Court Opinion

ID: 4600974
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:26:39.991723+00
Date Added: 2024-06-11T07:59:30.446432
License: Public Domain

GUS V. WINSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  FRANK W. DENTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  O. M. COULTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  W. S. MITCHELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  MRS. M. S. MITCHELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Winston v. CommissionerDocket Nos. 34242, 34507, 34509, 34510, 39349-39351, 42233.United States Board of Tax Appeals22 B.T.A. 1194; 1931 BTA LEXIS 1995; April 13, 1931, Promulgated *1995  1.  Ownership of an oil and gas lease determined.  2.  The El Dorado Syndicate was not an association taxable as a corporation.  3.  The respondent properly imposed a delinquency penalty against the petitioner, Coulter, for 1926.  Albert A. Jones, Esq., for the petitioners.  Warren F. Wattles, Esq., and L. A. Luce, Esq., for the respondent.  LANSDON *1194  In five of these proceedings, Docket Nos. 34242, 34507, 34509, 34510 and 42233, which are under section 280 of the Revenue Act of 1926, the respondent asserts that the petitioners are liable for the payment of a deficiency in income taxes determined against the El Dorado Syndicate, hereinafter sometimes referred to as the Syndicate, for 1925 and 1926 in the respective amounts of $2,448.74 and $27,441.42.  Liability has been asserted against each of the petitioners, Winston, Denton, Coulter, and W. S. Mitchell, in the amount of $29,890.16.  The liability of Mrs. M. S. Mitchell has been fixed by the respondent in the amount of $26,250.  The three proceedings numbered 39349, 39350, and 39351 pertain to the individual income tax liability of petitioners Winston, Denton, and Coulter, against*1996  whom the respondent has asserted deficiencies for 1926 in the respective amounts of $981.98, $7,095.57, and $1,073.98, plus a penalty for delinquency of $268.50 as to Coulter.  Counsel for the parties agree that the Syndicate had been liquidated and its assets distributed to the members thereof, each receiving in excess of a specified amount, which eliminates from these proceedings any question of transferee liability for any taxes due by the Syndicate.  There are two issues common to all eight proceedings: (1) Whether the Syndicate owned all or only one-half of a certain *1195  oil and gas lease; and (2) whether the Syndicate was an association taxable as a corporation.  Additional issues are presented in Docket Nos. 39350, 34510, 42233, and 39351, as follows: (1) The individual interest, if any, which Denton had in a certain oil and gas lease; (2) whether W. S. Mitchell or his wife, Mrs. M. S. Mitchell, was the owner of the Mitchell interest in the Syndicate; and (3) did the respondent properly impose a delinquency penalty against the petitioner, Coulter, for 1926?  The five transferee proceedings have previously been consolidated by order for hearing and decision.  Counsel*1997  for the parties have agreed that the evidence introduced in those cases shall apply to the other three proceedings.  All eight cases will be disposed of in this report.  FINDINGS OF FACT.  By contract dated February 28, 1924, W. S. Mitchell, as agent, acquired one-half of the leasehold interest in an oil and gas property located in Butler County, Kansas.  The lease, which reserved the usual one-eighth royalty to the owners of the land, provided that the lessees should drill two wells to the shallow oil sand, the first to be started within 40 days from February 13, 1924, and the second within ten days thereafter.  As consideration for a one-half interest in the lease, Mitchell agreed to "take over and assume the obligation of the drilling requirements at his own expense." Immediately Mitchell approached four of his business associates, suggesting that they join him in developing the property.  Anticipating that all four would enter into the adventure, the following instrument was prepared: ELDORADO SYNDICATE It is proposed to organize a syndicate consisting of ten units or shares of $500.00 each, for the purpose of taking over an oil and gas lease consisting of 320 acres, being*1998  the South Half of 19-25-5 Butler County, Kansas, and drill a test well thereon.  The terms and conditions of the contract under which the lease is taken over is that R. E. Cowen of the National Supply Company of Independence, Kansas, and D. P. Fleeger of Wichita, Kansas, who are the owners of the oil and gas lease thereon, turn the lease over to us, we agreeing to drill two wells to the shallow sand thereon for a half interest and are to have the entire production until we are repaid.  I, W. S. Mitchell, of 204 North Topeka, Wichita, Kansas, am to have the sole management of the Syndicate and am to participate therein for such syndicate units as I subscribe for.  The operation is to be conducted under the name of W. S. Mitchell, Agent.  I am to receive no commission or compensation for my services other than that which accrues to me through my unit interests.  It is proposed to sell five of these units and retain the other five in the treasury for future issuance, if and as found necessary.  The money subscribed *1196  by any of these units is to be used at my discretion in the drilling of two wells and such other wells thereafter as it may be decided upon to drill.  *1999  As Manager or Agent, the entire control and management of the business will be vested in me, with full power and authority to operate or to sell and transfer any of the property at such prices and upon such terms and conditions as in the exercise of my uncontrolled discretion I shall deem for the best interests of the Syndicate.  As Manager or Agent, I am to have the right if it shall be deemed expedient to do so, to form a corporation, or a joint stock association or a trust association, and transfer all the property of the Syndicate thereto and to deliver to any subscriber in discharge of his interest in the Syndicate certificates of stock of the company to be formed, or certificates of interest in the association, or trust certificates in case of a trust association, and upon such delivery I am to be discharged from all liability, the new corporation, joint stock association, or trust association assuming all contracts or agreements which I may have entered into as Manager or Agent.  No enumeration of any particular power or authority vested in me as Manager shall be deemed in any wise to limit the general powers conferred upon me as such Manager or my right to exercise my uncontrolled*2000  judgment or discretion in any connection for the operation of the Syndicate.  Each subscriber agrees to be bound by any action of the Syndicate Manager to the extent of his individual participation in the Syndicate and no more, and upon payment in full of his subscription, the Syndicate Manager will undertake and agree that any contracts or agreements which may be entered into by him shall be confined as to liability to the Syndicate assets and shall impose no personal liability upon the Syndicate subscribers.  Failure of any subscriber to perform and complete the terms of his subscription shall not effect or release any other subscribers, but in such case, or in the event of the release of any subscriber by the Syndicate Manager, other subscribers may be received to take the place of those released or failing to perform.  In case of partial failure on the part of the Syndicate Subscriber to complete his subscription when and as required, the Syndicate Manager in his discretion may declare forfeited any payments heretofore made by any such defaulting subscriber, or may release such subscriber and return the amount actually paid, less the proportionate share of all expenses, and*2001  losses up to the date of such release.  The subscribers shall not be construed to be copartners with the Manager, or with one another, nor liable to contribute more than the amount of their subscription.  Each subscriber shall furnish an address to the Manager and any notice required to be given hereunder shall be sufficient if mailed to such address.  As soon as five units have been subscribed, this Syndicate Agreement is to become binding and effective as to all subscribers.  This Syndicate is to bind and benefit ratably according to the amount of the subscriptions of the parties and shall bind their respective successors, survivors and personal representatives.  The Manager shall have the right to assign his rights as Manager and shall not be liable in any manner whatsoever except for actual bad faith.  I have allotted you a participation of one unit in the above Syndicate which at the price of $500.00 per unit amounts to $ One.Please sign the duplicate original hereof and return the same to the Syndicate Manager and thereupon this letter and the duplicate original so signed *1197  by you, together with similar letters and duplicate originals signed by other*2002  participants shall together constitute the Syndicate Agreement.  (Signed) W. S. MITCHELL.  W. S. MITCHELL, Syndicate Mgr.MAY 5, 1924.  I subscribe for one unit for $500.00 each, according to the above Syndicate Agreement, to all the terms of which I agree.  (Signed) O. M. COULTER, Subscriber.Winston, Denton, Coulter, and Mrs. M. S. Mitchell executed instruments similar to the above and contributed $500 each.  Before drilling operations were commenced, however, W. S. Mitchell called in the agreements for cancellation, since only four of the five units provided for in the agreements had been subscribed.  The following letter addressed to Coulter states the reasons for canceling the Syndicate agreements: Have been trying to get you all day of the telephone, but presume that you have been on the Pirtle property all day.  Mr. Shyrock has not subscribed for his unit in the El Dorado Syndicate and since he has not, Mr. Mitchell is holding up your check for $500 in payment of your unit and also mine, as per our understanding when we originally subscribed for these units.  Since Mr. Shyrock has not mailed us his check to cover the unit which he proposed to take in*2003  this Syndicate, are you willing to join Denton, Mitchell and myself in drilling this property?  We are of the opinion that the four of us would make a nice organization and of course if you join with us in the development of this property, it will probably cost us each more than $500 which we originally talked of, provided we get production in our No. 1 well.  If we do not get production in either the No. 1 or the No. 2 wells, I think that the $500 will be handled with what salvage can be realized out of the two dry holes to take care of the fulfillment of the contract with Mr. Fleiger.  If you are willing to join us under this plan, I wish you would bring your certificate which Mr. Mitchell delivered to you on May 5th in order that we may all surrender the certificates to Mr. Mitchell and continue under an agreement between the four of us.  Of course it must be understood that if we enter into this agreement and in case we get production, that none of us can sell our interest or barter it for sale without first offering it for sale to the other members of our firm.  I wish you would report at the office on this matter as quick as you receive this letter for the reason as before*2004  stated, I have been unable to get you or anyone else on the telephone.  Yours very truly, (Signed) GUS V. WINSTON Thereafter, W. S. Mitchell, Winston, Denton, and Coulter entered into an oral agreement whereby each was to contribute a like amount and to share equally in the profits or losses.  Pursuant to the agreement they proceeded to develop the property.  Mitchell acted as manager, Denton did the geological work, Winston looked after the books, and Coulter was in charge of the field work.  None of them received compensation.  Each paid in $500 at the outset and contributed additional amounts from time to time until the total investment *1198  of each was $1,750.  Approximately $9,000 was borrowed from banks on notes signed by Mitchell and endorsed by Denton.  On December 16, 1924, and January 6, 1925, Denton acquired, by assignments, the other one-half interest in the lease from Cowan and Fleeger.  The money to purchase such interest in the amount of $11,500 was furnished by Denton's mother, Sarah L. Denton, with the understanding that she should share equally with him in the profits from such investment.  There was an understanding between Mitchell and Denton at*2005  the time of the purchase that the former should have one-half of the Cowan and Fleeger interest upon reimbursing Denton for one-half of the cost, which was done from the proceeds of the sale.  On December 27, 1924, Denton delivered one of the Syndicate agreements set forth above to the South West National Bank as security for a personal loan previously made to him.  The instrument was furnished to Denton by Mitchell as evidence of his interest in the adventure known as the El Dorado Syndicate.  Thirty-one wells were drilled on the property up to February 20, 1926, when the entire leasehold interest was sold to the Skelly Oil Company for $210,000.  Title was conveyed to the purchaser by assignments of the lease and a bill of sale covering the personal property.  In addition, and at the request of the purchaser, an instrument purporting to dissolve the Syndicate was executed by Winston, Coulter, and Denton.  The proceeds of the sale were received by Mitchell and distributed to Winston, Coulter, Denton, and himself.  One-half of the amount received by Denton was delivered by him to his mother.  Mitchell deposited his portion in a bank to the credit of his wife.  The Syndicate*2006  filed a partnership income tax return for the year 1925 on March 15, 1926, and filed a like return on March 15, 1927, for the calendar year 1926.  The parties agree that the net taxable income from operations and from the sale of the seven-eighths working interest amounts to $68,080.05 for the calendar year 1925, and to $113,647.58 for the calendar year 1926.  Coulter expected that his income tax return for 1926 would be prepared and filed by Winston, but due to neglect the latter failed to do so.  The return was finally filed on July 11, 1927, when a representative of the Bureau of Internal Revenue interviewed Coulter and told him that he should file a return for 1926.  OPINION.  LANSDON: The issues which raise the question of ownership of the oil and gas lease herein involved are disposed of by our findings of fact above, from which we conclude that the Syndicate consisting *1199  of W. S. Mitchell, Winston, Denton and Coulter owned an undivided one-half interest in the lease; that Denton individually owned an undivided one-eighth interest; that W. S. Mitchell individually owned an undivided one-fourth interest; and that Sarah L. Denton owned an undivided one-eighth*2007  interest.  We come now to the principal issue in these proceedings, namely, whether the Syndicate was an association taxable as a corporation, or a copartnership.  We have found as a fact above that the Syndicate agreements were called in before they became operative and that the four individuals thereafter entered into an oral agreement whereby each was to contribute a like amount and the four were to share profits and losses equally.  The business was carried on pursuant to such agreement, which we think created a partnership.  The respondent erred in his determination that these individuals were organized as an association taxable as a corporation.  Cf. . Section 3176 of the Revised Statutes, as amended by section 1003 of the Revenue Act of 1924, provides in part: * * * In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the Collector in pursuance of the law, the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due*2008  to a reasonable cause and not to willful neglect, no such addition shall be made to the tax.  * * * The petitioner, Coulter, admits that his income tax return was not timely filed.  His explanation therefor is that he thought Winston looked after it.  Winston testified that he was supposed to look after Coulter's return, but forgot it.  We think the penalty should be collected.  Decision will be entered under Rule 50.