sued in any court, and service of process may be had on the President, Secretary, or Treasurer. The Board of Trustees shall have the power and authority in conducting the business of the Association to borrow money, and mortgage property and to do anything to further the interests of this Association. The Board of Trustees shall draw up the By-Laws of this Association, which may be approved and adopted by a majority vote of said Trustees at any regula» or called meeting, and any amendment may be made thereto, and to this Declaration of Trust, by the unanimous vote of the Trustees present, provided there is a quorum present. The Board of Trustees may from time to time declare and pay such dividends from the earnings of said Association as they may deem expedient.
    Third: Until changed by the By-Laws of the Association, the head offices of the Association shall be located in the City of Wichita Falls, Wichita County, Texas.

      Fourth : The President shall preside at all meetings of the Board of Trustees, and shall sign all certificates of membership and do all acts which the Board of Trustees delegate to him.
    The Secretary shall keep all minutes, hooks and records of the meetings of the Board of Trustees, and shall countersign all certificates of membership, attaching the seal of the organization thereto, and perform such other duties as the Board of Trustees may delegate to him.
    Fifth : If at any time the Board of Trustees shall deem it advisable to incorporate under the laws of the State of Texas, or of any other state, they may call a meeting of the shareholders and submit the same to them, and if consented to by a majority in interest of those present, or represented by written proxy, said Board of Trustees shall be authorized and may incorporate this Association.
    Sixth : The beneficial interest In this trust shall be divided into sixty one hundred and forty shares of stock, participating in the dividends of the association from time to time, and the holders of said stock having voting privileges in the management of the business affairs of the company. The above mentioned shares shall be of the par value* of One Hundred Dollars each, which shall be fully paid and non-assessable; and as evidence of ownership of said shares, and each of them’ the said Trustees shall cause to be issued to each shareholder a negotiable certificate in such form as the Trustees may adopt.
    Seventh : This trust shall continue for the term of twenty one years after the death of the last surviving person elected as Trustee under this Declaration of Trust, by the shareholders at their meeting at the time of the organization of this association, unless incorporated or otherwise dissolved prior to this time, and at the end of such period of time, the Trustees may proceed to wind up its affairs, liquidate its assets and distribute the same among its shareholders.
    Eighth : The Trustees shall hold the legal title to all property at any time belonging to this trust, as joint tenants, and not as tenants in common, in trust for the benefit of all the shareholders from time to time of the association, in proportion to the number of shares held by each and subject only the specific limitation herein and the By-Laws of the Association contained, and they shall have the absolute control, management and disposition thereof.
    Ninth : The shareholders of the association shall have no legal right to the trust property whether real or personal, and the ownership of shares hereunder, shall not entitle the owner thereof to any title in or to any of the trust property or the right to call for a partition of the same, or to the dissolution of the trust, or accounting; but shares hereunder shall be personal property, giving only the rights in this instrument of writing, and in the certificates specially set forth, carrying only the rights to a division of the property at the termination of the trust hereby created, whether by the expiration of the period fixed for its existence, or from the dissolution of the association otherwise brought about for the division of the property of the trust.
    Tenth : The death, insolvency or bankruptcy of any of the shareholders, the transfer of his or her interest by a sale, gift, devise, descent, or otherwise, during the continuance of this trust, shall not operate as a dissolution of this association, or termination of the trust, nor shall it have any effect upon the association, its operations or mode of business; nor shall it entitle his or her heirs, assigns, or representatives to an accounting or to take any action in any court, in law, or in equity, against the association, its members, its trustees, its officers, or its property or business operations which shall remain intact and undisturbed thereby, but they shall only succeed to the rights of the original members or shareholders; that is, to the certificates of membership, and the share or shares it represents, subject to all the terms of this agreement, its amendments and by-laws of the association, now or hereafter adopted.
    Eleventh : The Trustees shall be governed by this Declaration of Trust, its amendments and by-laws, now or hereafter adopted, but the said Trustees shall have and exercise all powers in such manner as they deem proper, except such as are specifically or by necessary implication, withheld by this Declaration of Trust, its Amendments and By-Laws.
    Twelfth : The Board of Trustees or any Trustee or the survivor of them, shall have no power to bind the shareholders personally, or the Trustees of any of them. In every written contract they shall enter into, relating to the business of the association, reference shall be made to this Declaration of Trust, and the person, firm, or corporation so contracting shall look only to the funds and the property of the association under said contract, and for the payment of any judgment or decree, debt, damages, or for the money that may become due and payable in anywise by reason thereof; and neither any trustee, nor any shareholder, present or future, shall be personally liable therefor, or any debts incurred, or engagements, or contracts made by the Board of Trustees, or any officer, agent, or servant acting under them for or on behalf of this association, or for any liability arising through contract, expressed or implied, or from tort, or in any way whatsoever.
    Thirteenth : No Trustee hereunder shall be liable in any event for the act or omission of his co-trustees or any other person whomsoever, whether employed by such trustee, or not, nor for anything other than his own personal breach of trust.
    Fourteenth : All letterheads, billheads and stationery whatever used by said Trustees, or by said association shall have printed thereon in a conspicuous place the following language:
    “ Durfee Mineral Company, a joint stock association, without personal liability in any event, of the Trustees, or any of the shareholders therein, in accordance with its Declaration of Trust recorded in Wichita County, Texas, of which all parties dealing with it must take notice.”
    Fifteenth: The funds and property of the association shall stand primarily charged with the burden of payment of any claim or money demanded, established or existing, on account of the operations and business of the association, whether founded on contract, expressed or implied, or on torts; it being distinctly understood, agreed and so declared that there shall be no personal liability in any event upon the Trustees, or any of them, or upon any shareholder hereunder.
    Sixteenth : The Trustees are authorized to engage in the business of:
    (a) Leasing and purchasing the right to prospect for oil, gas and other minerals, and buying and selling such rights.
    (b) Prospecting for such minerals, and the drilling of wells and otherwise seeking to locate same.
    (c) Acquiring the franchise for the laying of pipe lines and conduits for the transportation and merchandising of gas, petroleum, water and other minerals, and selling and supplying the same to corporations, municipalities, or individuals.
    (d) Buileling and operating suitable tanks, pipe lines, and other suitable means of preservation, transportation and merchandising of gas, petroleum, water or other minerals.
    (e) Producing, refining, and marketing gas, oil and other minerals and buying and selling the same.

      (f) Manufacturing and selling gas, electricity, or other agents for lighting, heating, power or for any other purpose.
    (g) Acquiring franchise for the transportation and merchandising of gas, electricity, or any other agencies for lighting, heating or power, or other purposes.
    (h) Acquiring, owning, managing, exchanging, selling or dealing in stocks, shares and securities of other corporations, trusts, or associations, and of this association, engaged in whole or in part in the oil or gas business.
    (i) Acquiring by purchase or otherwise, such property, real or personal, as said trustees deem necessary or proper for carrying on the business and purpose of this trust, and selling or leasing such property at their discretion.
    (j) Conducting or engaging in any other business or undertaking or investment which the Trustees may deem advisable, and to the best interest of this association.
    Seventeenth : A majority of the Trustees shall constitute a quorum, and the concurrence of all the Trustees shall not be necessary to the validity of any action taken by them, except as herein otherwise specified in paragraph “ Two,” but the decision of those present and voting at any time being conclusive, as to ordinary business.
    Eighteenth : The officers of the association, until otherwise provided by the By-Laws shall be President, Vice President, Secretary, and Treasurer, all of whom shall be shareholders in this association.
    Nineteenth : All deeds, contracts, and other instruments in writing of- whatsoever kind and character shall be signed by the President, of the association, and attested by the Secretary thereof, and the seal of the association impressed alongside the signature of the Secretary, and at the end of the instrument, and it is agreed and understood that such execution of all documents, deeds, leases, and any writing which the association may enter into is binding upon this association, the shareholders, trustees and officers thereof, and is the authorized method of executing all instruments of writing as aforesaid, relative to the business of the association, made in the manner set forth above, shall be binding upon the association, and upon them as trustees.
    For the consummation of this agreement, and the formation and conduct of the affairs of this association, it shall not be necessary for all or any particular number of the shares to be sold; the trustees are hereby empowered to sell the shares of the Treasury stock of the association, as they may deem proper for furthering the interest of this trust. The unsold shares shall be considered as treasury stock until sold, and dividends shall be declared only upon the stock actually sold and issued.
    In Testimony Whereof, the said W. D. Gordon, A. E. Borsum, K. C. Barkley, B. A. Cordell, and Geo. A. Smoot have hereunto set their hands in token of their acceptance, and of the assent of the Trust on behalf of themselves, and their successors, and each of them, in the selection of each of the others as Trustee, the day and year first above written.
    (Signed) W. D. Gordon,
    Aug. E. Borsum,
    K. C. Barkley,
    B. A. Cordell,
    Geo. A. Smoot,

      Trustees.

      The deed of conveyance was as follows:
    Geo. G. Clough.
    Ethel B. Cordell et al.
    Durfee Mineral Co.
    The State of Texas

      County of Wichita,

    Know All Men by These Presents :
    That, whereas, Ethel E. Cordell joined herein by her husband, B. A. Cordell, of the County of Bexar, State of Texas, and Mrs. John T. Milliken, a feme sole, of the City and County of St. Louis, State of Mo., George G. Clough of Harris County, Texas, W. H. Walton of Lampasas County, Texas, Thos. B. Lewis of Harris County, Texas, R. L. Durham of Wichita County, Texas, W. M. Campbell of Jefferson County, Texas, G. E. Townsend of Tarrant County, Texas, George A. Smoot of Wichita County, Texas, K. C. Barkley of Harris County, Texas, P. J. Duffy of Harris County, Texas, Mrs. Forrest Moore, a feme sole, of Grayson County, Texas, Marrs McLean and W. D. Gordon, both of Jefferson Co., Tex., are tenants in common of undivided interest, the particular portion intersese being unnecessary herein to relate but which interests have been fixed and established in part by agreements among the parties hereto as among themselves, and such interests as are not fixed will later be determined by agreement or judgment, and being the fee simple owners as co-tenants of all hereinafter described land; and
    Whereas, it is desired that their interest, estate, right and title in said land shall be conveyed to a joint stock association of which they, in proportion to their respective interest, are the beneficial holders and owners.
    Now, therefore, in consideration of the sum of Ten ($10.00) Dollars and other good and valid consideration, and of the facts above recited, thereunto as moving, we the said Ethel E. Cordell, joined by her husband, B. A. Cordell, Mrs. John T. Milliken, a feme sole, Geo. G. Clough, K. C. Barkley, W. H. Walton, Thos. B. Lewis, R. L. Durham, W. M. Campbell, Marrs McLean, W. D. Gordon, G. F. Townsend, Geo. A. Smoot, P. J. Duffy, and Mrs. Forrest Moore, some of which are acting herein eo nomine, and others by and through their duly authorized agents and attorneys in fact, as hereinafter indicated, have this day granted, bargained, sold and conveyed, and by these presents do hereby grant, bargain, sell and convey unto the Durfee Mineral Company, a joint stock association, organized under the laws of the State of Texas, as manifested by Articles of Association of record in Wichita County, Texas, to which reference is made for greater certainty, the following described land, to wit: *******
    To have and to hold unto the said Durfee Mineral Company all of the above described premises, and to its successors and assigns forever;
    It is understood, however, that neither individually nor collectively do the grantors in this instrument, by express terms or by implication, warrant the title to said land, except they do herein severally stipulate, as among themselves, that they have not heretofore sold or conveyed their respective interest; other than appears in the Deed Records of Wichita County, Texas, anteceding the making of this Deed.
    It is further stipulated and understood that the said grantee, Durfee Mineral Company, assumes to discharge and carry out any and all obligations of whatsoever nature and kind now chargeable against said premises, in whole or in part, without recourse against any or all of the individual grantors herein.

      It is further understood that the rights and interest now fixed as among the respectively grantors intersese shall be unaffected by this conveyance, and except that by this conveyance their respective interests shall be in the proportion of their stock ownership in said joint stock association, in like manner as the same at the making of this conveyance.
    In Witness whereof, we have hereunto set our hands this 27th day of June, A. D. 1919.
    [Signed] Geo. G. Clough,
    Ethel E. Cordell,
    Thomas B. E. Lewis,
    W. H. Walton,
    By K. C. Barkley,

      Their attorney in Fact,

    W. D. Gordon,
    By Marks McLean,

      Sis attorney in Fact,

    G. F. Townsend,
    Mrs. Forrest Moore,
    By J. B. Moore,

      Her attorney in Fact,

    Mrs. John T. Milliicen,
    By B. A. Cordell,

      Ser attorney in Fact,

    Marrs McLean,
    B. A. Cordell,
    R. L. Durham,
    P. J. Duffy,
    Geo. A. Smoot,
    K. C. Barkley,
    W. M. Campbell.
    All of the trustees were beneficiaries with the excexition of A. E. Borsum, secretary to W. D. Gordon, and who represented some of the other beneficiaries.
    2. On the same date the trust was formed an agreement was made to lease the land to one T. H. Bass, by the terms of which all of the land of the trust, less 27^ acres, was leased for $191,200. On July 16,1919, the trust received on the lease $130,000 in cash and two notes, amply secured, in the sum of $30,000 and $31,200, respectively. A supplemental agreement was also made with the said Bass that the trust would retain $10,000 for litigation purposes to protect the title to the land leased.
    On July 18,1919, there was a joint meeting of the trustees and the beneficiaries, all of whom were either present in person, by proxy, or represented by attorneys authorized to act for them. The minutes of that meeting follow:
    Meeting called by tbe Trustees of tbe Durfee Mineral Company, in response to Notices sent out to each of tbe Stockholders of the Durfee Mineral Company.
    Present: All tbe Trustees.
    Tbe following Stockholders were present in person or by proxy, to wit:
    Mr. Geo. G. Clough.
    Tbos. B. Lewis.

      J. B. Moore, representing Mrs. Forrest Moore.
    P. J. Duffy.
    Walton interests represented by K. C. Barkley and B. A. Cordell.
    W. M. Campbell, represented by A. E. Borsum.
    The first business was the reading of the Minutes of the last meeting. There being no objections, the Minutes were approved.
    Upon motion made by K. C. Barkley and seconded by B. A. Cordell, the President and Secretary were authorized to execute the Supplemental Agreement from the Durfee Mineral Company to T. H. Bass, Trustee.
    The motion was unanimously carried.
    The President stated that the Lease which had been placed to the credit of the Durfee Mineral Company, in the City National Bank, Wichita Palls, Texas, subject 1o the Escrow Agreement, was on the 10th inst., delivered to the Lessee, and the transaction closed by the payment of the sum of One Hundred and Thirty Thousand ($130,000.00) Dollars, to the credit of the Durfee Mineral Company, and by the execution of Two Notes — One for Thirty Thousand ($30,000.00) Dollars, due in sixty days, endorsed by John H. Kirby and supported by One Hundred Thousand ($100,000.00) Dollars par value of the Capital Stock of the Kirby Lumber Company, and another note for Thirty One Thousand Two Hundred ($31,200.00) Dollars, due in ninety days, endorsed by John H. Kirby, and to which was attached One Hundred Thousand ($100,000.00) Dollars par value Kirby Lumber Company Stock as collateral with provisions as noted above; the Notes providing the usual form for realization on the collateral in case of default of the payment of the Notes. Both notes bearing 6% interest from the 16th day of July, 1919, and at the same time, on account of a misunderstanding about the rate of interest that these notes were to bear, the Company contending that the Notes were to bear 8%, but it then being too late to change these notes, which were made out and endorsed as 6% notes, a Supplemental obligation was taken on T. H. Bass, Trustee, for the additional 2% interest, amounting to Two Hundred and Fifty-Six ($256.00) Dollars, which obligation was taken by the Company in order that the original agreement as to the paper bearing 8% interest might become effectual. Thereupon the Leases in duplicate were signed by T. H. Bass, Trustee, and one copy delivered to him, and the Escrow Agreement ended at the bank.
    A supplemental Agreement was also signed by the Durfee Mineral Company with T. H. Bass, Trustee, to the effect that the Durfee Mineral Company was to retain in its Treasury, at least Ten Thousand ($10,000.00) Dollars to assure expense money in any litigation which may involve the land leased, under the terms of the Warranty clause in the Contract; the Agreement being that the Durfee Mineral Company should pay the expenses, but not Attorney’s fees which might be incurred by T. H. Bass, Trustee, or his associates in litigation with adverse claimants under Oklahoma or the United States, and in this Supplemental Agreement, a saving provision that the Warranty attached to the lease was understood not to be breached if the Title should be lost to any person or persons claiming under any other sovereignty other than the State of Texas.
    Motion made by B. A. Cordell and seconded by Geo. A. Smoot, that the deal as outlined in statement of the president, and as concluded with Mr. T. H. Bass, Trustee, be approved.
    Motion was unanimously carried.
    Motion made by K. C. Barkley and seconded by B. A. Cordell that wherever the written claims made in conflict as to the ownership of the Stock, or any part of It, develops, that the Trustees of the Durfee Mineral Company, through their officers, hold such Stock and such stock’s proportionate part of the assets, as is embraced within the conflicting interests, in Escrow until the parties to the conflict either settle it by agreement or by suit.
    Motion unanimously carried.
    Motion made by K. C. Barkley and seconded by Geo. A. Smoot that after reserving the Ten Thousand ($10,000.00) Dollars provided in the Agreement with T. H. Bass, Trustee, the remainder of the money available shall be paid to the Stockholders as their interest appears.
    Motion unanimously carried.
    Motion made by K. C. Barkley and seconded by B. A. Cordell, that no commission be paid out of the proceeds of the sale of the lease, without the written consent of the Stockholders, or a decree of the Court enforcing such a demand.
    Motion unanimously carried.
    Motion made by K. C. Barkley and seconded by Geo. A. Smoot, that the Ten Thousand ($10,000.00) Dollars as provided in the Escrow Agreement be retained in cash and that the conflicting interest and the disputed commission be retained out of the Notes, and that the balance in cash on hand be paid out as dividends.
    Motion unanimously carried.
    Motion made by K. C. Barkley and seconded by Geo. A. Smoot, that each acre of the 200 acres of sand flats be valued at $2000.00 per acre, making a total of $400,000.00, and that the 26 acres in the 226 acre tract be valued at $4000-00 per acre, or a total of $104,000.00, and that the 27% acres of high land be valued at $4000.00 per acre, or a total of $110,000.00, and that the stock he issued in the proportions in which the parties owning [own] these tracts based upon the above valuations.
    Motion unanimously carried.
    On October 11, 1919, the trust received money for the face value of the notes and $821.56 interest. A large portion of this sum was paid to those beneficiaries who had in the meantime settled among themselves their conflicting interests. The remaining balance was held to be distributed to the remaining interests still in dispute and for the expenses of the trust.
    On November 1, 1919, the balance of the land (27-2/10 acres) was leased to the said T. H. Bass for $8,800 cash.
    On December 81,1919, the account of the trust stood as follows:
    Total net income received- $200, 821. 66 .
    Distribution made in cash to beneficiaries-$153, 500. 00
    Office expenses- 1,195. 73
    General expenses- 2, 441. 72
    Total expenses- 157,137. 45
    Undistributed cash on hand- 33, 684.21
    Legal expense fund- 10, 000. 00
    3. On January 3, 1920, it was decided by said trustees that it was necessary to be organized on a more permanent and satisfactory basis. There was a prospect of receiving royalties and there was also impending important litigation over the title to the land in question. The land was not only claimed through title derived from the State of Texas, but was claimed by the State of Oklahoma and the United States Government. Furthermore, an opinion was entertained by the president and organizer of the taxpayer that it might be held by the Texas courts that joint stock associations were partnerships.
    On February 2, 1920, the beneficiaries approved the acts of the trustees in forming a corporation; the trust estate was dissolved; its assets and liabilities were transferred to the Durfee Mineral Co.; a corporation was organized under the laws of the State of Delaware; and all the acts of the trustees were unamimously approved and the trustees discharged.
    4. On March 13, 1920, the former trustees filed an income-tax return for the trust estate for the year 1919 showing income and expenses as set forth in paragraph 2 of these findings of fact. The return was made on a blank f,or corporation returns as no other blanks were available in Wichita County, Texas, at that time. Accompanying the return was a letter explaining the return, which letter was as. follows:
    March 13, 1920.
    Hon. A. S. Walker,

      Internal Revenue Collector, Austin, Texas.

    Deab Sib : The enclosed report for the Durfee Mineral Company, a joint stoclt association, shows that this association was composed of the fee simple owners of the land which was put into the association as a means or method whereby it would be leased for operation as an oil property, and the bonuses and royalties conveniently distributed by one organization instead of by and through a dozen or more co-tenants. It is simply a case of investing the trustees with the power of administering the trust for the benefit of the owners. The report is therefore made by the organization as a trustee for the owners of the property and the names and amounts of each of these owners is shown in the statement of the tax, as well as the undistributed balance which the trustee organization holds.
    I thought best to accompany this report with this letter of explanation.
    Very truly yours,
    WDG./P (Signed) W. D. Gordon.
    There was also sent a statement of the amounts paid to the different owners of the land held in trust. There is evidence that some, if not all, of the beneficiaries returned the income so distributed in their personal income-tax returns.
    About three years later, to wit, March 2, 1923, the Commissioner proposed an assessment of tax in the sum of $78,273.75. The communication proposing the assessment was addressed to Durfee Mineral Co., and delivered to one W. D. Gordon, a former member of the trust estate who also was the former president and a member of the board of trustees. The proposed assessment was protested by the former trustees, but the protest was overruled by the .Commissioner, and on October 23, 1924, a deficiency was asserted in the sum of $91,467.90.
   OPINION.

Smith:

The Commissioner’s deficiency notice was based on his decision that the petitioner was taxable as a trust estate under the provisions of section 219 of the Revenue Act of 1918, and as far as the record discloses such was his opinion until the matter came to trial. At the hearing counsel for the Commissioner substantially abandoned the position previously taken in the deficiency letter and in the stipulations, and argued that the Board find that the organization was a joint stock association and therefore taxable as a corporation under the Revenue Act of 1918.

This procedure was objected to by counsel for the petitioner. The argument advanced by him at the hearing, however, was based on the theory that the organization was a common law trust and not an association, and he requested and secured permission to file a brief covering this point. Inasmuch as an interpretation of the provisions of the agreement of June 26, 1919, would be necessary in any event, and since the petitioner was not surprised by the change of front on the part of the Commissioner, we are constrained to entertain the issue which developed at the hearing, and which was the real point involved, namely, whether or not the taxpayer was an association that should be classified as a corporation for income-tax purposes. We do not apprehend that the position of the petitioner would be injured thereby, and the assumption by both the Commissioner and the petitioner throughout the early stages of the controversy that it was a trust, either taxable or nontaxable, was a mere conclusion of law not binding on this body.

The form of the organization under consideration is typical of those unincorporated associations commonly designated “Massachusetts Trusts.” Such organizations have existed in Massachusetts for more than a century and for even a longer period in England, but the decisions of the Massachusetts courts are confusing and perhaps irreconcilable concerning the nature of these trusts. Malley v. Howard, 281 Fed. 363 (1922). The great mass of litigation that has arisen through the operations of these associations has resulted in their classification as (1.) trusteeships, or (2) partnerships.

The origin of such division of these unincorporated associations may be traced to the celebrated English case of Smith v. Anderson, 15 Ch. D. 247 (1880). In that case the question of what constituted carrying on business arose and Lord Justice Brett said the shareholders “ were joined together for the purpose of once for all investing certain money which was delivered into their hands, and not for the purpose of obtaining gain from a repetition of investments.” The court also held that the shareholders did not transact the business of investing. “ It was not their business ” but was that of the trustees, who were “ clearly trustees as distinguishable from agents and from directors.” The organization was held a trusteeship on two points — (1) investment, and (2) lack of control by beneficiaries. This decision has been criticized in a few instances, but it is the law of England to-day. Williams v. Milton, 215 Mass. 1 (1912). It was not until 10 years after the decision in Smith v. Anderson, supra, that the courts of Massachusetts divided them into trusteeships and associations. Mayo v. Moritz, 151 Mass. 481 (1890). Litigation arising since that date has resulted in a number of decisions that are vague and conflicting as to how much or how little control by the shareholders is necessary to support a status as an association or as a trusteeship. Shareholders have little or no authority, practically, in any case, and it appears that the use of the control test, alone, is illogical and prolific of litigation and further confusion.

Cook on Corporations, in discussing Massachusetts trusts, states in Volume III, Eighth Edition, page 2251, et seq.:

What then are these Massachusetts trusts? In order to understand them it is necessary to divide them into two classes. First, where the trustees merely invest and collect dividends or interest or rental (from a single lease) and distribute the same among the shareholders. The supreme court holds that these are simple common-law trusteeships, the saihe as where a trustee under a will collects income and distributes it among the beneficiaries. The English authorities are to the same effect. Lord Halsbury says: “If . . . persons between whom no contractual relation exists subscribe to a fund to be invested in the shares of companies by trustees for the subscribers, the subscribers do not carry on a business, and probably the trustees ... do not either.” In this class of Massachusetts trusts the shareholders are not liable for the debts, and the trust is exempt from certain taxes.
Second, where the trustees carry on an active business for profit. These are simply unincorporated joint-stock associations.
These two lines of decisions probably mark the true line of distinction. Certainly those who carry on an active business for profit, through others, are principals and not mere beneficiaries, irrespective of how much or how little power of management and control they exercise, actually or by the terms of the original agreement. A silent participant in the profits of a business concern is liable for its debts, even though he take no part in its management.
The theory that these trusts should be divided according to whether the shareholders exercise great or little powers of control is only confusing. The trust instrument may be drawn either way. An investment trust agreement may give practically large powers to the shareholders, or a business trust agreement may give practically all powers to the trustees — a premium on irresponsibility. The real test is whether the shareholders or trustees or both combined carx-y on business; if so, they are a business trust, with liability for debts and taxes. Practically the courts apply this test now. A Massachusetts trust in active day by day mercantile or manufacturing or real estate business is far removed from a trusteeship to cut coupons, or collect dividends, or a fixed rental and distribute the same, as under a will. The distinction based on shareholders’ powers might well be abandoned. As a matter of fact, the shareholders exercise little actual control in any of these trusts, or in statutory joint-stock companies, or even in full corporation.

We shall now consider two cases, Crocker v. Malley, 249 U. S. 223, and Hecht v. Malley, 265 U. S. 144, which were relied upon both by the petitioner and the Commissioner to support their divergent claims.

In Crocker v. Malley, supra, the court had for consideration a case in which a Maine paper-manufacturing corporation with eight shareholders owned mills and certain real estate. It caused a Massachusetts corporation to be formed, and conveyed to it all of its mills but one, which, together with the real estate, were leased to it for a long term; receiving the stock of the Massachusetts corporation in return. The Maine corporation then transferred to the plaintiffs as trustees the fee of the property subject to lease, left the stock of the Massachusetts corporation in their hands, and was dissolved. The shareholders were the former stockholders of the Maine corporation. Written consent of a majority in interest of the shareholders was required for increasing the compensation of the trustees ; for the filling of a vacancy among the trustees, and for a modification of the terms of the trust. In no other matter had the beneficiaries any control. The function of the trustees was not to manage the mills but simply to collect the rents and income of such property as might be in their hands, with a large discretion in applying funds to repairs and development of the property and in distributing what they determined to be fairly distributable net income among the beneficiaries.

The court held that the organization constituted a trusteeship on two grounds — (1) lack of control in the shareholders, and (2) no association among the shareholders — saying:

“Tbe certificate holders * * * are in no way associated together, nor is there any provision in the [instrument] for any meeting to be held by them. The only act which (under the [declaration of] trust) they can do is to consent to an alteration ... of the trust ” and to the other matters that we have mentioned. * * * The question is whether a different view is required by the terms of the present act. As by P. above referred to trustees and associations acting in a fiduciary capacity have the exemption that individual stockholders have from taxation upon dividends of a corporation that itself pays an income tax, and as the plaintiffs undeniably are trustees, if they are to be subjected to a double liability the language of the statute must make the intention clear. * * *
If we assume that the words “ no matter how created or organized ” apply to “ association ” and not only to “ insurance company,” still it would be a wide departure from normal usage to call the beneficiaries here a joint-stock association when they are admitted not to be partners in any sense, and when they have no joint action or interest and no control over the fund. On the other hand, the trustees by themselves cannot be a joint-stock association within the meaning of the act unless all trustees with discretionary powers are such, and the special provision for trustees in D. is to be made meaningless. We perceive no ground for grouping the two — beneficiaries and trustees— together, in order to turn them into an association, by uniting their contrasted functions and powers, althortgh they are in no proper sense associated.

The pertinent facts in Hecht v. Malley, supra, were stated in the opinion as follows:

The Hecht Real Estate Trust was established by the members of the Hecht family upon real estate in Boston used for offices and business purposes, which they owned as tenants in common. It is primarily a family affair. The certificates have no par value; the shares being for one-thousandths of the beneficial interest. They are transferable; but must be offered to the trustees before being transferred to any person outside of the family. The trustees have full and complete powers of management; but no power to create any liability against the certificate holders. There are no meetings of certificate holders; but they may, by written instrument, increase the number of trustees, remove a trustee, appoint a new trustee if there be none remaining, modify the declaration of trust in any particular, terminate the trust, or give the trustees any instructions thereunder.
The Haymarket Trust is strictly a business enterprise. It was established by the original subscribers who furnished the money for the purchase of a building in Boston used for store and office purposes. The shares are of the par value of $100 each. Except as otherwise restricted, the trustees have general and exclusive powers of management, but no power to bind the certificate holders personally. At any annual or special meeting of the certificate holders, they may fill any vacancies in the number of trustees, depose any or all the trustees and elect others in their place, authorize the sale of the property or any part thereof, and alter or amend the agreement of trust.

The court held that the organization was an association within the meaning of the Revenue Act of 1918. In reaching this conclusion it considered the case from two standpoints — (1) control, and (2) doing business — and based its opinion primarily upon the latter, saying:

We conclude, therefore, that when the nature of the three trusts here involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, but are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to be deemed associations within the meaning of the Act of 1918; this being true independently of the large measure of control exercised by the beneficiaries * * *. We do not believe that it was intended that organizations of this character — described as “ associations ” by the Massachusetts statutes and subject to duties and liabilities as such — should be exempt from the excise tax on the privilege of carrying on their business merely because such a slight measure of control may be vested in the beneficiaries * * *. (Italics ours.)

The trustees of the Hecht Trust insisted that it was not an “ association ” within the meaning of the Revenue Act of 1918, and relied upon the decision in the Crocker case, which involved a determination as to the form of organization of the Wachusett Realty Trust, as conclusively determining that it should be judged by the single test of control vested in the shareholders. To this reasoning the court would not assent and stated that in that case—

The precise question was whether the trustees of The Wachusett Realty Trust were subject to the income tax upon dividends received from a Massachusetts corporation that was itself taxable upon its net income.

The court said further that its opinion in the Crocker case was:

* * * Based primarily upon the view that the Income Tax Act, considering its purpose, did not show a clear intention to impose upon the trustees as an “ association ” a double liability in reference to the dividends on stock in the corporation that itself paid an income tax, when considered as “ trustees ” they were by another provision of the Act exempt from such payment. And the language used arguendo in reaching this conclusion that the trustees could not be deemed an association unless all trustees with discretionary powers are such, and that there was no ground for grouping together the beneficiaries and trustees in order to turn them into an association — is to be read in the light of the trust agreement there involved, under which the trustees were, in substance, merely holding property for the collection of the income and its distribution among the beneficiaries, and were not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business. Zonne v. Minneapolis Syndicate, 220 U. S. 187, 190. And see Smith v. Anderson, L. R., 15 Ch. Div. 247.
It results that Crocker v. Malley is not an authority for the broad proposition that under an Act imposing an excise tax upon the privilege of carrying on a business, a Massachusetts Trust engaged in the carrying on of business in a quasi-corporate form, in which the trustees have similar or greater powers than the directors in a corporation, is not an “ association ” within the meaning of its provisions.

The measure of control reserved to the shareholders was not considered as a test by the Supreme Court in its determination of Burk-Waggoner Oil Assn. v. Hopkins, 269 U. S. 110, the question presented being whether or not an unincorporated association which was technically a partnership in Texas, the State in which it was organized, should be deemed to be a partnership or a corporation for income-tax purposes under the Revenue Act of 1918. In holding the plaintiff to be taxable as a corporation the court based its decision on the ground that the power of Congress to tax joint-stock associations and to “ determine how and at what rate the income of the joint enterprise shall be taxed,” is “not affected by the fact that, under the law of a particular State, the association cannot hold title to property, or that its shareholders are individually liable for the association’s debts, or that it is not recognized as a legal entity.”

The reasons for, and the circumstances surrounding, the creation of the present petitioner can best be obtained from the following testimony of W. D. Gordon, who said:

I live at Beaumont, and I bad some clients who had a claim, or ownership of some land right in the river bed of Red River, and adjacent to some older patent surveys.
The land up to the discovery of oil in that immediate territory was considered so worthless that the owners, to whom patents had been issued by the State of Texas, the immediate predecessors in interest of my clients, and other persons, other parties cotenants with them, had paid no taxes on them.
They could not be used for any beneficial purpose.
The discovery of oil near this land, however, in what is known as the Burke Burnett Oil field, provided a great oil boom in that section of the State, and there were other lawyers representing other branches of this title up there endeavoring to do something with this land.
There was some minor conflict between the interests represented by the other lawyers, and myself, all holding on to this patent that the State had issued to a man named Walton, and finally I was induced to go to Wichita in an effort to work out a solution of the difference between the cotenants and also to put the property in such condition as that the owners could lease it. At the time I got there there had been numbers of offers made for leases on this land by prospective oil operators, and before a lease could get out and be signed by all of the different cotenants, some of whom were in St. Louis, some in San Antonio, Tex., some in Lampasas, some in Houston, some in Beaumont, some in other sections, some in Dallas, before the lease could get around to be signed up the man who had made the proposition had gone on after something else, because he could not wait.
The boom condition of things was such that immediate action had to be had or you could not make a trade, could not close a trade with anybody.
That was the situation when I got to Wichita Falls. I immediately saw there must be an agency created with power to handle this property, that the individuals could not, in the very nature of things, make any trade for the leasing or development of their property at all in the situation in which it was thrown.
Even if it were not for the conflicting claims among certain of the cotenants, that had to be first adjusted, they could not close any trade, so I suggested to the cotenants, some of whom were there present, and all represented there by attorneys, that an agency would have to be organized, would have to be created to act as a conduit through which the property could be handled without reference to the individuals themselves.
I first thought of organizing a corporation, and that was too slow, so I took up an old trust form that they were using up there, that some of the lawyers had prepared, a form of a trust or an association.
From this, I dictated a document, using the general terms of it and making it directly applicable to the particular nature that was under consideration. I organized a trust. That document is in evidence here. I did that by getting all of the interested parties, all who were parties at interest, or interested in this land, or their attorneys, and the attorneys representing the parties at interest together and making ourselves trustees for the benefit of the others, and giving ourselves as ample power as I know how to put. in there for the purposes which we had in view.

The instrument of June 26, 1919, creating the petitioner is entitled “Articles of Association and Declaration of Trust of Durfee Mineral Company,” and throughout that instrument the organization is constantly referred to as an “association” or a “joint stock association.” Paragraph “ Second ” in the declaration outlines the powers of the trustees. Among other things they were empowered to fill vacancies occurring on the Board of Trustees, select and appoint proper officers of the association, conduct the business of the association, draw up and approve by-laws of the association and amend such by-laws and the .declaration of trust. “Voting privileges in the management of the business affairs of the company” were delegated to the shareholders in paragraph “ Sixth ” in the declaration of trust.

The declaration further provided:

For the consummation of this agreement, and the formation and conduct of the affairs of this association, it shall not be necessary for all or any particular number of the shares to be sold; the trustees are hereby empowered to sell the shares of the Treasury stock of the association, as they may deem proper for furthering the interest of this trust. The unsold shares shall be considered as Treasury stock until sold, and dividends shall be declared only upon the stock actually sold and issued.

The deed of conveyance of the property by the tenants in common to the Durfee Mineral Co., dated June 21, 1919, however, provided:

It is further understood that the rights and interest now fixed as among the respective grantors inter sese shall be unaffected by this conveyance and except that by this conveyance their respective interests shall be in the proportion of their stock ownership in said joint stock association, in like manner as the same at the making of this conveyance.

The form of organization chosen by the petitioner to carry out its purposes was complex and cumbersome, and although the articles of association purported to authorize the trustees to have complete control of the management of the property and the distribution of dividends arising therefrom, it is apparent from the action of the trustees in calling a shareholders’ meeting to approve the lease with T. H. Bass, and the leaving of such problems as the determination of the value of the property and the value of the conflicting interests therein to the shareholders for solution, that it was understood by all parties interested, either as trustees or shareholders, that the shareholders should have an active interest in the management of the business. The circumstances surrounding the formation of petitioner and the acts of the trustees and shareholders subsequent thereto indicate that both organizers and shareholders had in mind no more than the delegation of partial authority to a group of agents denominated “ Trustees.”

There can not be much doubt that the petitioner was engaged in doing business irrespective of the fact that as far as the record discloses the trustees did only one act, viz., the leasing of the property. The articles of association provided for the carrying on of a general oil, gas, and mineral production and marketing business in addition to the selling or leasing of the land and it is immaterial that the trustees in their discretion did not engage in all of the activities they were authorized to do. Flint v. Stone Tracy Co., 220 U. S. 107, and Zonne v. Minneapolis Syndicate, 220 U. S. 187, differentiating business and holding corporations.

The courts of the State of Texas, the jurisdiction in which the petitioner was organized, have often been called upon to decide whether organizations similar to the one under consideration here were in fact associations constituting trusteeships or partnerships, and a recent decision, after reviewing the Texas authorities and previous decisions in point, has held that associations organized for profit were partnerships irrespective of the element of control. Thompson v. Schmitt, 115 Tex. 53; 274 S. W. 554, cited with favor by the United States Supreme Court in Burk-Waggoner Oil Assn. v. Hopkins, supra. The court fwas asked “ Does the declaration of trust * * * constitute a joint-stock association,” and its reply Avas “Yes,” and the doubts expressed at the hearing by W. D. Gordon, president and organizer of the petitioner, that it would be considered a joint-stock association by the Texas courts were well founded and that under the Texas rule it was at all times a joint-stock association prior to its incorporation in 1920.

The Revenue Act of 1918 defines corporations as including “associations, joint-stock companies and insurance companies,” and the Supreme Court has held that Congress intended in the Revenue Act of 1918 to extend its application to associations or joint-stock companies whether organized under statutory authority or not, and irrespective of whether they may be considered partnerships as regards the liability of shareholders for debts to third parties. Hecht v. Malley, supra. Burk-Waggoner Oil Assn. v. Hopkins, supra.

It seems clear that the articles of association and declaration of trust of the petitioner when considered together with the reasons for and the circumstances surrounding its execution did not clearly set out and define the respective rights, duties and privileges of the trustees and shareholders; that it was engaged in doing business; that it would in all probability be considered by the Texas courts as a partnership Avith respect to its shareholders’ liability for debts to a third party; that as such partnership it would be properly taxable as a corporation under the Revenue Act of 1918; that the better rule and the one used by the courts to:day in classifying such an organization either as a trusteeship or a partnership is the double test of (1) control, and (2) doing business, especially the latter, and that applying such double test would result in confining trusteeships to those declarations of trust where there is no control in the shareholders and the trust is not engaged in doing business.

We are, therefore, of the opinion that the petitioner was, during the year 1919, an association engaged in doing business and should be classified as a corporation for income-tax purposes under the Revenue Act of 1918.

Judgment will be entered for the Commissioner on 15 days'1 notice, under Rule 50.

Aktjn’dell and Trussell dissent.

Milliicen not participating.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Harnsberger’s, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7053.
    Promulgated June 9, 1927.
    Petitioner’s purchases, gross sales, and expenses for 1919 and 1920 determined.

      Frank F. Nesbit, Esq., for the petitioner.

      T. N. Mather, Esq., for the respondent.
    This proceeding comes before the Board as a result of deficiencies in income and profits tax determined by the Commissioner for 1918, 1919, and 1920 in the respective amounts of $2,798.22, $9,464.14, and $9,485.85.
    FINDINGS OP PACT.
    Petitioner is a Virginia corporation with its principal place of business in Danville, where it is engaged in conducting a department store.
    During the taxable years petitioner recorded its sales, expenses, purchases, and inventories in certain records maintained by it, though it did not have a double entry system of bookkeeping, nor did it maintain a cash book or keep ledger accounts. Sales of merchandise were made on a cash basis, and all sales were recorded by listing the sales tickets, made out at the time in daily sales books. Total sales as shown bjr these books for each day were transferred to a summary sales record book which showed sales by days for each of the years in question.
    Some of the daily sales books for the years involved were rendered valueless as the result of a fire originating in an adjoining building though the summary sales record book for all years and some of the daily sales records were saved and were submitted in evidence in this proceeding.

      Expenses were paid by check and by cash out of cash received from sales, a record of the former being available on check stubs and of the latter from notations on the daily sales books, which were likewise available for 1920, wherein the expense item is in dispute.
    Summary purchase record books, memorandum book of purchases and check stubs were furnished as to purchases and payments on account of purchases during the years in question.
    Sales as shown by petitioner’s books were accepted by the Commissioner for 1918 and 1920. For 1919 the Commissioner determined gross sales by adding to the total of bank deposits, amounts which were paid out in cash prior to the making of such deposits, and deducting therefrom other amounts denominated borrowed money. By this method, sales for 1919 were increased $11,976.47.
    Amounts deposited by petitioner in bank consisted not only of proceeds from the sales of merchandise, but also of money borrowed and loans repaid and tobacco warehouse checks cashed by the petitioner for the convenience of its customers, money for which purpose was sometimes withdrawn from the bank.
    Expenses as shown by petitioner’s books were substantially accepted by the Commissioner for 1918 and 1919, but increased by him over that shown on the books for 1920 in the amount of $6,731.50.
    The amount of purchases for 1919 and 1920 was increased by the Commissioner in the respective amounts of $14,449.49 and $3,640.50. There is no material difference between the parties as to purchases for 1918 and they are likewise in agreement as to inventories for all years. For 1919 petitioner’s total gross sales were $296,670.55 and its total purchases were $253,802. For 1920 petitioner’s total purchases were $312,090.70 and its total expenses deductible from gross income were $65,655.90.
   OPINION.

Littleton:

The questions involved in this case are entirely questions of fact, the errors assigned being, in effect, that the Commissioner improperly disregarded petitioner’s books of account and determined income on an arbitrary basis. While the records maintained by the petitioner are very crude in their nature and can not be said to represent either a single or double entry system of bookkeeping, we are convinced from the books and other evidence submitted to the Board that the information contained therein furnishes an accurate basis for deciding the questions presented.

The items in dispute are the amount of total purchases and gross sales for 1919 and total purchases and expenses for 1920, petitioner having conceded the correctness of the result of the Commissioner’s determination for the year 1918. The evidence submitted by petitioner in support oí its contentions is rather voluminous and in great detail, and we deem it unnecessary to enter into a minute discussion of it here. Suffice it to say that petitioner’s books and records and the oral testimony of several witnesses who were thoroughly familiar with the business, and who kept the books and knew their contents, fully support petitioner’s claims, and the figures which we have found to represent the total purchases and gross sales for 1919 and the total purchases and deductible expenses for 1920. The revenue agent, whose report was followed by the Commissioner, could have determined these items from the books and records but apparently he was unwilling to undertake the task.

Redetermination of the deficiencies will be made in accordance with the foregoing.

Judgment will he entered on 10 days' notice, wider Rule 60.


author: Littleton :

text:
    T. S. Neal, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9333.
    Promulgated June 9, 1927.
    A corporation, 50 per cent of the stock of which petitioner owned, was not during the calendar year 1921 a personal service corporation and petitioner was not, therefore, entitled to deduct from his gross income any portion of an alleged operating loss sustained by the corporation for that year, and the evidence fails to show that petitioner was entitled to a deduction from gross income of any loss as a result of prior endorsements by him of the corporation’s indebtedness represented by money borrowed. The evidence is also insufficient to show that during the year 1921 petitioner sustained losses on personal investments.

      E. W. R. Ewing, Esq., for the petitioner.

      J. Arthur Adams, Esq.,'for the respondent.
    The Commissioner determined a deficiency of $763.38 for the calendar year 1921. Petitioner claims (1) that a corporation, 50 per cent of the stock of which he owned, was during the calendar year 1921 a personal service corporation and that he was entitled on that account to deduct a portion of an alleged operating loss sustained by the corporation; (2) that even though the corporation may not have been entitled to classification as a personal service corporation, he was entitled, when the corporation was dissolved, to deduct as a loss one-half of the outstanding indebtedness of the corporation on which he was endorser; and (3) that he sustained certain losses from investments.

      FINDINGS OF FACT.
    Petitioner is a resident of Orlando, Fla.
    In 1919 a corporation known as the Neal Oil Investment Co., Inc., was organized under the laws of Louisiana with principal office at Shreveport. This corporation issued $50,000 par value of the capital stock, each share having a par value of $100. Petitioner received 250 shares and one E. K. Smith received 149 shares. One share was issued to M. O. Pressler to qualify her as a director. Neal and Smith paid no cash into the corporation for stock but gave their promissory notes therefor. These notes were never paid.
    This corporation was engaged in buying and selling property and leases on its own account and as a broker in such matters for others on commission. The extent of the activities and business of the corporation during the year 1921 is not very clearly shown. Neal had active management of the affairs and business of the corporation and devoted all of his time to it. E. K. Smith was president of the Commercial National Bank, president of the Youree Hotel Operating Co., an officer of the Federal Reserve Bank at Dallas, Tex., and an officer of the Bill Rowe Oil Co. and its subsidiary companies. He also personally owned the Old Settlers’ Oil Co. Smith devoted all of his time to his interests other than in the Neal Oil Investment Co., Inc. He was not regularly engaged in the active conduct of the affairs of the Neal Oil Investment Co., Inc. The Neal Oil Investment Co., Inc., borrowed considerable money from time to time with which to carry on its operations. During the year 1921 the Neal Oil Investment Co., Inc., had outstanding, loans from banks in the amount of approximately $20,000 upon which petitioner and Smith were endorsers.
    On December 28,1921, the stockholders of the Neal Oil Investment Co., Inc., adopted a resolution providing, so far as is material here, as follows:
    Be It Resolved by the stockholders of the Neil Oil Investment Company Incorporated, that this corporation be and is hereby dissolved, and the president and secretary-treasurer be and are hereby directed to send copy of this resolution together with the waiver of notice and time by all the stockholders, to the Secretary of State, to the end that the charter may be surrendered in accordance with law.
    Be It Euktheb Resolved, that George R. Eaton be and is hereby appointed liquidator to wind up the affairs of said corporation, with full and complete power to do and perform all acts necessary and incident thereto. He shall have power to sell the property, execute the deeds to same in his capacity as liquidator of said corporation. He shall have power to collect its debts, to sue and to be sued, and to do and to perform generally and singularly all acts of every nature and kind which may be exercised , by a liquidator under the Constitution and Laws of this State.

      Be It Fubther Resolved, that said corporation, from this moment on, cease to function as a corporation, and it be and is now hereby declared to be in liquidation, as hereinabove provided, and that this resolution and the waiver as aforesaid, be also spread upon the minute book of the stockholders of this corporation.
    This resolution was filed and recorded in the office of the Secretary of State of Louisiana on January 2, 1922. George R. Eaton was appointed liquidator of the Neal Oil Investment Co., Inc.
    On December 29, 1921, T. S. Neal and E. K. Smith, as parties of the first part, and Robert H. Brothers, as second party, entered into an agreement which provided—
    That said parties do hereby and by these presents mutually enter into a co-partnership, the domicile of which shall be Shreveport, Oaddo Parish, Louisiana, the purpose of which shall be to conduct an oil and gas and real estate brokerage business and the name of which shall be the Neal Oil Investment Company, all parties hereto owning an equal one-third interest in the assets of said co-partnership and being equally interested in all business conducted by same, such ownership being subject to and governed by the conditions and stipulations hereinafter set forth.
    All parties agree that for the purposes of this contract the said co-partnership owns all of the assets of the Neal Oil Investment Company, Inc., as shown by said company’s books of date Nov. 30, 1921, which said company is now in process of liquidation, less however, items hereinafter mentioned, it being stipulated and understood that each co-partner owns an equal one-third interest in such assets, or owns, to be more exact, an equal one-third interest in the rights and privileges of the stockholders of the Neal Oil Investment Company, Inc., in and to said assets, subject, of course, to liquidation proceedings. The items deducted and by agreement of all parties not included in the assets of this co-partnership are declared to be as follows, to-wit:
    1. Those two certain promissory notes for Sixteen Thousand Six Hundred and no/100 ($16,000.00) Dollars each, dated May 10, 1919, payable to order of Steere-Neal Company, Inc., and due thirty days after demand, one of which notes bears the signature of E. K. Smith and the other of T. S. Neal.
    2. All interest in lease or oil, gas and mineral rights in the following described property appearing in the name of the Neal Oil Investment Company, Inc., said interest appearing in said company’s name for convenience only and not being actually owned by it, namely that certain oil, gas and mineral lease * * ♦.
    * * * # # * *
    All parties hereto further agree that the total indebtedness of the Neal Oil Investment Company, Inc., now in liquidation is approximately Twenty Thousand and no/100 ($20,000.00) Dollars and that the ownership of the co-partnership now being organized of the assets above referred to is subject to said indebtedness, it being stipulated and understood that the proceeds from any sales of said assets and also any net monies received from the brokerage business as now organized and operated shall be applied first to the payment of said indebtedness, First Parties guaranteeing for the purposes of this agreement that the indebtedness of the Neal Oil Investment Company, Inc., does not exceed the sum of Twenty Thousand and no/100 ($20,000.00) Dollars and further binding and obligating themselves in the event such indebtedness should exceed such sum of Twenty Thousand and no/100 ($20,000.00) Dollars, to personally pay the same, in that way holding Second Party absolutely harmless as to any possible indebtedness in excess of the said stated sum, it being further particularly understood and agreed that Second Party does not assume and is not in any way bound to personally pay any part of the indebtedness of the Neal Oil Investment Company, Inc., but that his one-third interest in the new company and any assets owned by it is hereby sold to him by First Parties for the sum of Six Thousand Six Hundred Sixty Six and 66/100 ($8,666.66) Dollars and that same is to be paid for out of an equal one-third of the net monies received from sale of any of the properties or assets of the co-partnership and from an equal one-third of any net monies made by said co-partnership in the brokerage business, said payments to be applied first to the payment of the Twenty-Thousand and no/100 ($20,000.00) Dollars indebtedness above referred to, the balance if any going to First Parties equally, it being particularly understood and agreed, however, that Second Party is not personally obligated for the payment of the purchase price above set forth save and except in the manner stipulated namely, from one-third of the net monies received from sale of assets and from one-third of net monies received from brokerage business, Second Party’s ownership and interest being in suspense until the entire sum of Six Thousand Six Hundred Sixty-six and 66/100 ($6,666.66) Dollars is fully paid.
    * * * It is further stipulated, however, that Second Party shall handle in connection with George R. Eaton, liquidator, the sale of the properties of the Neal Oil Investment Company, Inc. now in process of liquidation, it being contemplated that said parties will advise with one another in the matter of handling said assets to the best interest of all concerned.
   OPINION.

Littleton :

The evidence shows that the Neal Oil Investment Co., Inc., was engaged in trading as a principal, that considerable capital, either borrowed or invested, was used, and that the owner of 49 per cent of its capital stock was not regularly engaged in the active conduct of the business of the corporation. It was not, therefore, a personal service corporation and petitioner was -not entitled to any deduction from his income on account of whatever operating loss the corporation may have sustained. Petitioner claims that even though the Neal Oil Investment Co., Inc.,, may not have been a personal service corporation within the meaning of the statute he was nevertheless entitled to deduct from his gross income as a loss certain indebtedness of the corporation for which he, as endorser, was liable when the corporation was dissolved. The evidence is insufficient to show that petitioner was entitled to any deduction in this regard. At the end of 1921 the corporation was in process of liquidation. The stockholders paid no cash in to the corporation for their stock. The corporation had considerable assets at the time the dissolution resolution was adopted and recorded in the office of the Secretary of State and the two stockholders formed a partnership with Brothers to take over the assets of the corporation and to continue business theretofore carried on by the Neal Oil Investment Co., Inc. There is no evidence as to the value of these assets. When the corporation became dissolved these assets became the property of the petitioner and the other stockholder. From a consideration of the entire record the Board is unable to find that petitioner sustained a deductible loss even if it were held that the corporation was finally dissolved in 1921.

Petitioner further claims that in 1921 he sustained losses totaling $16,502.50 on personal investments in land, leases, oil stocks, and royalty interests, but there is no sufficient evidence in the record from which the Board can determine, as a fact, what losses, if any, he sustained in 1921 in this regard.

Judgment will he entered for the respondent.


author:
SteRnhagen:
      ¡Smith,

text:
    Alfred Le Blanc, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1872.
    Promulgated June 9, 1927.
    A stockholder of a corporation who, to protect and conserve his own business interests, enters into an agreement with an employee of the corporation that such employee shall receive the dividends upon his shares of stock so long as the employee shall remain with the corporation, is entitled to deduct the amounts of the dividends paid to the employee as a business expense.

      Isom J. Guillory, Esq., and E. Barrett Prettyman, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
    This is a proceeding involving determinations of income tax for 1918, 1919, and 1920, as follows:

    The petitioner claims an overassessment for the year 1918 in the amount of $19,037.15. The deficiencies arise from the Commissioner’s inclusion in gross income of certain dividends on stock owned by the petitioner which were paid to petitioner’s son under an agreement, and the Commissioner’s refusal to allow the petitioner to deduct these amounts as a business expense.

      FINDINGS OF FACT.
    The petitioner is a resident of New Orleans, La., and for about forty years prior to 1918 had been engaged in the steamship agency business in that city. Among several steamship lines for which he acted as agent was the Harrison Steamship Lines, an English steamship company with offices at Liverpool.
    In 1910 the petitioner’s son, Stewart LeBlanc, who had been employed in his father’s office, learned that the connection between the Mobile & Ohio It. B.. and the Elder-Dempster Steamship Lines at Mobile had been severed. Believing that he could secure this business, he suggested to his father and to one M. J. Sanders, agent at New Orleans for the Leyland Steamship Lines, that a corporation be formed to act as subagent at Mobile for the steamship companies represented by the petitioner and Sanders.
    Such a corporation Avas formed under the name of Mobile Liners, Inc., with a capital stock of $5,000. The 50 shares of stock of a par value of $100 each were distributed, 25 shares to Sanders, 24 shares to petitioner, and 1 share to Stewart LeBlanc. Sanders became the president of the company, the petitioner became vice president, and Stewart LeBlanc was made manager and treasurer at a salary of $150 a month.
    The business was conducted entirely by Stewart LeBlanc, and because of his personal capabilities it was very successful. At the end of 1917 the business had greatly increased, the stockholders had drawn a number of dividends, and Stewart LeBlanc’s salary had been increased to $5,000 a year.
    By 1917 he had married and had a child. He was dissatisfied with his limited opportunities under the salary he was receiving and desired to build up something which, like his father, he might leav<j to his children. He felt he had created the company and was responsible for its prosperity.
    He proposed to his father, the petitioner, that the father’s 24 shares of stock in Mobile Liners, Inc., be transferred to him. The petitioner recognized that his son’s efforts justified his demand for a greater share of the earnings of the company than his then salary. The son had opportunities to make other connections. He had received an offer of $25,000 a year to take charge of an agency in New York for another line, and he had been planning an amalgamation of steamship agencies on the South Atlantic and in- the Gulf.
    Furthermore, the son was very favorably regarded by the steamship owners in England, where he had worked and was known, and the petitioner regarded it as important to his own relations with these owners that his son be retained within his own organization,

      The petitioner did not want to give the stock to his son for the reason that he desired to retain ownership so that in the event Stewart LeBlanc left Mobile or died he would be able to place one of his other sons there, and also because he did not care to have the stock by any chance pass out of the possession of his own family to that of his son’s wife’s family. Furthermore, he was apprehensive that Sanders might believe he was giving up his interest in the Mobile agency, in which event Sanders might divert the Leyland steamship business elsewhere.
    After considerable negotiation it was agreed between the petitioner and his son that the son should receive all the dividends on the father’s stock as long as the son should remain with the Mobile Liners, Inc. The terms of this agreement are not entirely clear beyond the definite agreement that the dividends for 1918, 1919, and 1920 were to be so paid. To this end the petitioner wrote to his son, as treasurer and manager, the following letter under date of February 28, 1918:
    Please pay any dividends that may be declared on my stock, for last year and until further notice, to yourself, instead of to me. This letter is your authority.
    The three stockholders, Sanders, the petitioner, and his son, met and duly declared a dividend of $1,000 a share in 1918. Sanders lmew nothing of the agreement and so far as he was aware Stewart LeBlanc was receiving only his $5,000 salary and a $1,000 dividend. The check for the dividend on petitioner’s stock was, however, drawn to the son and received by him. The dividends were shown on the corporation’s books as paid one-half to Sanders and one-half to Stewart A. LeBlanc.
    The corporation, Mobile Liners, Inc., filed a personal service return in which it showed the distributees as Sanders and Stewart LeBlanc, omitting the petitioner. The petitioner filed an original return omitting the dividends, and later filed an amended return including the dividends and deducting the full amount as an expense. Stewart LeBlanc filed a return in which he returned the dividends as his distributive share of the corporate earnings.
    Late in 1919 the petitioner’s first wife died, and the question then arose in connection with the rights arising under the community property laws of Louisiana by reason of her death, whether the income received by the son on the stock was collatable as a premature testamentary gift. It was decided, apparently between the parties themselves, that it was not collatable, and the mother’s 12 shares were distributed among her four children, 3 shares to each.
    This made it necessary for Stewart LeBlanc to make other arrangements to insure the receipt by him of the compensation he had theretofore been receiving. It was agreed by Sanders and the corporation that he should receive a portion of the earnings before they were credited to surplus, to be paid directly to him by the corporation as compensation for his services. In addition, however, he continued to receive the dividends on the shares of stock remaining in his father’s name.
    The respondent, disallowed the deduction as expenses of the amounts of the dividends on the petitioner’s stock which had been paid to his son.
   OPINION.

SteRnhagen:

The primary question is whether the dividends on petitioner’s stock during the years in question are part of his income notwithstanding the fact that, because of his instruction to the corporation, they were not received by him but paid directly to his son Stewart. The question is essentially the same as that involved in Samuel V. Woods, 5 B. T. A. 413; Fred W. Warner, 5 B. T. A. 963; Providence & Worcester R. R. Co., 5 B. T. A. 1186, and in Rensselaer & Saratoga R. R. Co. v. Irwin, 239 Fed. 739; affd. 249 Fed. 726; certiorari denied 246 U. S. 671.

The petitioner was himself the stockholder and continued to own the stock. Notwithstanding the request to do so, he refused to give it to his son because he wanted to control its disposition, an important attribute of ownership. His direct purpose was to augment his son’s income for his part in the success of the corporation — not to make the son a stockholder, but to let him benefit, through the petitioner, by its earnings. The son received no dividend, because between him and the corporation there was no such relation as entitled him to a dividend. Only stockholders were entitled to dividends, and even although the amount was the same, his right to it was not derived from any of the considerations which apply to stockholders, but from a separate agreement with one other than the corporation. As between him and the corporation he had not even that inchoate interest in earnings which a stockholder has before dividend declared. All of the attributes and incidents of a stockholder were continued in the petitioner.

The significance and importance of this is clear when it is remembered that the individual stockholder taxpayer is freed from normal tax upon his dividends. This is upon the theory that, after all, the incidence of the corporation income tax is ultimately upon the stockholders, and Congress has to this extent lightened their tax burden. But it is hardly arguable that this legislative intent carried beyond the stockholders to anyone who might be collaterally or indirectly interested in the corporation’s earnings. It is the stockholder who gets the dividend and he alone who may have the normal-tax credit.

The petitioner points to Louisiana law by which the usufruct of property may be legally held by one other than the owner. Be that as it may, it does not change the solution of the problem. It may be that the son has acquired an independent right against the corporation (questionable, as will be seen from the adjustment which was made when the stock passed by death to another), yet this was only because the stockholder by anticipation had enjoyed and exercised his right of ownership by transferring it. He was, in effect, postdating his assignment to the several times when he was to receive dividends. As in the Rensselaer case, supra, the single contract was merely a convenience by which the amount of the dividend went across lots instead of taking the highway.

The adjustment when petitioner’s wife died, to which reference has been made, is significant. By Louisiana community property law the wife owned one-half the stock upon which the dividends in question were paid. Upon her death such stock descended to her children. At that time it was recognized by all those interested that the ownership of the stock carried with it the dividends; and thereupon, since so much of the amount would no longer be covered by petitioner's order to the corporation, it was brought about that the salary of Stewart LeBlanc should be increased. Indeed, the question was raised whether such, dividends on this stock as had already gone to Stewart were properly collatable, but this question was settled without adjudication and gives petitioner no support.

We hold that the amount of the dividends upon petitioner’s stock paid in the years in question is properly within his gross income.

Petitioner urges in that event that the amount is a proper deduction as a business expense. He was engaged in numerous ventures directly and incidentally related to shipping. He was not merely an inactive stoi ^holder in Mobile Liners, Inc. He and Sanders used this means of advancing and holding their personal interests in representing foreign steamship lines. Stewart LeBlanc was an important factor of success. He was in favor at the home office in London. He was threatening to quit, and the loss of his services might have been serious. To protect his own business position, the petitioner acquiesced in his demand for greater compensation and, for the reasons already set forth, did it by this means without consulting Sanders. The correspondence in evidence shows that it was done on a business basis to retain Stewart’s services and hold the Mobile steamship ' business. This is in our opinion a deductible expense. See Harold Motenson, 3 B. T. A. 300.

As to the overassessment for 1918, the petition is dismissed for want of jurisdiction. Cornelius Cotton Mills, 4 B. T. A. 255; John F. Cook, 4 B. T. A. 916; Florence M. Smith, Executrix, 5 B. T. A. 225.

Judgment will he entered on 15 days' notice, wnd&r Rule 50.

¡Smith,

dissenting: The facts in this case are simple and undisputed. Stewart A. LeBlanc, son of the petitioner, had been instrumental in creating Mobile Liners, Inc., a Louisiana corporation, for the purpose of conducting a steamship agency at Mobile, Ala. The son had acted as manager of the corporation at Mobile and had been responsible for the company being made the agent of the British Ministry of Shipping for all foreign ships going to Mobile. The son owned only 1 share of the capital stock and his father 24 shares out of a total of 50 shares. The son was receiving a salary of $5,000. He requested his father to sell him his 24 shares in order that he might receive the just rewards of his labor. The father did not wish to part with the legal ownership of the shares but agreed that his son should receive the usufruct of his shares so long as he should remain as manager of the company at Mobile. This agreement was entered into in 1917 and was faithfully carried out. The petitioner in pursuance of the agreement directed Mobile Liners, Inc., to pay over to Stewart A. LeBlanc all of the dividends accruing to him upon his shares of stock. Stewart A. LeBlanc received the dividends direct from the corporation and the petitioner neither received them nor had any ownership of them during the taxable years. The son returned them as a part of his income in his income-tax returns and paid income tax upon them. The father, not having received them and not having any ownership of them, did not return them as a part of his income.

The contract by which the petitioner parted with his interest in the dividends declared was made in New Orleans and was a Louisiana contract and subject to the provisions of the Louisiana law. The Civil Code of Louisiana expressly recognizes the usufruct of property as a property right transferable and otherwise possessing the attributes of distinct property. The code defines a usufruct as:

The right of enjoying a thing, the property of which is vested in another, and to draw from the same all the profit, utility, and advantages which it may produce, provided it be without altering the substance of the thing. (Art. 533.)

The code also contains the following provisions regarding usufructs:

Abt. 535. Perfect usufruct does not transfer to the usufructuary the ownership of the things subject to the unufruct * * *.
Abt. 537. Usufruct is an incorporeal thing because it consists in a right.
Abt. 540. Usufruct may be established by all sorts of titles; by a deed of sale, by a marriage contract, by donation, compromise, exchange, last will, and even by operation of law. * * *
Abt. 541. Usufruct may be established on every description of estates, movable or immovable, corporeal and incorporeal.
Art. 542. Usufruct may be established simply, or to take place at a certain day, or under condition; in a word, under all such modifications as the person who gives such a right may be pleased to annex to it.
Art. 544. All kinds of fruits, natural, cultivated or civil, produced, during the existence of the usufruct, by tbe things subject to it, being to the usu-fructuary.
Art. 545. * * * Civil fruits are rents of real property, tlie interest of money and annuities.
All other kinds of revenue or income derived from property by the operation of the law or private agreement, are civil fruits.
Art. 2477. The tradition or delivery is the transferring of the thing sold into the power and possession of the buyer.
Art. 2481. The tradition of incorporeal rights is to be made either by the delivery of the titles and of the act of transfer, or by the use made by the purchaser, with the consent of the seller.

I dissent from the decision of the Board that the income from the shares of stock standing in the petitioner’s name during the years 1918,1919, and 1920 was income of the petitioner. The decision of the Board proceeds upon the theory that the petitioner had income from the dividends payable upon his shares of stock by reason of the fact that he was the owner of the stock. This, however, is not a proper basis for determining whether the petitioner is liable to income tax in respect of dividends. The criterion laid down by the statute is whether a person derives income from dividends. (Sec. 213(a), Revenue Act of 1918.) As was stated by the Supreme Court in Eisner v. Macomber, 252 U. S. 189:

* * * A gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital however invested or employed, and coming in, being “ derived ”, — that is, received or drawn try the recipient (the taxpayer) for his separate use, benefit and disposal ;• — that is income derived from property. Nothing else answers the description.

It is not enough that wealth flows from a person’s property in order that he shall be liable to income tax in respect of it. It must be received or drawn by him for his separate use, benefit, and disposal before the tax will attach. The gain or profit must be to the individual charged with tax — not to another.

The principle announced by the Supreme Court in Irwin v. Gavit, 268 U. S. 161, is applicable here. In that case it was stated:

The Courts below went on the ground that the gift to the plaintiff was a bequest and carried no interest in the corpus of the fund. We do not regard those considerations as conclusivo, as we have said, but if it were material a gift of the income of a fund orddnarily is treated t>y equity as creating an interest in the fund. Apart from technicalities we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it. The fund is appropriated to the production of the same result whichever form the gift takes. Neither are we troubled by the question where to draw the line. That is the question in pretty much everything worth arguing in the law. (Italics ours.)

Looking to the substance and not merely to the form it is evident that the petitioner derived no income from the dividends paid on his shares of stock in Mobile Liners, Inc., during the years 1918, 1919, and 1920.

I furthermore heartily dissent from the decision of the Board to the effect that Alfred LeBlanc may deduct from his gross income as an ordinary and necessary expense the amount of the dividends paid on his shares of stock by Mobile Liners, Inc., directly to Stewart A. LeBlanc. The statute permits an individual to deduct from his gross income, among other things:

All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *. (Sec. 214(a) (1), Revenue Act of 1018.)

The petitioner was the representative of the Harrison Steamship Lines in Hew Orleans. He was their agent in that city. He also was the agent for certain other steamship companies. He was not, however, the agent of any steamship line in Mobile. The steamship agency in Mobile was owned by Mobile Liners, Inc. That corporation was created for the purpose of acting as such agent. The petitioner was at most a stockholder in that corporation. To hold that the petitioner may deduct from his gross income as a business expense the dividends upon his shares of stock in Mobile Liners, Inc., does violence to the very provisions of the statute. If the dividends on that stock are to be included in the petitioner’s gross income he should be required to pay income tax upon them. There is no provision of the statute which permits the deduction of them from his gross income. In my opinion the statute should not be given a strained and unnatural construction merely for the purpose of reaching a substantially equitable result in the case at bar.