*1172 Petitioner, a syndicate organized to develop and sell lots in a Florida cemetery, during the taxable years assumed active management of the cemetery. Profits were to be applied on the price which the syndicate agreed to pay for an interest in the cemetery and title to the interest was not to be conveyed until the price had been fully paid. Held, the petitioner is taxable as a corporation; held, further, it was engaged in business and is liable for excess profits tax.
*138 The respondent has determined the following deficiencies which are here contested:
| Calendar year | Income tax | Excess profits tax |
| 1936 | $1,538.65 | $1,128.81 |
| 1937 | 1,884.54 | 1,315.52 |
| 1938 | 641.80 | 698.18 |
| Total | 4,064.99 | 3,142.51 |
*139 The issues are (1) whether the petitioner is an association taxable as a corporation and (2) whether it was "engaged in or doing business" during the taxable years so as to be liable for excess profits tax. An additional issue relating to surtax on undistributed profits has been conceded by the respondent. *1173 The returns involved were filed with the collector for the district of Florida.
FINDINGS OF FACT.
On November 22, 1921, George S. Gandy, for the sum of $20,000, conveyed certain lands in Pinellas County, Florida, to the Central National Bank of St. Petersburg, Florida, as trustee for Reginald H. Sumner. The terms of the conveyance directed the trustee to convert the lands into a cemetery and empowered it to sell plots therein for burial. The trustee was directed to set aside and invested certain specified percentages of the proceeds of such sales, the income from which was to be used to support and maintain the cemetery. This fund was to be held in trust for a corporation to be organized and known as the Royal Palm Cemetery Lot Holders Association, of which each lot holder should be a member. Gandy was to receive $16,000 additional consideration out of 50 percent of the sale prices of the first lots sold. All remaining proceeds from the sale of lots, together with any excess over the cost of maintenance produced by the fund set aside for the Lot Holders Association, were to be paid over to Sumner, and if the income of the fund did not equal cost of maintenance during the*1174 first six years, the deficiency was to be made up by Sumner.
Pursuant to the terms of this conveyance the Royal Palm Cemetery was established and the Lot Holders Association was organized. Sumner became indebted in 1927 to certain individuals, among whom were J. M. Lassing, on three notes aggregating $21,000 in amount. These notes were secured by liens on Summer's interest in the Royal Palm Cemetery. In 1929 Homer W. Batson, a resident of Louisville, Kentucky, acquired these three notes, which were in default, and thereafter brought foreclosure proceedings in 1933. During the pendency of these proceedings Sumner attempted to reorganize the cemetery under section 77B of the Federal Bankruptcy Act, and while these efforts were being made Robert Lassing, the son of J. M. Lassing, was appointed receiver by the Federal District Court having jurisdiction of the property. These efforts proving unavailing, Sumner's interest in the cemetery was sold at public auction in June 1935 to Batson for $29,750. *140 Sumner thereafter secured from Batson an option to reacquire the interest at any time up to December 31, 1935, at a price of $31,500. It was agreed that during the pendency*1175 of the option Lassing should remain as manager of the cemetery. The option was never exercised.
Although it was contemplated under the original agreement that the trustee should sell the lots and assume active management of the cemetery, it never functioned in this capacity. The owner of the beneficial interest at all times negotiated the sale of the lots and provided for the upkeep and maintenance of the cemetery. The income from the trust fund established for the upkeep of the cemetery at no time equaled the cost of such upkeep.
When it became apparent late in 1935 that the option would not be exercised, Batson, who did not reside in Florida, sought to interest local parties in acquiring an interest in his beneficial rights in the cemetery. In these efforts he was successful and on January 3, 1936, he executed an agreement by which the possession and management of the cemetery was turned over to a group of "joint-adventurers" called "The Syndicate", which was composed of Batson and three others, including John M. Lassing, Jr. The syndicate was described in the agreement as "located in and operating at St. Petersburg, Florida." Batson agreed to sell his entire interest*1176 in the cemetery to the syndicate for a total consideration of $32,338.47, payable within five years at the rate of at least $3,000 each year, with interest at 6 percent. Conveyance of his interest was not to be made until the entire purchase price had been paid, and only then on condition that the cemetery had been maintained in "first class physical condition" and all expenses of operation, including taxes, had been paid. The syndicate agreed not to pay out any dividends or property to themselves until the amount owned Batson had been paid.
On the same date, in connection with the purchase of Batson's beneficial interest, there was prepared a "Syndicate Agreement" which stated that the four purchasing parties "hereby associate themselves as Joint-Adventurers or Syndicate, under the operating name of ROYAL PALM CEMETERY SYNDICATE, for the purpose of acquiring and operating all the property, rights, powers, privileges, title, interest, etc., owned by H. W. Batson, in the Royal Palm Cemetery. The agreement stated further that the interest acquired should be held "not in joint tenancy or in severalty, but as Joint-Adventure or Syndicate entity." It provided further for an office*1177 and place of business in St. Petersburg and for certificates issued and signed by the syndicate manager and by the other members evidencing the title of each of the four owners who held equal interests. These certificates were transferable only with the consent of the other certificate holders and only after they had been offered first to the remaining owners at the price fixed by an outsider in a bona fide offer.
*141 The object of the syndicate was stated to be "to acquire and own and operate the property * * * commonly known as the Royal Palm Cemetery." It was to continue "until all purposes of said cemetery have been accomplished", but might be terminated by the unanimous consent of the members. Each one-fourth interest was to have one vote "in the decision of all syndicate policies and matters" and such interest might not be split up into fractional votes, since this would interfere with the convenient functioning of the syndicate. Neither the death of a member nor the sale of his interest might affect the continuation of the syndicate. The agreement might be amended by three votes.
Provision was made for hiring a manager at an annual salary not to exceed $1,200, *1178 who should keep the syndicate's books and have control of its property, rights, and affairs. Meetings of the members were to be held on call of the syndicate manager or one of its members. No dividends might be distributed until the debt owed to Batson had been paid and thereafter only on the vote of three members and from net earnings.
It was finally provided that:
The Syndicate binds itself to operate as an independent entity as fully and completely as if it were a partnership or corporation and as an entity,, will pay all charges and expenses of operation of the property, and all taxes of every kind that may be levied against the Syndicate, or its property and rights. In addition thereto, the Syndicate shall pay the Federal Income Tax levied upon any member thereof by reason of his ownership in said Syndicate up to the normal tax levied by the Federal Government from year to year, but no state tax levied by any State Government upon any such member of the Syndicate shall be paid by the Syndicate or out of Syndicate funds.
This agreement was never signed, but it was examined and approved by all the syndicate members, who executed a separate instrument stating their assent*1179 to the form of the syndicate.
Twenty-five certificates of the type provided for were immediately thereafter printed and four were prepared for issuance to the owners on January 3, 1936, but were retained by the manager until 1939.
A statement of the operations of the syndicate during the taxable year 1936 is as follows:
| Income | |
| Lot sales, net cash | $3,633.79 |
| Baby spaces, net cash | 63.00 |
| Grave spaces, net cash | 2,598.75 |
| payments on contracts, net | 10,576.18 |
| Opening and closing graves, vaultrent, etc | 3,409.05 |
| Interest received | 219.67 |
| Total income | 20,500.44 |
| Expense | |
| Interest paid Batson, trustee | $1,498.67 |
| Expense - lights, telephone, stamps, etc | 1,262.47 |
| Manager's salary | 1,200.00 |
| Pay roll | 6,643.80 |
| Maintenance of grounds | 635.39 |
| Gas and oil | 336.94 |
| Executing deeds | 90.00 |
| Repairs - tools and equipment | 633.35 |
| Total expense | 12,300.62 |
| Net profit on operation before depreciation and capital set-off | $8,199.82 |
*142 Payments to the perpetual care fund held by the trustee were made during 1936 in the total sum of $1,999.42. The syndicate maintained a bank account, which had a balance of $2,553.41 at the beginning of 1936 and $4,153.25*1180 at the close of that year. There were 281 burials in the cemetery during 1936, as compared with 234 for the preceding year. Sales of lots and burial spaces increased during the year 1937. During the period from 1935 through 940, 308 1/2 lots were sold for a consideration of $85,124.88. In 1943 there were 1,706 1/2 lots available for sale.
Sales during the taxable years were negotiated by Lassing, who, after each sale, received from the trustee the deed to the lot sold. Lassing rendered weekly reports on operations to Batson and also prepared annual reports for him. No reports were made to the syndicate members except by word of mouth on casual inquiries made by them. No meetings of the syndicate members were held during 1936. Lassing consulted with Batson on all important decisions. No instructions were ever received from the other members. The principal objective of the management was to pay off the debt owed to Batson. Profits were paid over to him as they accumulated, to apply on the debt.
During the years 1935 and 1936 capital expenditures on the cemetery were made in the total amount of $10,128.69. The cost of completing the cemetery was estimated in 1940 at*1181 $47,092.
The following payments were made to Batson on the debt owed him, which at the beginning of 1936 amounted to $32,338.47:
| 1936 | $6,238.47 |
| 1937 | 9,100.00 |
| 1938 | 7,000.00 |
| 1939 | 3,000.00 |
| 1940 | 3,500.00 |
The balance remaining due at the close of 1940 was $3,500. There is now some $10,000 in Lassing's hands available to discharge this debt. No conveyance of Batson's interest has ever been made.
Reports of the income received in each of the years 1936 through 1938 were made on individual income tax returns under the name of the "Royal Palm Cemetery." This method of reporting income was adopted on advice of an internal revenue agent.
The certificates of interest were delivered to the members in 1939, when it was apparent that the debt owed to Batson would be paid off. No transfers of certificates have ever been made with the exception of one in 1939 from a member, who functioned at all times merely as a nominee, to the daughter of the real party in interest. This transfer was consented to by all the other members of the syndicate.
*143 The syndicate office during the taxable years was in the office of Lassing, who spent some two hours each*1182 day in the management of the syndicate. No organization was maintained for the sale of lots.
The petitioner has never filed a capital stock tax return.
OPINION.
ARUNDELL: Two issues are here for decision, the first of which involves the classification of the petitioner for tax purposes. The respondent seeks to treat it as a corporation; the petitioner opposes this action. The issue has a dual aspect involving, first, the question of whether the petitioner was in existence at all during the taxable years and, second, if the first answer is affirmative, the nature of the business carried on by it.
Decision of the first issue must turn narrowly on the question of whether the business carried on by the petitioner during the taxable years was on behalf of Batson as an individual, the syndicate members as a loose group not yet being formed into a business enterprise, or for the syndicate itself. It seems apparent, as will be developed below, that the nature of the business, the method by which it was carried on during the taxable years, and the form of the syndicate agreement render the petitioner taxable as a corporation if the syndicate was in existence then as the real*1183 party in interest.
Resort must be had first to the documents executed by the parties in the forepart of 1936. These speak plainly of a joint adventure or syndicate "operating" in St. Petersburg, Florida. They provide for purchase by the syndicate of property and for its operation by a syndicate manager. The membership of the group and its liabilities became definitely fixed under the signed agreement of purchase. From the date of the execution of that instrument the operation of the cemetery became the petitioner's responsibility. The manager, who had functioned before as receiver, was retained. His employer, however, became the syndicate; his salary and duties were fixed by the syndicate agreement.
The full form and purpose of the syndicate was at the same time spelled out in an accompanying syndicate agreement. It provided for the immediate organization of the syndicate. It was examined and assented to by all the members. Certificates of ownership were printed and endorsed by all members at the beginning of the year 1936.
The facts so far are without inconsistency and point toward the conclusion that the syndicate was organized and functioning from the beginning*1184 of 1936. The petitioner, however, points to certain facts which do not entirely support this view. The title to the beneficial interest remained in Batson. This circumstance is, however, a matter *144 without significance. Purchases of importance are largely made by a method similar to that provided here and do not prevent possession and management, as here, from passing to the purchaser. The petitioner points to the fact that Batson supervised operations during the taxable year, received all reports, and made all important decisions with reference to the cemetery. It remains, however, that the single objective of these operations was to pay off the debt owed to Batson in accordance with the terms of the purchase. His only benefit, as seller, from the operations was to receive his price more quickly. The profits were not his except as they applied on the price. Moreover, Batson occupied a dual role of purchaser and seller and it is as reasonable to assume that his efforts were exerted on behalf of the syndicate as that they were for himself.
It is pointed out that the syndicate certificates were not issued until 1939 and there is testimony, consistent therewith, *1185 that the parties intended the syndicate to come into existence only after the price had been paid. We think, however, that the intent of the parties is better to be collected from the syndicate agreement, which, though itself unsigned, was given written approval by the parties, and from the contract of purchase and the preparation of stock certificates. From these it seems apparent that immediate organization of the syndicate was contemplated. The action following thereon being most consistent with this view, it must be concluded that the syndicate was in existence during the taxable years.
The form of organization before us provides for a central management, a continuation of existence beyond the lives of the original members, transferability of interests with certain restrictions, and the holding of title by the syndicate as an entity. It is repeatedly stated that the syndicate is to function "as an entity." It is to be controlled by the vote of its members. Distribution of profits is to be by way of "dividend." Formal certificates of ownership were provided.
In these circumstances the petitioner must be held to fit within the long established definition of an association*1186 taxable as a corporation. ; ; ; .
Aside from its constitution and method of operation, moreover, the purpose for which the petitioner was organized gives further basis for our conclusion. Its function was one requiring business management and activities. It is of the sort which is ordinarily not confined within the limits of a joint venture or trust. The reasons for its establishment are more nearly those found in the case of corporations. These factors are of significance in resolving the question presently before us. The answer to be found in them supports the conclusion which we have *145 reached above. ; .
The petitioner relies on *1187 , and , cases in which individuals desirous of developing oil properties owned by them sold participating interests to a rather large group and secured development by placing the management of the properties in one or two individuals, to whom they gave powers of attorney. In the latter case title was also transferred to the managers. There was in each case free assignability of interests, but no limitation on personal liability. In both instances the Board held these enterprises to resemble partnerships more nearly than corporations and to be taxable as the former. These cases were affirmed by the Circuit Court, but they can have no controlling significance here, where there is a formal agreement establishing an organization, controlled by the vote of its members, and providing for formal certificates of interest and for continuity of existence. They were mere loose arrangements, without provision for continued existence. The purposes for which they were established were, moreover, more limited than those here involved. The present*1188 case must be controlled by cases considering broader business activity undertaken by an organization having some formal arrangement. See ; ; . Cases such as these and those cited above, lead, we think, to the conclusion that the petitioner more nearly resembled the corporate form and must be taxed as such.
There remains for decision the question of whether the petitioner was "carrying on" or "doing business" during the taxable years as provided in section 105 of the Revenue Act of 1935, as amended by section 401 of the Revenue Act of 1936, and section 601 of the Revenue Act of 1938. If so, the petitioner must be held liable for excess profits taxes.
The answer to this final issue is to be found in our decision on the first question. The petitioner was engaged in the active management and development of the Royal Palm Cemetery during the taxable years. It was patently "engaged in" or "doing business" in the taxable years. *1189 ; . Cases relied on by the petitioner wherein taxpayers were held not to be engaged in business when they had not completed their organization or begun active operations are not in point here, where it is plan that an active business enterprise was in progress during 1936. Cf. ; .
Decision will be entered under Rule 50.