. .- . 

Honorable George H. Sheppard 

Comptroller of Public Accounts 

Austin, Texas 

Dear Sir: Opinion No. O-4035 

Re: Construction of Stock Transfer 

Tax as applied to "certificates of 

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, being Article 15 of House Bill No. 8, Acts, 

Regular Session, Forty-seventh Legislature. We quote your several questions; 

"(a) A, B, C, and D own the working interest in an oil 

and gas lease which, for convenience, stands in the name of 

D, trustee. There is nothing on record showing who are the 

beneficial owners, but A, B, and J have, in fact, an assignable interest in the lease. No trust certificates are issued. 

If A assisgns his interest in the lease to B, is this tranaaction taxable7 

"(b) In the case supposed in (a), would it make any difference that D had issued trust certificates evidencing the 

interest of A, B, C, and D in the lease, and that the trust 

certificate itself was actually assigned by A 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, designated as 

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 several questions are 

subject to payment of a stock transfer tax it is because 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 

hereinafter provided on all sales, agreements to sell, or memoranda of sales, and all deliveries or transfers of shares, or 

oertifioates of stock, or oertjfiaates for rights to stock, or 

certifioates of deposit representing an interest in or representing certificates made taxable under this Seoticn in any domestic 

or fcreigh association, company, or acrpcraticn, or certificates 

of interest in any business eonduoted by trustee or trustees made 

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 intermediate or final, 

and whether investing the holder with the beneficial interest in 

or legal title to such stock or other certifioate taxable hereunder, or with,the possession or 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 face value 

or fraction thereof, three (3) cents, exoept in cases where the 

shares or oertifioates are issued without designated mcneta 

value, invhich case the tax shall be at the rate of three (3 7 

cents for each and every share. , . ." (Underscoring curs) 

It seems apparent to us that this Act does not purport to tax 

transfers of interest8 in all partnerships and trusts. From the context 

of the Act oonsidemd as a whole as well as from the plain meaning of the 

words themselves, it seems to us that the phrase "certificates of interest 

in any business conducted by trustee or trustees" oan only refer to certificates of stock or interest in those business entities known as joint 

stock associations, business trusts or Massachusetts trusts. The language 

is not susceptible of a construotionwhich would inolude partnership interests or interests of the beneficiaries of a "pure" trust. 
. 

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

Although, since the decision by the Supreme Court of Texas 

of Thompson V. Schmidt, 115 Tex. 63, 274 S.W. 554, the shareholders in 

a business trust have been held to be liable as partners, there are 

nevertheless, certain characteristics of a Eusiness trust which distinguishes it from a partnership on one hand and a "pure" trust cn the 

other. It may be useful to review come of the definitions which have 

been given of "business trusts." 

The definition found in 25 Texas Jurisprudence 174 reads as 

follows: 

*A 'business trust,' or, it is sometimes called, 

a 'Massachusetts trust,' may be said to be a form of 

business organization which 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 into which the 

beneficial interest in the prcpertv is divided. These 

certifiaates -- which resemble cert$ficates of shares of 

stock in a corporation, and are issued and transferred in 

like manner -- entitle the holder to share ratably in the 

income of the property, and, upon termination of the trust, 

in the proceeds. . . .s 

Professor Bcgert in his work on Trusts devotes a chapter to 

business trusts and describes them in the following manner (Vol. 2, page 

971)s 

"For many years the trust has been used in ?dassmhusetts.as a form of business orgmieaticn, a substitute for 

incorporation, and in the years following the Wcrld War the 

device came widely to be used elsewhere, especially in 

Texas and other states in the Southern oil fields. Suoh 

organizations are usually referred to as 'business trusts' 

or 'Wassaohusetts trusts,' although the term 'common-law 

trust' is also frequently used, emphasizing the faotthat 

the organization is one formed without the aid of statute. 

The usage of these terms has no entirely crystalised,~and 

in such a field definitions are often of little value; but 

in general, the term %assachusetts trust'is used 'to denote an unincorporated organization created for profit 

under a written instrument or declaration of trust, the 

management to be conducted by compensated trustees for the 

benefit of persons whose legal interests am represented 

by transferable certifioates of participation, or shares.'" 

That the nature of a business trust is essentially different 

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 indicated by 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 special kind of 

business association and can best be dealt with in oonmotion with other business associations." 

Perhaps the simplest way to try to describe the type of orgrnization whioh ms contemplated by the Legislature in the phrase "any business conducted by trustee or trustees" would be to say that it is I quasicorporate unincorporated association. .I9 the case8 concerned with the application of federal taxes to such organizations we find the courts again 

and again laying emphasis upon rnalogies to corporate struoture. 

In the cqse of In re Associated Trust, 222 Fed. 1012, the court 

held the Xasstichusetts-trust them invo'lvad to be an "unincorporated cornpany" within the meaning of the Fedsral Bankruptcy hot because it found 

the trust to have the following features in c-on with oorporations: 

(a) A capital contributed by the certificate holders 

(b) future mmnagsrs are to be chosen by the certificate holders 

(a) the character, scope, size of the enterpries may 

be ahanged or terminated by certificate holders 

(d) these rights and powers are given to the certifioate holders in the instrument by 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 association was subject to the payment of federal income taxes 18 though it were a corporation, 

after reciting variou$ characteristics of the association whioh were similar 

to those of corporations declared: "Because of this resemblance in form and 

effectiveness, these business orglnisations are subjected bythe Act to 

these taxes as corporations." 

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

"A business trustis, therefore an association under exbstiixg federal tax laws only if operating under a 

declaration of trust that provides for I division of 

the m%ole interest in the enterprise into shares transferable with only sash restrictions as 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 insures the ultimate oontrol 

of the trust by the latter as a group. Only then is 
Hon. Gee. H, Sheppard - Page 5 (o-4035) 

there both association among the beneficiaries and 

quasi-corporate form of organication. The last two 

features srs incompatible with the existence of a 

real trust, where the trustees act as principals. 

Hence no such trust can be an association." 

The power of the trustees to engage l otivsly in business as distinguished from the mere colleotion and distribution of revenus frcxsthe 

specific property conveyed to them is unquestionably an essantial element 

of a business trust. Hecht v. Ralley (1924), 265 U.S. 144, 44 S. Ct. 462, 

There is, however, some conflict in the cases as to whether the criterion 

shall be the powers enumerated in the trust indenture or the powers actually 

exercised by the trustees. In Tyson vi Commissioner of Internal Revenue 

(Cr. Ct. 0 f bpp. 1931), 54 Fed. (2d) 29, the court held that the Zenith 

Real Estate Trust was not an association vdthin the meaning 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 single building under a longtsnn lease, and the trustees' 

only duty was to collect the rent, pay taxes, etc., and distribute the net 

income among the certifioate holders. 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 determining when a 

txst is an association courts must look to the 

substance rather than the form of the entityused to 

carry on the business. Likewise, it must be more 

influenced by the instrument's activities than the 

ascertainment of the possible field of its activity. 

. . ." 

The "activity" test of business trusts is recognieed by H. 

Rottschaafer, page 306,.op. cit.8 "Trusts ars now classified fortax purnoses 

into holding and operating trusts.. The former are defined as those ir which 

the trustees merely hold property for the collection and 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 'but areassociated together 

inmuch the same mannor as directors in a corporation for the purpose of, and 

are actually engaged in carrying on some business enterprise'; they are deemed 

associations ~independently of my control exercised by the beneficiaries'." 

The New York stock transfer tax statute recognizes the 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". (emphasis ours) Ws believe a like distinction is intend= 

in the Texas Act since it makes taxable only "certificates of interest in any 

business conducted by trustee or trustees." Trustees of a purely "holding" 

trust can hardly be said to be oonducting a business. 
Bon. Gee. H. Sheppard 0 Page 6 (o-4035) 

Another question suggests itself: lhat arethe minimwn numbers 

of certificate holders and trustees possible in a business trust? Mr. 

Rottschaefer answers these questions at page 515 of his article: 

"The mere fact that there was but a a&r&e beneficiary, 

either at its inception or at some subsequent +&as, should 

not affect the conclusions. 

"The case is not as clear when there is but a single 

trustee. The difficulty arises from the absence of instmces in which corporations have but a single director." 

However, he concludes that (E&s 31, page 312) "Business trusts are conceivable that have but a single trustee or a single,benaficiary.s In view of the 

fact that the Texas statute expressly names "trustee or trustees* we believe 

that multiple trustees are not a necessary prerequisite 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 consider the specific fact situations presented 

in your request. 

In the situation presented in your question (a) there appears to be 

neither a trust indenture prescribing the respective rights and duties of the 

trustees and beneficiaries nor trust certificates isaued:to the,beneficiaries. 

The relationship among the four owners of the lease appears to be in the nature 

of an informal partnership with legal title in the name of ens of the partners. 

It is certainly not a quasi-oorporate organication meeting the .,qualifications 

of a business trust, and in our opinion the transfer ofthe interest of one of 

the partners is not subjeot to 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 certificates to evidence the interest of the other men in the lease: Cn its face, this does not describe a 

businsss trust. However, if there exists a trust indenture conferring upon 

the trustee or trustees the powers to engage in an active Imsiness, to buy and 

sell leases, etc., and confers uponthe beneficiaries the power to elect a 

new trustee or trustees, it would be a business trust andthe transfer of 

certificates oftrustsould 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 

Yours vsry truly 

ATTORSEYGENERAL OF TEXAS 

By ,&/Walter R. Koch 

Walter R. Kooh 

Assistant