. .- .

Honorable George H. Sheppard

Comptroller of Public Accounts Austin, Texas

Dear Sir: OpinionNo. O-4035 Re: Constructionof Stock Transfer Tax as applied to "certificatesof interest in any business conducted %y trustee or trustees.*

Your letter of September 22, 1941, requests cur opinion relating to the taxability of the transfer of certain interest in oil and gas under the Stock Transfer Tax Law, beingArticle 15 of House Bill No. 8, Acts, Regular Session, Forty-seventhLegislature. We quote your severalquestions;

"(a) A, B, C, and D own the working interest in an oil andgas lease which, for convenience, stands in the name of D, trustee. There is nothing on record showingwho are the beneficial owners,but A, B, and J have, in fact, an assignable interest in the lease. No trust certificatesare issued. If A assisgns his interestin the lease to B, is this tranaaction taxable7
"(b) In the case supposed in (a),would itmake any difference that D had issued trust certificatesevidencing the interestof A, B, C, and D in the lease, and that the trust certificateitselfwas actually assigned byA to BP
"(c) A is the cmer of the working interest in an oil and gas lease. He sells a small interest in the working interest to several other persons and gives each of them an assignment of such interest. By mutual agreement,A is permitted to cperate the lease, paying the expenses of operation out of the income,and remitting to each cmer the portion of the proceeds to which he is entitled. A is not, however, designatedas trustee. If one of the other persons holding an undivided interest in the working interest assims his interest to another, is this assigrmmnt taxable?- L

Hon. George H. Sheppard - Page 2 (O-4036)

s(d) If, instead of transferring a portion of the wcrking interest, A had assigned an overriding royalty interest in the case supposed in (o),would the assignment of the overriding interest be taxable?
"(8) A, the owner of the working interest,assigns l/4 of the production to B until B shall have reoeived the **sum** of $lO,OOO.OO. (This is ordinarily termed an oil payment). If B assigns this oil payment to G,would the assignment be taxable?"
If any of the trahsfera described in your severalquestions are subject to payment of a stocktransfer tax it isbecause they are desoribed by the phrase underlined in Section 1 of Article 15 of said **House** Bill Ho. 8, which reads in part;

"Seoticn 1. There is hereby imposed and levied a tax as hereinafterprovided on all sales, agreementsto sell, ormemoranda of sales, and all deliveries or transfers of shares, or oertifioatesof stock, or oertjfiaatesfor rights to stock, or certifioatesof deposit representing an interest in or representing certificatesmade taxable under this Seoticn in any domestic
or fcreigh association, company, or acrpcraticn,or certificates of interest in any business eonduoted by trustee or trusteesmade after the eff'eotiw date hereon, ðer made upon or shown by the books of the asspoiation, company, corporation,or trustee, or by any assignment in blank or by any delivery of any papers or agreement or memorandum or other evidence of sale ortransfer or order for or agreement to buy,whether intermediateor final, and whether investing the holderwith the beneficial interest in
or legal title to such stock or other certifioatetaxable hereunder, or with,the possessionor use thereof for any purpose, or to secure the future paymentof money or the futuretransfer of any such stock or oertificate,on eaoh hundred dollars of facevalue
or fraction thereof, three (3) cents,exoept in caseswhere the shares or oertifioatesare issuedwithout designatedmcneta value, invhich case the tax shall be at the rate of three (3 7 cents for each and every share. , . ." (Underscoringcurs)

It seems apparent to us that thisAct does not purport to tax transfers of interest8 in all partnerships and trusts. Fromthe context of the Act oonsidemd as a whole as well as **from** the plainmeaning of the words themselves, it seems to us that the phrase "certificatesof interest in any business conductedby trustee or trustees" oan only refer to certificates of stock or interest in those business entitiesknown as joint stock associations,business trusts or Massachusetts trusts. The language is not susceptibleof a construotionwhich would inolude partnership interests or interestsof the beneficiariesof a "pure" trust..

Hon. George H. Sheppard - Page 3 (o-4035)

Although, since the decision by the Supreme Court of Texas of ThompsonV. Schmidt, 115 Tex. 63, 274 S.W. 554, the shareholdersin
a businesstrust have been held to be liable as partners, there are nevertheless, certain characteristicsof a Eusiness trustwhich distinguishes it from a partnership on one hand and a "pure" trust cn the other. It may be useful to review come of the definitionswhich have been given of "business trusts."

The definitionfound in 25 Texas Jurisprudence174 reads as follows:

*A 'businesstrust,' or, it is sometimes called, a 'Massachusettstrust,'may be said to be a form of business organizationwhich is the product of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may, from time to time, be the holders of transferable certificates issued by the trustees, showing the shares intowhich the beneficial interest in the prcpertv is divided. These certifiaates-- which resemble cert$ficatesof shares of stock in a corporation,and are issued and transferred in like manner -- entitle the holder to share ratably in the income ofthe property, and, upon termination of the trust, in the proceeds.

. . .s
ProfessorBcgert in his work on Trusts devotes a chapter to business trusts and describes them in the followingmanner (Vol. 2, page 971)s

"Formany years the trust has been used in ?dassmhusetts.as a form of business orgmieaticn, a substitutefor incorporation,and in the years following theWcrld War the device camewidely to be used elsewhere, especially in Texas and other states in the Southern oil fields. Suoh organizationsare usually referred to as 'businesstrusts' or 'Wassaohusettstrusts,' although the term 'common-law trust' is also frequentlyused, emphasizing the faotthat the organization is one formedwithout the aid of statute. The usage of these terms has no entirely crystalised,~and in such a field definitionsare often of littlevalue; but in general, the term %assachusetts trust'is used 'todenote an unincorporatedorganization created for profit under a written instrument or declaration of trust, the management to be conductedby compensatedtrustees for the benefit of personswhose legal interestsam represented by transferable certifioatesof participation,or shares.'"
That the nature of a business trust is essentiallydifferent frcm that of a "pure" trust and that the rules of law applicable thereto. .

Ron. Geo. H. Sheppard - Page 4 (o-4036)

differ widely is indicatedby the fact that the &nericm Law Institut@'s Restatement of the Law of Trusts expressly excludes from the treetim my discussion of business trusts, declaring in Section I(b) thereof:

**I**

. . . The business trust is a specialkind of business association and can best be dealt with in oonmotion with other business associations."
Perhaps the simplestway to try to describe the type of orgrnizationwhioh ms contemplatedby the Legislature in the phrase "any business conducted by trustee or trustees" would be to say that it is I quasicorporateunincorporatedassociation. .I9 the case8 concernedwith the application of federal taxes to such organizationswe find the courts again and again laying emphasis upon rnalogies to corporate struoture.

In the cqse of In reAssociated Trust, 222 Fed. 1012, the court held the Xasstichusetts-trust them invo'lvad

to be an "unincorporatedcornpany"within themeaning of the Fedsral Bankruptcyhot because it found the trust to have the following features in c-on with oorporations:

(a)A capital contributedby the certificateholders (b) futuremmnagsrs are to be chosenby the certificate holders (a) the character, scope, size of the enterpriesmay be ahanged or terminated by certificateholders (d) these rights and powers are given to the certifioate holders inthe instrumentby which the trust is constituted.

In Burk-mggoner Oil Ass'n V. Hopkins, 269 U.S. 110, 46 S.Ct. 46, 70 I,.Ed. 163, the court in holding that the joint stock associationwas subject tothe payment of federal income taxes 18 though it were a corporation, after recitingvariou$ characteristicsof the associationwhioh were similar to those of corporationsdeclared: "Because of this resemblance in form and effectiveness,these business orglnisationsare subjectedbythe Act to these taxes as corporations."

In his artiole in 26 Columbia Law Review 305 entitled "Massachusetts Trust under Federal Tax Law," H. Rottsohaefsr sumnariaedhis conolusions at page 314 as follolrsc

_

"A business trustis, therefore an associationunder exbstiixg federaltax laws only if operatingunder a declaration of trust that provides for I division of the m%ole interest in the enterprise into shares transferablewith only sash restrictionsas would be valid in the case of ocrponts stocks that vests the conduct

.of the enterprize in trustees responsible to the hensficiaries as a group and insuresthe ultimate oontrol of the trust by the latter as a group. Only then isHon. Gee. H, Sheppard - Page 5 (o-4035)

there both association among 

### thebeneficiariesand quasi-corporateform of organication. The last two features srs incompatiblewith the existenceof a real trust,where the trustees act as principals. Henceno such trust can be an association."
The power of the trustees to engage 

### l otivslyin businessas distinguished from themere colleotionand distribution of revenus frcxsthe specificproperty conveyed to them is unquestionablyan essantial element of a business trust. Hechtv. Ralley (1924), 265 U.S. 144, 44 S. Ct. 462, There is, however, some conflict in the cases as towhether the criterion shallbe the powers enumerated in the trust indenture or the powers actually exercised by the trustees. In Tyson vi Commissionerof InternalRevenue (Cr. Ct. 0f bpp. 1931), 54 Fed. (2d) 29, the courtheld that the Zenith Real Estate Trustwas not an associationvdthin themeaning of the Federal Revenue Acts of 1924 and 26 although by the trust indenture the trustees were given the power to buy and sell real estate,because actually this trust owned only a singlebuilding under a longtsnn lease, andthe trustees' only duty was to collect the rent, pay taxes, etc., and distribute the net income among the certifioateholders. Said the court:

"Our question then is, when is a Massachusetts trust an association under these acts, and when is it a trust? "Probably the best test is to be found in the activities of the entity

. . . in determiningwhen a txst is an association courtsmust look to the substancerather than the form of the entityused to carry on the business. Likewise, itmust be more influencedby the instrument'sactivities than the ascertainment of the possible field of its activity.

. . ."
The "activity"test of business trusts is recognieedby H. Rottschaafer, page 306,.op. cit.8 "Trusts ars now classifiedfortax purnoses into holding and operating trusts..The former are defined asthose ir which the trusteesmerely hold property for the collectionand distribution of its income; they are held not to be associations, The latter are defined as those in which the trustees are not so restricted 'butareassociated together inmuch the samemannor as directors in a corporation for the purpose of, and are actually engaged in carrying on somebusiness enterprise';they are deemed associations ~independentlyof my control exercised by the beneficiaries'."

The New York stock transfer tax statute recognizesthe distinction between 'holding"and *operating" trusts in that it expressly exempts fras the tax "certificates issued under a noncorporate investment test agreement of the fixed typs". (emphasisours) Ws believe a like distinction is intend= in the Texas Act since itmakes taxable only "certificates of interest in any business conductedby trustee or trustees." Trustees of a purely "holding" trust can hardlybe said to be oonductinga business.Bon. Gee. H. Sheppard 0 Page 6 (o-4035)

Another question suggests itself: lhat arethe minimwn numbers of certificateholders and trustees possible in a business trust? Mr. Rottschaefer answers these questions at page 515 of his article:

"Themere fact thatthere was but a a&r&e beneficiary, either at its inceptionor at some subsequent+&as, should not affect the conclusions.
"The case is not as clearwhen there is but a single trustee. The difficulty arises from the absence of instmces in which corporationshave but a single director."
However, he concludesthat (E&s 31, page 312) "Business trusts are conceivable that have but a singletrustee or a single,benaficiary.s Inview of the fact that the Texas statute expresslynames "trustee or trustees*we believe thatmultiple trustees are not a necessaryprerequisite to the existence of such a business trust tcwhich the stock transfer tax would be applicable.

In the light of the general principles deducible frms the fbregoing authorities,we shall considerthe specific fact situationspresented in your request.

In the situationpresented inyour question (a) there appears to be neither a trust indenture prescribingthe respective rights and duties ofthe trustees and beneficiariesnor trust certificates isaued:tothe,beneficiaries. The relationship among the four owners of the lease appears to be in the nature of an informalpartnershipwith legal title in the name of ens of the partners. It is certainlynot a quasi-oorporateorganicationmeeting the .,qualifications of a business trust, and in our opinion the transfer ofthe interest of one of the partners is not subjeotto payment of a stock transfer tax.

The situation in (b) differs only to the extent that the person holding legal title to the lease has issued trust certificatesto evidence the interest of the othermen in the lease: Cn its face, this does not describe a businsss trust. However, if there exists a trust indenture conferringupon the trustee or trusteesthe powers to engage in an active Imsiness, to buy and sell leases, etc., and confersuponthe beneficiaries the power to elect a new trustee or trustees, it would be a business trust andthe transfer of certificatesoftrustsould be taxable under the Stock Transfer Tax Act.

In each of the situations involved in your questions (o), (d) and (0) the transfer is a transfer of a legal, fee interest in realty end could not besubject to the payment of a stocktransfer tax.

APPROIED OCT 27, 1941 /*/ Grover Sellsrs FIRSTMSISTAET b6IpIFpmacEBpL WRKrtilrgw Yoursvsry truly

ATTORSEYGENERAL OF TEXAS
By ,&/Walter R. Koch Walter R. Kooh Assistant