Buckley v. Commissioner , 22 T.C. 1312 ( 1954 )

William F. Buckley and Aloise S. Buckley, Petitioners, v. Commissioner of Internal Revenue, Respondent

Buckley v. Commissioner

Docket Nos. 32308, 44108

United States Tax Court

22 T.C. 1312; 1954 U.S. Tax Ct. LEXIS 82; 3 Oil & Gas Rep. 2119;

September 30, 1954, Filed September 30, 1954, Filed

---

Decisions will be entered under Rule 50.

1. Petitioners held certificates of ownership ¹ in two organizations formed under the laws of Venezuela as "anonymous companies" which held royalty rights to certain oil producing realty in Venezuela. Those companies had broad powers to carry on business, held title to property in their own right, had centralized management and continuity of enterprise uninterrupted by deaths among certificate holders or management, limited liability of certificate holders, and other features characteristic of corporate operation. Held, the organizations were legal entities separate and distinct from the certificate holders.

2. Held, further, petitioners were not entitled to deductions for depletion or credits for foreign taxes paid by reason of their ownership of certificates of ownership in those organizations and must treat as income the full amount received within the taxable years from those companies.

John E. Boice, Jr., Esq., Dean F. Cochran, Esq., James L. Buckley, Esq., and C. Dean Reasoner, Esq., for the petitioners.

George C. Lea, Esq., for the respondent.

Arundell, Judge.

---

ARUNDELL

Respondent determined deficiencies in the income taxes of petitioners for the years 1948 and 1949 in the amounts of $ 10,383.86 and $ 2,678.60, respectively. By amended answer filed herein, respondent seeks to increase the deficiency for 1949 to $ 9,238.

The issues for decision are as follows:

1. Whether petitioners were required to treat as income in each taxable year the entire amount received in that year from two organizations formed under the laws of Venezuela in which petitioners held certificates of ownership.

2. Whether petitioners were entitled to an allowance for depletion by reason of their ownership of those certificates.

3. Whether petitioners were entitled to credit for foreign taxes paid by the two organizations by reason of their ownership of those certificates.

FINDINGS OF FACT.

William F. Buckley and Aloise S. Buckley are husband and wife residing at Sharon, Connecticut. They filed a joint income tax return for each of the taxable years 1948 and 1949 with the collector of internal revenue for the district of Connecticut.

At all times material hereto, petitioner Aloise S. Buckley held 125 units of ownership in a Venezuelan entity known as Compania Anonima Regalia Aurora, hereinafter referred to as Aurora. During the entire taxable year 1948 and until February 14, 1949, petitioner William F. Buckley owned 240 units in Aurora. On the latter date he disposed of 200 units, reducing his holdings in Aurora to 40 units for the balance of 1949. The remaining Aurora units, out of a total of 2,500 outstanding shares, during each year were owned by various United States citizens and Venezuelan nationals.

During the taxable years 1948 and 1949, petitioner Aloise S. Buckley owned 3 units of ownership in the Compania Anonima Regalias de Anzoategui, hereinafter referred to as Anzoategui, out of a total of 80 units outstanding. The remaining shares of Anzoategui were owned by various citizens of the United States and Venezuelan nationals.

In their joint return for the taxable year 1948, the petitioners reported as taxable income the actual amounts distributed to them by Aurora and Anzoategui, respectively, and deducted from those amounts a statutory depletion allowance as follows:

Distributions:
	Aurora
	William F. Buckley		$ 26,812.06
	Aloise S. Buckley		13,964.61
	Anzoategui
	Aloise S. Buckley		4,827.28
			$ 45,603.95
Less:
Depletion
	Aurora
	William F. Buckley	$ 9,074.31
	Aloise S. Buckley	4,726.21
	Anzoategui
	Aloise S. Buckley	1,327.50	15,128.02
			$ 30,475.93

Petitioners computed the depletion allowance in the case of Aurora on the basis of 27 1/2 per cent of their pro rata share of the total gross royalties of the company for 1948 as follows:

	Per cent	Aurora's	Petitioners'
	total	gross	share gross	Depletion
	stock	royalties	royalties	allowance
William F. Buckley	9.6	$ 343,723.93	$ 32,997.50	$ 9,074.31
Aloise S. Buckley	5.0	343,723.93	17,186.20	4,726.21
	14.6		50,183.70	13,800.52

With respect to Anzoategui, the petitioner Aloise S. Buckley computed the depletion allowance on the basis of the actual distributions received from the company, namely, 27 1/2 per cent of $ 4,827.28.

Commencing with their return filed for the taxable year 1949, the petitioners, in lieu of reporting the actual distributions received by them from Aurora and Anzoategui as in the case of 1948, reported as taxable income their pro rata share of the distributable net income of the companies before the Venezuelan income taxes allocable to the shares held in said companies, whether paid or not, as follows:

		Total net
	Per cent	income before	Petitioners'
	total	Venezuelan	share total
	shares	taxes	net income
Aurora
William F. Buckley	2.6	$ 115,674.63	$ 3,007.54
Aloise S. Buckley	5.0	115,674.63	5,783.72
	7.6		8,791.26
Anzoategui
Aloise S. Buckley	3.75	$ 170,236.30	6,383.87
			$ 15,175.13

The following is a comparison of the amounts reported, with the actual distributions received from the companies by the petitioners during 1949:

	Reported	Received
Aurora
William F. Buckley	$ 3,007.54	$ 7,461.16
Aloise S. Buckley	5,783.72	14,006.37
	8,791.26	21,467.53
Anzoategui
Aloise S. Buckley	6,383.87	2,248.73
	15,175.13	23,716.26

From the taxable income reported, the petitioners claimed a depletion allowance on the basis of 27 1/2 per cent of their respective pro rata share of the total gross royalties of each of the companies.

Aurora and Anzoategui were organized as "anonymous companies" under the Commercial Code of Venezuela.

Article 206 of that code provides as follows:

Commercial companies or associations are those which have for their purpose one or more acts of commerce.

Article 207 of the Commercial Code provides as follows:

Commercial companies are of the following kinds:

1st. -- The company in collective name, in which the firm obligations are guaranteed by the unlimited and in solidum liability of all the associates.

2nd. -- The company in commendam, in which the firm obligations are guaranteed by the unlimited and in solidum liability of one or more associates, called responsible or industrial associates, and by the liability limited to a definite amount of one or more associates called capitalist associates. The capital of the capitalist associates may be divided into shares.

3rd. -- The anonymous company, in which the firm obligations are guaranteed by a definite capital and in which the associates are not obligated except up to the amount of their shares.

Companies constitute juridical persons distinct from those of the associates.

There is, besides, the casual association or that in joint accounts, which has no juridical personality.

The company in collective name and the company in commendam simply or with shares exist under a firm name.

The purpose clause of the Aurora document of constitution ² provides in part as follows:

Second: The object of the Company shall be: to dedicate itself to all kinds of business of petroleum and other hydrocarbons, exploration, exploitation, transportation, shipment, refining, manufacturing and sale of said products and their derivatives; the negotiation of all kinds of lands, concessions and rights of hydrocarbons and their derivatives and the establishment and development of the petroleum industry in all of its phases.

Paragraph 2 of Anzoategui's charter provides as follows:

The purpose of the Corporation is to acquire under any title, all kinds of royalties, rights, privileges and participations in connection with hydrocarbon concessions, and to alienate and dispose in any manner whatsoever of such rights, royalties and participations; to make investments in securities or in any other manner; to subscribe, acquire and sell shares of stock or bonds of other companies or enterprises; to receive the proceeds from the royalties (participations) or the dividends corresponding thereto; to give and receive money on loan, under the guarantees which may be deemed advisable, and to carry out any negotiations or business which the Board of Directors, by unanimous vote, may decide to undertake in the name of the Corporation. In order to obtain the purposes of the Corporation, it may execute any agreements, contracts, and carry out any negotiations of any nature whatsoever, and in general realize or carry out any of the acts required for the performance of the purposes of the Corporation.

Article 275 of the Venezuelan Commercial Code provides:

The daily conduct of the business of the association, as well as the representation thereof in what concerns this conduct, may be entrusted to directors, managers or other agents, associates or not, whose appointment, removal and attributes the by-laws shall regulate.

Article Eleventh of Aurora's charter provides, in part, as follows:

The administration, management and direction of the Company shall be the duty of a Board of Directors composed of three members, who shall hold the posts of President, Vice-President and Secretary-Treasurer, respectively, all named by the General Assembly³ of the shareholders. * * *

Paragraph 5 of Anzoategui's charter provides, in part, as follows:

The Corporation shall be administered by a Board of Directors consisting of three members, who may or may not be stockholders, and who shall be elected each year by the regular stockholders meeting. Each one of the Directors shall deposit, or have deposited, with the Treasury of the Corporation, one share of the Corporation by way of guarantee of the faithful performance of his office.

The Company shall have a Secretary who may or may not be a member of the Board of Directors, and the necessary employees who may be freely appointed and removed by the Board of Directors.

Article 29 of Aurora's bylaws provides, in part, as follows:

The Administrative Board ⁴ will manage the Company's business; it will be authorized for all the acts which its administration and ordinary action may require; and it is concerned especially with the following duties:

a) To direct and guard the Company's business, to appoint the subordinate employees of same and to determine their salaries;

b) To convene the ordinary and extraordinary General Assemblies, to determine the matters which must be taken up at same, and to execute the decisions of the Assembly through the President;

* * * *

e) To present to the Stockholders General Assembly a report in detail of the operations, the general balance and the net profit of the business, together with a plan for division of profits or the account of the profits already distributed, indicating in the report the innovations or revisions which, in its opinion should be made; * * *.

Article 30 of Aurora's bylaws provides, in part, as follows:

The president of the Administrative Board will have the following duties:

a) To carry out the management of all the business of the Company;

* * * *

c) To exercise with no limitation of any kind the full legal representation of the Company, judicial or extrajudicial, before any Tribunal, Magistrate, Officials and Authorities, with unlimited authority to enter into arbitration of rights or with arbitrators, to agree, to desist and to settle in the name of the Company, whether it be in court or out; to act at all times on proceedings and appeals, either as plaintiff or as defendant in all the trials and civil, mercantile, criminal or administrative proceedings in which the Company may be involved; * * *

Article 45 of Aurora's bylaws provides as follows:

The balances, reports, inventories and liquidations of profits agreed to and paid by the Administrative Board, or the project of liquidation of profits with the Manager's report, will be submitted for the consideration and approval of the ordinary General Assembly in accordance with the provisions in the social contract and the By-laws.

Article 47 of Aurora's bylaws provides as follows:

On the 31st of December of each year, the Administrative Board, after setting aside from the net (liquid) profits the amount determined for the establishment of the reserve fund shall draw up a proposal in which will be indicated and determined the use and disposition which should be made of the balance of the net profits or gains, determining the form and condition for either the distribution of these profits among the stockholders or else to assign them to additional working capital, to a reserve fund to provide for eventualities, for the maintenance of the assets or property of the Company or to any other use or legal object, in furtherance of the interests of the Company; and shall present this project for the approval of the following ordinary Assembly. In case the Administrative Board shall have declared and paid dividends from profits they shall submit this to the consideration of the next ordinary Assembly for its approval together with the project for distribution of the profits remaining to be distributed and which have been mentioned above.

Article 48 of Aurora's bylaws provides as follows:

The General Assembly shall determine the use for which the reserve fund shall be used, shall decide on the project for distribution of the profits or the report of the profits already distributed which must be presented to the Administrative Board in accordance with the previous article.

Article 26 of Aurora's bylaws provides for filling vacancies of directors.

Article 208 of the Venezuelan Commercial Code provides as follows:

The anonymous company has no firm name, nor is it designated by the name of any of the associates, but by the purpose for which it is organized or by some particular denomination. This denomination or designation must be clearly distinguished from that of any other association.

Article 214 of the Venezuelan Commercial Code provides that property contributed by stockholders is property of the company, in the absence of a stipulation to the contrary.

Neither in Aurora's charter or bylaws nor in Anzoategui's charter or bylaws is there any stipulation to the effect that property contributed by associates or stockholders is not to be deemed property of the company.

The various contracts covering the acquisition of royalty rights referred to Aurora and Anzoategui by name without mention of the certificate holders.

In carrying on their business, these organizations kept and maintained, on an accrual basis, the books and records required under the law of Venezuela to be kept and maintained by anonymous companies. Such books and records consisted of, or were comparable to, stockholders and minute books, journals, ledgers, and inventory books.

In the minutes which Aurora and Anzoategui kept recording the meetings of their boards of directors and of their stockholders, reference was made to Aurora and Anzoategui as having been incorporated.

The bylaws of Aurora provided for a seal in circular form with the inscription "Compania Anonima Regalia Aurora" on the circumference and in the center the legend "Established in 1933." The seal was to be kept in the charge of the secretary-treasurer of the company, to be used for stamping on all instruments which the officers, directors, or agents of the company might issue in its name and all titles or certificates of shares. The bylaws of Anzoategui provided for a similar seal.

For the purchase of the various royalty rights, Aurora used money paid into it by its stockholders or subscriptions to stock.

On December 8, 1933, Alamo Oil Corporation and Venezuelan Pantepec Company (which companies, together with their successors in interest and certain other companies, are hereinafter collectively referred to as the Pantepec Companies) executed certain agreements recognizing in favor of one Guillermo Elizondo the right to a 2 1/2 per cent royalty covering a number of parcels of land or concessions held by the Pantepec Companies under grants from the Venezuelan Government. It was contemplated at that time that title to the royalties would be taken in the name of a "compania anonima" to be constituted. In accordance with the provisions of the aforementioned agreements, Elizondo and two other Venezuelan nationals, by an agreement dated December 28, 1933, constituted Aurora, with a capital of Bs.250,000, divided into 2,500 units of Bs.100 each, all of which units were initially subscribed for as follows:

	Units
Julio de las Casas	1,250
Luis J. Segovia	1,249
Guillermo Elizondo	1

On December 29, 1933, Elizondo transferred and assigned to Aurora all his right, title, and interest in and to his right to receive from the Pantepec Companies the aforementioned 2 1/2 per cent royalties in consideration for the payment of Bs.248,000. These assignments were ratified and approved by the Pantepec Companies. Pursuant to those assignments, the Pantepec Companies on April 10, 1934, executed contracts recognizing and granting in favor of Aurora the aforementioned 2 1/2 per cent royalties, providing, inter alia, as follows:

SECOND: * * * [concessionaire] declares by this document that it recognizes, executes and constitutes in favor of the Compania Anonima Regalia Aurora, * * * a participation or royalty of 2 1/2% of the petroleum extracted from [property description] in accordance with the following terms and conditions:

[Concessionaire] declares that if in the exercise of the rights vested in it for the exploitation of hydrocarbons in connection with the concessions described in the foregoing clause, it should decide to drill in the said exploitation parcels * * * and if it should strike petroleum in same it will pay to the Compania Anonima Regalia Aurora 2 1/2% of the gross product of the mineral extracted in the said parcels excluding of course the mineral (oil) lost due to fire, fortuitous events or force majeure and the product used for the operations connected with the exploitation of the concessions. The said participation or royalty of 2 1/2% shall be liquidated every month and shall be paid by [concessionaire], its legal successors or assigns, to the Compania Anonima Regalia Aurora, its legal successors or assigns, quarterly at the end of each quarter, in cash, computed in accordance with the market value of the mineral (oil) exploited at the place of exploitation. For this liquidation, there shall be taken as basis the average price of the product during the previous month. The Compania Anonima Regalia Aurora may, however, opt to receive its quota in kind, namely in the crude mineral extracted instead of receiving its quota in cash, and in such event, the [concessionaire] shall deliver same at the place of exploitation. * * *

It is expressly agreed that the [concessionaire] will only recognize a single holder in connection with everything concerning the said participation or royalty and therefore in the event that such participation or royalty should belong to several persons or companies, all of them together must elect a single representative with whom the [concessionaire] is to deal. * * *

Prior to the taxable years here involved, certain of the concessions upon which Aurora held royalties were transferred by the Pantepec Companies to Creole Petroleum Corporation and the Atlantic Refining Company, in each instance subject to the Aurora royalty.

On June 10, 1936, Aurora, by its president, entered into a contract to sell 30 per cent of its royalties, the contract being made without prior authorization of the board of directors. This action was subsequently ratified by the board of directors on June 16, 1936, and by the general assembly on June 29, 1936. The sale was consummated by the formation of a new compania anonima, named Compania de Petroleo Amana. There was transferred to Amana the 30 per cent participation in exchange for all of Amana's authorized units of ownership. These Amana units were then sold to third parties, thereby reducing Aurora's interest in the royalties to a 1.75 per cent participation. The proceeds from the sale of the 30 per cent participation were disposed of as follows: From the gross proceeds an amount representing return of capital, which article 312 of the Commercial Code prevented Aurora from distributing, was deducted and reinvested in another compania anonima named Fabrica de Productos de Hierro y Madera (an iron and wood factory), which investment was subsequently written off as worthless. The balance, representing profit, was distributed, 5 per cent to the statutory reserve fund and 95 per cent to the Aurora certificate holders.

Aurora and Amana designated the Royal Bank of Canada their joint agent to collect the royalties and make distribution between the respective companies, 70 per cent to Aurora and 30 per cent to Amana. In making collections for the joint account of Aurora and Amana, the Royal Bank of Canada accepted no responsibility for conserving the royalties or in determining the correctness of the royalty income collected.

Article 20 of Aurora's bylaws sets forth the duties of the general assembly, providing, inter alia:

To examine, approve or disapprove, according to the Manager's report, the account of operations, general balance and report on the state of the Company which the Administrative Board must present to it, and approve or revise the project of profit distribution; * * *

The holders of units of ownership in a compania anonima are represented in their dealings with the management and board of directors by an official termed the comisario whose position is provided for by the Venezuelan Commercial Code. The comisario has a plenary power to examine all books, correspondence, and documents of the company and to investigate complaints of the certificate holders respecting mismanagement of the affairs of the company by its officers; and if such complaints appear to be well founded, he is empowered to call a meeting of the certificate holders to act thereon.

Article 267 of the Venezuelan Commercial Code provides as follows:

Annually there shall be set aside from the net profits a quota of five per cent, at least, to form a reserve fund, until this fund amounts to what is prescribed in the by-laws, and it cannot be less than ten per cent, of the firm capital.

Pursuant to the bylaws of Aurora, the reserve fund was to be accumulated until it reached 20 per cent of the capital or such greater amount as might be deemed advisable by the board of directors.

At a meeting of the board of directors of Aurora on August 28, 1944, a resolution was adopted authorizing the deduction of 5 per cent of the gross receipts to defray the expenses of administration and remuneration of the officers.

Aurora leases a single room as office space, the rent being prorated between Aurora and its employees who carry on their personal activities on the premises. Aurora's name is not on the door nor is it listed in the Caracas telephone directory. There are four part-time employees, all of whom are officers. The combined time of the officers devoted to Aurora's affairs amounts to approximately 15 man-hours per week.

For a brief period during 1949 Aurora held title to certain of the concessions on which it already had a royalty interest and which Creole Petroleum Corporation was prepared to abandon. Aurora paid no consideration for the concessions and their acquisition was necessary to prevent a termination of the royalty rights. Prompt arrangements were made to transfer the concessions to Pancoastal Oil Company in consideration for a continuation of the royalty rights. Pending formal transfer of the concessions, Pancoastal Oil Company paid all surface taxes and other expenses in order to prevent a lapse of the concessions.

In its report to its stockholders covering the calendar year 1949, Aurora stated, in part:

The Creole Petroleum Corporation advised the Company under date of April 20, 1949 of its intention to waive general parcels of land on which the Company held royalties. In order to maintain the interest of the Company, maintaining these concessions in force, we carried out lengthy negotiations. As a result of same, it was agreed that instead of the said concessions being renounced they were transferred by the Creole Petroleum Corporation to this Company, the Pancoastal Oil Company agreeing to take care of the royalty on these concessions and of the payment of the surface taxes earned beginning with the date of the transfer by the Creole Petroleum Corporation. Therefore, under date of December 14, 1949, there was executed an instrument before the First Court of the Department of Libertador under No. 38 of the Register of Authentications by means of which the Creole Petroleum Corporation assigned and transferred outright to this company the said parcels, to wit 22 concessions of exploitation of hydrocarbons located in the States of Anzoategui and Monagas reading as follows: * * *

Aside from the royalty rights and the nominal holding of certain concessions as described in the preceding paragraph, the only assets of Aurora during the years involved herein consisted of cash on hand and in banks and a nominal amount of office furniture. The only type of income received by Aurora during the years involved other than royalties was a small amount of interest on bank deposits.

Aurora's profit and loss statements, stated in Venezuelan bolivars, as supplied to its stockholders for the years 1948 and 1949, contain the following figures:

	1948	1949
Income
Royalties	Bs.1,246,961.80	Bs.451,235.00
Interest	2,599.45	3,399.05
	1,249,561.25	454,634.05
Expenses
Overhead expenses	62,348.09	64,892.49
Bank commissions	3,270.89	1,078.09
Sundry taxes and dues	1,249.55	454.65
Depreciation of furniture and fixtures	508.35	689.12
	67,376.88	67,114.35
Net income before Venezuelan income taxes
and reserves	1,182,184.37	387,519.70
Venezuelan income taxes	129,564.06	36,621.82
Net income	1,052,620.31	350,897.88
Statutory reserve fund	49,482.78	10,161.85
Reserve for contingencies	62,964.94	150,660.70
	112,447.72	160,822.55
Income available for distribution	Bs.940,172.59	Bs.190,075.33

Royalties are received quarterly and distribution is customarily made to the membership four times a year. Starting with the year that Aurora commenced receiving royalties, the following is a summary of the income treated by Aurora as available for distribution with the corresponding distributions arranged according to the year in which the income was earned:

	Net income
	for the year
Year	after Venezuelan	Distributions	Undistributed
	income	applicable to	income at
	taxes and	the year 1	the year
	reserves 1		end 1
1943	Bs.74,953.79		Bs.74,953.79
1944	305,137.81	Bs.377,500.00	2,591.60
1945	526,460.69	500,000.00	29,052.29
1946	567,960.00	575,000.00	22,012.29
1947	773,810.44	787,500.00	8,322.73
1948	940,172.59	937,500.00	10,995.32

The Venezuelan income tax law employs a schedular system of taxation. The rate at which any particular income is taxed depends on the nature of the activity producing the income or its source. All income from a given source or activity is taxed at the same rate without regard to the character of the person or entity earning it. Aurora paid income taxes of Bs.129,546.06 for 1948 and Bs.36,621.82 for 1949. Venezuela levies a single tax on the income of a compania anonima, there being no tax imposed on the certificate holders to whom the income is distributed.

In addition to the regular income tax, Venezuela imposes an additional so-called 50-50 tax on net income from mining or hydrocarbon industries in excess of specified percentages. The Government of Venezuela imposed the so-called 50-50 tax on both Aurora and Anzoategui.

Under the 50-50 tax, a deduction for depletion by way of amortizing cost of royalties purchased was allowed and deducted by both Aurora and Anzoategui. Under the basic or ordinary Venezuelan income tax, as distinguished from the 50-50 tax, there is no provision for depletion allowances.

On or about November 18, 1949, the Venezuelan Government assessed against Aurora a deficiency for 50-50 taxes covering the calendar year 1948 in the amount of Bs.454,653.35, and on or about December 4, 1950, a deficiency was assessed for 50-50 taxes covering the calendar year 1949 in the amount of Bs.150,660.70. Aurora protested and appealed these deficiencies and at all times material to these proceedings the contested 50-50 taxes remained unpaid. In order to provide for the contingent liability created by these contested 50-50 taxes, Aurora established a reserve for contingencies and increased the statutory reserve fund beyond the amount required by the bylaws.

With the exceptions of the sale of 30 per cent of its interest in the royalties, the investment in the wood and iron company, and the interim holding of certain concessions pending transfer to Pancoastal Oil Company, all as described above, Aurora has since its inception confined its activities to the collection of royalties from the concessionaire, the payment of ordinary expenses, and the distribution of profits to certificate holders.

Anzoategui was constituted by a group of Venezuelan nationals pursuant to an agreement dated August 19, 1941, for the purpose of acquiring a one-third interest in certain royalties held by a compania anonima known as Compania Petroleos de Anzoategui, hereinafter referred to as Petroleos. At all times material to these proceedings, the capital of Anzoategui amounted to Bs.120,000 divided into 80 units of Bs.1,500 each, all of which were subscribed to and paid for by the delivery of 80 units of ownership in Petroleos and cash of a nominal amount.

Anzoategui subsequently surrendered to Petroleos the 80 Petroleos units acquired in part payment for the issuance of its own units of ownership and received in exchange therefor one-third of the assets of Petroleos, including a one-third interest in 2 1/2 per cent royalties covering a number of separate parcels of land or concessions owned and operated by Mene Grande Oil Company.

There is no material difference between the bylaws of Anzoategui and those of Aurora. The terms and conditions of the royalty contracts governing the payment by the concessionaire of the royalties held by Anzoategui are in all material ways similar to those held by Aurora. It operated in substantially the same manner as Aurora, its board of directors and general assembly holding meetings and conducting its other affairs in substantially the same manner as Aurora. Anzoategui distributed royalties in the same manner as did Aurora.

At all times material to these proceedings, Anzoategui had no assets other than the royalties it held and cash on deposit in Venezuelan banks. The only income it received during the period in question was nominal amounts of interest on bank deposits and moneys paid by the concessionaire on the royalty rights held by Anzoategui. All income received by Anzoategui has been distributed to the holders of certificates of ownership except for funds needed to pay expenses of administration and sums retained to cover contingent liabilities.

The concepts of the common law trust and of equitable ownership are unknown to Venezuelan law.

Article 321 of the Venezuelan Commercial Code provides, in part:

The association in collective name [partnership] is dissolved by the death, interdiction, disqualification or bankruptcy of one of the associates, if there be no convention to the contrary.

In their 1949 return, petitioners claimed a credit for Venezuelan income taxes assessed against and paid by Aurora and Anzoategui, based on their ownership of shares therein. Petitioners by amendment to their petition seek a foreign tax credit for 1948 which was not claimed in the return as originally filed.

Both Aurora and Anzoategui were legal entities separate and distinct from their stockholders and, as such, each of those companies, as distinguished from its stockholders, held all right, title, and interest in and to the royalties in question.

The stipulated facts are incorporated herein by this reference.

OPINION.

Petitioners, during the years in question, held certificates of ownership in the two "anonymous companies," Aurora and Anzoategui, which companies had title to certain royalty rights on various parcels of oil producing property in Venezuela. The royalties were paid by the concessionaires or exploiters to Aurora and Anzoategui which companies after setting aside sufficient sums to meet administrative expenses, taxes, and necessary reserves, either as required by Venezuelan law or otherwise, distributed the balance to the holders of the certificates of ownership.

In determining the deficiencies in question, respondent has found that Aurora and Anzoategui are corporations or in any event legal entities separate and distinct from the petitioners as holders of certificates of ownership therein. It is respondent's position that whatever rights to depletion or foreign tax credits may have existed were in those legal entities to the exclusion of the certificate holders and, further, that the certificate holders were taxable in each year on the amount actually distributed by the entities in that year. We think respondent's position is well taken.

As we understand the contentions of the petitioners, they are essentially based on the premise that the holders of the certificates of ownership, as distinguished from the anonymous companies, were the real beneficial owners of the royalty rights. Petitioners assert, therefore, that they should report as income in a given tax year their pro rata share of all income received by Aurora and Anzoategui in that year without regard to the amount distributed to them by those entities. They further contend that as the beneficial owners of the royalty rights they are entitled to deductions for depletion and credits for foreign taxes paid by the companies to the Venezuelan Government.

Our study of the record convinces us beyond doubt that Aurora and Anzoategui were separate and distinct legal entities in the nature of corporations. The so-called document of constitution or charter as well as the bylaws of each company provided for centralized management in its officers and board of directors. Indeed, petitioners concede that one of the basic advantages in the existence of these companies was the centralization of the power of negotiation with the concessionaires. Another admitted advantage was the continuity of enterprise uninterrupted by the death or withdrawal of a certificate holder or director. Each of the companies was authorized to hold title to assets in its own right and did so. The liability of the certificate holders was limited. Each company had a seal. The records maintained by the companies were, or were comparable to, minute books of stockholders' and directors' meetings, journals, ledgers, inventory records, and stockholders' books. The management rendered regular reports to the certificate holders, setting forth summaries of the activities of the companies and enclosing copies of current financial statements. The certificates of ownership were transferable.

Obviously then, the companies in question possessed the salient features of corporate organization as set forth by the Supreme Court in the leading case of . See also .

Petitioners argued that even though the companies were corporate in form they should be treated for tax purposes as pure trusts, there being no business purpose or activity. In support of that argument they state that these companies were organized only for the purpose of conserving the royalty rights, negotiating with the concessionaires, collecting the profits, and distributing the proceeds. They urge that a pure trust was the ideal and normal way to accomplish their purposes. There being no concept of trusts in the Venezuelan law, however, petitioners contend that they were compelled to adopt the form of the compania anonima as the only acceptable substitute, stating various reasons why a partnership or agency could not have been used. It may be that a trust would have afforded a convenient vehicle for the purposes of the petitioners, and there may have been certain disadvantages in the use of a partnership or agency, but we are by no means convinced that there was no alternative to the use of the compania anonima.

We have no doubt that these Venezuelan companies were organized and operated for business purposes. They were organized under the Venezuelan Commercial Code; their charters gave them rights to operate in the business field and they were authorized to carry on the broadest business activities. Aurora not only bought royalty rights, but sold royalty rights and at one time made an investment in a totally unrelated field. Anzoategui from the record appears to have been somewhat less active, but its activities as disclosed in our findings were clearly of a business character. There is no warrant for disregarding these foreign entities and treating the distributions made by them from time to time to their shareholders as other than dividends.

As stated by the Supreme Court in :

The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.

Respondent correctly determined that whatever rights to depletion deductions and foreign tax credits arose from the payment of royalties by the concessionaires were vested in those corporate entities to the exclusion of the certificate holders. The amounts distributed to petitioners by Aurora and Anzoategui in each of the taxable years were in the nature of dividends and were, therefore, income to petitioners in those years.

Decisions will be entered under Rule 50.

---

Footnotes

• 1. The terms "certificates of ownership," "units of ownership," "shares," and "stock" are used interchangeably hereinafter, as are the terms "certificate holders," "unit holders," "shareholders," and "stockholders."↩

• 2. The term "document of constitution" is a literal translation of the Spanish equivalent of the English word "charter" as applied to business organizations. The terms are hereinafter used interchangeably.↩

• 3. The terms "general assembly" and "stockholders' meeting" are alternative translations from the Spanish and are used interchangeably herein.↩

• 4. The terms "administrative board" and "board of directors" are alternative translations from the Spanish, and are used interchangeably herein.↩

• 1. Stated in Venezuelan bolivars.↩