Myers, Long & Co. v. Commissioner

MYERS, LONG & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Myers, Long & Co. v. Commissioner

Docket Nos. 12358, 24511.

United States Board of Tax Appeals

14 B.T.A. 460 ; 1928 BTA LEXIS 2975 ;

November 27, 1928 , Promulgated

*2975 Persons associating themselves together without definite organization for the development of oil and gas lands held not to constitute a corporation within the meaning of section 2 of the Revenue Acts of 1918, 1921, and 1924.

George M. Hosack, Esq., and W. D. McBryar, Esq., for the petitioner.

Harold Allen, Esq., for the respondent.

MURDOCK

*461 These proceedings involve additional assessments of income taxes for the years 1920 to 1924, inclusive, as follows: 1920 $38,740.72

1921 12,846.92

1922 1,275.33

1923 683.37

1924 19.76

The sole question for determination is whether or not the petitioner is to be taxed as a corporation, or whether the activities of the persons interested constitute a joint venture or a partnership.

FINDINGS OF FACT.

In 1912 James B. Myers of Waynesburg, Pa., went into business with F. B. Long. They were engaged in contracting and drilling oil wells. On April 23, 1918, they entered into a lease agreement with J. T. Wright and others, which by its terms purported to "grant, demise and let" to the partners all the oil and gas in and under certain premises therein described and situated *2976 in Washington Township, Greene County, Pennsylvania. This lease was for a term of ten years and as much longer as the premises might be operated for the production of oil and gas, or as oil or gas might be found in paying quantities on such premises.

On March 10, 1919, Myers entered into a lease with Elizabeth and William Meek, covering property in Washington Township, Greene County, Pennsylvania, under the terms of which said property was leased for the purpose of drilling, operating and controlling oil or gas. The term fixed in this instrument was for a period of five years and as long after such period as oil or gas should continue to be found thereon in paying quantities.

Myers and Long were not in a position to finance the drilling of the necessary wells under the leases and Charles T. Sutton was enlisted to obtain financial assistance. As a result of his efforts, various subscriptions were obtained. A subscription agreement was prepared and entered into between J. B. Myers, F. B. Long and Charles T. Sutton, as parties of the first part and various subscribers as parties of the second part. This agreement is dated May 1, 1919, and contains the following provisions:

*2977 * * *

WITNESSETH, that whereas, the said parties of the first part are the owners of two certain oil and gas leases on land in Washington Township, Greene County, Pennsylvania, described as follows:

* * *

AND *462 WHEREAS, the said parties of the first and second part are desirous of drilling one or more wells for oil or gas on said leases.

NOW THEREFORE, in order that this project may be financed it is agreed that a co-partnership shall be formed and 180 shares of stock issued at One Hundred Dollars per share, twenty-two and one-half shares of which are to be carried for the parties of the first part, free of cost, in the first well drilled on said leases in consideration for said leases and the management and supervision of drilling of said well, the remaining 157 1/2 shares to be paid for at the aforesaid rate of One Hundred ($100.00) dollars per share, which amount is to be used for the purpose of drilling and operating said leases. In case the cost of drilling and operating shall not equal this amount, then any surplus remaining shall be distributed to the shareholders owning the 157 1/2 shares according to their respective shares therein.

It is also agreed *2978 that a majority in interest shall control all transactions of this partnership.

According to the terms of this agreement, as above set forth, we, the undersigned, hereby subscribe for the number of shares set opposite our names and agree to pay for same as follows: One-half on or before May 20, 1919, and the remaining one-half on or before June 20, 1919, and it is further made part of this agreement and specifically agreed to by each party signing this agreement that on failure on his part to make said payments when due, he shall forfeit his stock and the amount paid thereon, after ten days notice in writing. All payments under this agreement to be made to Chas. T. Sutton, treasurer, or to some one selected in his stead by a majority of the shareholders in interest.

* * *

Some time after the original subscribers, 52 in number, had paid their subscriptions and the wells had begun to yield in considerable quantities, Smith Watson commenced to purchase shares from the original subscribers, such purchases being evidenced by informal instruments containing words of assignment. The shares of 34 subscribers were purchased in this way.

A well was started in June, 1919, the oil *2979 being run in the name of Myers, Long & Co. In obtaining the subscriptions subscribers were given an opportunity to ascertain who the other subscribers were. One person declined to subscribe at the time subscriptions were sought, on the ground that he did not care to join an enterprise with the persons who were constituting the group of subscribers. He later, however, obtained a share.

No formal meetings were ever called. Frequently those interested would meet on the street and discuss the affairs of the oil enterprise. At one time there was a meeting called but it was extremely informal in character. No one presided and the discussion was of an informal nature.

Certificates of stock were issued August 20, 1920, and signed by J. B. Myers, president, and Smith Watson, secretary. These persons had never been chosen to the offices which they were designated on the certificates as occupying, nor was the issuance of the certificates ever authorized at a meeting. Under the subscription agreement Charles *463 T. Sutton was designated as treasurer to whom the subscriptions were to be paid, with the addition of the phrase "or to some one selected in his stead by a majority *2980 of shareholders in interest." There was no board of directors, no seal and no by-laws. The leases remained in the names of the original lessees.

On November 19, 1920, an instrument was filed in the office of the Prothonotary of Greene County, Pa., under an act requiring individuals conducting a business under an assumed name to file a certificate in which the name of a person conducting such business is set forth. In the certificates so filed, it is stated that the business conducted under the name of Myers, Long and Company is being conducted by J. B. Myers, F. B. Long, D. M. Anderson, Mrs. J. C. Carpenter, J. S. Johnson and Smith Watson.

OPINION.

MURDOCK: The question for determination in this case is how the petitioner should be classified for the purposes of taxation, that is to say, whether as a corporation (in which are included associations, joint stock companies and insurance companies) as a partnership, or as a group of joint adventurers.

The respondent cites numerous definitions of the term "joint stock companies" to the effect that such a company is a partnership with a capital divided into shares so as to be transferable without the consent of all the partners. *2981 It is clear, however, that in order that an association of individuals shall constitute a joint stock company something more is required than the mere issuance of so-called shares.

In , the Supreme Court passed upon the applicability of the special excise tax to a Massachusetts trust. In deciding that the word association as used in the statute included a Massachusetts trust, the court made the following observation:

The word "association" appears to be used in the Act in its ordinary meaning. It has been defined as a term "used throughout the United States to signify a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise." 1 Abb. Law Dict. 101 (1879); 1 Bouv. Law Dict. (Rawle's 3rd Rev.) 269; 3 Am. & Eng. Enc. Law (2d ed.) 162; and , in which this definition was cited with approval as being in accord with the common understanding. Other definitions are: "In the United States, as distinguished from a corporation, a body of persons organized, for the prosecution of some *2982 purpose, without a charter, but having the general form and mode of procedure of a corporation." Webst. New Internat. Dict. "[U.S.] An organized but unchartered body analogous to but distinguished from a corporation."

In the case of , the Supreme Court in considering the definition of the term "corporation" *464 contained in the Revenue Act of 1918, made the following comment:

Unincorporated joint stock associations, although technically partnerships under the law of many States, are not in common parlance referred to as such. They have usually a fixed capital stock divided into shares represented by certificates transferrable only upon the books of the company, manage their affairs by a board of directors and executive officers, and conduct their business in the general form and mode of procedure of a corporation. Because of this resemblance in form and effectiveness, these business organizations are subjected by the Act to these taxes as corporations. (Italics ours.)

The method of conducting the petitioner's business bore almost no resemblance to the method of conducting business ordinarily *2983 used by a corporation. The petitioner was very loosely organized. No officers or directors were ever elected. No by-law or method of doing business was ever regularly adopted. Digging of wells was left to the partnership of Myers and Long. What few policies were determined by the partnership, as for example, the question of drilling additional wells, were the result of the opinions of the various parties interested expressed to one another on the street or else were the result of the judgment of the partnership of Myers and Long to which nobody interested in the petitioner ever took any objection. The subscription agreement is the only one to which we can look for the intention of the parties. It contains none of the provisions commonly found in corporate charters with the exception of the provision with regard to the issuance of shares. It does not provide for a directorate or for the election of any officer except the treasurer. No director or officer was ever elected. No shares were ever regularly issued. After a number of the original subscribers had sold their interests, the purchaser of these interests had certain certificates distributed. The issuance of these certificates *2984 was never authorized by those interested. The signatures attached to them carried no authority. Under the circumstances these certificates had no legal effect whatsoever upon the petitioner.

While there is some slight evidence that the subscribers in this case had an opportunity to determine who the other subscribers were, we can not find that there was a true delectus personae. We are therefore of the opinion that the organization composed of the persons who subscribed to the so-called shares in this enterprise was neither a joint stock company nor an association but that such persons were joint adventurers and must be taxed as individuals.

Reviewed by the Board.

Judgment will be entered for the petitioner.