1930 BTA LEXIS 2078">*2078 Held that the petitioners constitute an "association" taxable as a corporation under the Revenue Acts of 1924 and 1926.
20 B.T.A. 597">*597 In this proceeding the petitioners seek a redetermination of their income-tax liability as trustees of the City Real Estate Trust, for the fiscal years ended July 31, 1925, and July 31, 1926, for which period the respondent has determined deficiencies in the amounts of $2,842.35 and $4,441.78, respectively.
The question at issue is whether a trust was, for income-tax purposes, taxable as such, or as an association.
FINDINGS OF FACT.
On July 25, 1892, certain subscribers thereto executed a declaration of trust under the terms of which they designated Owen F. Aldis, Bryon Lothrop, Henry W. King, Byron L. Smith and Richard 20 B.T.A. 597">*598 M. Bradley as trustees to receive subscriptions for funds in $1,000 or multiples thereof up to the sum of $5,000,000. The trust was to be effective when $200,000 was contributed. The largest amount of the capital of the trust outstanding at any one time after1930 BTA LEXIS 2078">*2079 the creation of the trust was $722,000. The funds were to be used for the purchase of real estate, improved or unimproved, in the city of Chicago, and all real estate so purchased was to be conveyed to them in joint tenancy as trustees. The trust agreement did not designate any name to the trust, but the trustees operated under the name of City Real Estate Trustees.
Article 5 of the trust agreement provided as follows:
The Trustees shall have as such, as absolute control over and disposal of all property held by them at any time under this Trust as if they were the absolute owners thereof, including the power to sell for cash or credit at public or private sale, to mortgage with or without power of sale, to lease or hire, for improvement or otherwise, for a term beyond the possible termination of this Trust or for any less term, to let, exchange, to re-lease and to partition. But the indebtedness of said Trust shall never exceed fifty (50) per cent of the cost to the Trustees of the property belonging to the Trust. This provision and restriction as to mortgages shall not, however, affect the title of any mortgagee, and no purchaser or mortgagee shall be liable for the application1930 BTA LEXIS 2078">*2080 of money paid or lent.
Both the trustees and the holders of beneficial interests were expressly relieved of any individual responsibility. It was provided that no assessments other than calls for subscriptions shall ever be made upon the subscribers or receipt holders. It was provided that the trustees could be subscribers to the declaration of trust and receipt holders thereunder. Provisions were made for the setting aside of a contingent fund of not more than 15 per cent of the year's income. The trustees were to divide the net income at their discretion. The trustees were to elect their own successors. Beneficial interest certificates were transferable. The trust was to terminate fifteen years after the death of the surviving designated sons of certain of the original subscribers, or at an earlier time, if the trustees unanimously decided to terminate same, or upon the request of three-fourths of the holders of receipts for beneficial interest.
The certificates of beneficial interest were issued in the following form:
CITY REAL ESTATE TRUSTEES.
This Is to Certify That
The Trustees under the City Real Estate Agreement and Declaration of Trust, made July twenty-fifth1930 BTA LEXIS 2078">*2081 A.D. 1892, and recorded in the Recorder's Office of Cook County in the State of Illinois, United States of America, as document numbered 1,719,397, in Book 3948 of Records, on page 79, have received Thousand Dollars from who has become by virtue of the payment thereof the owner of this Receipt No. issued under and in 20 B.T.A. 597">*599 pursuance of the terms of said Agreement, and by the acceptance of this Receipt part to said Agreement. The right to transfer this Receipt is limited by a provision of said Agreement endorsed hereon. The possession of this Receipt shall not be regarded as vesting any ownership of or interest in the same in any other than the person in whose name it is issued as between the Trustees and the holder, until transfer thereof is duly made on the books of the Trustees. This Receipt shall not be valid until signed by the CHICAGO TITLE AND TRUST COMPANY, the Transfer Agent of the Trustees, nor until countersigned by Chicago Title and Trust Company, the Registrar of the Trustees.
CHICAGO TITLE AND TRUST COMPANY,
Transfer Agent of the Trustees.
By
Its
Dated Chicago A.D. 19 .
These certificates were assignable after being endorsed in the same manner1930 BTA LEXIS 2078">*2082 as certificates of capital stock and were freely transferred between vendors and purchasers. Petitioner had a regular transfer agent whose duties were to issue certificates to new subscribers or to transferees of certificates when they were properly endorsed on the back and keep a record of the existing receipt holders and their addresses. The transfer agent was paid a fixed fee for making transfers of certificates of receipts.
The trustees have operated under the terms of the trust agreement. No officers were elected and no meetings held. During the years involved in this appeal the trustees held title to one piece of property which was leased to a single tenant, who paid in addition to rent, all taxes, insurance, upkeep and repairs on the property. The trustees employed Aldis & Co., real estate brokers, of which firm one or two of the trustees were members, to collect rent and manage the property. Aldis & Co. kept the books of the trust and no separate office was maintained by the trustees. The trustees owned securities in which they invested surplus earnings. In the fiscal year 1925 the ownership of such securities amounted to $46,524.23 and in the fiscal year 1926 to1930 BTA LEXIS 2078">*2083 $49,178.17. The trustees consulted freely with Aldis & Co., orally and by letter, regarding the management of the business and exercised their discretion, after investigation, as to what securities should be purchased. The trustees had no communication with the beneficiaries except to send them annual statements and dividends, the amount of the dividends being decided in each occasion at the discretion of the trustees. The dividend resolutions were signed by the Chicago trustees and then mailed to the trustees in Boston for their approval. There were three trustees in Chicago and two in Boston. The dividends were disbursed semiannually by the trustees and the checks signed "City Real Estate Trustees by Aldis and Company, Agents."
In 1924 the trustees, acting under their discretion conferred by the instrument of trust, sold a piece of land and a building and distributed 20 B.T.A. 597">*600 as a liquidating dividend 50 per cent of the outstanding capital stock among the beneficiaries. This dividend amounted to $361,000. The trust did not buy or sell any securities except, when bonds came due and were paid off, the trustees would invest the proceeds in other bonds to hold for the surplus1930 BTA LEXIS 2078">*2084 funds. There were, perhaps, three or four such transactions each year. The way investments were made for the sinking fund was: the Boston trustees would make the investigation and they would submit bonds which they thought were suitable investments for this fund and it would be approved by the Chicago trustees, generally by letter. The trustees sent annually to each receipt holder a statement showing the financial condition of the trust at the end of the fiscal year. A statement for the year ending July 31, 1926, will serve to show the kind of statement which was issued annually:
CITY REAL ESTATE TRUSTEES
Statement for Year Ending July 31, 1926
| REVENUE ACCOUNT | ||
| PRICE BUILDING (Cost $472,754.20): | ||
| Gross earnings | $40,239.12 | |
| Expenses (tenant pays taxes and insurance) Commission | ||
| and proportion of trustees' compensation | 3,017.91 | |
| Net earnings at rate of 8% per annum | 37,221.21 | |
| Interest received and accrued on Investments (Less | ||
| proportion of Trustees' compensation) | 2,422.77 | |
| Profit on sale of securities | 257.25 | |
| 39,901.23 | ||
| OTHER EXPENSES: | ||
| Legal and Miscellaneous | $631.83 | |
| Federal and Income Tax | 9.06 | |
| Massachusetts Income Tax | 195.89 | |
| Interest on temporary loan | 38.12 | |
| 874.90 | ||
| Net earnings for the year, equal to 10.8 per cent | ||
| before depreciation | 39,026.33 | |
| DEDUCT: | ||
| Depreciation for year | $4,455.08 | |
| Dividend for year, 8 per cent | 28,880.00 | |
| 33,335.08 | ||
| Balance for year ending July 31, 1926 | 5,691.25 | |
| Balance on July 31, 1925 | 102,109.13 | |
| Balance July 31, 1926 | 107,800.38 |
| BALANCE SHEET | ||
| As at July 31, 1926 | ||
| ASSETS: | ||
| Price Building and ground | $472,754.20 | |
| Loss: reserve for depreciation | 46,375.50 | |
| Total real estate | 426,378.70 | |
| Bonds and short term notes | 49,178.17 | |
| Cash providing for dividend payable Aug. 1, 1926 | 18,050.00 | |
| Cash after paying dividend | 4,136.17 | |
| Accrued interest on investments | 798.64 | |
| 498,541.68 | ||
| LIABILITIES: | ||
| Receipt-holders | 361,000.00 | |
| Dividend payable Aug. 1, 1926 | 18,050.00 | |
| Profit and loss: | ||
| Capital surplus and liquidation reserve | $11,691.30 | |
| Balance earnings, July 31, 1926 | 107,800.38 | |
| 119,491.68 | ||
| 498,541.68 |
20 B.T.A. 597">*601 During the years involved the trust filed individual income-tax returns on Form 1040, and paid income tax of $9.06 for the year 1925 and $26.55 for the year 1926, and counsel for the respondent has agreed that these amounts should be credited to the deficiencies for the respective years, should the Board find that there are deficiencies. The amount of income subject to tax in each year is not in dispute. The respondent contends that, under the facts, the trust should pay tax as an association.
OPINION.
BLACK: The respondent contends that the petitioner1930 BTA LEXIS 2078">*2086 involved in this proceeding is an association within the meaning of section 2(a)(2) of the Revenue Acts of 1924 and 1926, which are identical, and should be taxed as such.
The respondent stated his grounds for such contention in the deficiency letter as follows:
The evidence on file in this office shows that this trust was organized for the purpose of acquiring, operating, and selling real estate for profit and gain, and that the trustees have adopted a quasi-corporate form of thus engaging in business; that in pursuance of such a plan, the control and management of the property were placed exclusively in the trustees and that the trustees in administering the affairs of the trust perform substantially the same duties as corporate directors. The trust has a fixed capital, divided into shares which are evidenced by receipts and which may be transferred. The trust may continue as an organized body, irrespective of any changes in the personnel of its trustees or beneficiaries, for a definitely ascertainable period of time.
20 B.T.A. 597">*602 It is, therefore, held by this office that this trust is an association for income-tax purposes and that, as such, it is subject to taxation as1930 BTA LEXIS 2078">*2087 a corporation. Articles 1502 and 1504, Regulations 69; General Counsel's Memorandum 715, Cumulative Bulletin V-2, page 7.
To this holding of respondent petitioner excepts and alleges as error that the Commissioner erred in holding that the trust was an association for tax purposes and taxable as a corporation.
We think the evidence brings the petitioner within the class of associations provided for in the statute and recognized in Hecht v. Malley,265 U.S. 144">265 U.S. 144; and Burk-Waggoner Oil Assn. v. Hopkins,269 U.S. 110">269 U.S. 110. We find great similarity between this case and Lansdowne Realty Trust et al.,20 B.T.A. 119">20 B.T.A. 119, decided by this Board on June 24, 1930, in which we said:
This group was not merely passively holding property and collecting income therefrom. It was engaged in maintaining and renting a building which it owned, being thus similar to the Hecht Real Estate Trust. That this was done through agents who took the burden of the activities makes it none the less the conduct of the group through their trustees; especially since the agents were themselves the principal trustees and beneficiaries. Nor can it be said that1930 BTA LEXIS 2078">*2088 they were merely collecting rents during an interim before final disposition, for they were actively seeking tenants and making and renewing leases, and Coffin testified that he, a trustee, beneficiary and agent, had never considered selling the property. The trust instrument provided for little or no control by the beneficiaries and no meetings of trustees or beneficiaries were held; but these facts have little importance when it is remembered that the majority of the beneficial holders were themselves trustees and thus in control, and formal meetings were entirely unnecessary.
On account of the period involved, this proceeding does not fall within the purview of section 704(a) of the Revenue Act of 1928. It was undoubtedly the intention of Congress, in passing section 704(a) of the Revenue Act of 1928, to give relief to trusts which prior to the decision of the United States Supreme Court in 265 U.S. 144">Hecht v. Malley, supra, had filed returns as trusts. It was also the evident intent of Congress, from the date of that decision, if they functioned as an association, to tax them as such. See also 1930 BTA LEXIS 2078">*2089 J. W. Pritchett et al.,17 B.T.A. 1056">17 B.T.A. 1056.
Reviewed by the Board.
Van Fossan dissents.
Judgment will be entered under Rule 50.