
    394 F. 2d 842
    RAY R. SENCE AND TOD OVIATT, TRUSTEES OF THE RAY R. & GRACE I. SENCE TRUSTS v. THE UNITED STATES
    [No. 106-64.
    Decided May 10, 1968]
    
      
      Carl A. Stutsman, Jr., attorney of record, and Jack B. White, for plaintiffs. Hill, Barrer <& Burrill, of counsel.
    
      Bichard A. Gadbois, Jr., J. Patrick Whaley, for Musick, Peeler & Garrett, Amicus Curiae. Miller <f& Chevalier, of counsel.
    
      Joseph Kovner, with whom was Assistant Attorney General Mitchell Bogovin, for defendant. Philip B. Miller, of counsel.
    Before CoweN, Chief Judge, Laramoee, Dureee, Davis, ColliNs, SkeltoN, and Nichols, Judges.
    
   Per Curiam :

In 1958,19 Declarations of Trust were executed by Ray R. Sence and Ms wife Grace, their grandson being the primary income beneficiary of each of them. Sence and Virginia R. Oviatt, the Sences’ daughter, were named as co-trustees in all of the trusts. For the trusts’ fiscal years ending October 31,1958, 1959, and 1960, seven of the 19 had sufficient income to require the filing of an income tax return, and the trustees filed such a return for each of the seven. However, the Commissioner of Internal Revenue asserted deficiencies with respect to these seven returns in the total amount of $198,812.77. The trustees have paid such sum, plus interest in the amount of $114,964.82, and here sue (there having been a substitution of one of the original trustees) for the refund of such payments totaling $613,777.59, plus interest thereon.

The dispute between the parties involves three separate questions, which will be individually treated.

The Multiple Trust Question

Defendant contends that, for Federal income tax purposes, the 19 trusts should, since they effectuate impermissible income splitting, be consolidated and taxed as one. Plaintiffs argue that the individual trusts were created in good faith for nonincome tax purposes and are entitled to treatment as separate tax entities.

Except for one trust which consisted only of mineral rights on neighboring property, the trusts, created in August and September 1953, consisted of portions of a ranch owned by the settlors, together with the mineral rights incident thereto. This ranch of over 1,300 acres is located near the town of Somis, in Ventura County, California, and is therefore ref erred to as the Somis Ranch. It is situated near the top of South Mountain. This mountain is near the western end of a range in certain portions of which it had long been known that oil of economically productive quantity and grade existed. The entire area is known by geologists and the industry as the Ventura Oil Basin. One of these oil areas, discovered in 1916, was on top of South Mountain, and was known as the South Mountain Oil Field. The entire range constituted an anticline, a geological formation considered to be favorable for oil accumulation. Three other fields existed to the east of the South Mountain field.

After World War II ended, oil-drilling activity increased in the California oil fields. Additional exploration succeeded in gradually extending the South Mountain field from the top of the mountain down its sides. The Somis Ranch, close to the top, lay in the path of this extension. In 1949, Sence leased a portion of the ranch for oil exploration, and by 1952 the Shell Oil Company had successfully developed several producing wells on the property. This lease covered 160 acres in the northern part of the ranch.

However, the South Mountain Oil Field area is a highly faulted one (i.e., fractures exist in the earth strata). In such a faulted area as the South Mountain one, oil occurs in small domal structures or fault traps of approximately one square mile dimension. It is extremely difficult to predict the location of such domal structures. Furthermore, the South Mountain field is composed of so-called lenticular oil sands. Such fields normally have a high oil, low water content at their center, and low oil, high water content, at their ends. As of the end of 1952, the two most southerly wells on the Somis Ranch property covered by the Shell lease had less oil-bearing sands than those farther north and were not considered good producers. There were no other oil wells on the ranch south of the Shell wells but there were more southerly wells on adjoining properties, and the producing well thereon nearest to the southern border of the Shell-Sence lease also had a high water, low oil, content. These factors indicated to Shell, as well as to some other oil companies, that, at least so far as the Somis Ranch was concerned, the South Mountain Oil Field did not economically extend southward below the border of the geological structures covered by the Shell lease, their feeling being that the water table was being approached at such border. Sence had, prior to 1953, unsuccessfully attempted to interest several oil companies in other portions of his ranch.

However, the intensified exploration of the California oil fields that had commenced after the war continued without abatement, reaching its peak in 1954. The years 1953 and 1954 were the most active ones for drilling unexplored, unproved, acreage, and Shell too made plans to drill several new wells as part of its overall South Mountain Oil Field development program. Despite its considering the two most southerly wells on its Sence lease as poor producers, Shell planned three more wells on the southern portion of the lease that would be slightly south of such two wells, as well as 13 more wells on two leases it had on adjoining properties on which there were already a large number of producing wells. These 13 new wells would, if successful, constitute a slight southern extension of the field.

Furthermore, other oil companies during this period were not as conservative as Shell in exploring further down the sides of South Mountain. On the properties directly adjoining the Sence Ranch on the west, the Union Oil Company owned a lease south of the two Shell leases which, in 1952, it made plans to develop. It commenced drilling on such leased property in February 1953 and in April successfully brought in a producing well, the most southerly one in the area. It then began drilling another well on such leased property at approximately the same southerly line but to the east and near the adjoining Shell-Sence lease, forcing Shell to drill an “offsetting” well, and constituting Shell’s most southerly well on the Sence property. Both new Union and Shell wells turned out to be producers.

In the midst of this activity, the Humble Oil and Refining Company appeared on the South Mountain scene. It had first entered the west coast area in 1947 and was thereafter extremely active in attempting to discover new crude oil sources to support its new west coast retail marketing operations, assuming, in this exploration activity, risks that some other oil companies considered unwarranted. In early 1953, it commenced making an intensive geological investigation of the South Mountain area including, with Sence’s permission, the Somis Ranch.

It was during this time that Sence first considered creating the trusts. The Sences were wealthy and in their sixties, and had one daughter, and one grandson, age eight. Sence felt he should engage in some estate planning. He wanted to provide an income for his wife and daughter, and to provide for the future of his grandson. After consulting with an attorney who was in general practice, but who was not unacquainted with tax law, and with an accountant who was an expert in estate planning, including the tax aspects thereof, Sence decided, insofar as the overall plan concerned the grandson, to place all of his interests in the Somis Ranch (except for the 160 acres under lease to Shell) in trust for his grandson, any income to be accumulated and paid out during his adulthood (but with the trust principal being available at any time for his support, if necessary). He decided to accomplish this, however, by creating a number of trusts and conveying to each trust only a portion of the ranch. Thus, taking the approximately 1,309 acres comprising the ranch, less the 160 under lease to Shell, the remaining 1,149 would be broken up into 30 sections of approximately 40 acres each, with each section to be conveyed to a separate trust. For ease in effecting the breaking up of the ranch into such 40-acre divisions, it was decided simply to follow the grid lines separating the quarter-quarter sections (each such section comprising approximately 40 acres) on the state survey map.

In accordance with this agreed-upon plan, Sence’s attorney began drafting the trusts in April 1953, the first one being dated April 20, 1953. By May 11, 1953, he had drafted 19 of them.

At about this time, Humble offered to lease a portion of the Somis Ranch property lying in the southwestern part of the ranch and upon which Sence’s neighbor, Bianchi, held one-half of the oil rights. The proposed lease also covered some of Bianchi’s property upon which Sence held one-half of the oil rights. Humble presented to Sence and Bianchi an oil and gas lease dated June 1,1953, for their execution. The lease covered some of the Somis Ranch parcels which Sence’s attorney had already included in the 19 trusts he had drafted, but Humble, of course, was unaware of the as yet unexe-cuted Sence trust plan. However, evidently at least by May 7, 1953, as a result of negotiations or otherwise, Sence and his attorney knew of the coverage of the proposed lease because the corpus of one of the 19 trusts the attorney prepared at that time, i.e., the one dated May 7, 1953, consisted only of the oil rights that Sence owned on the Bianchi property and covered no portion of the Somis Ranch.

After the tender by Humble, Sence submitted the proposed Humble lease to his attorney for review, and the further drafting of additional Declarations of Trust, for unexplained reasons, apparently ceased (in all probability, however, to await agreement upon the Humble lease and a determination of the part the proposed trusts would have to play in connection therewith). Meanwhile, the execution of the Humble lease was postponed, presumably to await the completion of the details incident to the creation of the trusts that would have to be parties to the lease.

In early August, the attorney sent to Sence for execution and notarization the seven trusts (six covering Somis Ranch parcels and the seventh covering the Bianchi oil rights), which were involved in the proposed Humble lease. These seven trusts were all executed and duly notarized on August 7, 1953, and recorded at the county registry on August 12, 1953. Thus, these were the first trusts created (i.e., those dated April 20 and 24, and May 1, 5,6,7, and 11,1953).

In September 1953, Sence’s attorney made certain suggestions concerning the proposed Humble lease, and also gave instructions concerning its execution by the seven trusts. In that month also the remaining 12 trusts were all executed, notarized, and recorded, four being executed on September 18 and recorded on September 22,1953, and eight being executed on September 23 and recorded on September 25, 1953.

Thereafter, the Humble lease was changed to reflect the ownership of the property interests covered thereby in the trusts, and the lease, still dated as of June 1,1953, was finally executed by the trustees of the seven trusts on December 23, 1953 (after having been executed by the Bianchi interests on November 25,1953). The lease was for two years and provided that the seven trusts would receive a one-sixth royalty interest in any oil produced.

In their important aspects, all the trusts were substantially the same. The grandson was the principal beneficiary of each, each had the same trustees (Sence and his daughter) and each imposed almost identical duties upon the trustees. Except for the one trust consisting only of the oil rights, the corpus of each, irrevocably conveyed, was approximately 40 acres, or a quarter-quarter section, of the ranch property, together with all interests of the settlors (oil rights, if any) incident to the particular 40 acres. The only variations consisted of the date of the distribution of the income to the principal beneficiary, the designation of a minor income beneficiary, and the powers of the trustees with respect to investments.

At about this time, Sence decided, for reasons not made clear by the record, to discontinue the creation of any further trusts. Thus, of the approximately 30 trusts originally contemplated for complete division of the ranch, only the above described 19 were actually created so that, except for the contiguous trust parcels of the seven trusts which were parties to the Humble lease, the trust parcels are scattered throughout the ranch, and Sence still owns approximately half of the ranch.

Although no oil was found by Humble on the property covered by the June 1, 1953 lease, under a second lease (and operating agreement) with Humble executed in 1955 by seven of th.e other trusts (as well as by the Sences individually, the ranch properties covered by the second lease consisting of both trust and nontrust parcels), several producing wells were successfully brought in, and it is the trust income derived from this second Humble lease (and operating agreement) which gives rise to the dispute herein. Plaintiffs, as trustees of such trusts, filed separate fiduciary income tax returns for the seven trusts, but deficiencies were assessed by the Commissioner of Internal Revenue on the basis of all the trusts constituting only one entity for tax purposes.

Since a trust is a separate tax-paying entity, entitled to its own exemption, it is obvious that, where there is income-producing property to be placed in trust, it would, solely from an income tax point of view, be advantageous to place it in several trusts instead of just one. In this way, many taxpaying entities would be created, each paying the lower tax applicable to its portion of the split income, as well as being entitled to its own exemption, instead of one entity paying the higher tax applicable to the entire income, and with only one exemption. See Note, Multiple Trusts and the Minimization of Federal Taxes, 40 Colum. L. Rev. 309 (1940).

However, plaintiffs deny that income splitting was the motivation for the creation of the multiple trusts. They contend that the settlors were not even thinking of possible imminent oil income when the trusts were created and that their creation was instead legitimately related only to long range real estate subdivision plans of a wholly nontax nature. The contention is that, while the ranch property at the time the trusts were created in 1953 was of little value as real estate, the settlors contemplated that in 20-30 years, when the grandson would be an adult, the great population growth of California in general and Ventura County in particular would in all probability cause the ranch to be in demand for subdivision purposes. It was reasonably contemplated, it is argued, that at that time relatively small 40-acre parcels, or even, lesser parts thereof, would be more readily salable for subdivision development purposes than a large 1,200-acre tract. And, although small pieces of a large tract could, it is true, be sold off in the future at the appropriate time just as well from one trust, it is explained that, under the California laws as they existed in 1953, and as plaintiffs allegedly reasonably construed them, the ranch could tifien be broken up into parcels down to 40 acres without the necessity of complying with various burdensome requirements otherwise relating to subdivision development. Therefore, plaintiffs allege, the settlors decided to avail themselves then of such favorable situation, instead of running the risk of burdensome requirements being imposed some time in the future and which might handicap the trustees in effecting sales. The trustees would then, according to the plaii, invest the proceeds of the future property sales in order to provide a life income for the grandson who, as an adult, would then be able to handle it.

This attempt to divest the creation of the trusts from the oil aspects of the situation must be rejected. As the recited facts demonstrate, the idea of the multiple trusts was conceived at the height of oil exploration activity on the ranch as well as on the neighboring South Mountain Oil Field properties. At that very time Humble was actively investigating the ranch. Sence was naturally and understandably oil minded. Oil had already been discovered on his ranch and was being profitably exploited by Shell. He had attempted to interest other companies in other portions of his ranch. The trend of the South Mountain Oil Field development was down the flanks of the mountain in the direction of bis ranch properties. Oil had just recently been discovered on neighboring property geographically below the southern border of the Shell lease on his ranch. The Humble lease of June 1, 1953, was tendered prior to the creation of any of the trusts in August and September 1953, so that when the trusts were created, Humble’s interest in the property was known. Indeed, the six trusts whose ranch properties were covered by the proposed Humble lease, plus the one trust consisting only of the one-half interest in the oil rights on the Bianchi property, were, although not consecutively prepared and dated, taken out of order and were the first seven created, all being executed and notarized on August 7, 1953, and recorded on August 12, 1953. The Humble lease then 'had to be revised to reflect the change in the ownership of the trust properties from Sence to the seven trusts. Certainly, under these circumstances the contention that Sence was not thinking of oil or possible oil income at the time he created the multiple trusts cannot be accepted.

Furthermore, on this record it is extremely difficult to accept the alleged real estate considerations as constituting the motivation for the creation of the multiple trusts.

Whaít we are here concerned with is, of course, the intent of the settlor and what he had in mind in establishing the trusts. However, the testimony of Sence concerning his reasons for creating the multiple trusts and the purpose he intended they would serve is most unsatisfactory. Indeed he could give no satisfactory or plausible reason. About all he said was that he acted on his attorney’s advice. Insofar as it relates to future subdivision possibilities, it is unacceptably vague and indefinite. Substantially all the testimony about the future subdivision basis for the creation of the trusts came instead from Sence’s attorney and related to the advice he gave Sence.

Nor is this alleged nontax reason plausible. The ranch consists of rough, mountainous country. It would be most difficult to develop. Only a hardy optimist could believe that this ranch would be attractive for subdivision development even in 20-30 years. Eighty percent of the ranch has a slope in excess of 25 percent. Some of the steeper portions contain slopes in excess of 40 to 50 percent. It is extremely difficult to develop land having a slope in excess of 20 percent, the development of land with a 25 percent slope being considered economically unfeasible. Highways and utilities are located at a great distance from the ranch. The ranch could not sustain more than one house to the acre. The normal developer prefers to place around five houses on an acre. Furthermore, below the range of mountains of which South Mountain is a part lies the undeveloped relatively flat terrain of the Las Posas Valley containing 10,000 acres of virtually undeveloped land which could support over 135,000 people. This valley would almost certainly be developed prior to any development near the top of the mountain. The record makes plain that no development of the Somis Eanch would be reasonably foreseeable until about the year 2000.

One would think that if real estate subdivision considerations were significant in the settlor’s mind, he would at least have obtained some expert advice on the matter. However, no evaluation or appraisal of the ranch as real estate or subdivision development property was ever obtained from anyone. Nor was the property divided in any meaningful way so far as real estate development is concerned. The 40-acre trust parcels were simply created by the attorney’s following the quarter-quarter section grid lines on an official map, irrespective of contours or geographical features that would normally control subdivision areas. Indeed, the very nature of this rough, mountainous property would necessitate a developer’s having a broad choice in selecting locations. For this reason, a subdivider would require, from an economic standpoint, from 200 to 500 acres for proper subdivision, and not the arbitrary 40-acre grid line divisions the attorney made. This was not the kind of property that reduction to 40-acre parcels would serve to facilitate sales to subdividers. And finally the creation of the trust of May 7, 1953, consisting only of Sence’s one-half interest in the oil rights on the Bianchi property could not possibly have had any basis in real estate subdivision considerations.

In support of the contention that the splitting of prospective oil income was not the motivating factor for the creation of the trusts, plaintiffs point to the interest displayed by Sence in the fall of 1955 — some two years after the trusts were created and while he was negotiating with Humble for the second lease (and the operating agreement) — to terminate the trusts, which would have resulted in the consolidation of all the income in his own hands. However, the motivation behind the seeming desire to undo the trusts and recapture the property is insufficiently explained by the record, and, further, Sence never in fact took any steps to revoke the trusts. In any event, it is the settlor’s intent at the time the trusts were created that is important, not the second thoughts he may have had two years later. Furthermore, the desire to recapture the property, which would have made all the income taxable to Sence himself, raises essentially different problems than those involved in the question of whether, there admittedly having been a divestment, such divestment should be treated as being in one or 19 parts. For the same reason, insofar as the consolidation issue is concerned, the underlying reason offered for the creation of the trusts, i.e., to take the ranch property (except the 160 acres then under lease to Shell) out of the Sence estate while it was still of relatively low value, is irrelevant, for the property could just as well be conveyed and removed from the estate by one conveyance as well as by multiple conveyances. The issue is not the basic right of the Sences to give away their property. Consolidation of the trusts into one for tax purposes will not affect that right at all and will leave this purpose for the establishment of the trusts undisturbed.

For all the above reasons, the alleged nontax real estate subdivision basis for the creation of the multiple trusts is so implausible that it cannot be accepted. On this record, the conclusion must be that the possibility of currently imminent oil income, not distantly future real estate subdivision, was the basic underlying reason for the creation of the multiple trusts.

This being so, the Government urges, and the trial commissioner held, that the trusts must be treated as one because tax avoidance was the reason for the creation of separate trusts. Plaintiffs, on the other hand, contend that even a clear tax avoidance motivation cannot transform individual trusts into one consolidated trust for tax purposes; all that is required for separate taxation, they say, is that separate trusts be actually created. We do not reach or consider the issue of whether separate trusts can be established for a tax avoid-anee purpose because, in our view, plaintiffs have failed to fulfill the necessary prerequisite to the application of the general standard they proclaim. Even if we assume that an undisputed tax avoidance motivation would be irrelevant, the taxpayer would still have to show that he did in fact establish and maintain separate trusts before he could avail himself of the privilege of separate taxation. In this respect plaintiffs have faded. They did not sufficiently maintain the trusts as separate and distinct entities.

The blurring of the lines among the various trusts, as well as between the trusts (on the one hand) and Mr. Sence’s personal ownership (on the other), is revealed by our findings. In a number of ways the trusts were treated as one, and in' other ways the trust properties were treated as if still owned by Mr. Sence. Although some income was earned by seven of the trusts in 1953 and 1954 (under the Humble lease), books of account for the separate trusts were not set up until October 1956. One checking account and two savings accounts were established for all the trusts, called the “South Mountain Account”, and there was apparently no indication that these were trust accounts; checks drawn on the account were signed by Mr. Sence (who personally controlled the account) without any notation that he was signing as trustee or that the account was a trust one. Mr. Sence also deposited some of his personal funds in this acount. The income from the Humble agreements was all deposited in the account and the amounts entered in each trust’s books were calculated on the basis of the ratio of the acreage held by that trust to the total acreage under the Humble contracts — regardless of the location of the income-producing wells and without any proof of a pooling arrangement.

Similarly, Mr. Sence did not keep his own interests completely apart from those of the trusts. We have already pointed out that he deposited personal funds in the “South Moutain Account”. He invested trust funds in a type of investment prohibited by the trust instruments. He distributed trust funds to charities not named as beneficiaries in the trusts and in percentages not specified; the named charities were never informed that they had an interest in the trusts’ annual income; and the charitable payments were by check on the “South Mountain Account” which did not reflect that a trust was the source of the payment but instead made it appear as a personal contribution of Mr. Sence. He continued to graze his cattle on property conveyed to the trusts although not paying any grazing fees to the trusts for the use of the land. From 1953 to 1965, county property taxes on property owned by the trusts were assessed to the Sences, individually, without complaint by them; during some of this period the taxes were paid by the Sences personally, and for other periods out of the “South Mountain Account”. The trust books showed money received by the trusts as a receivable from Sence, not as a cash asset of the trust itself.

We catalog these facts, not to show that the trusts were “unreal” or “sham” or “paper trusts” in the sense that title to the real estate never passed from Sence to the individual trusts, but rather to show that Sence did not adequately maintain the trusts as separate from each other and from himself. If it is permissible to create separate trusts solely for tax avoidance reasons (which, as stated above, we do not decide), then it is appropriate to require a taxpayer to turn square corners — to dot his i’s and cross his t’s (if that metaphor is preferred) — in order to take advantage of the rule. Transactions between family members “calculated to reduce family taxes should always be subjected to special scrutiny.” Commissioner v. Tower, 327 U.S. 280, 291 (1946). See, also, Helvering v. Clifford, 309 U.S. 331, 335-37 (1940). As applied here, that principle means that the taxpayer with tax avoidance motivation must affirmatively show that he created and maintained truly separate trusts before he can claim that they should be taxed individually and not as one. In that respect plaintiffs have fallen down. Cf. Boyce v. United States, 190 F. Supp. 950, 957 (W.D.La.), aff'd per curiam, 296 F. 2d 731 (5th Cir. 1961). “When a taxpayer thus boldly proclaims that his intent, at least in part, in attempting to create a trust is to evade taxes, the court should examine the forms used by him for the accomplishment of his purpose with particular care; and, if his ingenuity fails at any point, the court should not lend him its aid by resolving doubts in his favor.” Morsman v. Commissioner, 90 F. 2d 18, 22 (8th Cir.), cert. denied, 302 U.S. 701 (1937).

Accordingly, for income tax purposes, all these substantially identical trusts created, as part of a family arrangement, primarily for the benefit of the same beneficiary should be treated as consolidated into one and the tax computed on the basis of their consolidated incomes and with only one exemption.

The Depletion Question

The second oil lease and the operating agreement with Humble hereinabove mentioned were both entered into on November 30,1955. The agreements were executed by Humble, the trustees (Sence and his daughter) on behalf of seven of the trusts, and Sence and his wife as individuals (with respect to portions of the ranch retained by them). The two instruments were part of an overall arrangement. The Sences would not have entered into one without the other. Sence, for himself and on behalf of the seven trusts, was not interested in a lease only, but insisted also on participating in investing in the development of the property through an operating agreement, and, in return, in the sharing of a portion of the hoped-for operating profits. Negotiations concerning the lease and operating agreement had taken place since September 1955, Sence, his attorney, and an oil lease expert retained by Sence, all taking part therein, but with the expert doing most of the direct negotiating with Humble on behalf of the Sences and the trusts.

Under the lease the lessors each leased to Humble the land they owned (which was south of the Shell lease and east of the first Humble lease) for five years and so long thereafter as oil (or gas or other hydrocarbon substances) were produced in paying quantities. The rental royalty was 26 percent of the net proceeds from the sale of oil produced from the leased property. Under the operating agreement, which related to the same real property covered by the lease, the Sences and the seven trusts agreed to share 25 percent of Humble’s expenses in return for 25 percent of Humble’s profits from the sale of oil. The Sences and the seven trusts under each agreement were to share the income in proportion to the amount of acreage each owned to the total acreage under tbe lease. Tbe operating agreement further provided that Humble (designated as tbe “Operator”) and tbe lessors under tbe simultaneously executed lease (designated as tbe “Non-Operators”) agreed to share jointly in tbe expenses of developing tbe property covered by tbe lease and to jointly own tbe products therefrom and all property and equipment placed thereon on tbe basis of 75 percent for Humble and 25 percent for the lessors. Tbe agreement further provided that, although tbe entire leasehold estate had been vested in Humble, Humble held for tbe Sences and tbe seven trusts an undivided 25 percent interest in tbe leasehold estate, tbe Sences and the seven trusts owning such undivided 25 percent interest in proportion to tbe amount of acreage each owns to tbe total acreage under the lease.

In computing tbe deductions for depletion in connection with reporting tbe gross income of each of the seven trusts in each of tbe three years herein involved, the trusts aggregated the income received under the lease and that received under tbe operating agreement to determine tbe total gross income for tbe purpose of computing the statutory limitations on depletion.

With respect to the years in issue (1958 to 1960, inclusive), sections 611 and 613(a) and (b) of the Internal Eevenue Code of 1954 permit a taxpayer to deduct by percentage depletion 27% percent of tbe gross income from tbe property which may not, however, exceed 50 percent of the taxable income from the property.

However, tbe Commissioner disallowed the claimed right to aggregate income from the lease and operating agreement for the purpose of computing the depletion limitation. The result of this disallowance was a reduction of the trusts’ deductions for depletion. The disallowance was in accordance with a specific provision of Treasury Regulation § 1.614-2(b) stating that: “A taxpayer may not aggregate operating mineral interests and nonoperating mineral interests such as royalty interests.” (26 C.F.R. § 1.614 — 2(b).)

Plaintiffs first contend that, while the 1954 Code admittedly does draw distinctions between operating and nonoperating (or royalty) interests, there is nothing in the Code which specifically prevents, in computing depletion, combining the income from such separate interests in the same parcel or tract of land and that the regulation, which serves to deny to taxpayers a right not expressly denied to them by the Code, is invalid. They point out that Regulation § 1.611-1 (b) (26 C.F.R.), issued under section 611 of the Code, the basic section allowing a depletion deduction for oil and gas wells, provides that such “deductions are allowed only to the owner of an economic interest in mineral deposits” and that “An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place * * * and secures, by any form of legal relationship, income derived from the extraction of the mineral * * *, to which he must look for a return of his capital.” Further, section 613(a) of the Code provides that the depletion allowance shall be a percentage of the gross income “from the property”, the word “property” being defined in section 614(a) as “each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land”, with Eegulation § 1.614 — 1(a) (2) issued thereunder again defining “interest” as “an economic interest in a mineral deposit.”

Under these definitions, plaintiffs argue that, since both the lease and the operating agreement resulted from a package deal and a single investment from which they looked to production for a return of their capital, they in effect owned only one “economic interest”, and not “separate” ones, despite the fact that two agreements were involved in securing such interest. Since Eegulation § 1.611-1 (b) allows depletion to the holder of an interest from which income is derived “by any form of legal relationship”, it is immaterial, they say, whether such single interest is derived from one agreement or two. The income from this single interest is therefore entitled, they contend, to be aggregated as income “from the property” under section 613(a) of the Code.

This contention cannot be accepted. It presumes that, in the “package deal” circumstances such as are here involved, the 1954 Code permitted the aggregation of income from an operating and a nonoperating interest. The Code, however, cannot be so interpreted.

It is true that the Code did not specifically prevent the aggregation of nonoperating and operating interests. It is plain, however, that, as enacted, there were entirely separate provisions specifying special rules for the aggregation of operating interests (68A Stat. § 614(b) (1954)) and for the aggregation of nonoperating (or royalty) interests (88A Stat. § 614(c) (1954)), (as there still are) It would hardly be logical to conclude that although Congress laid down meticulously in separate sections, in an orderly statutory scheme, provisions concerning the aggregation only of the same kinds of interests, i.e., either operating or nonoperating, without making any similar provision for the aggregation of such dissimilar interests, Congress nevertheless meant to permit the aggregation of such dissimilar interests. Even the aggregation of similar interests was hedged in by conditions -and limitations. Certainly the conclusion is compelled that the lack of any provisions permitting the aggregation of such dissimilar interests indicates an intention to prevent such aggregation.

Nor, in view of the definition of “property” which is subject to the depletion allowance as “each separate interest owned by the taxpayer in each mineral deposit in each separate tract”, is the fact that the separate and different royalty and operating interests were obtained in a package deal of any significance. Even though they were bargained for together, there were two separate and 'different interests created by two separate agreements, one, the “operating mineral interests” as defined by section 614(b), involving “costs of production”, and the other, the “Nonoperating mineral interests” as defined by section 614(c), and under the statute each “separate interest” was entitled to its own depletion allowance. The regulation definitions of “interest” as “an economic interest” in no way serves to alter this conclusion. While in a broad sense it may be said that the taxpayer here had only one “economic interest” in one “property”, i.e., his ultimate interest was only in the oil on his property, nevertheless, as defined by the statute and regulations, he had two “economic interests”, one arising out of the royalty agreement, and the other arising out of the operating agreement.

That Congress, despite the absence in the statute of a specific prohibition against aggregating the dissimilar operating and nonoperating interests, did not intend to permit such aggregation is made wholly plain by the legislative history of the 1954 Code provisions in question.

As it passed the House, the bill (H.R. 8300) which subsequently became the 1954 Revenue Code, provided for the aggregation of operating interests only. However, the Senate added a new section to the House Bill to provide for the aggregation of nonoperating interests too, but only upon a Showing of undue hardship. This section became section 614(c) of the Code. And the Beport of the Senate Finance Committee with respect to this addition and explaining it, specifically stated:

* * * Nonoperating mineral interests are defined for purposes of this subsection as interests which are not operating mineral interests within the meaning of section 614(b) (3), and thus includes royalty interests. In no case may a nonoperating interest he aggregated with an operating interest. * * * S. Rept. No. 1622, 83d Cong., 2d Sess., 3 U.S.C. Cong. & Adm. News (1954) 4621, 4976. [Emphasis supplied.]

Thus, since section 614 of the 1954 Code treats operating and nonoperating interests differently, and since the legislative history clearly indicates that Congress did not intend that operating and nonoperating interests be treated as a single depletion unit, Treasury Eegulation § 1.614-2 (b) specifically prohibiting the aggregation of operating and nonoperating interests does not go beyond the statute and is valid.

Plaintiffs, however, further and alternatively contend that, in any event, section 614(d) of the 1954 Code (26 U.S.C. § 614(d) (1958)), properly interpreted, permits taxpayers the use of the 1939 Code treatment of depletion if there were any rights under the 1939 Code which had not been provided for in the 1954 Code, and that under the 1939 Code it would have been proper to aggregate an operating and a nonoperat-ing interest where such interests were included in a single tract or parcel.

Section 614(d) was added to the 1954 Code by section 37 of the Technical Amendments Act of 1958 (72 Stat. 1606,1633, 1637). It reads as follows:

(d) 1939 Code TkeatmeNt With Eespect to Operating MINERAL INTERESTS IN CASE OE OlL AND GaS Wells. — In the case of oil and gas wells, any taxpayer may treat any property (determined as if the Internal Eevenue Code of 1939 continued to apply) as if subsections (a) and (b) had not been enacted. If any such treatment would constitute an aggregation under subsection (b), such treatment shall be taken into account in applying subsection (b) to other property of the taxpayer.

Plainly, this section limits 1939 Code treatment to operating interests. The caption specifically says so and the text refers only to subsection (a), which defines “property”, and subsection (b), which refers only to operating mineral interests. It is difficult indeed to derive from this section permitting 1939 Code treatment where operating interests are concerned authority to use such Code when a nonoperating interest is involved.

However, plaintiffs contend that it is only the heading of section 614(d) that says anything about operating interests and that the text of the section is not so restricted at all. Pointing to certain legislative history, they argue that Congress did not actually intend to so limit the section and that the section’s “confusing heading” therefore should, in accordance with the general rule that “the plain and unambiguous meaning of the text of a Code provision cannot be extended or limited by its title or heading” (1 Mertens, Law of Federal Income Taxation § 3.19), be disregarded. Once the definition of depletable “property” as “each separate interest”, set forth in section 614(a) of the 1954 Code, is disregarded, as section 614(d) authorizes taxpayers to do should they elect to come in under the 1939 Code, then, say plaintiffs, under the 1939 Code, which did not define “property” at all and which made no distinctions between operating and non-operating interests, aggregating such interests in a case such as the instant one would allegedly be proper, the pertinent regulations under such Code, simply defining “property” as an interest owned in any mineral property, also allegedly not prohibiting such aggregation in a proper case (i.e., where both interests really constitute, as plaintiffs say their two interests do, only one interest in a single parcel of land).

The contention that Congress did not intend by section 614(d) to restrict resort to the 1939 Code to operating interests only, and that the heading of the section so stating should be disregarded, cannot be accepted. Again the legislative history of the provision clearly indicates that Congress meant exactly what it said, heading and all.

The legislative history upon which plaintiffs rely is the Eeport of the House Committee on Ways and Means concerning the Technical Amendments Act (H.E. 8381) as it passed the House. H.E. Eept. No. 775, 85th Cong., 1st Sess. The proposed section 614(d) then read as follows:

(d) 1939 Code Treatment: Any taxpayer may treat any property (determined as if the Internal Eevenue Code of 1939 continued to apply) as if subsections (a), (b), and (c) had not been enacted. If any such treatment would constitute an aggregation under subsection (b) or (c), such treatment shall be taken into account in applying subsections (b) and (c) to other property of the taxpayer. 104 Cong. Eec. 17045.

However, the provision was substantially altered by the Senate to read as the finally enacted section 614(d), quoted above. The heading was changed so as to refer only to operating interests in oil and gas wells, and the text was also conformably changed to apply only to oil and gas wells and to delete the reference to subsection (c) of the 1954 Code, which provided a “Special Eule as to Nonoperating Mineral Interests” and which permitted aggregation thereof under certain circumstances. It is thus plain that the heading is in no way inadvertent or confusing. Instead, both heading and text were amended so as to make it clear that only operating interests were covered by the section, the heading specifically saying so, and all references to nonoperating interests being deleted from the text.

In addition, the Report of the Senate Finance Committee with respect to the amended provision which was finally enacted as section 614(d) stated concerning its amendment:

Under subsection (c) of your committee’s bill, section 32 of the House bill has been retained as section 614(d) of the code, insofar as it relates to the treatment of operating mineral interests in the ease of oil and gas wells. S. Rept. No. 1983, 85th Cong. 2d Sess., 3 U.S.C. Cong. & Adm. News (1958) 4791,4974. [Emphasis supplied.]

And the balance of the discussion concerning the section, including the illustrative examples, refers only to operating interests.

Moreover, the Conference Report on the act further dispels any possible doubt as to the meaning of the Senate amendment:

Section 32 of the House bill amended section 614 of the 1954 Code to provide, in effect, that any taxpayer could treat any mineral property as if section 614 of the 1954 Code had not been enacted and as if the 1939 Code rules pertaining to the definition of the property continued to apply. Senate amendment 91¡. limits the application of section 32 of the House bill to operating mineral interests in the case of oil and gas wells. The amendment further provides a new set of rules which are applicable to operating mineral interests except in the case of oil and gas wells and to all nonoperating mineral interests. Conference Rept. No. 2632, 85th Cong., 2d Sess., 3 U.S.C. Cong. & Adm. News (1958) 5053, 5065. [Emphasis supplied.]

Thus, since section 614(d) plainly does not authorize plaintiffs’ attempt to use the 1939 Code as a basis for aggregating an operating interest with a nonoperating one such as are herein involved, it is not necessary to resolve the further dispute between the parties as to whether such an aggregation would in any event have been permissible under the 1939 Code.

Lloyd Corp. v. Riddell, 347 F. 2d 455 (9th Cir. 1965), is the only case cited by the parties which specifically addresses itself to the issues herein involved. It holds, in agreement with the conclusions hereinabove set forth, “that under the 1954 Code operating and nonoperating interests may not be combined” and that under section 614(d), the 1939 Code could apply “only to an aggregation of operating interests” (at 458). Plaintiff insists that this decision is erroneous, and urges this court, upon a fresh consideration of the issues involved, to hold otherwise. However, upon such consideration, as set forth above, including those contentions made here which seemingly were not made to the Ninth Circuit, it seems clear that the holding of the Lloyd Oorp. case is sound.

The Charitable Deduction Issue

The trust instrument for each of the 19 trusts provides that its trustees must pay a certain percentage of its trust income to its specified charity within the year the income was earned. Sence, as co-trustee for each of the seven trusts having income, did not pay the proper amount of the income to the named charity as directed by each trust document but instead distributed some of the specified income to other charities. A portion of the pertinent percentage of the trust income, however, was paid to the proper specified charity. The balances owed to its charity by each trust were noted as liabilities on its books.

On the tax returns for each trust for each year herein involved there was deducted the amount of net income which was distributable to the named charitable beneficiary under the terms of the Declaration of Trust whether or not that beneficiary had actually been paid. However, the Commissioner of Internal Eevenue determined that those amounts not actually paid to the charity denominated in the trust document were not deductible from the trust income in computing the income tax.

Section 642(c) of the Internal Eevenue Code of 1954, 26 U.S.C. § 642(c) (1964), allows an estate or trust a deduction for any amount of gross income “which pursuant to the terms of the governing instrument is, during the taxable year, paid or permanently set aside for a [charitable] purpose.” Since, under this provision, the amounts in dispute were concededly not “paid”, the only question is whether they were “permanently set aside” for a charitable purpose within the meaning of the statute.

On this issue, the law is well settled in plaintiffs’ favor. In the case of either an estate or a trust, income is deemed to be “permanently set aside” for a charity if the governing instrument makes mandatory the payment of the income to the charity during the tax year. See Commissioner v. Leon A. Beeghly Fund, 310 F. 2d 756 (6th Cir. 1962); Arthur Jordan Foundation v. Commissioner, 210 F. 2d 885 (7th Cir. 1954); Bowers v. Slocum, 20 F. 2d 350 (2d Cir. 1927); Estate of John E. Myra, 4 T.C.M. 958 (1945); and cases cited therein. The fact that the income “was in fact used * * * for purposes other than those lawfully exempt * * * is wholly irrelevant” since by the will or trust instrument itself, “the income in dispute was i:!: * * during the taxable year paid or permanently set aside for * * * [statutorily exempt] purposes * * *.’ No action, of the petitioner could change that fact.” Estate of John E. Myra, supra at 959. “* * * [I]fthe deduction qualifies in other respects, there is no question about the deduction being a valid one, even though no payment is actually made to the charitable beneficiary during the taxable year. The statute does not require that it be actually paid — it requires that it be ‘paid or permanently set aside.’ * * *” Commissioner v. Leon A. Beeghly Fund, supra at 760. Where trust income is “irrevocably dedicated for the use and benefit of charitable organizations,” it is “ ‘permanently set aside’ for charitable purposes within the meaning of” the statute. Id., at 761. In the comparable case of an estate, the “permanent setting aside of the income” is accomplished “by the will itself”. Any rule conditioning the deduction, in the case of an estate or trust, on actual payment “would make the imposition of the tax depend upon some act of the executors, which had no result in law upon the rights of the parties, and is not in accordance with what we have found to be the expressed intent of the Congress, which was to tax the income received by the estate which would pass to any person subject to taxation, but relieve from taxation the income set aside by the terms of the will for corporations of the character described.” Bowers v. Slocum, supra at 352.

Accordingly, charitable deductions may be taken for the full amount of income required by the Declarations of Trust to be paid to the designated charities.

FINDINGS or Fact

The court having considered the evidence, the report of Trial Commissioner Saul Richard Gamer, and the briefs and arguments of counsel, makes findings of fact as follows:

1. This is an action arising under the Internal Revenue Laws of the United States, brought pursuant to 28 U.S.C. § 1491. Plaintiffs seek to recover from defendant the sum of $498,812.77 together with interest paid thereon in the amount of $114,964.82, respecting income taxes paid for the fiscal years ending October 31,1958, October 31,1959, and October 31,1960, pins statutory interest allowable by law.

2. Plaintiffs are citizens of the United States and residents of the county of Los Angeles, State of California. They are the presently acting trustees of the inter vivos trusts referred to hereinafter.

3. Eay E. Sence (hereafter “Sence”) has owned various substantial income-producing assets and other property throughout the State of California from a time prior to 1953 up to the present. Although certain assets were recorded at a nominal value of $1, in 1952 Sence’s net worth tdtal was $738,000, in 1955 his net worth remained at $738,000, in 1956 his net worth was $873,000, and in 1957 his net worth exceeded $1,100,000. Sence’s net worth increased each year thereafter through 1963 when his net worth totaled $2,128,000.

4. For 1951 Sence reported a gross income of $35,736 and a taxable income of $31,548 on his Federal income tax return. In 1952 the reported gross and taxable income were $65,399 and $59,999, respectively. In 1953 the reported gross income exceeded $28,700.

5. As a result of purchases made at various times commencing in 1941, Sence and his wife, Grace I. Sence, were the owners of a large ranch located near the town of Somis, in Ventura County, California (hereinafter sometimes referred to as the “Somis Eanch”). By 1949 the ranch consisted of over 1,309 acres which had been acquired at a total cost of approximately $30,000. The ranch lies generally on the upper elevations, and near the top, of South Mountain. It consists of rough, mountainous terrain.

6. (a) It had been known long prior to 1940 that oil of economically productive quantity and grade existed in certain portions of the range of mountains of which South Mountain was a part, the entire area being known as the Ventura Oil Basin. This range constitutes an anticline, a favorable geological formation for the accumulation of oil. The South Mountain Oil Field, discovered in 1916, is on the westerly part of the anticline, three other fields lying to the east, and is in the center of the Ventura Basin.

(b) The South Mountain Oil Field, located on the top of South Mountain, and extending downwards therefrom, is a highly faulted area. Faulting is a geologic term used to designate a fracture in the strata of the earth along which movement or slippage has taken place to cause an offset of. one particular side of a stratum with respect to the other side. In highly faulted areas such as South Mountain, oil occurs in small domal structures or fault traps approximately one to one and one-half square miles in area. In these highly faulted areas, it is difficult to predict exactly where oil will be found. As a general rule, lenticular oil fields like those of South Mountain have a high oil, low water content at the center of the oil field which drops off to a low oil, high water content at either end of the field.

7. (a) As of 1949, the Sences owned oil rights on only part of the ranch acreage. No oil rights were owned in eight quarter-quarter sections located generally in the northeast portion of the ranch, nor in two small parcels in the south part of the ranch. In several parcels in the western half of the ranch, they owned one-half of the oil rights, the other half being owned by one Bianchi, who owned the adjoining property. As to the balance of the ranch property, the Sences owned all the oil rights as part of their ownership of the fee. In all, of .the 1,309.46 acres comprising the ranch, the Sences owned all the oil rights in 731.93 acres, half the oil rights in 244.83 acres, and no oil rights in 332.70 acres.

(b) In addition, the Sences owned one-half of the oil rights in approximately 189 acres of property adjoining the westerly part of the Somis Ranch of which Bianchi owned both the fee title and the other half of the oil rights (such oil rights being sometimes referred to as the “Cananas” oil rights).

8. In 1949 the Sences executed an oil and gas lease covering four quarter-quarter sections (160 acres) in the northern part of the Somis Ranch with one Fairfield, who in turn assigned the lease to the Shell Oil Company (hereinafter referred to as the “Shell Lease”). Under the lease the lessee was granted the right to explore for oil and gas, to develop the property for the production of oil and gas, and to mine such minerals. By 1952 Shell had successfully developed several producing oil wells on such leased acreage, the property being considered part of the South Mountain Oil Field.

9. In April or May 1952, Sence met Robert M. Himrod, an attorney at law in general practice but who also was familiar with tax law and performed legal work in the tax field. At that time Sence engaged Himrod to do some legal work in connection with some corporations in which Sence was interested.

10. In 1953, there were no oil wells on the Somis Ranch south of those on the Shell lease. However, there were wells on properties adjoining the Somis Ranch and the nearest producing well to the part of the Sence Ranch below the Shell lease had a high water content, low oil yield. In addition, the most southerly wells on the Shell lease had less oil-bearing sands than those farther north. This indicated to Shell and some other oil companies that the South Mountain Oil Field did not extend economically to the south below the southern border of the Shell lease on the remaining portions of the Somis Ranch, it appearing that the water table was being approached at the southern border of the Shell lease. Prior to 1953 Sence had unsuccessfully attempted to interest several oil companies in other portions of his ranch.

11. (a) Subsequent to the end of World War II oil-drilling activity began to increase in the California oil fields. This development reached a peak in 1954. The years 1953 and 1954 were the most active years for drilling unexplored, unproved and wildcat acreage.

(b) In 1952, Shell made plans to drill several new wells as part of its South Mountain Oil Field Development Program. It planned three more wells on the southern portion of its leased acreage on the Sence Ranch, as well as 13 more wells on leases it had (the “Lookout” and “Casperson” leases) on adjoining properties to the west of the Sence property, all forming part of the South Mountain Oil Field. This program contemplated a slight southern extension of the field, there already being a large number of producing wells on such leases to the north of the proposed wells. However, Shell’s two most southern wells on the Shell-Sence lease were not considered good producers and Shell did not intend to drill any wells south of the geological structures involved in its Sence lease. One of these wells (No. 7), drilled in 1952, .produced 55 barrels of oil a day, but approximately 200 barrels of water, and the other (No. 8), also drilled in 1952, although producing 116 barrels of oil a day, was also considerably water bearing. However, as stated, Shell did plan on drilling three more wells slightly south of these two as part of its 1953 development program (one of such wells produced around 190 barrels a day, thus being a better producer although it was further south).

(c) However, in 1952 other oil companies were not as pessimistic as Shell about attempting to extend the South Mountain field in a more southerly direction down the flanks of South Mountain. The Union Oil Company owned a lease (the “Culbert” lease) on property south of the Shell Lookout and Casperson leases and directly west of the Sence Ranch which, after Shell successfully brought in a producing well on its Casperson lease, it made plans to develop. It commenced drilling a well on such Culbert property in February 1953 which was completed as a producing well on April 2, 1953. This well extended production 600 feet southerly from the previous nearest well and became the most southerly producing well in the area at that time.

By mid-1953, Union drilled another well (No. 5) in the northeastern part of its Culbert lease which was near the Shell-Sence lease and Shell immediately drilled a well (No. 11) on the Sence lease as a so-called offsetting well (a well drilled as a protection against a well on adjacent property draining off all the oil from the underground pool). Both wells turned out to be producing, such Shell well being the most southerly producing well on the Shell-Sence lease, with both the Shell No. 11 and the Union No. 5 being, as of mid-1953, the most southerly producing wells in the South Mountain area.

12. (a) In 1947, the Humble Oil and Refining Company (hereafter “Humble”) entered the west coast area. Thereafter it was extremely active in attempting to find new sources of crude oil to support its west coast retail marketing operations. In this activity it appeared to some to be taking unwarranted risks in exploring certain areas.

(b) In early 1953, Humble commenced making an extensive geological investigation of tbe Sontb Mountain field area. In connection therewith, it sought permission from Sence to investigate his Somis Ranch property which was not under lease, which permission Sence granted. To properly evaluate property similar to the Somis Ranch for potential oil productiveness, both an actual surface geologic investigation on the property and an assimilation and analysis of all of the known subsurface information are necessary. Such an investigation would normally, for a company such as Humble breaking into a new area, take at least several months. Oil geology is not an exact science, and in a highly faulted area such as the South Mountain area, an evaluation is particularly difficult. Since, in an area like South Mountain, it would cost an oil company approximately $80,000-$90,000 to drill a well, commitments are made only after an extremely careful investigation.

13. Around February or March 1953, while Humble was investigating his Somis Ranch property, and during the increased Union Oil and Shell activities described in finding 11, Sence felt that it would be wise, in view of his extensive property holdings and his and his wife’s ages, to consider some estate planning. Accordingly, he consulted Himrod with respect thereto. At that time he and his wife were between 60 and 65 years old. They had only one daughter, Virginia Oviatt, and one grandson, Kim Oviatt, who was then 8 years old. Sence wanted to provide his wife and daughter with incomes for their lives, and for the future of his grandson. In so providing, he was also interested in minimizing taxes so that his beneficiaries could realize the maximum amount of income and property.

14. After first consulting Himrod, and after further consultations between both Sence and Himrod with an accountant who was an expert in estate planning, including the tax aspects thereof, Sence decided as follows:

(a) He would place certain of his income-producing assets in trust, the income from which would go first to his wife for her life, and then to his daughter for her life.

(b) All of the Sences’ interests in the Somis Ranch, exclusive, however, of the 160 acres leased to Shell, would be placed in trust for the grandson. It was decided to accomplish this, however, by creating a number of trusts and conveying to each trust only a portion of the ranch. Thus, taking the ranch acreage of approximately 1,300 acres less the 160 under the Shell lease, the remaining 1,140 acres would be broken up into 30 plots of approximately 40 acres each, and each plot would be conveyed to a separate trust, making 30 trusts. For ease in effecting the divisions, it was decided to follow the grid lines separating the quarter-quarter sections on the state survey map, such a quarter-quarter section consisting of approximately 40 acres.

15. The motivation for the decision to use the multiple-trust device in the conveyance of the Somis Eanch (less the Shell lease acreage) to trustees for the benefit of the grandson was to break up into lower tax levels such oil income as might flow from the ranch, each trust being a separate tax-paying entity and entitled to a separate exemption. Were, as a result of the Humble investigations of the ranch then being made, and the active South Mountain Oil Field developments then taking place and planned down the sides of South Mountain, oil in productive quantities to be found in the remaining portions of the ranch, as it had already been found in the portion leased to Shell, a greater amount of the gross income would be thus available for the grandson beneficiary by the reduction in income taxes that the multiple trusts would make possible.

16. After the plan to use approximately 30 trusts had been decided upon, Himrod and Sence worked out the various provisions of the trusts. After a draft of one proposed Declaration of Trust had been approved by Sence, Himrod was instructed to proceed with the drafting of the trusts in accordance with the plan that had been adopted. During the months of April and May 1953, Himrod began preparing the first documents under which certain portions of the Somis Eanch were conveyed by the Sences to the trusts. The Declarations of Trust were dated as of the date the final draft was completed by Himrod. By May 11, 1953, 19 trusts were drawn up and dated April 20,21,22, 23,24, 25,27, 28, 29 and 30,1953, and May 1, 2, 4, 5, 6,7, 8, 9, and 11,1953 (Le., one a day except for Sundays).

Himrod mapped out a division of the ranch into parcels to be transferred to the trusts. Using section lines of a county map and legal descriptions of the property, Himrod attempted to cut the ranch into as many 40-acre quarter sections as possible. Because some of the boundaries of the ranch were irregular, a few of the parcels Himrod proposed for the trusts were of irregular size and shape.

17. Some time prior to June 1, 1953, Humble offered to lease from the Sences, for the exploration and production of oil and gas, a part of the Somis Ranch in the southwestern portion and upon which Bianchi had half of the mineral rights, as well as that portion of the Bianchi property upon which the Sences owned one-half of the mineral rights. Thus Bianchi (and his interests) would also have to be a party to the lease, and Humble prepared such a lease for execution by the Sence and Bianchi interests. There had been negotiations between Sence, Bianchi, and Humble prior to the drafting of the proposed lease by Humble. Bianchi’s mineral rights were held as trustee for a beneficiary, one Antoinette Paxton. During this period, the Sence trusts were being prepared by Himrod. The property interests proposed to be covered by the Humble lease consisted of the interests covered by the trusts dated April 20 and 24,1953, and May 1, 5, 6, 7, and 11,1953, which Himrod had or was drafting, the trust of May 7, 1953, being the one that covered only Sence’s undivided one-half interest in the minerals on the Bianchi property. However, at that time Humble was not cognizant of the proposed Sence trusts, and the proposed lease which it prepared, which was dated June 1, 1953, made no mention thereof. Sence submitted the proposed Humble lease to Himrod for review.

With the offer of this Humble lease, Himrod apparently ceased drafting any further trust documents.

18. The seven trusts dated April 20 and 24, 1953, and May 1, 5, 6, 7, and 11, 1953, which were the ones involved in the proposed Humble lease, were each executed by the Sences, and duly notarized, on August 7,1953, and then recorded at the county registry on August 12, 1953. These were the first trusts so executed and recorded.

19. By letter of September 1, 1953, Himrod forwarded to Sence the first seven trusts that had been recorded, and by another letter of the same date, gave Sence certain advice concerning the proposed Humble lease. He also specified the exact “names and dates of various trusts and trustees required to sign the same.” By a further letter of September 17, 1953 to Sence, Himrod prepared a change in the proposed lease to reflect the fact that the ownership of the land covered thereby was in the trusts.

20. The remaining 12 trusts conveying property not covered by the Humble lease were notarized and recorded as follows: The four trusts dated April 21, 22,23, and 25,1953, were executed and notarized on September 18, 1953, and recorded on September 22, 1953. The eight trusts dated April 27, 28, 29, and 30, 1953, and May 2, 4, 8, and 9, 1953, were executed and notarized on September 23, 1953, and recorded September 25,1953.

21. The recorded trusts received all right, title, and interest owned by the Sences in the property transferred, whether it was solely mineral interests, solely real estate without such interests, or both.

Of the 19 trust estates, five consisted of land which did not include mineral rights, one consisted of only oil rights, six consisted of land with one-half of the mineral rights, and the remaining seven consisted of land with full oil rights.

22. Some time subsequent to September 23, 1953 (the date on which the last group of trust documents were executed), the Sences decided that they no longer wanted to continue to divide the property into separate trusts. As a result no further trusts were executed or recorded and the Sences retained ownership of approximately one-half the Somis Ranch (excluding the property leased to Shell). Consequently, the 19 trusts were not all of contiguous portions of the ranch, although the trusts covering the properties leased to Humble were of contiguous properties. Himrod had not prepared the trusts in completely contiguous property order since, had the original plan been completed, the entire ranch would have been conveyed.

23. After the proposed Humble oil and gas lease was redrafted to reflect the ownership of the property interests in the trusts, as set forth in Himrod’s letter of September 17, 1953, the lease, still dated June 1, 1953, was executed by Kay R. Sence and Virginia R. Oviatt (Sence’s daughter) as trustees of the seven trusts dated April 20 and 24,1963, and May 1, 5, 6, 7, and 11, 1953, on December 23, 1953. The Bianchi interests (Robert Bianchi, trustee, and Antoinette Paxton, beneficiary) had signed the lease covering their interests in the same property on November 25,1953. The lease was for a period of two years. It permitted Humble to explore for and extract oil and gas on the property and provided that the seven trusts would receive a one-sixth royalty interest in any oil or gas removed and sold. The lease was subsequently extended twice by the parties. However, no oil was found by Humble on the property covered by this lease.

24. The 19 executed and recorded trusts were all basically the same, Ray R. Sence and his wife Grace I. Sence being the donors (designated collectively in the trust documents as “Trustor”, and sometimes so hereafter referred to). Each of the Declarations of Trust provided that the trustor transferred to the trustees, in trust, all of the trustor’s right, title and interest in the property designated in the schedule attached thereto. Each trust provided as follows: That the trustees (collectively referred to as “trustee”, and sometimes so hereafter referred to) were Ray R. Sence and Virginia Oviatt (Ray R. Sence’s daughter); that the corpus could be increased by anyone at any time (Article I); that the trust was irrevocable and that the trustor waived all right, title and interest in the corpus and income of the trusts (Article II); that the trustee could sell, lease, lend and invest the corpus and income (Article IV); for the management duties of the trustee and for appointments of successor trustees (Article V); that one Louis P. Sparks and then Todd Oviatt (the trustor’s son-in-law) were successor trustees; that their duties, rights and obligations were the same as those vested in the named trustees; that the beneficiary, Kim Oviatt (the trustor’s grandson) would become a trustee upon attaining the age of 21 and that the Title Insurance and Trust Company would become a trustee on certain contingencies, subject to removal by Kim Oviatt when he reached the age of 30 (Article YI); that the trust would not fail for want of a trustee (Article VII); that all profits and losses were to be charged to the trust and not the trustee (Article VIII); that the trustees could invade principal at their discretion if the income was not sufficient to pay for the support, maintenance, education and medical expenses of the beneficiary whether or not the beneficiary at that time is receiving or is entitled to receive income from the trust (Article IX); that neither the principal nor income was subject to the private debts of any beneficiary and that each payment was to be made solely to the beneficiary entitled to it (Article X); that the trust was to be construed under California law (Article XI); that the provisions of the trust were severable (Article XII); that the trustee had the authority to compromise any claims for or against the trust and could make interest-bearing loans to the trust (Article XIV); that estate and inheritance taxes were chargeable to principal and all other taxes were chargeable to income, except that taxes upon profits which inure to the benefit of the corpus were to be paid from the corpus and that improvements were to be charged against the principal while maintenance expenses were to be charged to income (Article XV); for the distribution of certain income and expenses among corpus and income (Article XVI); and that a specified percentage of the net income was payable to a named charity and that the balance would be accumulated for the benefit of Kim Oviatt until a specified date at which time all income earned thereafter was distributable to Korn Oviatt after the payment to the named charity; that the income was distributable to Kim for his life; that should Kim have any siblings each would share proportionately with Kim in the corpus and income; that Kim had an irrevocable inter vivos power of appointment of the income under which he could appoint his income interest to any person who was the issue of Ray R. Sence; and that upon Kim’s death the corpus would be distributed to his children equally and the trust would terminate (Article XIX).

25. The following provisions of the 19 trusts were identical: (a) the trustees were Ray R. Sence and Virginia Oviatt, his daughter; (b) the primary income beneficiary was Kim Oviatt; (c) the income was to be accumulated until Kim reached a certain age; (d) the corpus was not distributable until Kim’s death; and (e) the obligations, duties, and rights of the trustees and the beneficiaries.

26. The 19 trusts differed in only four respects: (a) each trust coi’pus was a different part of the Somis Eanch; (b) the earned income was distributable to the same beneficiary, Kim Oviatt, Eay E. Sence’s grandson, at different dates (Article XIX); (c) the permissible investments varied slightly (Article IV); and (d) the four named charitable beneficiaries and their interests in the annual income varied from one to five percent as follows (Article XIX) :

Trust dated Charity Percent
April 20, 1953_Masonic Homes of California_ 5
April 21, 1953_National Bed Cross_ 4
April 22, 1953_National Bed Cross_ 3
April 23, 1953_National Bed Cross_ 5
April 24, 1953_Masonic Homes of California_ 2
April 25,1953_Burbank Girl Scouts-1
April 27, 1953_Burbank Girl Scouts_ 2
April 28,1953_Burbank Girl Scouts-5
April 29, 1953-Burbank Girl Scouts_ 4
April 30, 1953_Burbank Girl Scouts_ 3
May 1,1953_Masonic Homes of California_ 4
May 2, 1953_TMCA_ 1
May 4,1953_TMCA_ 2
May 5,1953_National Bed Cross_ 2
May 6,1953_Masonic Homes of California_ 3
May 7,1953_National Bed Cross_ 1
May 8,1953-_TMCA_ 3
May 9,1953_TMCA_ 4
May 11,1953_Masonic Homes of California_ 1

27. The primary income beneficiary of each of the 19 trusts was Kim Oviatt. The balance (after the charity’s share) of net income of each trust was to be accumulated and added to the principal and held for Kim’s benefit until a future date. Thereafter, he was to receive annually the trust’s net income, less the charitable beneficiary’s share, for the rest of his life. Upon Kim’s death, the corpus of each trust was to go to Kim’s children. The trusts had different commencement dates for the distribution of income to Kim ranging from 1977 to 1995. The decision to have such different commencement dates was made after the original decision to use the multiple-trust technique.

28. (a) Plaintiffs contend that the motivation for conveying the property by multiple trusts instead of just one trust was to make the property more attractive for real estate subdivision in the future and to afford certain advantages to the trustees when the property would become salable for subdivision purposes in the future. The contention is that both Iiimrod and Sence felt that, although the ranch then had substantially no value as real estate for home development purposes, in approximately 20 to 30 years, when the grandson would be an adult, there would, considering the rapid population growth of California in general and Ventura County in particular, be a demand for the ranch property as subdivision real estate. Thus, if the land were then sold to developers, a substantial fund would be realized which could then be invested and produce income for the grandson’s benefit at a time when he would be able to handle it. It would, it is argued, be advantageous to divide ownership of the ranch into a number of trusts so that when the property ultimately became attractive for subdivision, each trust could act as a separate seller. In this way, each trust would be able, under Himrod’s interpretation of the California Subdivision Map Act (Calif. Bus. & Prof. Code § 11,000 et seq.), to make as many as four sales to different subdividers of property held by such trust, without the trustees being required to comply with certain requirements imposed by such act. As Himrod interpreted the statute, if the ranch were all owned by one trust, there would be less flexibility because the trustee could only make four sales out of the entire ranch without having to comply with the various subdivision requirements. It was also allegedly Sence’s and Himrod’s belief that if smaller parcels could be sold the potential market would be broadened and better prices obtained because more buyers would be available who were able to develop small parcels than large ones. Accordingly, it was allegedly agreed that the Somis Eanch be divided into a number of trusts in the hope of providing a flexible means of selling tte property while shifting the burden of compliance with subdivision regulations to the ultimate buyers. In Him-rod’s opinion, it would not be necessary for the Sences to comply with the Map Act in dividing the ranch into 30 separate parcels because, according to his interpretation, large acreage could be divided into 160-acre parcels without the necessity of complying, and then also, without such necessity, each such parcel could be cut up into four parts. In this fashion approximately 30 separate parcels could be created from the ranch for transfer to separate trusts. Thus, Him-rod was relying on alleged exceptions to the Subdivision Map Act with respect to (a) parcels of 160 acres (or more) and (b) not more than four sales.

(b) For the following reasons, it cannot be found that such real estate and subdivision considerations constituted the motivation for the creation of the multiple trusts:

(1) The record does not support the contention, which is based almost entirely on the testimony of the attorney as to the advice he gave Sence. The important factor is Sence’s own intent and purpose in creating the trusts. And Sence’s own testimony as to such purpose and intent, insofar as it relates to future subdivision possibilities, is unacceptably vague and indefinite. His own testimony fails to give any satisfactory reason whatsoever for the creation of multiple trusts.

(2) The ranch would be extremely difficult to develop and could not be considered as desirable subdivision property. Eighty percent of the ranch property has a slope in excess of 25 percent, while some of the steeper portions of the property contain slopes in excess of 40 to 50 percent. The greater the slope of the land, the more difficult the land is to develop. Highways and utilities, such as sewers, water lines, power and gas lines, are located a great distance from the ranch. The building of such highways and utilities is at present extremely difficult on land having a slope greater than 20 percent. In Ventura County the development of a 25 percent slope is considered at present to be economically unfeasible. The ranch could sustain no more than one-half to one house per acre, while the normal developer prefers to put five houses on each acre.

(3) The ranch is located in close proximity to the undeveloped relatively flat terrain of the Las Posas Valley. This valley contains approximately 10,000 acres of virtually undeveloped land which could support a population of 136,-000 people. This valley most certainly would be developed prior to any development of the Somis Ranch. No development presently seems foreseeable until the year 2000. In the Ventura County planning staff’s proposed development plan for the entire county, the Somis Ranch was considered outside the scope of any urban development through the year 1985. No evaluation or appraisal of the Somis Ranch as real estate or subdivision development property was made prior to the creation of the trusts. Neither Himrod nor any other person had studied the property for possible development for subdivision purposes or for any other ultimate use prior to or during the estate plan discussions.

(4) A developer would have to have a broad Choice in selecting locations upon which to build on land as rough and mountainous as the Somis Ranch. In such a mountainous area, a subdivider would require from 200 to 500 acres from an economic standpoint so as to be able to subdivide the property. Prior to the establishment of the trusts, no sub-divider or other real estate expert was consulted to determine how the ranch property should be divided into the various trusts. Moreover, no individual was consulted for the purpose of evaluating the Somis Ranch property prior to its division into the proposed 30 40-aore plots. Arbitrary divisions by grid lines, irrespective of contours or other geographical features, would hardly be the way property would be divided for subdivision purposes.

(5) Sence’s half interest in the Cananas oil rights on the Bianchi property constituted the corpus of one trust. There being no real estate in this trust, its creation could not have had any basis in subdivision considerations.

(c) The multiple-trust idea was conceived at the height of oil exploration activity both on the Somis Ranch and the neighboring properties, as above described, and at the very time when Humble was investigating tbe ranch for a possible lease. The lease was tendered prior to June 1,1953, and prior to the actual creation of the trusts in August and September 1953. The lease was revised to reflect ownership of the property interests covered thereby in the trusts, and the lease was not executed until the trusts were created. The contention that Sence was not thinking about or considering the possibility of oil income in creating the trusts cannot be accepted. Fi'om all the facts and circumstances, it is concluded that the possibility that there would be such income, and the desire to effect tax savings by splitting such income through the multiple-trust technique, was the motive for the creation of the trusts.

29. Some time in 1955, Sence received two offers to lease another portion of the Somis Ranch for the purpose of exploration for oil and gas, one from Humble and one from the Union Oil Company. On November 30, 1955, Sence and Virginia Oviatt, as trustees for the seven trusts dated April 21, 23, 27, 29, and 30, 1953, and May 4 and 9, 1953, and Ray R. Sence and Grace I. Sence as individuals (with respect to land retained by them and not transferred to the trusts — but excluding the Shell lease property) entered, by a lease instrument dated as of such date, into a second oil and gas lease with Humble Oil and Refining Company. At the same time and as part of the overall arrangement with Humble, the same parties, by an operating agreement instrument also dated November 30,1955, entered into an operating agreement with respect to the same real property covered by the November 30,1955 lease. Said seven trusts were not the same trusts that were parties to the first Humble lease.

30. Negotiations concerning the second Humble lease and the operating agreement began in approximately September 1955 and lasted until the signing of the lease on or about November 25,1955. Himrod participated in the negotiations along with Sence and a man named Sterling, an oil lease expert who was recommended by Himrod and did most of the direct negotiating with Humble on behalf of Sence and the trusts.

31. In 1955, during the second Humble lease negotiations, Sence and Himrod consulted with the Title Insurance and Trust Company of Los Angeles, California, as to whether the 19 recorded trusts could be terminated. This company is the leading title insurer in California and its attorneys are frequently consulted for advice as to the status or validity of title to property, and the effect that various transactions might have on such title. Sence and Himrod were advised by the Title Insurance and Trust Company’s then chief counsel that in his opinion the trusts could be revoked only by way of a proceeding in equity against all beneficiaries living and unborn. In such an action all the beneficiaries having both contingent and vested interests would have to be represented by independent counsel. The objection of one beneficiary (including charitable beneficiaries or unborn contingent remaindermen) would prevent a termination unless no purpose remained to be accomplished by the trust.

Sence decided to take no action looking toward the termination of the trusts.

32. The term of the second Humble lease was for five years and so long thereafter as oil, gas and other hydrocarbon substances were produced in paying quantities. The rental or royalty reserved by the lessors was 26 percent of the net proceeds from the sale of oil or gas derived from the leased property. The lease further provided that the royalty would be divided among the parties, Ray R. and Grace I. Sence, and the seven trusts, in the same proportion as the number of acres each owned bore to the total number of acres leased to Humble regardless of the location of the producing wells. The fractions were as follows: Ray R. Sence and Grace I. Sence, as individuals, 51.119 percent; Trust dated April 21, 1953,6.825 percent; Trust dated April 23,1953,7.194 percent; Trust dated April 27,1953, 6.825 percent; Trust dated April 29,1953, 6.825 percent; Trust dated April 30,1953,6.825 percent ; Trust dated May 4,1953,7.041 percent; and Trust dated May 9,1953,7.346 percent.

33. Under the operating agreement which was executed simultaneously with the second lease, Humble (designated as “Operator”) and the lessors, Ray R. and Grace I. Sence and the seven trusts (designated as “Non-Operators”), agreed to jointly share the expenses of developing the property covered by the lease and to jointly own the products therefrom and all property and equipment placed thereon with the “Operator” having a 75 percent interest and the “Non-Operators” a 25 percent interest. However, the agreement expressly provided that no costs or expenses incurred prior to establishment of commercial production on the leased land would be chargeable to the landowners, but all such costs were to be borne exclusively by Humble. Each of the lessors had an interest in the operating agreement in the same proportion of the 25 percent interest received from Humble as the number of acres each party owned bore to the total acreage encompassed under the agreement regardless of the location of the wells. Each of the parties had the following interest: Humble Oil and Refining Company, 75 percent; Ray R. Sence and Grace I. Sence, 12.780 percent; Trust dated April 21, 1953,1.706 percent; Trust dated April 23,1953,1.799 percent; Trust dated April 27,1953,1.706 percent; Trust dated April 29, 1953, 1.706 percent; Trust dated April 30, 1953, 1.706 percent; Trust dated May 4,1953, 1.760 percent; and Trust dated May 9,1953,1.837 percent.

34. The operating agreement further provided that, although the entire leasehold estate had become vested in Humble by virtue of the Humble lease, it was agreed that Humble was !the owner of an undivided three-fourths interest only in and to said leasehold estate, and that Humble held for the lessors an aggregate undivided one-quarter interest in said estate, with each lessor being the true owner of his respective fractional part thereof. The agreement expressly stated, however, that it was not intended to create a trustor-trustee relationship between Humble and the lessors.

35. Sence, for himself and his wife, and on behalf of the trusts, was not interested in a lease only without the operating-agreement. The two agreements were negotiated and executed as a package and were conditioned upon each other.

36. Although the trust instruments were executed and recorded in 1953, no gift tax returns were filed by or on behalf of the Sences until 1960 or 1961. Late gift tax returns were filed by the Sences reporting the gifts to the 19 trusts and a gift tax paid. Timely returns were not filed because the Sences’ advisors originally concluded that the 1953 value of the property brought the gifts within the lifetime exemption of the Sences and that no gift tax return was therefore due.

37. A certified public accountant, William L. Wolcott, was hired by Sence individually and for the trusts in 1954. Wol-cott set up an accounting system for the trusts and prepared the first income tax returns filed by the trusts. The first returns filed by any of the trusts were for the period from June 1, 1953 to May 31, 1954. The seven trusts that were parties to the 1953 Humble lease earned some rental income thereunder, and separate income tax returns for each of the trusts were filed. Wolcott also established a separate set of boohs and records for each trust, although it was not until October 1956 that books of account were maintained with respect to the trusts under the first Humble lease.

38. A commercial checking account and two savings accounts were established by the trustees under the name “South Mountain Account”. Although either trustee (Ray R. Sence or Virginia Oviatt) had the authority to draw on the account, only one signature was needed and Ray R. Sence personally controlled the bank account and the distribution of funds therefrom. Checks were drawn on this account and signed by Ray R. Sence without any indication thereon that he was signing in the capacity of a trustee or that the account was a trust account.

39. The South Mountain Account was shown as a receivable account from the trustees (i.e., an asset account) in each set of trust books. Any money received by one of the trusts was deposited in the South Mountain Account and set up as a receivable from Sence on the trusts’ books and credited to the proper credit or income account of the trust. The reverse procedure was followed in the case of payments on behalf of a trust.

40. Sence has deposited some of his personal funds into the South Mountain Account. There is no showing that this was done with any intent to make further contributions to the trusts.

41. Several commercially productive and income-producing wells were successfully established by Humble under the second lease of 1955. Consequently, income was also successfully produced under the operating agreement.

42. When Humble made payments to the lessors under the 1955 Humble Lease and Operating Agreement for the oil that was ultimately produced from the leased property, the payments to the seven trusts involved were by separate checks to each trust. Each trust received two checks, one for its agreed royalty under the Humble lease and one for its agreed interest under the operating agreement. The checks were deposited by the trustees in the South Mountain Account and the amount entered in each trust’s books to reflect its proper fractional share of the money held by the trustees in the South Mountain Account. This fractional share is determined merely by dividing the total acreage owned by each trust (which formula also applies to the Sences individually) into the total amount of acreage under the lease. Each trust receives this fractional share regardless of the location of the income-producing wells.

43. (a) Trust expenses which were incurred by reason of the obligations assumed under the operating agreement were paid by a single check out of the South Mountain Account and recorded on the books of each trust in the appropriate fractional share as the agreement provided. Under the agreement, each trust is deemed to own a proportionate share of each well and its equipment regardless of the location of the well. Accordingly, after income from the sale of oil and gas had commenced, each trust was allocated its fractional share of all the expenses, depreciation, and other miscellaneous costs attributable to each well.

(b) Similarly, other joint expenses such as property taxes, improvements and maintenance charges were paid by one check drawn on the South Mountain Account. General expenses, such as legal and accounting fees, automobile expenses, insurance, trust fees, office expenses, and engineering and consulting fees, were allocated evenly among the seven trusts regardless of the income earned by each trust, such expenses being considered as benefiting all the trusts equally.

44. (a) For the assessment of Ventura County property taxes, tbe Somis Banch. has been divided into various assessment blocks. The property is divided on the basis of ownership and usage. The ownership of the property for tax assessment purposes is normally ascertained by the County Assessor’s Office from the title documents in the County Be-corder’s Office. However, the 19 trusts were in fact recorded in such office, the recording of which trust instruments was sufficient to convey title under California law, even though there was no separate deed. All the property owned by the 19 trusts was assessed for all tax periods throughout the 1964 — 1965 assessment to Mr. and Mrs. Bay B. Sence, individually. The interest owned by the trust dated May 7, 1953, and recorded on August 12, 1953, is solely in one-half the mineral rights. The mineral right assessment, however, on this property was made against the Sences as individuals. The title to the surface is owned by and the taxes were assessed to Ernest Bianchi.

(b) When property is transferred and the incorrect party is assessed, that person may inform the Assessor’s Office that he no longer owns the property and request the office to change the assessment. This request is normally complied with.

(c) The primary concern of the Tax Assessor’s Office is to obtain payment of the tax. Where, for some reason, its records as to title changes are not complete so that the tax is billed to the previous owner, if the bill is paid the Assessor normally has no concern as to who the proper owner might be.

45. Often the property being assessed was not clearly identified in the tax bill, making it difficult for plaintiffs to segregate the taxes owed by the trusts and the taxes owed by the Sences as individuals. The Ventura County taxes on the property, both real and mineral interests, were paid for the years 1960-1961 to 1964-1965, as follows:

(a) For the three trusts dated April 28, 1953, and May 2 and 8,1953, Sence personally paid all the property taxes for all taxable periods. The trust property is located in an assessment area with property owned by the Sences individually.

(b) For the trust dated April 25, 1953, Sence personally paid all of the property taxes for all taxable periods. The trust property is located in an assessment area with property owned by the Sences individually.

(c) For the seven trusts dated April 21, 23, 27, 29, and 30, 1953, and May 4 and 9, 1953, Sence paid the property taxes personally in two installments for the year 1960-1961; Sence drew on the South Mountain Account for the first installment for 1961-1962, while paying the second installment personally; Sence personally paid both property tax installments for 1962-1963; and Sence drew on the South Mountain Account for both installments for property taxes in 1963-1964 and again in 1964-1965. The trust property is located in an assessment area with property owned by the Sences individually.

(d) For the trust dated April 22, 1953, Sence personally paid all of the property taxes. The trust property is located in an assessment area with property owned by the Sences individually.

(e) For part of the property transferred to the trust dated May 6, 1953, Sence personally paid the property taxes for 1960-1961 through 1963-1964; Sence drew on the South Mountain Account to pay the property taxes for 1964 — 1965. The trust owned all the property in the assessment area.

(f) For the five trusts dated April 20 and 24, 1953, and May 1, 5, and 11, 1953, and for part of the property transferred to the trust dated May 6, 1953, Sence personally paid the property taxes for 1960-1961 and 1962-1963; Sence drew on the South Mountain Account to pay the taxes for 1961-1962, 1963-1964, and 1964-1965. All of the property within this tax assessment area is owned by the trusts and no property owned by the Sences individually is included.

(g) For the mineral interest owned by the trust dated May 7, 1953, Sence personally paid the property taxes for 1960-1961 and 1962-1963, while Sence drew on the South Mountain Account for 1961-1962,1963-1964, and 1964-1965. This was the trust which owned only one-half of the mineral rights, the other half, as well as the title to the surface, being owned by Bianchi. The Sences were assessed as individuals.

(h) The trusts did not pay any property tax to Ventura County for the tax periods 1958,1959, and 1960. After 1960, each trust was charged with its proportionate share of the property taxes based on the amount of acreage in each trust to the total acreage and dividing that percentage into the amount paid with the South Mountain Account check.

46. On July 29,1959, Sence executed a lease with the seven trusts that were parties to the second Humble lease for the rental of the Tulare Ranch, which was another ranch the Sences owned, located in the San Joaquin Valley and which was also conveyed to the trusts. Sence and his daughter, Virginia Oviatt, signed for the trusts as co-trustees. No independent third party represented the trusts’ interest in the execution of this lease or of any of the documents or contracts executed in behalf of the trusts.

47. The lease between Sence and the seven trusts on the Tulare Ranch requires Sence, as lessee, to pay $14,500 rent per year or in lieu thereof, in his option, to repair and rehabilitate the property at a cost equal to the extent of the minimum of the stated annual rental. Sence has chosen to pay the annual rent by repairing and maintaining the property in lieu of paying the stipulated cash rental. Sence has spent in repairs and maintenance the following:

1958 _$14,244.98
1959 _,._ 17,808.17
1960 _ 30,228.41
1961_:_ 15,421.66
1962 _ 14,659.11

Additional amounts were expended by Sence for wells, pumps, irrigation systems, fences, ditches and plumbing which are considered as satisfaction of Sence’s rental obligation.

48. The trust instruments varied as to the type of permissible investment. The trust instrument dated April 80, 1953, for example, provides that the trustee shall be permitted to invest the trust funds in any kind of property except “municipal bonds and also excluding any other corporate stocks, whether preferred or common.” Regardless of this specific instruction, Sence, as co-trustee, invested the income earned by this trust in municipal bonds (later changed on the books). Four of the other six income-producing trusts (dated April 21,23, and 29,1953, and May 4,1953) similarly prohibit investment in municipal bonds. As the ledgers of the seven trusts are similar and as the funds of each trust have been proportionately invested in each transaction (e.g., the Tulare Ranch and savings account), the effect of the explicit prohibition against investing in municipal bonds in some of the trust instruments was disregarded by the trustee.

49. Sence has continued to graze his cattle on the property conveyed to the various trusts on the Somis Ranch, although he has not paid any grazing fees to the trusts for the use of this land.

50. The trust instruments provide that a certain percentage of the annual income of each trust is to be paid annually to a specified charitable beneficiary. When the trusts began earning income, Sence, as trustee, made various payments to charities out of the South Mountain Account. Although the correct percentage of trust income was paid to charity under the trust document, Sence paid some of the money to charities which were not named as beneficiaries in the trust agreement and in percentages not specified by the trust document. The named charitable beneficiaries were never informed by Sence or anyone on the trusts’ behalf that they had an interest in the annual income of the trusts. The payments to the named charities and to the unnamed charities were made by checks drawn by Sence on the South Mountain Account which in no way reflected the source of payment was from a trust but instead appeared as though they were a personal contribution of Ray R. Sence.

51. On tlie tax returns for each trust for each year, Wol-cott deducted the amount of net income which was distributable to the named charitable beneficiary of such trust whether or not that beneficiary actually had been paid. Wolcott did not discover until later that all of the distributable income was not paid to the proper beneficiaries, though part of it was. All amounts which had been paid to charities not named as beneficiaries were charged back on the books as receivables from the trustees to the trust and entered on the books as liabilities of the trust to the named charities. For the fiscal year ending October 31, 1960, sums paid to non-named charities were recorded in an account denominated “Contributions (nondeductible)”. These sums in this account were later used to reduce the principal or corpus of the trust. In all other years, the deficiencies not paid to the named charities were charged on the books of the trust as receivables from the trustees as liabilities of the trusts. Some of such deficiencies had as of July 1965 not yet been paid. At no time have these stipulated deficiencies payable to the named charitable beneficiary been physically set aside for the use of the particular charity. They are commingled with the general funds of the seven trusts in the South Mountain Account.

52. When Wolcott discovered the errors in payments to charitable beneficiaries, he made the appropriate adjustments in the trusts’ books but made no corresponding adjustments in the trusts’ tax returns. Whether the sums due to the named charity were paid to it or to another charity, the trusts claimed the amounts which were required to be distributed annually to the named charity under the Declaration of Trust as a deduction on their Federal income tax returns.

53. The seven trusts which were lessors under the Humble lease of 1955 filed separate fiduciary income tax returns with the District Director of Internal Revenue at Los Angeles, California, for the years in question. The income reported in said returns, reduced by depletion and other deductions, resulted in the following taxes which were remitted with the respective returns by the trustees:

Trust Year Ended Tax Paid
April 21, 1953. 10/31/58 $8, 069.14
10/31/59 13,102. 54
10/31/60 3, 598.78
April 23, 1953. 10/31/58 8, 688. 86
10/31/59 13,950. 50
10/31/60 3, 908.53
April 27, 1953. 10/31/58 8, 318. 37
10/31/59 13,475.25
10/31/60 3, 695.38
April 29, 1953. 10/31/58 8, 069.14
10/31/59 13,102. 54
10/31/60 3, 598. 66
April 30, 1953. 10/31/58 8,193. 76
10/31/59 13,288. 96
10/31/60 3, 647.10
May 4, 1953. 10/31/58 8, 791. 89
10/31/59 14, 097. 24
10/31/60 3, 910. 53
May 9, 1953. 10/31/58 9,152. 62
10/31/59 14, 572.93
10/31/60 4,103.65

54 In determining deductions for depletion in connection with the reporting of the gross income of each of said seven trusts in each of the years involved, the respective trusts aggregated the income received under the Humble lease of 1955 and the income received under the operating agreement to determine total gross income for the purpose of computing the statutory limitations on depletion of 27.5 percent of gross or 50 percent of taxable income.

55. On April 30, 1963, the Commissioner of Internal Nev-enue issued to each of said seven trusts a statutory notice of proposed deficiency in income tax for the taxable years ending October 31,1958, October 31,1959, and October 31,1960. Said proposed deficiencies were attributable to the following:

(a) A disallowance of the claimed right to aggregate income from the Humble lease and operating agreement for the purpose of computing the depletion limitation. The result of such disallowance was a reduction of the trusts’ deductions for depletion.

(b) A disallowance of a portion of the claimed deductions for amounts of income distributable to charities. The amounts disallowed represented amounts not paid to the charity-beneficiaries named in the trust documents but merely carried as a liability on the books of the trusts, as well as all sums erroneously paid to charities not named hi the trust documents.

The assessments were as follows:

Trust Year Ended Deficiency
April 21, 1953 -10/31/58 $5, 906. 40
10/31/59 1,251.20
10/31/60 1.454. 88
April 23, 1953 -10/31/58 6,624. 60
10/31/59 1, 705. 88
10/31/60 1, 661.10
April 27, 1953. -10/31/58 5, 438. 58
10/31/59 625. 32
10/31/60 1,263. 53
April 29, 1953. -10/31/58 5, 906.40
10/31/59 1,251. 20
10/31/60 1,413.10
April 30, 1953 -10/31/58 5, 674. 64
10/31/59 938.19
10/31/60 1, 338.23
May 4, 1953--10/31/58 5, 616.19
10/31/59 659.13
10/31/60 1,295.01
May 9, 1953— -10/31/58 6.454. 78
10/31/59 1,413. 84
L0/31/60 1, 548. 96

56. Also on April 30, 1963, the Commissioner of Internal Revenue issued a separate statutory notice of proposed deficiency addressed collectively to all 19 of the trusts covered by the 19 recorded Declarations of Trust referred to herein. Said deficiencies were for the taxable years ending October 31, 1958, October 31, 1959, and October 31, 1960, and were computed by the Commissioner by consolidating the gross income of the aforesaid seven trusts which filed tax returns for the years in question and by computing the statutory depletion limitation separately on the income received under the 1955 Humble lease and the income received under the operating agreement, rather than aggregating said income. Also, the Commissioner did not allow a deduction for the full amount of income distributable to charities. The amount disallowed represented income not paid, but merely carried as a liability on the books of the trusts. The Commissioner did not allow any credit for the taxes that had already been paid with respect to the same income, which had been reported in the returns filed by the seven trusts. The proposed deficiencies were as follows:

Tawable Year Ended Deficiency
10/31/58_$178,608. 67
10/31/59_ 182, 252.10
10/31/60- 78, 510. 84
Total-$439,371.61

The “Statement” explaining the computation of the deficiency stated, among other things, that “It is determined that the execution of 19 separate trust indentures beginning April 20, 1953 and ending May 11, 1953 created in fact and substance one trust.” In “Explanation of Adjustments”, it was stated, with respect to the depletion question: “ * * * It is determined that there are two separate mineral interests which may not be aggregated under section 614(d) of the Internal Eevenue Code of 1954”, with respect to the deductions claimed for the charities-beneficiaries: “It is determined that deductions claimed in each of the alleged separate trusts in excess of actual distributions are not allowable under any provisions of the Internal Eevenue Code”, and with respect to the issue concerning the number of trusts involved: “It is determined that only one trusit exemption is applicable * *

The taxpayers are entitled to credit against the tax liability due from the one taxable trust any tax paid by the separate entities for which a claim for refund has been filed.

57. The term “minor beneficiary” which was used in the various statutory notices referred to the respective charitable beneficiaries named in the separate trust indentures, and not the grandson of the trustors who was also named as a beneficiary in such indentures.

58. Subsequent to the issuance of the aforesaid statutory notices, the respective deficiencies proposed therein were duly assessed.

59. On or about September 20, 1963, plaintiffs paid to the District Director of Internal Revenue at Los Angeles, California, the sum of $59,441.16 in payment of the assessments set forth in finding 55 plus accrued interest thereon in the amount of $14,596.38. On or about September 24,1963, plaintiffs paid to said District Director the sum of $439,371.61 in payment of the assessment set forth in finding 56 plus accrued interest thereon in the amount of $100,368.44.

60. On or about November 7,1963, plaintiffs filed with the District Director of Internal Revenue at Los Angeles, California, 24 timely claims for refund on Internal Revenue Service Form 843, seeking a refund of all of the sums paid as set forth herein in finding 59. By statutory notices dated March 12,1964, all of said claims were rejected by the District Director.

61. Plaintiffs, as trustees of the trusts referred to herein, are the owners of all of the claims which are the subject of this timely instituted action. Such claims have not been assigned to them or by them.

CONCLUSION OK LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover on the charitable deduction claim, together with interest as provided by law, and judgment is entered to that effect. Plaintiffs are not entitled to recover with respect to the multiple trust and depletion issues (except as indicated in finding 56) and with respect to those aspects of the case the petition is dismissed. The amount of recovery will be determined under Rule 47 (c). 
      
      On “The Depletion Question” and “The Charitable Deduction Issue” this opinion Incorporates, without change, the opinion of Trial Commissioner Saul Elchard Gamer. (The defendant did not except to the commissioner’s adverse recommendation on the latter Issue.) On “The Multiple Trust Question”, we use, with only the slightest modification, the commissioner’s statement of the facts and his discussion of the settlor’s purpose. With respect to the ultimate legal issue of whether the trusts should be taxed as one or separately, we come to the same result as the commissioner but on a narrower ground, and we do not reach or discuss the broader point on which he rests his recommendation.
     
      
       Of the 18 trusts covering rejal estate, five consisted of land which did not include any mineral rights, six consisted of land with one-half of the mineral rights, and seven consisted of land with full mineral rights (finding 21).
     
      
      
         Although the property was in the names of both Mr. and Mrs. Sence, Mr. Sence will sometimes be referred to as the taxpayer and property owner.
     
      
       A -well drilled as a protection against a well on adjacent property draining off all tbe oil from the underground pool.
     
      
       As to his wife and daughter, Sence decided to place certain of his income-producing assets in trust for their lives.
     
      
       The Masonic Homes of California was such beneficiary in five of the trusts, the National Red Cross in five, the Burbank Girl Scouts in five, and the YMCA in four. These charities were entitled to receive from one to five percent of the trust income, the amounts varying from trust to trust.
     
      
       Section 641(b) of tie Internal Revenue Code of 1954, 26 U.S.C. § 641(b) (1964), provides that “the taxable income of an estate or trust shall be computed in the same manner as in the case of an individual.” (Che section further provides that “the tax shall be computed on such taxable income and shall be paid by the fiduciary.”
     
      
       Under the California Subdivision Map Act (Calif. Bus. & Prof. Code § 11,000 et aeq.), one who divides his property intoi five or more parcels for purposes of sale would be required to submit to the Ventura County Planning Department for approval a tentative map indicating thereon proposed road alignments, lot locations, zoning, and other similar details. One exception to the filing provisions of the act is where the land division is of not less than 160 acres, if such land is under Federal survey. Plaintiffs say that the settlors interpreted these provisions to permit first dividing up the ranch into 160-aere parcels, and then further dividing each 160t-acrej parcel four more times into 40-acre parcels, all without being required) to comply with the Map Act filing provisions. Furthermore, under their interpretation, the trustees, when it came time to make sales from each 40-acre parcel, could make four sales therefrom, again without having to comply with the act.
     
      
       Plaintiffs erroneously refer to the creation of the trusts as taking place In April and May, which would he prior to the tender of the June 1 lease. The trusts were not actually executed, notarized, and recorded, until August and September 1953.
     
      
       “Q. By Mr. Shaiman: Now, can you tell us, Mr. Sence, why you set up these trusts?
      “A. Well, as you probably know by now, I have quite a number of interests In different things. I certainly never enter into any of these deals without getting good legal advice and studying it, and whichever then from that point on that we think is the best is the way we move.
      “So, I went in with my attorney on this for several times.
      “Q. Who was that attorney, by the way?
      “A. Bob Himrod. And then, from that point on, we decided that it would be good to set up these trusts, and that’s what we did.” (Sence Dep. pp. 24-25.)
     
      
       In Sence’s entire testimony, “subdivision” is mentioned only once, as follows:
      “Q. Is there any specific reason why you set up the trusts in the fashion that they were set up 1 Bid you discuss this with Mr. Himrod ?
      “A. I think not any more than what I have explained with you. So, after discussing it, aU the details can’t come back to me, what we went into.. We thought it would be a good idea for subdivision in the future, and it would be ail set apart. dJhat was one thing.” ( Sence Dep., p. 27.)
     
      
       It was agreed at the trial that insofar as the attorney’s testimony referred to statements made by Sence, such testimony would constitute hearsay and would not be admissible to establish the truth of Sence’s alleged statements. (Transcript, pp. 27, 32.)
     
      
       Nor does the fact that there was also conveyed to five of the trusts ranch property upon which the Sences owned no oil rights negative the oil basis for the creation of the trusts because income-reporting techniques would mate it possible for such non-oil-rights trusts to share in the oil income of the oil-rights trusts anyway, under the income-reporting arrangement that was actually adopted for the trusts when oil income was realized, all the trust parties to the lease (and operating agreement) divided the oil income according to the ratio the acreage held by a particular trust bore to the total acreage of the seven trusts, regardless of the location of the wells earning the income.
     
      
       Defendant further attacks the validity of the legal justification given for breaking up the ranch into 40-acre parcels without the necessity for compliance with the Map Act. Defendant says that, if the breaking up was done with real estate subdivision really in mind, then the settlors would have been required to comply with the filing provisions of the Map Act in accordance with what it regards are the act’s requirements. However, this is a technical matter of state law insufficiently developed on this record. Furthermore, a conclusion that the attorney’s opinion was erroneous would not necessarily affect the bona fide nature of his belief. It is true, however, that it would be most surprising if the opinion expressed by plaintiff’s attorney were valid because by first bringing down a large tract to 160 acres, and then by the constant application of the four-four rule in further dividing up the property, the Map Act could be completely subverted. Moreover, in the instant case, there was never any prior actual division of the property into 160-acre parcels.
     
      
       Said sections provide in part:
      “§ 011. Allowance of deduction for depletion.
      
      “(a) General rule. In the case of mines, oil and gas wells * * * there shall be allowed as a deduction in computing taxable income a, reasonable allowance for depletion * * * to he maid» under regulations prescribed by tbe Secretary * * *.
      “§ 613. Percentage depletion.
      
      “ (a) General rule. In the case of mines, wells, and other natural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percentage, specified in subsection (b), of the gross income from the property * * * . Such allowance shall not exceed 50 percent of the taxpayer’s taxable income from the property (computed without allowance for depletion) * * *.
      “(b) Percentage depletion rates. The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows:
      “(1) 27% percent — oil and gas wells. * * *”
     
      
       For instance, with respect to the trust of April 23, 1953, the adjusted depletion allowance for the taxable year ended October 31, 1958, was computed as follows:
      “Royalty interest depletion:
      (a) 27%% of 45,890.56, gross income— $12, 619. 70
      (b) 50% of 44,860.39 net income before depletion_$22, 430.20
      Lesser of (a) or (b)_ $12,619.90 Operating mineral interest depletion:
      (a) 27% % of $32,662.05, gross income- $8, 982. 06
      (b) 50% of 475.30, net income before depletion_ 237.65
      Lesser of (a) or (b)_ 237.65
      Total depletion_ $12, 857. 55”
      On the aggregate basis, the total gross income would be $78,552.61 (45,890.56+32,662.05), 27% percent of which would be $21,601.97. The total net income would be $45,335.69 (44,860.39 +475.30), 50 percent of which would be $22,667.85. The $21,601.97 figure, being the lesser one, would be applicable. Thus, the depletion allowance resulting from the aggregation would be $21,601.97, instead of $12,857.55, mating a difference of $8,744.42 for this one year on this one trust.
      On the aggregated basis, the sharp effect of the low net income on the operating interest (due to the expenses involved) in the operation) is diluted when added to the high net income on the royalty interest (on which there Is little expense), making the total 50 percent limitation figure much higher.
     
      
       “Sec. 614. Definition of Property.
      “(a) General Buie. — For the purpose of computing the depletion allowance in case of mines, wells, and other natural deposits, the term ‘property’ means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.
      “(b) Special Buie as to Operating Mineral Interests.
      
      “(1) Election to Aggregate Separate Interests.
      
      “If a taxpayer owns two or more separate operating mineral interests which constitute part or all of an operating unit, he may elect (for all purposes of this subtitle)—
      “(A) to form one aggregation of, and to treat as one property, any two or more of such interests ; and
      “(B) to treat as a separate property each such interest which he does not elect to include within the aggregation referred to in subparagraph (A).
      “For purposes of the preceding sentence, separate operating mineral interests which constitute part or all of an operating unit may be aggregated whether or not they are included in a single tract or parcel of land and whether or not they are included in contiguous tracts or parcels. A taxpayer may not elect to form more than one aggregation of operating mineral interests within any one operating unit.
      “(2) Manner and Scope of Election * * *.
      “(3) Operating Mineral Interests Defined. — For purposes of this subsection, the term ‘operating mineral interest’ includes only an interest in respect of which the costs of production of the mineral are required to be taken into account by the taxpayer for purposes of computing the 50 percent limitation provided for in section 613 * * *.
      “(c) Special Buie as to Nonoperating Mineral Interests.
      
      “(1) Aggregation of Separate Interests. — If a taxpayer owns two or more separate nonoperating mineral interests in a single tract or parcel of land, or in two or more contiguous tracts or parcels of land, the Secretary * * * may, on showing of undue hardship, permit the taxpayer to treat (for all purposes of this subtitle) all such mineral interests as one property. * * *
      
      “(2) Nonoperating Mineral Interests Defined. — For purposes of this subsection, the term ‘nonoperating mineral interests’ includes only interests which are not operating mineral interests within the meaning of subsection (bH3).”
     
      
       26 U.S.C. § 614 (1964 ed.). Subsection (b), entitled Special rules as to operating mineral interests in oil and gas wells, permits the combining of all of a taxpayer’s operating mineral interests in a separate tract but forbids the combination of such interests in different tracts (subsection (d), containing the same definition of “operating mineral interests” as was set forth in § 614(b)(3) of the original statute), and subsection (e), entitled Special rule as to nonoperating mineral interests, permits aggregation of such interests in a single tract or adjacent tracts provided the Secretary, on a showing that “a principal purpose is not the avoidance of tax” grants permission for such aggregation (subsection (e) (2) containing the same definition of “Nonoperat-ing mineral interests” as was set forth in § 614(c) (2) of the original statute).
     
      
       The Report of the Committee on Ways and Means stated, In discussing the section Involved (614) :
      “The operating Interests that may be combined Into one property need not be included in a single tract of land or even in contiguous tracts, but they must be comprised in extractive operations which are normally or reasonably conducted as a unit. The taxpayer may not elect to form more than one aggregation of interests within any one operating unit. Royalties or similar interests which do not bear a portion of the costs of exploration, development or production are not operating Interests, and may not be combined.” H. Rept. No. 1337, 83d Cong., 2d Sess., 3 Ü.S.C. Cong. & Adm. News (1954) 4017, 4085.
     
      
       The Senate Finance Committee’s Report on the bill described the House bill as adding “a new subsection to section 614 which, in effect, provided that a taxpayer may elect to treat any property as if the 1954 Code definition of property had not been enacted and as if the 1939 Code rules still applied”, and then went on to state: “Tour committee’s bill represents a substantial amendment of the House bill insofar as it concerns the treatment of operating mineral interests in the case of mines and other natural deposits (except oil and gas) and the treatment of all nonoperating mineral interests.” Senate Rept. No. 1983, 85th Cong., 2d Sess., 3 U.S.C. Cong. & Adm. News (1958) 4791, 4962-63.
     
      
       Regulation § 1.614-4 (a) issued under section 614(d) specifically restricts the application of the section to operating interests providing, in pertinent part, as follows :■
      “In the case of oil and gas wells, a taxpayer may treat under section 614(d) and this section any property as if section 614i(a) and! (b) had not been enacted. Nor purposes of this section, the term ‘property’ means each separate operating mineral interest owned by the taxpayer in each mineral deposit in each separate tract or paircel of land.”
     
      
       Plaintiffs contend that limiting section 614(d) to operating interests mates it redundant, since section 614(b) already gave taxpayers the right to aggregate such interests at the time section 614(d) was enacted. This “redundancy” argument is without merit. Section 614(d) eliminated the definition of “property” contained in section 614(a) of the 1954 Codie as to those with operating interests who elected to come under the 1939 Code. Thus, owners of operating interests who had or could have aggregated such interests under the 1939 Code and in accordance with definitions of aggregable “property” then contained in the applicable regulations and in court decisions, which definitions were alleged to be more favorable than the statutory definition contained for the first time in the 1954 Code, were permitted by section 614(d) to aggregate in accordance with the 1939 Code. Thus, insofar as “property” concepts under the 1939 Code permitted the aggregation of operating interests that would not be permitted under section 614(d), such section would be far from redundant. The mere fact that a taxpayer owned two operating interests would not automatically make them aggregable under either the 1939 or the 1954 rules. They still had to qualify for aggregation under the rules. See Note, The Property Concept in the Calculation of Percentage Depletion: The Disjunction of the 195b Aggregations, 113 U. Pa. L. Rev. 1246 (1965).
     
      
       After the discovery by the accountant for the trusts of the erroneous payments, all amounts which had been paid to unnamed charities were charged on the books of the trust as receivables from the trustees.
     
      
       There is no issue in this ease concerning the qualification of the beneficiaries involved as charities.
     
      
       So spelled In each Declaration of Trust, although spelled “Tod” In the petition filed herein.
     
      
       It was agreed at the trial that Sence’s attorney’s testimony as to what Sence told the attorney would constitute hearsay and would not be admissible to establish the truth of Sence’s statements.
     
      
       Each notice with respect to the separate trusts contained an “Explanation of Adjustments” which, in this respect stated:
      “In the return filed, you have claimed percentage depletion upon the basis of aggregating income from nonoperating mineral interests and operating mineral interests with the resultant limitation of 27% percent of gross income or 50 percent of net income. It is determined that there are two separate mineral interests which may not be aggregated under section 614(d) of the Internal Revenue Code of 1954.”
     