Sather Lease--Thomas Sather & Co. v. Commissioner

SATHER LEASE - THOMAS SATHER & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sather Lease--Thomas Sather & Co. v. Commissioner Docket No. 31979. United States Board of Tax Appeals 26 B.T.A. 86; 1932 BTA LEXIS 1370; May 13, 1932, Promulgated *1370 J. E. Bakken, Esq., for the petitioner. P. A. Bayer, Esq., for the respondent. MATTHEWS *86 This proceeding arises from a determination of the respondent of a deficiency of $163.51 in petitioner's income tax for the calendar year 1926. The sole question in issue is whether a group of individuals working a lease of mining lands constituted a partnership or an association taxable as a corporation. FINDINGS OF FACT. A group of individuals, composed of Thomas Sather, Burkich and Wold, was engaged in 1926 in mining under a lease on mining property in Shoshone County, Idaho, and filed a return as a partnership for that year under the name of "Sather Lease." The lease was made by the Bunker Hill & Sullivan Mining Company to Thomas Sather. This company owned certain silver and lead mines in Idaho, which it did not mine itself, but leased. These leases were for a term of one year and were made only to individuals. In case of a partnership, the lease was made to only one of the partners. The lease to Sather for 1926 was on the same form and is identical with a lease executed to him in 1927, a copy of which was submitted in evidence and which is in*1371 material part as follows: THIS AGREEMENT, made and entered into this 10th day of February, 1927, between the Bunker Hill & Sullivan Mining and Concentrating Company, a corporation organized and existing under the laws of the State of Delaware, *87 hereinafter known as the Company, and Thomas Sather of the city of Kellogg, Idaho. WITNESSETH: That for and in consideration of One (1) Dollar, receipt of which is hereby acknowledged, and for and in consideration of the covenants and agreements hereinafter specified, the Company does hereby grant unto the said Thomas Sather the exclusive privilege of mining within that portion of its property [here follows description of property] for the period of one year from the date hereof, or until February 10, 1928 unless sooner forfeited, subject to the terms, provisions and payments hereinafter specified. 1st. Said Thomas Sather will pay all costs of mining development, equipment and delivery of a marketable product to the railway cars, or delivery of concentrating ore to the concentrator of the Company at its option, and will hold the Company safe from all liens, judgments and claims of whatever nature, and it is distinctly understood*1372 that said Thomas Sather is an independent contractor and operator and the Company is not liable for personal injuries that may occur to him or to any of his associates, sub-lessees, partners, contractors, employees, or third persons: 2nd. Said Thomas Sather shall not transfer this lease or any part thereof, nor sub-let any portion of the said premises, without the consent of the Company in writing first being secured. 3rd. All product from the property to be shipped by the Company for its account, and payment to be made to said Thomas Sather less any charge for services, material or supplies furnished, and less a royalty charge of fifteen per cent of the net smelter return, that is, the value of the product less freight and treatment charges, for all products of the old stopes, stope fillings, pillars, and ores that have been disclosed by, or remained from former operations. If the search and development work of said Thomas Sather or any work, shall discover new ore or the continuation into unmined ground of the present known ore bodies, then the Company shall withhold as royalty from the product of such new ore-bodies twenty per cent of the net smelter returns, being the value*1373 of the product, less freight and treatment charges. 4th. If said Thomas Sather shall fail to perform any of the terms or covenants of this contract or lease, or fail to perform at least one hundred dollars worth of labor in any month upon said property, then all his rights under and by virtue of this lease shall be forfeited and the Company may re-enter and take possession of said property. * * * Prior to 1926 the lease on this particular property had been made to one Lein. On January 7, 1926, Lein died and his interest was acquired on January 28, 1926, by Sather, his brother-in-law. During the taxable year Sather, Burkich and Wold mined under the lease. They owned nothing but the tools with which they worked, and did all the work under the lease. Before Sather came in as a purchaser of Lein's interest he talked it over with Burkich and Wold. There was no formal agreement in writing between them as to working the mine, but they shared the profits and losses and the cost of the tools was divided between them. The group had no directors or officers. The three associates after mining the ore took it to the lessor's smelter and, after the ore's treatment by the lessor, *1374 received payment *88 therefor, less a deduction for royalty and certain charges by the lessor, as provided for in the lease. OPINION. MATTHEWS: The only question in this proceeding is whether the petitioner was an association taxable as a corporation, or a partnership, the income of which is taxable to the individual members. A very similar situation was presented in the case of , wherein we held that a group of individuals operating under a mining lease constituted a partnership and not an association. The petitioner in this proceeding was, in its organization and operation, very like the petitioner in that case. It had no officers, did not carry on its business upon any corporate forms or methods, and in fact bore no resemblance to an association in the usually accepted meaning of that term. See . The respondent contends, however, that the petitioner is a "mining partnership" under the statutes of Idaho and as such, by construction in all of the local courts, is in all essentials a corporation, and that as a result of its status as a corporation under state law it*1375 is taxable as an association under Federal income-tax laws. The applicable provisions of the Idaho statutes are as follows: § 5856. When mining partnership exists. A mining partnership exists when two or more persons who own or acquire a mining claim for the purpose of working it and extracting the mineral therefrom, actually engage in working the same. § 5857. Express agreement not necessary. An express agreement to become partners or to share the profits and losses of mining is not necessary to the formation or existence of a mining partnership. The relation arises from the ownership of shares or interests in the mine and working the same for the purpose of extracting the minerals therefrom. The respondent devotes a large part of his brief to his contention that the petitioner is a mining partnership, pointing out the distinction between an ordinary and a mining partnership. We can not agree with the respondent that these three men working together constituted a mining partnership. It is true that they all three worked in the mine and shared the profits and losses equally. The lease, however, was taken in Sather's name. The evidence shows that the lessor*1376 company had adopted the policy of making leases to an individual only and that it would not make a lease to a partnership as such, and that this policy was followed in the instant case. The law of Idaho expressly provides that a mining partnership exists when two or more persons own or acquire a mining claim. The respondent refers to the case of , for the proposition that the leasing of a mining *89 claim amounts to "acquiring" it within the meaning of the statute. But the court in that case did not hold that it was sufficient for one person to lease the claim. It said: The fact that the mining claim, in this instance, was merely leased does not prevent a mining partnership as a result of law. The partners do not have to own the claim. They have to own only a possessory right. That may be acquired by lease. Our statute says "own or acquired" Section 8050 supra. That shows that "own" and "acquire," in the statute, have different meanings. Lessees, as well as owners, may be mining partners. * * * [Italics supplies.] *1377 In the case of ; , the Supreme Court of Idaho held that in order to constitute a mining partnership there must be two factors; one, that two or more persons shall own or acquire a mining claim, and the other that the coowners actually engage in working the mine. See also (West Virginia); ; and . Our attention has not been called to any authority, nor have we been able to discover any, holding that a mining partnership exists where only one member of the alleged partnership owns mining property or acquires a lease thereon. The case of , is not in point, since in that case it appeared that the lessee acquired the lease as agent for the other members of the partnership. There is no evidence in this case of any agreement of agency. It is our opinion that the petitioner was not a mining partnership under the laws of Idaho, and it is therefore unnecessary to consider the further*1378 contention of the respondent. Since it is clear that the petitioner is either an ordinary partnership or a joint venture and bears no resemblance in any way to an association, the respondent erred in taxing the petitioner as an association. Judgment will be entered for the petitioner.