Bowlen v. Commissioner

P. D. Bowlen (Alleged) Withholding Agent for Guelph Texas Oil Syndicate, Petitioner, v. Commissioner of Internal Revenue, Respondent. P. D. Bowlen (Alleged) Withholding Agent for Toronto Texas Oil Syndicate, Petitioner, v. Commissioner of Internal Revenue, Respondent Bowlen v. Commissioner Docket Nos. 1430, 1431 United States Tax Court 4 T.C. 486; 1944 U.S. Tax Ct. LEXIS 5; December 18, 1944, Promulgated *5 Decisions will be entered for the respondent. Petitioner was the manager of two Canadian syndicates owning oil wells or interests therein in Texas. Neither was engaged in trade or business in the United States or had any office or place of business in this country. During some of the years involved petitioner received checks payable to him representing the proceeds of oil produced and sold, and he remitted the checks to Canada, for payment of expenses and distribution of the balance to the syndicate members. Thereafter, under petitioner's direction, the checks, still payable to petitioner, were sent by the purchasing pipe line companies directly to his attorney in fact in Canada. Held, petitioner was a withholding agent within the meaning of section 143 (b) of the various controlling revenue acts, and he should have deducted and withheld from the amounts remitted to Canada the tax specified in section 143 (b); held, further, penalties for failure to file returns as withholding agent were properly imposed. George S. Atkinson, Esq., and Arthur Squyres, C. P. A., for the petitioner. J. Marvin Kelley, Esq., for the respondent. Arundell, Judge. ARUNDELL *6 *486 The respondent has determined deficiencies in income tax, together with interest and penalties for delinquency in filing returns, against P. D. Bowlen as withholding agent for Guelph Texas Oil Syndicate and Toronto Texas Oil Syndicate, or for the individual members of the syndicates for the years and in the amounts as follows: *487 Docket No. 1430 Deficiency Year in tax 25% penalty 6% interest Total [1933] $ 632.00 $ 158.00 $ 324.60 $ 1,114.60 [1934] 411.43 102.86 186.63 700.92 [1935] 196.24 49.06 77.24 322.54 [1936] 209.43 52.36 69.87 331.66 [1937] 292.10 73.03 79.92 445.05 [1938] 244.95 61.24 52.32 358.51 [1939] 179.40 44.85 27.56 251.81 [1940] 182.85 45.71 17.12 245.68 Total 2,348.40 587.11 835.26 3,770.77 Docket No. 1431 [1932] $ 129.13 $ 32.28 $ 74.07 $ 235.48 [1933] 236.12 59.03 121.27 416.42 [1934] 353.31 88.33 160.26 601.90 [1935] 117.04 29.26 46.07 192.37 [1936] 86.05 21.51 28.71 136.27 [1937] 114.14 28.54 31.23 173.91 [1938] 92.56 23.14 19.77 135.47 [1939] 62.58 15.65 9.61 87.84 [1940] 58.18 14.55 5.45 78.18 Total 1,249.11 312.29 496.44 2,057.84 While the facts in the two cases are *7 not identical, it was agreed that the cases should be consolidated for hearing. The issues presented are: (1) Whether or not petitioner is liable for taxes as withholding agent on certain income earned in the United States and remitted to Canada, under section 143 (b) or section 144 of the applicable revenue laws and, (2) if liable, whether he is liable for penalties determined against him because of failure to file withholding returns. FINDINGS OF FACT. The petitioner, P. D. Bowlen, is, and at all times here material was, a citizen of Canada. His address is now, and was during all the years involved, 137 Rowland Drive, Tyler, Texas. During the years 1935 to 1938, inclusive, he resided in Tyler, Texas. His place of residence during the other years involved does not appear. In the years prior to 1935 he was employed by a Canadian corporation at Tyler, Texas. On October 21, 1932, he acquired, by assignment from Leo Marwil, an oil and gas lease on certain property located in Rusk County, Texas. By the terms of the lease one-eighth of all the oil and gas to be produced from the land was reserved to the fee owner, and one-eighth of the remaining seven-eighths was reserved to Marwil. *8 In consideration of the assignment, petitioner assigned to Marwil a right to a fixed percentage of all oil and gas produced until the sum of $ 5,000 was paid. On October 26, 1932, a driller agreed to drill a well upon the leasehold for the consideration of $ 10,000. Without adequate funds himself, petitioner interested several friends and relatives in Canada to *488 join with him in the exploitation of the lease and together they formed the Guelph Texas Oil Syndicate. The syndicate agreement was executed on November 4, 1932, at Guelph, Ontario, Canada. In this agreement it was recited that petitioner had agreed "to bring the said well and the necessary lands surrounding the same into the Syndicate hereby formed in consideration of the issue to him of ten of the units composing or forming part of the capital of the Syndicate." The agreement further provided as follows: Now This Agreement Witnesseth that a Syndicate is hereby formed for the purpose of acquiring from the said Patrick Dennis Bowlen all his right, title and interest in the said well now being drilled on the said lands when completed and of acquiring all oil that shall or may issue therefrom and for the purpose*9 of marketing or otherwise disposing of said oil at a profit. The Syndicate shall be known as The Guelph Texas Oil Syndicate. The capital of the Syndicate shall be Twenty-Five Thousand Dollars ($ 25,000.00) and shall be considered to be divided into twenty-five (25) units of One Thousand Dollars ($ 1,000.00) each. The holders for the time being of the units shall be members of the Syndicate. Each subscriber hereto shall be entitled to the number of units set opposite his signature. The units shall be transferable but not divisible. A transfer must be registered. The managers of the Syndicate shall be the said Patrick Dennis Bowlen and or such other person or persons as the members shall hereafter by a majority vote elect, and Martha Irene Watters of the City of Toronto shall be the secretary until such time as a secretary is elected by the members. The price of each unit shall be paid to the managers in cash or upon such terms of credit as shall from time to time be decided upon subject to call but no member shall be liable for more than the amount of the price of the units subscribed for by him. All moneys paid to the managers in respect to the purchase price of units or otherwise*10 shall be paid into a chartered bank and shall be applied by the managers for the purpose only of the Syndicate. The managers shall have control of the affairs of the Syndicate and may conduct them in such manner as they think best. It Is Expressly Declared that the managers shall (a) complete the drilling of the said well and bring it into production (b) shall make arrangements for the sale, marketing and disposal of the oil produced by the said well (c) and otherwise to conduct the general business and management of the affairs of the Syndicate but the managers are hereby expressly restricted from disposing of the undertaking of the Syndicate without the authority of the members expressed in general meeting as hereinafter provided. The managers may convene meetings of the Syndicate to deliberate and decide on any of the affairs of the Syndicate; every unit shall confer one vote; the majority of votes to decide; votes may be given in person or by proxy; five days notice of meetings shall be given. The profits shall be shared and losses, if any, shall be borne by the members proportionately to the number of units held by each. In case of dissolution by sale or disposition of *11 the property of the Syndicate the moneys resulting shall be applied, first, in paying all debts and liabilities of the Syndicate. Second, in repaying the capital contributed by the members in respect of their units and the surplus shall be divided among the members in proportion to their units. *489 Meetings shall be held at such time and place as may be deemed convenient by the managers and notice to such subscribers may be given by post addressed to him at his address below mentioned. The twenty-five units of the face value of $ 1,000 each were subscribed by eight individuals, in addition to the petitioner, all residents in and citizens of Canada. Certificates bearing the number of units purchased by each were issued as evidence of the interest of the various members. The title to the lease was not conveyed to the syndicate, but remained in the name of the petitioner. The well was drilled and began to produce in 1932. The oil was purchased by Henderson Pipe Line Co. On December 6, 1932, petitioner, Marwil, and the fee owner executed an instrument termed a "division order," directing the manner in which the purchaser of the oil should make payment. Under this instrument*12 petitioner's share was to be paid directly to him. The name of the syndicate did not appear on the instrument, nor were any payments to be made to the syndicate. During the years 1932 and 1933 petitioner received the checks payable to him in this country and mailed them to "Miss M. I. Watters," the secretary of the syndicate in Canada. In 1934 Toronto Pipe Line Co. supplanted the Henderson Co. as purchaser of the oil produced from this well. The Henderson Pipe Line Co. was directed to send all checks payable to petitioner directly to Miss Watters in Toronto, to whom petitioner at that time gave a power of attorney to endorse, in his name, all checks payable to him from the pipe line company. The syndicate did not itself operate the well, but employed a neighboring company to perform what slight work was necessary, to whom it paid $ 25 per month. Petitioner occasionally inspected the well. On June 21, 1932, petitioner entered into an agreement with the Lone Pine Oil Co. whereby he agreed to drill and equip an oil well on a Texas leasehold owned by the Lone Pine Oil Co. In consideration thereof, petitioner was to receive a certain percentage of the proceeds of all oil produced *13 until he was paid $ 15,000, and thereafter 43.75 percent of the proceeds of all oil produced as long as the well should operate, petitioner to pay his proportionate share of operating expenses after receipt of the $ 15,000. Lone Pine retained the right to operate the well. On July 18, 1932, petitioner and Canadian friends and relatives entered into a second syndicate agreement to finance the drilling of this well. The agreement reads in part as follows: We, the undersigned, hereby jointly and severally covenant and agree each with the other and the others as follows: -- 1. The undersigned, who together are the owners of the twenty units into which the interest heretofore held by P. D. Bowlen in a producing well hereinafter *490 referred to, has been divided, hereby constitute themselves and their successors, into a Syndicate. 2. The business of the Syndicate shall be carried on under the style of the "Toronto-Texas Syndicate," herein called the "Syndicate". 3. The Syndicate shall have an office at Toronto, Canada, and may have offices at such places in the United States of America as may be agreed upon. 4. The purpose of the Syndicate is to administer jointly on behalf of the*14 individual Unit Holders, their respective interests in a producing well in Rusk County, East Texas, known as the "J. B. Wilson well". 5. Each of the subscribers hereto shall be entitled to the number of units set opposite his signature. The units shall be transferable and divisible. Any transfer of ownership of units must be registered with the Manager of the Syndicate. 6. M. I. Watters shall be the Manager of the Syndicate, until her successor shall be appointed. 7. The Manager shall be entitled to receive all sums of money to which the Syndicate or the members thereof may become entitled, and deposit same in a Bank account in the Union Trust Company, Limited, Toronto, in the name of the Syndicate. After deducting the ordinary expenses of administration, she shall account monthly to the Unit Holders for their respective shares in same. All cheques to be drawn on the fund shall be signed by the Manager or by such other person as the Syndicate members from time to time appoint "on behalf of the Toronto-Texas Syndicate". All cheques so drawn shall be valid and The Union Trust Company, Limited, shall not be bound to see to the execution of any trust or otherwise as to the application*15 of the monies deposited. 8. The Manager may convene meetings of the Syndicate and decide on any affairs of the Syndicate; every unit to confer one vote; the majority of votes to decide; votes may be given in person or by proxy; three days notice of all meetings shall be given. 9. Notices to each subscriber may be given by post addressed to him at his address below mentioned. Notice so given to be deemed served twelve hours after posting. 10. The Manager shall keep in a book for the purpose a register of memberships in the Syndicate and a record of transfer of memberships. 11. The Manager shall be entitled to such remuneration as from time to time may be determined by the Syndicate at a General Meeting. 12. The Manager shall not have power to enter into any obligation which may involve the members of the Syndicate in any liability. If however, at any future time it is considered in the interests of the Syndicate to incur any extraordinary or capital expenditures on the said well, it shall first be submitted to a special meeting of the Syndicate called for that purpose (of which three days' notice in writing shall be given) and ratified and adopted by at least three-fourths of the*16 unit holders, whereupon it shall become binding upon all the members of the Syndicate who agree to contribute their proportionate part. The agreement was signed by the subscribers, numbering eleven, including the petitioner. No certificates of interest or other evidence of ownership were issued. Miss Watters was appointed secretary and petitioner was authorized to transact all the business of the syndicate. Sometime prior to July 1932 petitioner contracted with R. H. Dearing & Sons to drill the well for a fixed amount. The well was completed and began to produce in July 1932, and the oil was sold to the *491 Sun Oil Co. On July 28, 1932, a division order was given the Sun Oil Co. by petitioner and Lone Pine Co. showing petitioner to be entitled to a 5/24 working interest in the well. No provision was made for payment to Toronto-Texas Syndicate. Sometime thereafter petitioner directed that the checks, payable to him, be sent directly to Miss Watters in Toronto, and he gave Miss Watters a power of attorney to endorse all checks payable to him from the Sun Oil Co. The syndicate paid Lone Pine Co. $ 25 per month to operate the well. Neither syndicate had an office or seal. *17 There were no formal meetings, and corporate formalities were not observed. Miss Watters kept all the books and records, paid all bills and expenses, conducted all necessary correspondence, and made all distributions from her apartment at 408 Oriole Parkway, Toronto, Canada. In return for her services she was paid $ 15 per month by each syndicate. Expenses of operation included production taxes, road, school, and other local taxes in Texas, amounts paid for the operation of the wells, and the salary of Miss Watters. Miss Watters received the checks for the proceeds of the oil sold, deposited the amounts in the bank, paid all expenses, and distributed the balance periodically to the unit holders of the syndicate. The Commissioner determined that the net income remitted in each year by petitioner to Miss Watters consisted of dividends of the respective syndicates for the accounts of the members, and determined that petitioner was liable as withholding agent for the tax due on said amounts. In an amended answer in each proceeding, the respondent alleged that if the amounts "remitted by petitioner to Miss M. I. Watters, Toronto, Canada, were not in fact dividends of [the respective*18 syndicates], then in the alternative, the respondent avers and alleges that such sums as are set forth in the deficiency notice represent proceeds, profits or income from the sale of oil belonging to [the respective syndicates] or represent other fixed or determinable annual or periodical gains, profits or income from sources within the United States." OPINION. The broad question presented is whether or not petitioner was required by section 143 (b) or section 144 of the various controlling revenue acts to withhold a tax on amounts representing proceeds from the operation of oil wells remitted by him or under his direction to Canada. Initially it should be observed that this case has been presented on the theory that neither of the syndicates here involved was engaged in trade or business in the United States, or had any office or place of business in this country. The arguments of the respondent are bottomed upon this premise and petitioner has not seen fit to dispute it; *492 indeed, his own case proceeds upon such an assumption. Therefore, accepting the case as presented, we shall assume for the limited purposes of this decision that both syndicates were nonresident of the*19 United States. The statute subjects to withholding of tax certain enumerated types of income and all other "fixed or determinable annual or periodical income" of a nonresident alien individual or of a nonresident foreign partnership or corporation. The immediate question is whether or not the amounts received from the pipe line companies in payment of the syndicates' share of the proceeds of the oil produced and sold were "fixed or determinable annual or periodical income." The regulations have consistently provided as follows: Art. 143-2. Fixed or determinable annual or periodical income. -- * * * * Income is fixed when it is to be paid in amounts definitely predetermined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. The income need not be paid annually if it is paid periodically; that is to say, from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with some one's will or with the happening of an event does not make the payments any the less determinable or periodical. * * * The income derived*20 from the sale in the United States of property, whether real or personal, is not fixed or determinable annual or periodical income. Petitioner argues that the amounts in question are income derived from the sale of personal property, the oil, in the United States within the meaning of the last quoted sentence of the regulations set forth above. The argument is deceptive. "The production of oil and gas, like the mining of ore, is treated as an income-producing operation, not as a conversion of capital investment as upon a sale, and is said to resemble a manufacturing business carried on by use of the soil." Anderson v. Helvering, 310 U.S. 404. It follows that the proceeds received from the pipe line company constitute ordinary income. Income is said to be determinable whenever there exists a basis of calculation whereby the amounts to be paid may be ascertained. Art. 762, Regulations 77; art. 143-2, Regulations 86, Regulations 94, Regulations 101, and Regulations 103. In the case of both syndicates the amount of income due each was definitely ascertainable by the simple expedient of multiplying the number of barrels of oil sold each month by the*21 prevailing price per barrel. It is clear that the income was periodical within the meaning of the statute, inasmuch as monthly remittances were made by the pipe line companies during the entire period involved. We hold, therefore, that the income involved in each case constitutes fixed or determinable annual or periodical income within the meaning of section 143 (b) of the Internal Revenue Code and of prior acts. *493 The next question is whether or not petitioner was properly a withholding agent in regard to the income. The statute in sweeping terms subjects to the obligation to withhold, all persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any fixed or determinable annual or periodical income of nonresident alien individuals or of nonresident foreign partnerships or corporations. Petitioner was, under the terms of the Guelph Texas Syndicate agreement, the manager of that syndicate. The Toronto Texas Syndicate agreement named Miss Watters manager of the syndicate until a new manager should be elected, but by his own admission petitioner managed that syndicate also. It was to petitioner that the checks from the pipe line*22 companies were made payable and during the whole time here involved he either picked up the checks and sent them to Canada himself or had them sent under his direction to Miss Watters as attorney in fact for him for distribution to the various members of the syndicates. The record affords no very definite indication of petitioner's residence during several of the years here involved. It is clear that he was resident at Tyler, Texas, for the years 1935 to 1938, inclusive. Prior to that time he was employed in Texas by a Canadian company and apparently spent considerable and perhaps all of his time there. The power of attorney executed in favor of M. I. Watters by petitioner in 1934 recited that he was of the County of Smith, State of Texas. During the early years he personally picked up the checks from the pipe line companies in Texas. No evidence relative to his residence in the years after 1938 is presented. In these circumstances, if it is material (see Lord Forres, 25 B. T. A. 154), we would be forced to hold that petitioner has failed to show that he was other than a resident of the United States during all of the years here involved. For the*23 foregoing reasons, we are of the opinion that petitioner was a "person * * * having the control, receipt, custody, disposal or payment of * * * fixed or determinable annual or periodical gains, profits, and income * * * of any nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens * * * ." He was, therefore, required to deduct and withhold the tax specified in the various applicable revenue acts. We do not feel obliged to decide in this proceeding whether the syndicates were partnerships or associations within the meaning of the Federal revenue laws, a question strenuously argued by the parties. The Commissioner has determined that petitioner is liable as withholding agent for taxes in a specific amount on remittances to Canada for the benefit of the syndicates or the individual members thereof. It is necessary only to decide whether or not he was required to withhold *494 these amounts. We are not faced with the problem of how these syndicates would be taxed if they were resident in this country, nor is the withholding*24 agent required to decide at his peril what the nature of a nonresident foreign joint venture might be under the laws of the United States. We hold only that petitioner was obliged under the provisions of section 143 (b) of the various controlling revenue acts to withhold the tax required to be withheld by that section on amounts remitted to nonresident alien individuals or foreign partnerships. On this point the Commissioner is sustained. The remaining question concerns the correctness of the determination of penalties for each of the years in question for failure to file the returns required. Under section 291 of the Revenue Acts of 1932 and 1934 and section 406 of the Revenue Act of 1935, the imposition of the penalty is mandatory if no return has been filed. Scranton-Lackawanna Trust Co., 29 B. T. A. 698; affd., 80 Fed. (2d) 519; certiorari denied, 297 U.S. 723; Kathryn Lammerding, 40 B. T. A. 589; affd., 121 Fed. (2d) 80. Under section 291 of the Revenue Act of 1936 and subsequent acts, the penalty is required unless the taxpayer shows*25 that the failure to file was "due to reasonable cause and not due to willful neglect." Estate of Frederick C. Kirchner, 46 B. T. A. 578. Reasonable cause for failure to file has not been shown in this case. "Nothing more than belief that one is not required to file a return is not enough to discharge the penalty." West Side Tennis Club, 39 B. T. A. 149; affd., 111 Fed. (2d) 6; certiorari denied, 311 U.S. 674. On this point the determination of the Commissioner must be sustained. Decisions will be entered for the respondent.