*1562 The petitioner trust, with beneficiaries, voluntarily associated to acquire, subdivide, improve and sell a parcel of real estate for gainful purposes, is an association taxable as a corporation under the provisions of the Revenue Acts of 1921 and 1924.
*211 The respondent asserts deficiencies in income taxes for the years 1923 and 1925, in the respective amounts of $4,246.60 and $643.62, and a penalty in the amount of $1,061.65 for failure to file a return for 1923. Two issues are involved, viz: (1) Was the petitioner taxable as a corporation in the years involved? and (2) Shall a penalty be collected for failure to file any tax return for the year 1923?
FINDINGS OF FACT.
The petitioner is a trust created by the execution of a declaration of trust on February 22, 1922. Its office is at Santa Monica, California.
Prior to February 22, 1922, one W. A. Prince acquired title to four acres of land in Santa Monica. He formed a small syndicate which purchased such land, but he personally retained an interest therein. After the syndicate was*1563 formed, Prince transferred title to the property to Charles D. Francis and Frederick W. Armitage, as joint tenants, and not as tenants in common, with rights of survivorship to be held in trust for the members of the syndicate who had purchased interests in the land from Prince.
On December 22, 1922, Charles D. Francis, Laura A. Francis and Armitage executed a declaration of trust which was adduced in evidence at the hearing and by reference is hereby incorporated in this report. Such declaration named Prince and the purchasers *212 from him as beneficial owners of the property in the following proportions:
| Samuel Drury | 12/48 |
| Stanley Gardner | 8/48 |
| Anna Munger Teague | 8/48 |
| James M. Hardman | 10/48 |
| W. A. Prince | 5/48 |
| F. W. Armitage | 5/48 |
Certificates of interest, as set out above, were issued to the beneficial owners by Francis and Armitage. The certificate issued to Hardman was later assigned to Alfred V. Keating and such assignment was recognized by the trustees. No other changes in the beneficial ownership of the property occurred prior to or within the taxable years here involved.
Provisions of the declaration of trust pertinent to the issues*1564 of this proceeding may be summarized as follows: The trustees were authorized to sell or lease all or any part of the property on terms and conditions directed by the beneficiaries; to subdivide the same into lots; to make all improvements which the beneficiaries agreed might be necessary; to provide for the payment of the $30,000 mortgage on the property; to pay all expenses and taxes; to pay commissions to agents not in excess of 7 1/2 per cent of the selling price; and to distribute the balance of receipts not otherwise required to the beneficiaries in the proportions above set out.
F. W. Armitage managed the affairs of the trust. He engaged a sales agent, who disposed of some of the lots in the taxable years on terms that resulted in distribution to the beneficiaries. As the proceeds of sales accumulated he distributed the same among the owners in proportion to their several beneficial interests. His activities as trustee and manager were at all times subject ot control of the beneficiaries, but such control was not actually exercised at any time. The trustees received no salaries.
No meetings were held, minutes kept, or officers or directors elected by the beneficiaries.
*1565 None of the profits from the sale of lots were reinvested for the account of the enterprise or retained for use as working capital.
The trustees made no returns of income in any form in 1923 or 1924.
Armitage, who was in charge of the business, was advised by Prince, who was a banker and tax adviser, that no returns were necessary. In 1925, or early in 1926, other tax advisers told him that he should make a fiduciary return each year. Acting on this advice, he filed fiduciary returns for the years 1923, 1924 and 1925. No income was reported nor has any been asserted for 1924. The return for *213 1925 was timely. The respondent has asserted a penalty for delinquency in 1922. Such penalty is based on the amount of income disclosed by the fiduciary returns filed for that year in 1926.
OPINION.
LANSDON: The petitioners' first contention here is that it was strictly a trust in the taxable years; that all the income realized from the sale of lots was distributable to the beneficiaries in proportion to their interests; and that such distributions having been made as contemplated by the trust instrument, it was not taxable in any of the years in question. The facts*1566 herein are similar to those found in , and, in our opinion, our decision there must control in this proceeding. Here, as there, a voluntary association was formed and financed to acquire, hold, improve and sell a parcel of valuable real estate. The operations extended over a few years and, while they involved only one purchase, they included many sales. There is sufficient resemblance to corporation organization and procedure to bring the petitioner within the provisions of the law for taxing an association as a corporation. The purpose of this organization was to make money by dealing in real estate. Its operations were carried on for profit. In our opinion, the determination of the respondent must be approved. ; .
Subsequent to the promulgation of , the Board adopted and promulgated its report in the proceeding of . The facts in that proceeding distinguish it from the instant case. There, there was no organization of the participants in a*1567 joint venture. Each individual contributed capital, which was to be used by a manager who was in unrestricted control over the operations from which profit might be derived and empowered to close out the venture and distribute the proceeds at any time. The participants entered into no association with each other and there was no resemblance to corporate organization and operation. In the instant proceeding the beneficiaries of the trust associated themselves in an organized capacity and retained complete authority over the trustees and their operations. This brings the petitioner within the provisions of section 2 of the Revenue Acts of 1921 and 1924, as interpreted by the Commissioner in article 1312 of Regulations 74. See .
The distinction between a trust instituted solely for the purpose of conserving and liquidating properties already owned by the beneficiaries and one that is based on an organized association of individuals engaged in business for profit is now well established. In *214 *1568 , and , there was no voluntary association of individuals, but merely contributions to a fund to be used by a promoter in complete control of all transactions. This is also true in , where the trust was instituted for the sole purpose of disposing of certificates of beneficial interest in one-half of the property, but was terminated before operation was begun. In , the trustees merely received property already owned by the beneficiaries and under lease for five years and collected and distributed the income therefrom and did "nothing more than trustees ordinarily would be called upon to perform in the management of trust property." In , which affirms , the trust was declared for the purpose of proving and selling an oil lease and never continuously operated the property as a business.
On the other hand, a long line of cases decided by the courts and this Board hold*1569 that if there is a voluntary association functioning similiarly to a corporation that transacts business for profit, tax liability as a corporation results. At the head of these cases is , in which the Supreme Court said:
We conclude, therefore, that when the nature of the three trusts here involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, but are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to be deemed associations within the meaning of the Act of 1918; * * *
In the , the court disposed of all contentions as to the constitutional power of Congress to tax unincorporated associations as corporations. In , this Board exhaustively discussed all the phases of the question here involved and reached the conclusion that the petitioner therein was an association. Cf. *1570 ; ; ; .
In the light of all the pertinent decisions cited and others too numerous for citation, we conclude that whether a trust is taxable as an association must be determined (1) by the form of the organization and (2) by the purposes, nature and results of its operations. The application of these tests requires the taxation of the petitioner as an association.
There is no evidence that the failure to file returns in the taxable year was willful. As soon as the trustees realized that reports of *215 some sort must be made to the Commissioner, they made out and filed what they regarded as the returns required by law. Section 3176 of the Revised Statutes (U.S. Code Title 26, 98) as amended, provides in part as follows:
* * * In case of any failure to make and file a return within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the*1571 tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * * [Italics supplied.]
In this proceeding a return was filed after the due date. The evidence is clear that the failure to file a timely return was due to reasonable cause and not to willful neglect. We are of the opinion that in the circumstances herein and in the light of the explanation made at the hearing, the penalty was not authorized and should not be collected. ; ; .
Decision will be entered under Rule 50.