4 T.C. 1242">*1243 The Commissioner has determined deficiencies in income taxes for the calendar year 1940 in the following amounts: Alex McCutchin, $ 13,046.24, and Alma McCutchin, $ 13,046.24.

These proceedings have been duly consolidated for hearing and opinion. The deficiencies resulted mainly from the inclusion in the gross income of each petitioner of one-half of the income of certain trusts established by them in 1939. Certain other adjustments made by respondent are not now in issue. By amended answer respondent affirmatively alleges that in the notice of deficiency he improperly allowed the deduction of the amount of $ 27,970.42 as intangible drilling and development costs and that he further erred in failing to allow a deduction for depletion in the amount of $ 1,395.63.

FINDINGS OF FACT.

The petitioners, Alex McCutchin and Alma McCutchin, 1945 U.S. Tax Ct. LEXIS 175">*178 are husband and wife and at all times material herein they resided in Dallas, Texas. For the calendar year 1940 they filed separate returns on the community property, cash receipts and disbursements basis with the collector of internal revenue for the second collection district of Texas.

Issue No. 1.

On December 26, 1939, the McCutchin Investment Co., a corporation, was chartered under the laws of the State of Texas, with authorized capital stock of $ 25,000, fully paid in in cash. Its incorporators were the petitioners, Alex and Alma McCutchin, and R. M. McCutchin, brother of Alex McCutchin. Alex was president of the corporation and owned all of its stock except qualifying shares. The corporation had no employees or office of its own and was organized to receive and manage the trusts hereinafter described.

4 T.C. 1242">*1244 On December 29, 1939, petitioners established by trust indenture four trusts, known, respectively, as the Jerry McCutchin trust, the Gene McCutchin trust, the Carrie McCutchin trust, and the J. A. McCutchin trust. Under the indentures certain community oil properties were transferred to the McCutchin Investment Co., as trustee, for the purposes stated therein. 1945 U.S. Tax Ct. LEXIS 175">*179 Petitioners duly filed Federal gift tax returns for 1939, reporting these gifts in trust, and proper returns by or on behalf of each of four donees were duly filed.

The primary beneficiary of the first trust above mentioned was Jerry McCutchin, a son of petitioners, born November 23, 1939. The pertinent provisions of the instrument are as follows:

The Trustee shall immediately take possession, management and control of all of the property conveyed to it, as heretofore specified, and shall diligently and faithfully manage, conserve, care for, protect and control the trust property and every part thereof. The Trustee shall have, and is hereby given and granted, as full and complete power in the management, control and disposition of the trust property as it would have or might exercise if it were the sole and absolute owner thereof in fee simple, except to the extent that its powers are expressly limited herein. Without in anywise limiting the generality of this grant of power, the Trustee is hereby expressly authorized and empowered:

(a) - To hold, manage and control the trust property and every part thereof.

(b) - To sell, for cash or upon credit, or to exchange any property at1945 U.S. Tax Ct. LEXIS 175">*180 any time belonging to the Trust.

(c) - To lease, rent, improve or otherwise develop any property belonging to the Trust, including the right and power to make oil, gas and mining leases upon any property belonging to the Trust for any term by it deemed appropriate, even though longer than the probable existence of this Trust. Any lease so made shall be valid and binding, according to its terms, even though this Trust should terminate before the termination of such lease.

(d) - To demand, receive and collect all revenues and proceeds arising from the operation or disposition of the trust properties, or any part thereof.

(e) - To invest and reinvest all funds coming into its hands as such Trustee and to change the form of any investment as frequently as it deems necessary or appropriate. In making investments, the Trustee shall not be restricted by any law now in existence, or hereafter adopted, regarding the character of investments which Trustees or other Fiduciaries may make, but may at all times invest in such lawful enterprises as the Trustee may deem appropriate, including joint enterprises, stocks, and securities of corporations, either organized or organizing, and any other1945 U.S. Tax Ct. LEXIS 175">*181 lawful enterprise.

(f) - In its own name sue and defend in all courts or quasijudicial bodies in all matters relating to the trust property or its affairs, with or without disclosing its trusteeship, and without being required to make the beneficiary a party thereto.

(g) - Hold in is own name, without disclosing its trusteeship, any property belonging to the Trust.

(h) - Borrow money for the purposes of the Trust and execute mortgages, deeds of trust and pledges of any trust property to secure its indebtedness.

(i) - Lend money with or without security.

(j) - Acquire and pay the premiums upon policies of life insurance upon the life of the beneficiary, and annuities measured by his life, taking such steps and making such provisions with respect to such insurance and annuity contracts as may be appropriate, to the end that the benefits therefrom will be used for the 4 T.C. 1242">*1245 purposes herein specified and ultimately go as is herein provided for the remainder of the trust property.

Whenever above, or elsewhere in this instrument, reference is made to the trust property, the parties intend that that phrase shall apply, not only to the original corpus of the Trust, but to all changes1945 U.S. Tax Ct. LEXIS 175">*182 therein, the revenues derived therefrom and all reinvestments and acquisitions of every kind at any time held by the trustee hereunder, and the powers granted herein shall apply to all such property.

(4).

Until the beneficiary reaches the age of twenty one (21) years, the income of this Trust shall be accumulated and reinvested. Thereafter, and until said beneficiary reaches the age of twenty five (25) years, the Trustee shall pay over to him monthly such portion of the income of the Trust as the Trustee may in its uncontrolled discretion determine advisable, reinvesting the remainder of said income, if any. Thereafter, for so long as this Trust shall remain in existence, the Trustee shall pay over to the beneficiary periodically, and as frequently as once each year, the entire net income of the Trust. In addition, the Trustee may (after the beneficiary reaches the age of twenty one or marries) in its discretion, acquire and hold in its own name a suitable residence for the beneficiary and furnish and maintain the same from trust funds, allowing the beneficiary to use the same without charge. Whenever and if, prior to the time the beneficiary reaches the age of twenty one years, 1945 U.S. Tax Ct. LEXIS 175">*183 those legally responsible for the support, education, and maintenance of the beneficiary as a minor are unable to support, educate and maintain him, then the Trustee may expend such portion of the net income of the Trust as it may in its uncontrolled discretion determine to be appropriate for the purpose of supporting, educating and maintaining the beneficiary until he reaches the age of twenty one (21) years.

(5).

At any time, and from time to time, after the beneficiary reaches the age of twenty one (21) years, and before he becomes twenty five (25) years of age, the Trustee may deliver to him any portion of the trust property which, in the uncontrolled discretion of the Trustee, it would be appropriate for him to have, but not exceeding in the aggregate property of the value of Twenty Five Thousand ($ 25,000.00) Dollars. After the beneficiary reaches the age of twenty five (25) years, the Trustee may, in its uncontrolled discretion, from time to time, deliver to the beneficiary all of the remaining property of the Trust then held by it under the terms hereof. But the Trustee shall never be required to deliver to the beneficiary more than the amounts of income specified in paragraph1945 U.S. Tax Ct. LEXIS 175">*184 four (4) hereof, and its judgment as to the advisability of so doing shall not be subject to review or control by any Court, or otherwise. It is the desire of the Settlors that said beneficiary shall, upon reaching the age above specified, receive from the Trustee portions and all of the estate created hereby for his benefit if and as rapidly as he has demonstrated his capacity to manage and care for the same; but that until and unless that capacity has been demonstrated to the satisfaction of the Trustee, the corpus of the Trust shall be held for the use and benefit of the beneficiary, even though this period extends throughout the entire life of the beneficiary. Any property delivered by the Trustee to the beneficiary from the trust estate under the discretionary powers herein granted shall thereafter be free from all control by the Trustee and shall belong to the beneficiary absolutely in fee simple. Any distributions made by the Trustee under the terms of this paragraph may be in kind and at valuations and appraisals made by it and not subject to review by any Court, or otherwise.

4 T.C. 1242">*1246 Paragraph 6 of the Jerry McCutchin trust indenture provides for the disposition of 1945 U.S. Tax Ct. LEXIS 175">*185 the property in case the beneficiary should die prior to the termination of the trust and the delivery of the corpus to him. It provides that if the death of the beneficiary occurs before his twenty-first birthday and he is unmarried the corpus is to go in equal shares to the surviving children of the settlors (petitioners), or, if there should be at that time a trust in existence for such surviving children, to the trust for their benefit. It further provides that if the beneficiary is married or 21 years or over at the time of his death, the trust property goes to his surviving spouse or issue, or to his brothers or sisters, as he shall by will appoint. In case of failure to appoint, the trustee is directed to distribute the property in accordance with the laws of descent and distribution of the State of Texas.

The instrument further provides as follows:

(10).

In determining distributable income, the Trustee shall act in accordance with sound accounting principles, making reasonable provisions for depreciation, depletion, reserves for losses and bad debts. Revenues from oil, gas and mining properties shall be treated as income to the extent the same are so treated by the current1945 U.S. Tax Ct. LEXIS 175">*186 Federal Income Tax Laws. The trustee's classification of corpus and income shall not be subject to review.

(11).

The Settlors, and each of them, hereby acknowledge and declare that the gift, evidenced hereby and by the conveyances to the Trustee made this date and heretofore referred to, is, and is intended to be, irrevocable and that this decision has been reached after full deliberation and consideration, and that in no event shall this trust instrument be construed as authorizing or empowering them, or either of them, or the survivor of them, (either with or without action by the Trustee) to reinvest in themselves, or in either or the survivor of them, the beneficial title to all or any part of the trust property or its revenues, except and only under the circumstances specified in paragraph (6) (a) hereof. Nevertheless, said Settlors retain for themselves, or their survivor, the following rights and powers with respect to this Trust and the property at any time constituting a part thereof, to wit:

(a) - To designate one or more substitute trustees in lieu and in place of the McCutchin Investment Company, or any subsequently appointed Trustee or Trustees, and to require the McCutchin1945 U.S. Tax Ct. LEXIS 175">*187 Investment Company, or any subsequently appointed Trustee or Trustees, to surrender and deliver to such substitute or successor trustee or trustees all of the property then held hereunder. Such successor or substitute trustee or trustees may be either an individual or corporation, or one or more individuals and/or one or more corporations, and the Settlor, Alex McCutchin, may be and become one of the Trustees. Likewise, the Settlors, or their survivor, may appoint one or more individuals or corporations to act as co-trustees with the McCutchin Investment Company and to share with it its powers, duties, responsibilities and immunities as such Trustee.

(b) - To require the McCutchin Investment Company, or any substitute, successor or co-trustee, to give bond or security for the faithful performance of its duties.

(c) - To restrict the discretionary power herein granted to the Trustee to the extent the Settlors, or the survivor of them, may deem proper as to the character 4 T.C. 1242">*1247 of investments which may be made of trust funds, the right to borrow money, and the right to hold in its own name, without disclosing the trusteeship, property belonging to this Trust.

(d) - While both 1945 U.S. Tax Ct. LEXIS 175">*188 of the Settlors are living, and if they act jointly and after the beneficiary has reached the age of twenty one (21) years, to require the Trustee to deliver to the beneficiary, for his free and unrestricted benefit and disposal, such portion or all of the corpus of the trust property as the Settlors by such joint action may direct.

(e) - From time to time, to add to the corpus of the trust property by gift, bequest or devise.

The Gene McCutchin trust is identical in terms with the Jerry McCutchin trust except for the primary beneficiary, who is Gene Paul McCutchin, a son of petitioners who was a minor at the time the trust was established.

The third trust, the Carrie McCutchin trust, was for the benefit of Carrie McCutchin, the mother of petitioner Alex McCutchin. Paragraph 3 of the indenture, dealing with the powers of the trustee, is identical with paragraph 3 of the Jerry McCutchin trust. Paragraph 4 provides as follows:

During the life of the primary beneficiary, the Trustee shall pay over to her from time to time such portions of the income of the Trust as, in its uncontrolled discretion, the Trustee deems appropriate for the needs and welfare of the said primary beneficiary. 1945 U.S. Tax Ct. LEXIS 175">*189 If, in the uncontrolled discretion of the Trustee, the needs and welfare of the primary beneficiary so require, the Trustee may, from time to time, distribute to the primary beneficiary such portions of the corpus of this Trust as the Trustee deems appropriate. Any income not so distributed shall be held, invested and disposed of by the Trustee under the further terms hereof.

Upon the death of the primary beneficiary, this Trust shall terminate and all property and funds remaining in the Trust shall pass to and vest in equal shares in the two sons of the Settlors, to wit, Jerry Alex McCutchin and Gene Paul McCutchin. But if, at that time, there is still in existence a Trust or Trusts created by the Settlors on this date of which the Trustee herein named in Trustee, and of which said sons are the respective beneficiaries (which Trusts are known as "The Jerry McCutchin Trust" and "The Gene McCutchin Trust", respectively) the share or shares of the residue of this Trust which would otherwise go directly to Settlors' said sons, or either of them, shall pass to and become a part of the property then so held in trust for Settlors' son or sons, respectively, and thereafter in all respects1945 U.S. Tax Ct. LEXIS 175">*190 be governed, pass and be disposed of in accordance with the terms of said respective Trusts in exactly the same way as if the property so passing by this provision had constituted a part of the original corpus of said Trust.

If either of the said sons of Settlors predecease the primary beneficiary and leave no descendants surviving, the share of the residue of this Trust which would otherwise go to such predeceased son, or to his Trust as above provided, shall pass to and vest in the surviving son, or in his Trust as above provided.

If either or both of such sons, predeceasing the primary beneficiary, should leave surviving him a child or children, or their descendants, the share of the residue of this Trust which would otherwise go to, or for, such son shall pass to and vest in his surviving child, children or their descendants, per stirpes.

4 T.C. 1242">*1248 If both of the Settlors' said sons should predecease the primary beneficiary and leave no child, children, or their descendants, surviving them, the residue of this Trust shall pass to and vest in the Settlors, in equal shares, or in the survivor of them.

The trust contains spendthrift provisions and provision for compensation of1945 U.S. Tax Ct. LEXIS 175">*191 the trustee. Paragraph 8, dealing with the determination of distributable income is identical with paragraph 10 of the Jerry McCutchin trust and paragraph 9 is identical with paragraph 11 of the Jerry McCutchin trust, with the exception of subparagraph 11 (d) of the latter instrument, which does not appear in the Carrie McCutchin trust.

The J. A. McCutchin trust is identical in terms with the Carrie McCutchin trust except for the primary beneficiary, who was J. A. McCutchin, father of petitioner Alex McCutchin.

The property transferred to the McCutchin Investment Co. under these instruments consisted of two kinds of oil interests: (1) Oil payments, and (2) overriding royalties carved out of leasehold interests owned by petitioners. Each trust took an undivided one-fourth interest in all of the oil properties conveyed to the McCutchin Investment Co. as trustee. The conveyances were duly recorded in the deed records of the counties in which the properties were located.

Books and records were opened for McCutchin Investment Co., trustee, and a bank account was opened by the investment company with the Tyler State Bank at Tyler and, subsequently, with the First National Bank in Dallas, 1945 U.S. Tax Ct. LEXIS 175">*192 Texas. At no time did petitioners have any accounts in these two banks. As oil was produced from the properties held by the McCutchin Investment Co. the proceeds were remitted by the pipe line companies purchasing the oil directly to McCutchin Investment Co., trustee, under division orders.

Within the calendar year 1940, the investment company's share of the proceeds before the deduction of the gross production tax levied by the State of Texas totaled $ 81,278.48. The production tax in the amount of $ 2,419.26 was paid by the pipe line companies directly to the State of Texas and there was remitted to the McCutchin Investment Co., trustee, the sum of $ 78,859.22. Ad valorem taxes in the amount of $ 808.69 and trustee fees totaling $ 3,902.51 were incurred and paid, resulting in net income for the four trusts in the total amount of $ 74,148.02, before the deduction of statutory percentage depletion.

J. A. McCutchin died in July of 1940. Thereupon, in accordance with the provisions of the J. A. McCutchin trust, the corpus and accumulated income thereof vested one-half in the Jerry McCutchin trust and one-half in the Gene McCutchin trust. The distributive share of each of the respective1945 U.S. Tax Ct. LEXIS 175">*193 trusts in the gross oil proceeds for the year 1940, and in the deductions attributable to such proceeds, exclusive of statutory percentage depletion, was as follows: 4 T.C. 1242">*1249

On December 31, 1940, after the transfer of the corpus and accumulated income of the J. A. McCutchin trust ratably to the Jerry McCutchin trust and the Gene McCutchin trust, the undivided profits accounts of the three remaining trusts stood as follows:

No distributions of income were made by the McCutchin Investment Co., trustee, to the beneficiaries of the 1945 U.S. Tax Ct. LEXIS 175">*194 various trusts prior to December 31, 1940. Beginning about July 1942, there was distributed to Carrie McCutchin out of the income of the Carrie McCutchin trust the sum of $ 50 per month.

During the year 1940 Alex McCutchin and the McCutchin Investment Co. jointly purchased four separate oil properties, each advancing part of the purchase price. In the case of two of the joint purchases, Alex McCutchin received more value proportionately for his contribution than the investment company received. In the case of the remaining two joint purchases, the investment company received more value for its contribution, proportionately, than Alex McCutchin received. As to each of the four transactions, however, both Alex and the investment company in each and every instance received full value for their contributions to the purchase price.

In April 1940 Alex McCutchin borrowed $ 23,500 from the investment company without security. Interest to December 31, 1940, was paid on March 4, 1941, in the amount of $ 333.67.

For the calendar year 1940 the McCutchin Investment Co., trustee, duly filed Federal income tax returns and reported and paid a tax on the income of each of the four trusts above1945 U.S. Tax Ct. LEXIS 175">*195 described.

Respondent determined a deficiency in income tax against petitioners for the year 1940 based upon the inclusion in the income of each of one-half of the income of the four trusts.

4 T.C. 1242">*1250 Issue No. 2.

On March 15, 1940, Jessie Reagan, joined by her husband, J. H. Reagan, executed an oil and gas lease on certain described property to Alex McCutchin, the pertinent provisions of which follow:

Lessee, Alex McCutchin, agrees to immediately apply to the Railroad Commission of Texas for permits to drill four (4) wells upon said tract of land, and in the event one or more of such permits should be granted, to immediately, upon the completion of a well which McCutchin is now drilling, known as The Tucker-Bieler well, move said rig and drilling machinery and equipment to the tract of land hereinabove described and begin actual operations for the drilling of the first well on said tract, and continue said drilling operations with due diligence until said well is drilled to completion. And, successively, thereafter, lessee will drill the additional wells for which Railroad Commission permits have been secured at not to exceed ninety (90) days intervals from the completion of1945 U.S. Tax Ct. LEXIS 175">*196 any one well until the commencement of drilling operations on a succeeding well; all of said wells to be drilled with due diligence and in a good and workmanlike manner.

Failure of the lessee to so drill said wells as above described will, ipso facto, forfeit this lease as to such undrilled locations, and lessee agrees to immediately assign to lessors such undrilled locations.

In the event a well, or wells are drilled upon any tract of land adjacent to the hereinabove described property, which in the opinion of lessors demand that a compensating offset well be drilled upon the hereinabove described tract, and if a permit or permits can be secured from the Railroad Commission of Texas for such well or wells to be drilled upon the above described tract, lessee agrees to drill such well or wells, or, in the alternative to assign to lessors such undrilled locations.

During the year 1940, petitioners expended the sum of $ 27,970.42 as intangible drilling and development costs in connection with the drilling of three wells on this lease. In their returns for the year 1940 petitioners deducted this amount from their community gross income as an expense. The respondent in the notice of 1945 U.S. Tax Ct. LEXIS 175">*197 deficiency took no action in regard to this deduction, but by amended answer he alleges that the deduction should be disallowed as a cost incurred in the acquisition of a capital asset. Respondent agrees that if it should be found that this amount should be capitalized rather than deducted as an expense, petitioners are entitled to an additional allowance for depletion in the amount of $ 1,395.63.

OPINION.

The first issue deals with the taxability of petitioners on the income of the four trusts here involved under section 22 (a) of the Internal Revenue Code and under the principle of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. The respondent contends that the McCutchin Investment Co. is but an alter ego of petitioner Alex McCutchin; that he must be regarded as the real trustee; and that as 4 T.C. 1242">*1251 such he has retained controls over the several trusts sufficient to leave him in substance the owner of the properties.

It is apparent, we think, that the McCutchin Investment Co. is not an independent entity insulating the grantors against taxability, if otherwise the various trusts should fall within the rule of the Clifford case. Petitioner Alex1945 U.S. Tax Ct. LEXIS 175">*198 McCutchin owned all the shares of the corporation except qualifying shares and directly managed the corporation as its president. He further reserved the right to change the trustee and substitute himself. Under these circumstances he must be treated as the actual trustee for present purposes. Phipps v. Commissioner, 137 Fed. (2d) 141.

The respondent's contention that petitioner Alex McCutchin retained such control over the properties of the trusts as to remain in substance the owner thereof is based upon the following alleged factors: (1) The intimate family relationship of the parties; (2) the broad powers vested in the trustee-settlor in connection with the management and control of the trusts; (3) the broad powers vested in the trustee-settlor in connection with the distribution of the income of the trust property; (4) the ability of the trustee-settlor to shift the beneficial interest; and (5) the ability of the settlor to gain through his dealings with the trusts. Initially, it must be observed that the four trusts are expressly irrevocable and are not subject to alteration or amendment By the terms of the instrument the grantors divested1945 U.S. Tax Ct. LEXIS 175">*199 themselves of all interests in the trusts and only upon the remote contingency that they survive their children, who were minors at the time of the creation of the trusts, and the issue of such children, have they any reversionary interest. The short term factor of the Clifford case is thus not present in this case. See Lura H. Morgan, 2 T.C. 510.

That the trusts were established for the benefits of the children and the parents of the grantors can not of itself direct the conclusion. Lura Morgan, supra. The powers of management and control over the trusts were vested in petitioner Alex McCutchin (ignoring the investment company) as the trustee and the exercise of such powers for his own advantage as distinguished from that of the trusts would have been subject to strict judicial control. Slay v. Mary Couts Burnett Trust, 180 S. W. (2d) 480; MacDonald v. Follett, 180 S. W. (2d) 334. It is now clear that the possession of such fiduciary powers as here vested in the trustee does not in and of itself serve to subject the grantor to a tax on the income1945 U.S. Tax Ct. LEXIS 175">*200 of the trusts. Armstrong v. Commissioner, 143 Fed. (2d) 700; Estate of Benjamin Lowenstein, 3 T.C. 1133; David Small, 3 T.C. 1142. There must be an economic gain or profit realized or realizable by the grantor before he may be taxed. Helvering v. Stuart, 317 U.S. 154">317 U.S. 154. But, the respondent argues that petitioner Alex McCutchin may derive and, in fact, has derived economic gains from his dealings with the trust res. The evidence 4 T.C. 1242">*1252 shows that he purchased four oil properties during the taxable year, part of the consideration being furnished by him and part by the trusts. In return for their contribution the trusts received oil payments in each and in every instance. It was stipulated that in two instances the petitioner received more proportionately for his contribution than did the trusts and that in the remaining two the trusts received more proportionately for their contribution than did the petitioner. These circumstances satisfy us that the petitioner has not dealt unfairly with the trusts in his capacity and has not utilized the1945 U.S. Tax Ct. LEXIS 175">*201 trust properties to his own advantage.

The crux of respondent's argument seems to rest in the contention that the petitioner retained the right to make or withhold distributions at will and that this "is equal to the reserved power of the taxpayer settlor to shift the beneficial interest. Commissioner v. Buck, 120 Fed. (2d) 775." It is argued that in all four trusts petitioner could increase the estate of the secondary beneficiaries by withholding distributions of income and corpus during the lifetimes of the primary beneficiaries and that he could in the case of Carrie and J. A. McCutchin trusts eliminate the secondary beneficiaries entirely by distributing the whole corpus to the primary beneficiaries at any given time.

We think this argument has no application whatsoever to the Jerry and Gene McCutchin trusts. The indentures establishing those trusts provide that the income is to be accumulated and reinvested until the beneficiary reaches the age of 21. Thereafter, and until the beneficiary reaches the age of 25, the trustee is to pay monthly to the beneficiary such proportion of the income as the trustee deems advisable, the balance to be 1945 U.S. Tax Ct. LEXIS 175">*202 accumulated and reinvested. After that time the entire net income of the trust is to be distributed to the beneficiary as long as the trust continues. The only variation from the above provision is authorized only in the event those legally bound to support, educate, and maintain the beneficiary prior to his twenty-first birthday are unable to do so. That problem will be discussed hereinafter more fully. The devolution of the corpora of the trusts is fixed by the terms of the trust instruments, which permit of no variation.

The instant case is different from Louis Stockstrom, 3 T.C. 255; affd., 148 Fed. (2d) 491. In that case the court pointed out that the trustee-settlor "was not required to distribute any part of the income to any of the beneficiaries during his lifetime." Nor do we think it is comparable to Commissioner v. Buck, supra, where the grantor had reserved for his life, the power, at any time, and from time to time, to "alter or amend in any respect whatsoever" the provisions relating to the distribution of the income and the principal of the trust estate. The facts and circumstances1945 U.S. Tax Ct. LEXIS 175">*203 here are more like those in David Small, 4 T.C. 1242">*1253 , and Frederick Ayer, 45 B. T. A. 146. In the Small case the powers of management lodged in the trustee-settlor appear to be as broad and comprehensive as those here present and in that case, in addition to his discretionary power over the distribution of the income to the minor children, the trust instrument also provided that in the event the income from the trust, at any time while the petitioner or his wife was trustee, should in his or her sole discretion be deemed insufficient for the comfort, care, maintenance, and/or support of the children or issue of deceased children, the trustee might in his or her sole discretion pay to such children or issue of such children, out of principal, such additional amount as he deemed necessary or advisable. It was further provided that the trustee in making such payments to one child or to the issue of one child to the exclusion of others, should charge the entire trust estate and not the ultimate share set apart for the child for whose benefit the payment was made. It is apparent that the control of the trustee over1945 U.S. Tax Ct. LEXIS 175">*204 the distribution of the trust property in the instant case is less comprehensive than in the Small case, supra. In the circumstances, we conclude that the trusts for the benefit of the children should be given treatment similar to that which we accorded in the cases just mentioned.

The two trusts for the benefit of the parents are different from those for the children. There the trustee was to pay to the beneficiary so much of the income or corpora as in his discretion was appropriate for the needs and welfare of the beneficiary. Any undistributed income was to be accumulated and the whole was to vest in equal shares in the two sons of the petitioner upon the death of the primary beneficiary. It is to be noted that the sweeping rights of alteration or amendment reserved to the settlor in his individual capacity in Commissioner v. Buck, supra, are not here present and in the circumstances, it would appear that the broad powers over the income and principal there reserved would have little, if anything, in common with the limited discretion here provided for. See Phipps v. Commissioner, supra.However, 1945 U.S. Tax Ct. LEXIS 175">*205 the facts here blend rather closely with those in Louis Stockstrom, where it was held that the broad management powers on the part of the settlor-trustee, coupled with the discretion in the distribution or accumulation of the income, were sufficient to render the settlor-trustee taxable as the "owner" of the trust property.

Accordingly, we conclude that the petitioner here is likewise liable to tax within the meaning of section 22 (a) of the Internal Revenue Code on the income of the trust established by him for the benefit of his parents.

The trusts for the benefit of Jerry and Gene McCutchin provide that the income thereof may be used for the support, education, and maintenance of the minor beneficiary if prior to the time he becomes of age 4 T.C. 1242">*1254 those legally bound to support, educate, and maintain him are unable to do so. At all times pertinent petitioners were well able to provide for their children and none of the income of the trusts was used to that end. 317 U.S. 154">Helvering v. Stuart, supra, therefore, is not applicable. Robert P. Scherer, 3 T.C. 776. Moreover, it may not be amiss to point out that even were1945 U.S. Tax Ct. LEXIS 175">*206 the rule of the Stuart case applicable in the instant case, petitioner would be entitled to the benefits of section 134 of the Revenue Act of 1943, adding section 167 (c) of the Internal Revenue Code, upon compliance with the conditions therein set forth.

The remaining issue concerns the deductibility of the amount of $ 27,970.42 as intangible drilling and development costs incurred in the drilling of three oil wells on the Reagan leasehold. Under the provisions of Regulations 103, section 19.23 (m)-16, ¹ the taxpayer is accorded an option to charge to expense or to capitalize certain expenditures in connection with the drilling and development of oil wells. It is now settled that the option does not extend to costs incurred in the drilling of wells where such drilling is required as part of the consideration for the acquisition of the lease. F. F. Hardesty, 43 B. T. A. 245; affd., 127 Fed. (2d) 843; Hunt v. Commissioner, 135 Fed. (2d) 697; F. H. E. Oil Co., 3 T.C. 13. Indeed, the opinion of the Circuit Court of Appeals for the Fifth Circuit, rendered1945 U.S. Tax Ct. LEXIS 175">*207 March 6, 1945, affirming the F. H. E. Oil Co. case, holds that the cost of drilling oil wells is a capital investment in every instance, recoverable only by depletion, and that the provisions of section 23 (m)-16 of Regulations 101 and 103, in so far as the granting of the option is concerned, are inconsistent with the statute. Aside from the broad impact of that decision, under the terms of the instant lease petitioner was obligated to drill in order to avoid termination of the lease in whole or in part. Such a condition falls within the rationale of all the above cited cases and on their authority we hold that the deduction of the drilling costs should properly be disallowed.

1945 U.S. Tax Ct. LEXIS 175">*208 It is conceded by the Commissioner that the disallowance of this item necessitates the allowance of additional depletion in the amount of $ 1,395.63 by reason of the capitalization of the intangible drilling and development costs. This concession will be given effect in the recomputation under Rule 50.

Decisions will be entered under Rule 50.