*895 1. Trusts under which a trustee took title to real estate during the subdivision thereof, primarily for the purpose of affording security to a small group who advanced funds to enable a real estate concern to subdivide the property, held not associations under section 701(a)(2), Revenue Act of 1928.
2. Commissions on sales held properly deducted as expenses in the year paid.
*760 The respondent has determined deficiencies in income tax as follows:
| Year | Trust No. 1546 | Trust No. 1521 |
| 1929 | $1,681.88 | $2,381.01 |
| 1930 | 3,110.44 | 3,150.60 |
| 1931 | 639.75 | 1,086.95 |
Petitioners allege error in the respondent's classification of them as associations taxable as corporations and in his treatment of sales commissions as deductible expenses.
*761 FINDINGS OF FACT.
The trustee in each of these proceedings is the successor by consolidation of the Chicago Trust Co., an Illinois corporation. The present trustee and its predecessor will hereinafter be referred*896 to as the trustee.
In the taxable years the trustee held title to two parcels of real estate, one a 10-acre tract and the other a 20-acre tract, both in Evanston, Illinois. The trusteeship in the 10-acre tract was created by a declaration of trust dated December , 1925, and known as Trust No. 1521. The trust agreement covering the 20-acre tract is dated January 5, 1926, and designated Trust No. 1546. The provisions of both trust agreements are the same, aside from the land descriptions, and the term trust agreements used herein will include both.
In 1925 two real estate brokers, A. G. Pickett and C. L. R. Holt, organized the Paramount Realty Corporation for the purpose of subdividing and selling the above mentioned two tracts of land. The Paramount Realty Corporation did not have sufficient funds to purchase the tracts, and Pickett and Holt solicited from a number of individuals, hereinafter called the beneficiaries, a sufficient amount to meet the initial payment on each tract. The purchase price of the 10-acre tract was $60,000, with an initial payment of $25,000 and the balance payable $15,000 in three years and $20,000 in five years. The purchase price of the 20-acre*897 tract was $110,000, payable $50,000 initial cash payment and the balance by assumption of existing mortgages in the amount of $60,000.
The several interested parties, namely the beneficiaries, the Paramount Realty Corporation, and the trustee, executed a contract with respect to each tract of land, which contracts were attached to and made a part of the trust agreements. Under both agreements the beneficiaries (called "Owners" therein) agreed to pay to the trustee sufficient cash to meet the initial payments on the tracts of land and to subscribe the balance of the purchase price within 60 days. The agreements stated the proportionate interest of each subscriber and provided that legal title was to be taken by the trustee, and authorized the trustee to cause the land to be subdivided, platted, approved, and recorded as directed by the Paramount Realty Corporation.
It was further provided in each contract that the Paramount Realty Corporation "shall be the manager of the trust hereby created"; that it was empowered to sell the lots in each tract at prices to be specified in the plats and to aggregate not less than $200,000 in the 10-acre tract and not less than $400,000 in the*898 20-acre tract; that sales were to be made either for cash or on a basis of an initial *762 payment of at least 25 percent of the sale prices and the balance in monthly payments of at least 1 percent each. In the case of cash sales the Paramount Realty Corporation was to retain one third of the sale prices and the remaining two thirds was to be paid to the trustee for the benefit of the beneficiaries. On installment sales the Paramount Realty Corporation was to retain the down payment, but not to exceed 25 percent of the sale prices; the trustee was to collect subsequent installments and retain two thirds thereof for the benefit of the beneficiaries and hold the remaining one third for the benefit of the Paramount Realty Corporation.
Upon payment to the beneficiaries, or to the trustee for their benefit, of $105,000 in the case of the 10-acre tract and $200,000 in the case of the 20-acre tract, with interest in both cases, all right, title and interest of the beneficiaries was to cease. Thereupon all rights in the property and in the proceeds of sales were to belong to the Paramount Realty Corporation and the trustee was to account solely to it.
The Paramount Realty*899 Corporation agreed that it would cause to be sold one half in value of the lots in each tract within one year, and all of the lots within two years. It further agreed to pay all expenses in connection with the sale of lots, including the cost of surveying, platting, grading, clearing, and sidewalks, and the fees and expenses of the trustee.
It was further provided in each contract that the trustee would cause the land to be subdivided and would execute deeds to purchasers of lots upon payment of the full purchase price, and distribute the proceeds of sales in accordance with the provisions of the contracts and the trust agreements.
The trust instrument in each case provided that the interest of each beneficiary should consist solely of a power of direction to deal with the title to the property and the right to receive the proceeds from rentals or sales; that the right to the proceeds was to be deemed personal property, assignable as such, and that no beneficiary should have any title or interest in the real estate as such. It was provided that certificates evidencing the interests of the beneficiaries could be issued by the trustee.
It was also provided in the trust instruments*900 that the trustee would deal with the real estate only on written direction of the Paramount Realty Corporation in accordance with contracts of sale executed by it as selling agent, or on the written direction of the beneficiaries.
Certificates were issued to be beneficiaries by the trustee, the face of which bore an overprint of the Paramount Realty Corporation. Each certificate set forth the amount subscribed by the beneficiary, and his proportionate interest in the trust, which was described as *763 being "a proportionate interest in the net income, proceeds and avails of the property of said Trust." The back of each certificate bore a printed assignment form.
Upon completion of plats of the tracts, which plats were approved by the trustee, the Paramount Realty Corporation advertised the lots for sale and employed a corps of salesmen on a commission basis. Sale contracts were entered into between the Paramount Realty Corporation and purchasers of lots. The originals of such contracts were forwarded to the trustee. Initial payments of not over 25 percent of the sale prices were retained by Paramount and used by it to pay salesmen's commissions and other expenses. *901 Collections of subsequent installments were made by the trustee. The Paramount Realty Corporation did not consult the trustee or any of the beneficiaries as to the selection or qualifications of the purchasers. The trustee made no investigations as to the solvency of the purchasers, and checked the contracts only for the purpose of ascertaining whether their terms complied with the provisions of the trust agreements. The trustee did not initiate any sale of lots.
The Paramount Realty Corporation borrowed various sums from outside interests in 1928 and 1929, giving as security for such loans an assignment of its right, title, and interest in the two trusts.
In 1930 an employee of the trustee made an audit of Trust No. 1546 and discovered several transactions that were not in accordance with the trust agreement. Following the discovery of irregularities, agreements supplemental to the trust agreement were executed bearing dates December 19, 1930, and March 21, 1931. These agreements recited certain irregularities, such as sales of some lots for less than plat prices and some for more; that mortgages were sold for less than face value; that junior mortgages were accepted in*902 part payment for one lot; and various other acts for which no authority appears in the trust agreements. The supplemental agreements further provided that the trustee should pay all expenses of administering the trust, including trustee's fees, cost of issuing deeds, cost of guarantee policies, taxes, and assessments on unsold lots and on those under contract of sale where not paid by the purchasers, and that all such payments should be charged against the interests of the Paramount Realty Corporation. One of the supplemental agreements directed the trustee to accumulate a "sidewalk fund" to be used for the construction of sidewalks, and the other gave it power to approve bids for sidewalks. These agreements contained numerous other provisions supplementing or modifying the original trust agreements. The trusts were thereafter administered by the trustee in accordance with the provisions of the supplemental agreements.
*764 The trusts have not been closed and are still under administration of the trustee.
In determining the deficiencies here involved the respondent treated the amounts collected by the Paramount Realty Corporation and retained by it as commissions as*903 deductible expenses in the year of such collection and retention.
OPINION.
ARUNDELL: The salient facts concerning these two trusts may be briefly stated. The organizers of the Paramount Realty Corporation located two tracts of land available for subdivision. Not having sufficient funds of their own to handle the deals, they procured from a number of individuals sufficient funds to start the subdivision enterprises. In order to protect the individuals advancing the money, title to the land was placed in the trustee. Paramount Realty was appointed sales agent. Under the agency and trust agreements Paramount Realty collected and retained a portion of the initial payments made by the purchasers of lots. The amount over and above the part retained by Paramount Realty was paid to the trustee, which also collected all installments on deferred payment sales. The amounts so received by the trustee were received primarily for the benefit of those who advanced the funds necessary to start the projects. They were to receive stated amounts and any excess was to go to Paramount Realty.
The respondent has classified these trusts as associations and taxed them as corporations.
*904 Section 701(a)(2) of the Revenue Act of 1928 provides that "The term 'corporation' includes associations, joint stock companies, and insurance companies." The respondent has formulated regulations for the purpose of defining the term "association" and distinguishing associations from other organizations. See articles 1312, 1313, and 1314 of Regulations 74. The revenue act itself does not define what constitutes an association. The Supreme Court, in Hecht v. Malley,265 U.S. 144">265 U.S. 144, has partially defined the term as follows:
The word "association" appears to be used in the Act in its ordinary meaning. It has been defined as a term "used throughout the United States to signify a body of persons united without a charter, but upon the methods and form used by incorporated bodies for the prosecution of some common enterprise." 1 Abb.Law.Dict. 101 (1890); 1 Bouv. Law Dict. (Rawle's 3d 269; 3 Am. and Eng.Enc. Law (2d Ed.) 162; and Allen v. Stevens,33 App.Div. 485, 54 N.Y.Supp. 8, 23, in which this definition was cited with approval as being in accord with the common understanding. Other definitions are:
"In the United States, as distinguished*905 from a corporation, a body of persons organized, for the prosecution of some purpose, without a charter, but having *765 the general form and mode of procedure of a corporation." Webst. New Internat. Dict.
"[U.S.] An organized but unchartered body analogous to but distinguished from a corporation." Pract. Stand. Dict.
There have been a great number of cases before us and in the courts involving the proper classification of groups of persons associated under instruments designated as trusts. None of the decisions lay down a definitive rule into which all cases can be fitted and accurately judged. In fact, in one of the recent cases, Coleman-Gilbert Associates v. Commissioner, 76 Fed.(2d) 191, it is said that "the decisions are seemingly in a hopeless state of confusion." The court there, after reviewing a number of decisions, had this to say:
From the decisions of the Board of Tax Appeals and the several Circuit Courts of Appeals, it is impossible to mark out any definite pathway to follow in every case. The only conclusion is that each case must depend on its own state of facts.
*906 In view of the lack of comprehensive definition and the absence of any well defined trend of judicial decision, we must find the solution through the process of "balancing the resemblances which petitioner bore to a trust, against those which it bore to a corporation, and considering also that facts as to what the petitioner actually did." Lucas v. Extension Oil Co., 47 Fed.(2d) 65; Commissioner v. Brouillard, 70 Fed.(2d) 154, 158.
The petitioner here was in form a trust. There was a grantor and a trustee, and there were beneficiaries. There was but one trustee, who took title to the property for the benefit of the beneficiaries. The trustee was limited in its powers to deal with the property. In these respects the organization had the characteristics of a trust rather than that of a corporation. There was not present in the organization the control that corporate stockholders customarily may exercise. While under the more recent cases it is held that "beneficiary control is not a requisite to the taxability of a trust as a corporation", *907 Morrissey v. Commissioner, 74 Fed.(2d) 803, still "the absence of such control is assuredly an element which should be taken into consideration." Extension Oil Co.,16 B.T.A. 1028">16 B.T.A. 1028; affd., 47 Fed.(2d) 65.
About the only resemblance of this organization to a corporation was the issuance of certificates of interest to beneficiaries. This in itself does not necessarily classify it as a corporation. There was no group corresponding to corporate directors in duties or powers. The functions of the trustee were limited to seeing that sales contracts complied with the trust agreement; it had no power to exercise general supervision over sales or to determine policies as would a board of directors. This case differs from that of Swanson v.*766 Commissioner, 76 Fed.(2d) 651. In that case the organization was created for a definite period of time for the purpose of managing an apartment building. The trustee had broad powers including the power to exchange, reconstruct, remodel, sell or improve at their discretion, or to borrow money secured by the property. In this case, as pointed out above, the trustee had*908 no such broad powers. Here the acts of the trustee were performed under direction of the trust agreements and supplements thereto and these were limited to such matters as were incidental to its administration of the trust rather than extended to the broad scope usually enjoyed by corporate directors as in the Swanson case.
The substance of the arrangement here in each case was to place title to a single tract of land in trust for the purpose of affording security to the group that advanced the money to enable the Paramount Realty Corporation to subdivide and sell the land. The organization bore little, if any, resemblance to a corporation in either structure or operation. In our opinion it should be classified as a trust and not as an association. Cf. Tyson v. Commissioner, 54 Fed.(2d) 29; Commissioner v. Duckwitz, 68 Fed.(2d) 629; Coleman-Gilbert Associates v. Commissioner, supra.
The second point has to do with the method of computing income from the sale of lots. The allegation of error, denied by the respondent, is: "Use of an improper accounting method to reflect taxable income or losses." No evidence*909 was introduced which will support any finding as to the method of keeping books. Two of petitioners' witnesses were examined as to the Paramount Realty Corporation's method of bookkeeping. One of them testified that the 25 percent of the down payment retained by Paramount "went into the Paramount Realty Corporation's general account", and, "I imagine we carried it as a commission item." The other witness stated: "The twenty-five percent on our books was treated as the down payment, the first twenty-five percent was treated as a sales expense." Further, on cross-examination, "it [the 25 percent] was allocated to sales expenses, because it was all paid out for sales expenses, or for money that we had advanced for sales promotion or advertising."
We gather from statements in the deficiency notice and the briefs of the parties that the respondent treated the commission retained by the Paramount Realty Corporation as a deductible business expense rather than as a reduction of either the selling price of the lots or the initial payment thereon. This is in accordance with the long established practice of the Bureau. See I.T. 2305, C.B. V-2, p. 108; art. 352, Regulations 74 and 77; *910 art. 44-2, Regulations 86. Petitioners' claim, as we understand it, is that the net amount *767 received after deducting the part retained by the Paramount Realty Corporation should be treated as the selling price. This would have the effect of throwing back into the earlier years some of the profit ultimately realized on the deferred payment sales. We know of no authority for this method of computing income. The gross amount which purchasers contracted to pay was the selling price and must be accounted for as such, regardless of bookkeeping or accounting methods. Commissions on sales are business expenses to be deducted in the years of accrual or payment, according to whether the taxpayer is on the accrual or cash basis, and are to be deducted in arriving at net income. This is the normal method of determining income and petitioners have not shown any reason for a departure therefrom. Some argument is made as to the lack of value of the sales contracts. We do not see what this has to do with the question presented; moreover, there is no evidence at all as to the value of the contracts.
Decision will be entered under Rule 50.