1930 BTA LEXIS 1813">*1813 The petitioner herein held to be an association taxable as a corporation.
21 B.T.A. 656">*656 This proceeding is for the redetermination of deficiencies in income tax, and penalties, asserted by the respondent for the years and in the amounts, following:
| Year ended June 30 | Deficiency | Penalty |
| 1925 | $706.72 | $176.68 |
| 1926 | 743.48 | 185.87 |
| 1927 | 11,256.40 |
The deficiencies arise from the respondent's determination that the trust was created for the purpose of conducting a business enterprise under corporate methods, and was an association within the meaning of the Revenue Acts of 1924, 1926, and 1928. The penalties were asserted because the respondent had no record of returns being filed for the first two taxable years.
FINDINGS OF FACT.
The Zenith Real Estate Trust, located in Chicago, Ill., was created on June 1, 1920. The terms of the trust are as follows:
We, Russell Tyson, of Chicago, Illinois, John Dorr Bradley, of Lake Forest, Illinois, and Allen G. Mills, of Chicago, Illinois, each in consideration1930 BTA LEXIS 1813">*1814 of the undertakings of the others herein expressed and for the benefit of the beneficiaries of the trust by this instrument created, do hereby covenant and agree to and with one another as follows, that is to say.
(1) The undersigned will by deeds, contracts or other instruments in writing satisfactory to them, acquire title to the following described real estate in the 21 B.T.A. 656">*657 City of Duluth, County of St. Louis and State of Minnesota and the buildings and improvements situated thereon, described as follows, to-wit:
The Westerly Half (W-ly 1/2) of Lot Ten (10) and the Easterly twenty four feet (E-ly 24 ft.) of Lot Twelve (12) Block Four (4) in Central Division of Duluth, in the City of Duluth, Minnesota.
The trustees may also acquire title to other real estate as may from time to time be deemed desirable and may develop the same, by contructing buildings of all kinds thereon, and managing and leasing, mortgaging or selling the same or any part thereof and otherwise dealing with the trust property as herein set forth.
(2) Notice delivered personally, or mailed post-paid ten (10) days before any proposed action is to be taken or before any meeting is to be held, addressed1930 BTA LEXIS 1813">*1815 to any beneficiary hereunder or shareholder, or to his attorney designated for that purpose, at the residence given to the trustees at or before the date of the issuance of his certificate, or to the address given by him from time to time to said trustees, shall be deemed a sufficient notice for all purposes and binding upon all parties in interest.
(3) Said trustees shall use all money paid to them as such, except as hereinafter provided, for the purchase and improvement of real estate in the cities of the United States of America, or any interest therein, including the shares of or interests in trusts or corporations formed for the purpose of purchasing and improving real estate, and all property shall be held by them in joint tenancy as trustees hereunder and not as tenants in common.
In fixing the cost of improvements said trustees may include a sum sufficient to pay five per cent (5%) on their cost and on the cost of the estate improved during the period of improvement.
(4) Said trustees shall have, as such, as absolute control over and disposal of all real estate or property held by them at any time under this trust as if they were the owners thereof, including the power1930 BTA LEXIS 1813">*1816 to sell for cash or credit, at public or private sale, on such terms and conditions as they deem best, to mortgage or pledge, 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, to exchange, to release, to partition, to grant and acquire easements.
Said trustees shall have power to borrow money and to secure repayment of the same by their promissory notes as trustees hereunder, or by pledge mortgage or hypothecation of the trust property, or any part thereof, or both; but neither said trustees, nor any shareholder hereunder, shall be personally liable for any money so borrowed. All persons dealing with said trustees shall look only to the property of the trust for payment of their claims. No lender of money to said trustees shall be bound to inquire as to the indebtedness of the trustees to any other person or persons, nor shall any such lender nor any purchaser be liable for the application of money loaned, or of purchase money.
(5) Said trustees may set aside such portion of the annual income as they may deem prudent for a contingent fund, or sinking fund, or both. 1930 BTA LEXIS 1813">*1817 They shall divide the remainder of the net income of the property held by them under this trust among the shareholders annually, or oftener, at their discretion, and their decisions as to what constitutes net income from time to time shall be final. Said contingent or sinking fund, and any money waiting investment, as provided in paragraph (3) may be put at interest or invested and reinvested by said trustees at their discretion, or may be divided among the shareholders.
(6) Said trustees may from time to time incur and pay reasonable expenses for the transaction of the business of the trust, including office rent and pay 21 B.T.A. 656">*658 for clerks, attorneys, accountants and any other person they may deem necessary or expedient, and appoint such officers and agents, for transferring and registering the shares thereof, as they may think best, fix their compensation and define their duties.
The compensation of said trustees for their ordinary duties shall not exceed five per cent (5%) of the income of the property held by them under this trust.
(7) Said trustees shall issue certificates or receipts in such form as they shall deem best for each sum of one hundred dollars ( $100) 1930 BTA LEXIS 1813">*1818 or for multiples thereof, paid to them under this agreement; but no certificate shall be issued for any less sum than one hundred dollars ( $100) which shall be deemed a share. The trustees may, at any time, or times, after the certificates or receipts have been issued call for the surrender of all outstanding certificates or receipts and cancel the same and issue in lieu thereof other certificates or receipts which may show the interest of the respective beneficiaries to be a fractional interest, or the interest may be expressed in shares without specifying the value of any share.
(8) Shares may be transferred on the books of said trustees, upon the surrender of any certificate for cancellation by the person named in the certificate, his attorney or legal representative, and a new certificate shall be issued to the transferee, who shall thereupon become subject to all the terms of this agreement. Said trustees shall never be liable except to the registered holders, nor shall they be liable to any person for issuing a certificate to the appointee or transferee named in a transfer made by a registered holder, by his attorney, or by his legal representative, nor shall they be held1930 BTA LEXIS 1813">*1819 to inquire into the legality, cause, or purpose of any such appointment and transfer.
(9) Said trustees may from time to time, at their discretion, invite and receive further subscriptions for the purpose of increasing the capital of the trust, upon such terms and conditions as they shall deem best. All subscriptions shall be subject to the terms of this agreement.
(10) No assessment shall ever be made upon any of the shareholders or beneficary hereunder.
(11) The books of said trustees shall always be open to the inspection of shareholders.
(12) Any trustee under this agreement may resign his trust by a written instrument signed by him and acknowledged in the manner prescribed for the acknowledgment of deeds; and such instrument shall be recorded in the registry of deeds for the County of St. Louis in the State of Minnesota. The remaining trustees shall fill any and all vacancies that may be caused by death or resignation, and all new appointments of trustees shall be evidenced by a written instrument acknowledged and recorded as aforesaid, and such new trustee, or trustees, shall have the same power and estate as if originally named herein. When any trustee is absent1930 BTA LEXIS 1813">*1820 from the United States or incapable by reason of disease or other cause, the other trustees shall have all the powers hereunder; and any trustee may be power of attorney delegate his powers for a period not exceeding six months at any one time to any other trustee or trustees hereunder, provided that in no case shall less than two trustees actually exercise the powers hereunder, except in case of death or incapacity of two trustees and in that event the remaining trustee shall fill the existing vacancies. All powers hereunder may be exercised and all deeds and other instruments may be exected by two of the trustees and their decision shall be binding upon all. The term "said trustee" used in this agreement shall be deemed to mean those who are or may be trustees for the time being. It shall not be necessary for the heirs at law or next of kin of any deceased trustee, or for any trustee who may resign his trust, to execute and deliver any deed of 21 B.T.A. 656">*659 conveyance but the remaining trustee or trustees and any successor or successors that may be appointed in accordance with the provisions of this trust agreement, shall thereafter have all and the same powers (including all discretionary1930 BTA LEXIS 1813">*1821 powers) and all and the same estate (without the necessity of conveyance) as if originally named as trustee or trustees herein. No trustee shall be required to give a bond.
(13) At the expiration of twenty-one years, after the death of the last survivor of the following named persons: Alice Pritchard Bradley and Eleanor Bradley, daughters of John Dorr Bradley, of Lake Forest, Illinois, trustee herein, and Allen H. Mills, Ruth Helen Mills and Mary Virginia Mills, son and daughters of Allen G. Mills of Chicago, Illinois, trustee herein, or at such earlier time as two (2) or more of the said trustees named herein may, by an instrument in writing, signed and acknowledged in the manner prescribed for the acknowledgement of deeds, and recorded in the registry of deeds for said St. Louis County, Minnesota, appoint, said trustees shall terminate this trust by selling all property then held by them, as such, and dividing the proceeds among the shareholders.
(14) Said trustees shall be responsible only for a wilful breach of trust, and each shall be responsible only for his own acts.
(15) This declaration of trust may be amended from time to time by the said trustees, but the rights1930 BTA LEXIS 1813">*1822 of third persons shall not be affected, nor shall any third person be deemed to have notice thereof, until a certificate setting forth such amendment, signed by a majority of said trustees, and duly acknowledged, shall be recorded in the Registry of Deeds for said St. Louis County, Minnesota, and such certificate shall be conclusive evidence of the validity of the amendment certified and all facts therein stated.
(16) A like certificate so recorded shall also be conclusive evidence of all facts affecting title. The laws of the State of Minnesota shall govern the construction of this instrument.
The certificate mentioned in sections 7 and 8 of the trust agreement was in the following form:
No.
Par Value of Each Share $100.00
ZENITH REAL ESTATE TRUST.
This is to certify, That is the owner of shares, under a trust agreement executed by Russell Tyson, John Dorr Bradley and Allen G. Mills, as Trustees, dated the First day of June, A.D. 1920, and recorded in the Office of the Register of Deeds in the County of St. Louis, Minnesota, on the twenty-eighth day of June, A.D. 1920 in Book 23 of Agreements, at page 248, and is entitled pro rata to the benefits accruing thereunder.
1930 BTA LEXIS 1813">*1823 This Certificate is issued pursuant to the trust agreement above mentioned, and is subject to all of its terms and provisions, and is transferable only on the books of said trustees by the person above named, or his attorney in fact or legal representative, on the surrender hereof.
Signed and sealed this day of , 19 .
(SEAL) As Trustees under said Agreement and Declaration of Trust.
On the back of the certificate was printed a blank form for use in assigning or transferring the interest of the certificate holder.
The trustees bought the Duluth property mentioned in the agreement. One Otis joined with them in the purchase, each man contributing 21 B.T.A. 656">*660 $5,000 to make up the cash payment required. The purchase was concluded in July, 1920. The same four men later contributed $2,500 each to take up the first purchase money note. Later, other persons subscribed to the enterprise.
The property purchased was occupied by a responsible tenant, whose lease ran until 1937. Under that lease the tenant was obligated to pay all taxes and assessments levied against the property and to keep the building insured against fire, liability for personal injuries, boiler explosions, 1930 BTA LEXIS 1813">*1824 cyclones, or any other injury to the premises. The tenant also was obligated to keep the building in good repair, to restore or replace any total or partial destruction thereof, and to make any desired alterations, additions, or improvements which it might desire, at its own expense.
The trustees held title to the property, and through an agent collected the monthly rentals and saw that the tenant paid the taxes, insurance, and other expenses. There were no formal meetings of the trustees, but they met occasionally to discuss the value of the property, consider declarations of dividends from their receipts, and at the time an offer for the property was made they met to consider such offer. There were no other activities by the trustees. They had no officers, but all were of equal status. No meeting of the beneficiaries was ever held. When the question of selling the property arose, the principal beneficiaries were consulted orally. Dividends for each six months were paid from the receipts. At such time the beneficiaries were notified in writing that the distribution enclosed was made at the rate of such and such per cent. Except for these notices and an annual report, no1930 BTA LEXIS 1813">*1825 circulars or reports were sent to the beneficiaries.
The trustees set aside $5,000 to cover depreciation of the building. This amount was invested in bonds, which were held for about one year. The trustees received interest on these bonds, and upon bank deposits for the taxable years as follows: first year, $90.30; second year, $156.78; third year, $135.95. No interest was received from any other source.
In the latter part of December, 1926, the trustees sold the Duluth property and realized thereon a profit of $78,611. This amount, together with income received, was distributed proportionately to the then beneficiaries, and the trust was dissolved before the close of that year.
The petitioner's fiscal year closed on June 30. For each of the taxable years an income-tax return was filed by the petitioner as a trust. The returns were received in the respondent's office on the following dates: August 22, 1925, return for the year ending June 30, 1925; September 14, 1926, return for the year ending June 30, 1926; September 13, 1927, return for the year ending June 30, 1927.
21 B.T.A. 656">*661 Upon audit the respondent computed the tax upon the theory that petitioner was an association1930 BTA LEXIS 1813">*1826 doing business under corporate methods. He also asserted a penalty of 25 per cent for each of the first two taxable years because he had no record of returns having been filed for those years.
OPINION.
MARQUETTE: The facts herein are not materially different from the facts in . Upon the authority of the decision therein, the petitioner is held to constitute an association and is taxable as a corporation.
Reviewed by the Board.
Judgment will be entered for the respondent.
TRAMMELL and VAN FOSSAN dissent.