Court Opinion

ID: 4607827
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:41:28.891325+00
Date Added: 2024-06-11T07:53:35.931894
License: Public Domain

HOVER CONSOLIDATED ROYALTIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hover Consol. Royalties v. CommissionerDocket Nos. 50795, 54327.United States Board of Tax Appeals24 B.T.A. 1041; 1931 BTA LEXIS 1555; November 30, 1931, Promulgated *1555  Where a trust which is taxed as a corporation buys in part of its own units (or shares) of ownership it does not thereby increase the basis for computing depletion on its assets.  F. S. Jacobson, Esq., and E. G. Toomey, Esq., for the petitioner.  A. H. Fast, Esq., for the respondent.  VAN FOSSAN *1042  These proceedings were brought to redetermine the tax liability of the petitioner for the years 1927 and 1928, for which years respondent determined deficiencies in the sums of $589.45 and $132.52, respectively.  On motion, Dockets Nos. 50795 and 54327 were consolidated for hearing and report.  The petitioner alleges in effect that the respondent erred in refusing to allow depletion on an alleged capital expenditure in the sum of $25,000 paid by the petitioner in 1926 for 1,250 Class B units of beneficial interest in itself.  FINDINGS OF FACT.  On November 16, 1920, Herbert A. Hover and others organized a common law trust under the laws of the State of Montana.  The agreement establishing the trust contained, among others, the following provisions relating to its purposes: A.  To engage in and carry on the business of buying and selling, *1556  exchanging or otherwise acquiring, or disposing of, oil, leases, government prospecting permits and leases, mining properties, and buying, selling or exchanging or otherwise acquiring or disposing of Royalties and operating interests in oil, gas, and petroleum, properties or wells, or in mining properties, or the oil, gas, petroleum or minerals extracted from the same, and buying, selling, exchanging, or otherwise acquiring petroleum and petroleum products, natural gas and minerals of every kind and nature, and to engage in and carry on any other necessary and incidental business in connection with the foregoing which is calculated directly or indirectly to increase or enhance the value of the Trust Estate.  B.  To buy, sell, acquire, own, mortgage, encumber, lease, manage, exchange, dispose of, and deal in the good-will, franchise, property, stocks, securities, beneficial units, shares and units of corporations, trusts and associations engaged in whole or in part in any business similar to any business above mentioned.  C.  To buy, sell, license, acquire, own, mortgage, encumber, lease, manage, exchange, dispose of, and deal, in franchises, contracts, concessions, leases, real*1557  estate, patents, patent rights, trade names, trade marks, copyrights and any and all property of whatsoever nature, real, personal, or mixed, tangible or intangible in any way believed by the Trustees to be valuable, necessary or incidental in connection with the carrying on of any business above mentioned.  D.  To do all and every act and thing necessary or incidental in connection with the carrying on of any business above mentioned.  The trust estate was divided into 2,500 beneficial units of the expressed par value of $100 each, the certificates therefor reading as follows: This certifies that * * * is the holder of * * * unit in the capital of Hover Consolidated Royalties fully paid and non-assessable, subject to Declaration of Trust in favor of said organization, dated November 16, 1920, and recorded in Book 10, at page 512, Miscellaneous Records of Fergus County, Montana, and recorded November 24, 1920, as document Number 3946 in the *1043  office of Clerk and Recorder of Lewis and Clark County, Montana, transferable only on the books of the Organization in person or by attorney upon surrender of this Certificate properly endorsed.  On December 9, 1920, the units*1558  were divided equally into two classes, arbitrarily denominated Class A and Class B units.  The division was made pursuant to the following resolution adopted by the trustees of the petitioner: WHEREAS, the Declaration of Trust, dated November 16, 1920, and recorded at page 10, book 512, of Miscellaneous Records of Fergus County, Montana, provided that 2500 units shall be issued in payment for the properties and cash described in said Declaration of Trust, and WHEREAS, all said units of Hover Consolidated Royalties were originally created as of equal value and with equal rights and privileges, and all were issued as provided by the Deed of Trust previously herein mentioned, and WHEREAS, Herbert A. Hover has delivered to this Company a waiver of right to receive dividends on 1250 units represented by certificates Nos. 1, 2, and 7 until dividends of $100.00 per unit has been paid on the remaining units, and WHEREAS, it is desired to accept said proposition by proper resolution: NOW, THEREFORE, It is resolved by the Trustees of Hover Consolidated Royalties, that until one hundred dollars ($100.00) per unit has been paid in dividends on 1250 units other than those represented*1559  by Certificates Nos. 1, 2, and 7, no dividends shall be paid on 1250 units represented by certificates Nos. 1, 2, and 7 and that after One Hundred Dollars ($100.00) per unit has been paid in dividends on said remaining units, all units of Hover Consolidated Royalties shall receive equal dividends, and no unit shall thereafter be entitled to receive more than any other.  Nothing herein shall affect any other right or benefit of any of said units as provided in said Declaration of Trust.  A copy of this resolution shall be inserted on certificates Nos. 1, 2, and 7, and on any certificates issued in lieu thereof.  and was based on the following waiver of right presented to the trustees by Hover: To the Trustees of Hover Consolidated Royalties: Gentlemen: My present intention is to sell approximately one half of my units of Hover Consolidated Royalties to the public, and to retain approximately half of same.  I desire in so doing to give preference in dividends to the half of such units which I anticipate selling until the par value of same is repaid in dividends.  I therefore waive all rights to receive dividends on my 1250 units, represented by Certificates Nos. 1, 2, and*1560  7, until One Hundred Dollars ($100.00) per unit has been paid in dividends on all other units, and thereafter all owners of units to receive equal dividends on each unit.  Dated Lewistown, Montana, December 9, 1920.  On June 1, 1926, the holders of Class A certificates (of the par value of $125,000) had received $104,500 in dividends.  On that day the trustees of the petitioner had on hand approximately $40,000 in cash and quick assets.  Under the resolution of December 9, 1920, the owner of Class A certificates would have been entitled to $20,500 of that amount.  On July 21, 1926, the petitioner purchased from Hover*1044  his 1,250 Class B units for $25,000.  The certificates therefor were delivered to the treasurer of the petitioner, are still held by him, and never have been canceled.  The certificates have been held as treasury stock and their amount deducted from the outstanding capital of the petitioner.  The purchase money was accumulated from the earnings of prior years and the income-tax had been paid thereon.  The payment for the units was charged by the petitioner to the oil royalties account as property acquired.  From 1920 to 1925, inclusive, the petitioner*1561  purchased oil royalties and working interest in oil and gas leases, principally in the Cat Creek Field.  No royalties were acquired in 1926, the purchase of the Hover units being the only purchase made.  The petitioner has made its income-tax returns as a corporation and it has been so taxed.  OPINION.  VAN FOSSAN: The petitioner is a common law trust in which the shares are represented by certificates of beneficial interest.  The entire issue of such beneficial units was 2,500 units or shares of the "expressed" par value of $100 each.  On July 21, 1926, the petitioner, through its trustees, purchased 1,250 Class B units from Herbert A. Hover for $25,000.  The petitioner owned certain oil royalties and working interests in oil and gas projects.  The respondent has allowed a proper depletion on such assets.  The petitioner contends, however, that it is entitled to some allowance for "exhaustion or amortization or an offset of some other name," on the theory that the purchase of the Class B units was the acquisition of a property right to oil and that it is, therefore, the purchase of a depletable asset.  We can not agree with the petitioner's contention.  Its income-tax returns*1562  were made as a corporation and it was so taxed.  The certificates of beneficial interest correspond to shares of common stock in a corporation.  They are assignable and transferable exactly as stock certificates.  They represent an interest in the capital of the petitioner.  They neither purport to, nor do they represent an ownership in or a property right to oil.  Under the provisions of the trust agreement the trust might engage in many kinds of business.  On July 21, 1926, it so happened that its assets consisted of oil royalties and operating interests in oil and gas wells.  When petitioner bought in 1,250 units of its ownership, it acquired no additional depletable assets.  The only practical effect of the purchase was to make the holdings of its remaining unitholders proportionately more valuable.  . In the cited case we held that a corporation's own shares are not *1045  assets, but merely a convenient form for evidencing shareholding interests.  Such an increase in the proportionate value of the remaining units would not increase the base for determining depletion.  Decision will be entered for the respondent.