*1026 Where the powers of the trustee, under the terms of a written trust, as properly supplemented by a contemporaneous oral agreement by the parties to the written trusts, are limited, during the by the parties to the written trusts, are limited, during the tax years, to those purely ministerial, such a trust is taxable, for those years, as a trust and not as an association.
*492 This case involves deficiencies in income and excess profits taxes for the calendar years 1934 and 1935 as follows:
| 1934, income tax | $2,994.62 |
| 1934, excess profits tax | 1,088.95 |
| 1935, income tax | 8,266.82 |
| 1935, excess profits tax | 3,006.12 |
The only issue is whether petitioner, as trustee of a trust of real estate located in Canton, Ohio, is taxable as an association under sections 13, 702, and 801 of the Revenue Act of 1934.
FINDINGS OF FACT.
Prior to 1914, Lewis Gibbs individually acquired four parcels of commercial real estate in downtown*1027 Canton, and, together with his two sons, four additional parcels, which latter were owned by the three in equal shares. Upon his death, in 1914, the four properties owned by him and his one-third interest in each of the other four properties were divised to his two sons and a daughter in equal shares. Thereafter the first four properties were owned by his three children in equal undivided shares of one-third each and the other four properties in the proportions of four-ninths in each of his sons and one-ninth in his daughter.
On June 1, 1930, the three children of Lewis Gibbs created two trusts of these properties, with the George D. Harter Bank as trustee. These trusts were identical in character. The only reason for the creation of two trusts instead of one was the different proportions in which the properties were held. The trust instrument in the present case, known as Gibbs-Preyer Trust #1, covers the four properties in which Elmer W. Gibbs and Alvin J. Gibbs, sons of Lewis Gibbs, owned each a four-ninths interest, and Clara G. Preyer, a daughter of Lewis Gibbs, owned a one-ninth interest. The trust instrument provided for the division of the equitable ownership of the*1028 property into fractional shares evidenced by certificates. These *493 were made transferable, but, by later modification of the trust agreement, it was provided that the certificates themselves should not be transferable but that the equitable interest thereby evidenced might be transferred by separate instrument of conveyance executed and delivered with the formalities of a conveyance of real estate accompanied by a surrender to the trustee of the certificate covering the interest, whereupon the trustee was required to issue a new certificate to the transferee.
The trust instrument empowered the trustee to hold, control, and manage the trust estate; to receive rents and profits; to pay taxes; to provide for insurance, repairs, maintenance, and improvements whereever the lessees were not required to do so by the terms of their leases, and to lease all or part of the trust estate. It was further empowered to compromise claims, to bring suit, to provide funds for temporary needs by borrowing or otherwise, and to advise with counsel. It was required to keep books of registry of the ownership of beneficial interests and to make monthly distributions to the certificate holders*1029 of the net proceeds from rentals.
The beneficiaries were declared by the trust instrument to have equitable titles only. No beneficiary had the right to compel partition of the trust estate. The action of two-thirds of the beneficial interest in the property could control the trustee and require its sale of the corpus or conveyance of the property to the beneficiaries as tenants in common, direct the leasing of the properties, and determine any matter concerning the administration of the trust by the trustee. The trust was to terminate, in any event, on January 1, 1980. At the time of the creation of the trust in question it had long been the policy of the members of the Gibbs family to hold real estate as tenants in common and it had been their uniform custom to hold and not sell properties acquired. After the death of Lewis Gibbs the properties belonging to his heirs were not partitioned and it was desired to hold these properties in the family. Several times the continuance of this policy had been endangered by threats of partition by some interests. At the time the petitioning trust was executed, such a condition existed by reason of certain marital trouble in the family*1030 of one of the children of Lewis Gibbs and it was with the purpose of avoiding this danger that the trust was created. A further reason for the creation of the present trust was the fact that the sons of Lewis Gibbs desired to relinquish their activities in connection with the management of the various properties and to transfer their activities with respect to these properties to their sons.
Article X of the written instrument creating the trust provides, inter alia:
The Trustee shall receive reasonable compensation for the services in the collection and distribution of rents and income, management of the Trust Estate *494 and performance of its trusts hereunder. Certain of the real property conveyed to the Trustee by the Settlors as hereinbefore recited is, at the time of the making of this Indenture, subject to certain leases by the terms whereof the Lessees are required to pay all taxes, maintain repairs, and generally to keep up and preserve the demised property and certain of said property is or may hereafter be from time to time placed in charge of a rental agency or agent by whom the leasing thereof and collection of rentals, payment of taxes, making of repairs*1031 and the like are or shall be conducted, so that, with reference to such property, the duties of the Trustee will be substantially limited to the receipt of rentals, keeping accounts and making distribution of such rentals. With reference to such property as is now so demised upon such terms as are just above recited, with reference whereto the duties of the Trustee shall be substantially limited to those just mentioned, and so long as said situation continues with respect to said property, or whenever and so long as the leasing and care of such property may at any time be placed in charge of any rental agent or agency as aforesaid, the compensation of the Trustee for the management of such property with respect whereto such situation exists or shall exist, shall be one per centum (1%) of the income received by the Trustee from such property.
As to all other property of the Trust Estate, and as to the property in this Article aforementioned if and when the above recited sutuation with respect thereto shall cease to exist or the duties of the Trustee respecting the same be substantially increased, the compensation of the Trustee shall be five per centum of the income received therefrom. *1032 * * *
When the trust was created, two of the parcels were in the hands of a real estate agency, and such of the remaining properties as were not under leases placing the duties of management upon the tenants, were managed by members of the Gibbs family who acted as agents for the other beneficiaries in making leases, supervising repairs, erection of new buildings, etc.
A consideration or inducement for the execution of the written instrument creating the petitioning trust was a contemporaneous oral agreement between the parties to the written trust that, where the properties of the trust were managed by members of the Gibbs family, or beneficiaries, such persons would be considered agents of the beneficiaries of the trust.
Since the creation of the trust, the properties of the trust have always been managed by the individual members of the Gibbs family. This management included making of repairs, the securing of tenants, and fixing of rentals. Leases have geen negotiated by the individual members of the family charged by the beneficiaries with the care of particular properties. The leases were drawn by the attorney who is the husband of Clara G. Preyer, and were merely*1033 sent to the trustee with instructions to execute them. In some instances the properties have been improved. Buildings have been erected or the existing structures remodeled. In each instance the necessity for this action has been determined by the members of the Gibbs family, contracts for the work have been executed by them, and all the necessary funds have been contributed by the beneficiaries. In no case did the trustee make the decision for the erection of new buildings nor plan the details *495 nor select the contractor. In no case has it furnished or procured the funds for the trust. The trustee has paid the insurance frm trust income whenever the lessee was not required to keep the property insured and has paid taxes in like circumstances, but has had nothing to do with the selection of the insurance company nor with the decision as to how much insurance should be carried. It has taken no part in the making of repairs to the properties except, in some instances, it paid bills sent to it with payment directed by the member of the Gibbs family in charge of the particular property involved.
Upon execution of the trust instrument certificates of beneficial interest*1034 were issued to the several beneficiaries in proportion to their interests in the property. Certain of these interests have been since transferred in trust for the benefit of certain younger members of the Gibbs family.
Since the trust was created, the trustee has never exercised any control or management of any of the trust property and has limited its activities to the holding of legal title to the trust properties, the payment of taxes and maintenance and insurance items upon order of a member of the Gibbs family, the signing of leases similarly directed, the collection and distribution of rents, less expenses, and the keeping of the necessary trust records. The trustee never asked for nor received more than 1 percent for its services.
There have been no additions or subtractions from the corpus by purchases or sales since the creation of the trust and no accumulations of funds by the trustee for purposes other than the payment of taxes.
All stipulated facts not appearing herein are included by reference.
OPINION.
LEECH: A sine qua non of a trust, taxable as an association, is that such trust, in the words of the Supreme Court in *1035 , be "created and maintained as a medium for the carrying on of a business enterprise and sharing its gains." It has been held by the Board, on the authority of that case and its companions, 1 that, in determining whether the trust was created and maintained for such purpose, the powers granted in the trust instrument and not only those exercised during the tax years must be considered.
Here it may be said that the powers of management and control of the trust properties, granted to the trustee by the written trust instrument, characterized it as a business trust. See , and . But the same trust instrument, in effect, provided that the exercise of those powers was "substantially *496 limited to the receipt and distribution of rents" so long as the trust properties were under*1036 lease requiring the tenants to pay taxes, negotiated by the beneficiaries or their agents, and maintain the properties, or were in charge of agents of the beneficiaries. And, as an inducement or consideration for the execution of that written contract, the parties thereto contemporaneously orally agreed that the members of the Gibbs family, or beneficiaries, who managed the trust properties, were to be considered agents of the beneficiaries and not of the trust.
That this was a part of the trust contract is corroborated. All of the trust properties, during the tax years, were under leases negotiated by the beneficiaries of the trust or by their agents, under which the tenants were required to pay the taxes and maintain the properties, or were managed by the beneficiaries or members of the Gibbs family as their agents. The trustee has not exercised any powers of management or control but has limited its activities to those purely ministerial. It never asked for nor was it paid for more than those services.
Since this contemporaneous oral agreement did not contradict the terms of the written trust, it must be considered a part of the written agreement. *1037 ; ; ; Alexander v. Righter, 240 pa. 22; .
It follows that, under the terms of the written instrument creating the trust, as thus supplemented, during the tax years, the trustee had no powers of management and control of the trust properties, and the trust was not, therefore, "created and maintained as a medium for the carrying on of a business enterprise and sharing its gains." It was taxable as a pure trust and not as an association. .
Decision will be entered for the petitioner.
Footnotes
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