*2214 Under the fact in this proceeding it is held that the Commissioner was correct in holding the petitioner to be an association taxable as a corporation.
*1274 The petitioner is an organization known as a Massachusetts trust and was created on January 5, 1922, by the widow and the four sons of C. W. Cowell, who died intestate in 1921, to hold title to the property which passed to them by reason of the death of C. W. Cowell. For the year 1924 the respondent determined that the petitioner was an association in the nature of a corporation and taxable as such. He determined a deficiency of $392.51 in income tax for said year.
Petitioner alleges as error that it is not an association in the nature or form of a corporation; that it is not engaged in business; and that it is not taxable as a corporation.
FINDINGS OF FACT.
The petitioner has its office in Denver. In December, 1921, Charles W. Cowell died intestate, leaving surviving him his widow, Maria I. Cowell, about 74 years of age, and four sons, C. B. Cowell, F. H. Cowell, James H. Cowell*2215 and Don F. Cowell. The decedent left an estate consisting of real estate and personal property situated in the city of Denver, Colo. Evidence was not introduced as to the separate items comprising the estate. It was not considered expedient to make an immediate division of the property, so the interested parties determined to create a trust by conveying their interest in the estate of Charles W. Cowell to trustees, under the designation of "The C. W. Cowell Company," for the purpose of holding title thereto, collecting the rents, preserving the property, selling certain *1275 of the assets and reinvesting the proceeds, distributing the income, and ultimately disposing of and distributing the property. To accomplish this purpose on January 5, 1922, the widow and her four sons executed a declaration of trust and duly acknowledged same, and it was recorded in the deed records of the City and County of Denver, Colo. This declaration of trust is a lengthy document and provides succinctly as follows:
That whereas the subscribers propose to transfer, assign and deliver to the Trustees, under the designation of "THE C. W. COWELL COMPANY" a certain property and money, and the*2216 Trustees, for the purpose of defining the interest of the subscribers and their assigns, in said property and money, have agreed to issue the subscribers and their assigns negotiable certificates of "EIGHT SHARES" which shares shall all be common shares. The said shares shall have no par value; but shall represent the total value of all of said Trust property. Said shares to be issued to the following:
| Shares | |
| To Maria I. Cowell | 4 |
| To C. B. Cowell | 1 |
| To F. H. Cowell | 1 |
| To James H. Cowell | 1 |
| To Don F. Cowell | 1 |
Now, therefore, the Trustees hereby declare that they will hold the said property and money to be transferred to them as well as all property of any and every kind, including money, stocks, bonds, real, personal and mixed property which they may acquire, as Trustees, together with the proceeds and profits thereof in trust.
The trustees hereby declare that they will conduct the business of said trust, which shall include:
The purchase and sale of real estate, either improved or unimproved;
The erection, alteration or improvement of buildings of all kinds;
The leasing, renting or otherwise disposing of trust property;
To purchase, sell or hypothecate*2217 stocks, bonds or other securities;
To acquire, hold, sell or otherwise dispose of real estate, personal estate and right of all kinds for the benefit of this trust; to manage, acquire and dispose of the same for the benefit of the shareholders or shares issued hereunder, and in the manner and under the stipulations herein mentioned.
The Trustees shall always be three in number and the trustees herein mentioned shall hold office until the next annual meeting, or until their successors are elected and accept this trust.
The shareholders shall at every annual meeting elect on trustee to serve for three years.
The Trustees shall hold the title to all property of every kind, at any time belonging to this trust and shall have the exclusive management and control of same.
The trustees may elect officers who shall have the authority and duties incident to like officers in corporations or such duties as the trustees shall determine
Stated meetings of the Trustees shall be held at least once each month, and other meetings shall be held from time to time upon the order of an officer or trustee. A majority of the Board of Trustees shall constitute a quorum *1276 and a concurrence*2218 of all of the Trustees shall not be necessary to the validity of any action to be done by them, but the wish of a majority of the trustees present voting at the meeting shall be conclusive except as hereinafter provided. The Trustees may make, adopt, repeal and amend such laws, rules and regulations not inconsistent with the terms of this Agreement, as they may deem necessary for the conduct of the business or for the government of themselves, their agents or representatives. The Board of Trustees shall elect a President from their number, whose duty shall be to sign all deeds or other instruments of writing, together with the duties usually performed by such officers; and a Secretary, who shall perform the duties usually performed by Secretaries. He shall affix the seal of said Board of Trustees, to all documents requiring a seal, and attest the signature of the President.
The trustees may from time to time declare and pay such dividends out of the earnings from time to time received by them, as they may deem advisable, but the amount of such dividends and the payment of them shall be wholly in the discretion of the trustees, and the surplus earnings or profits shall not be*2219 maintained as a separate fund but shall merged in the body of the trust property.
The death of a trustee or shareholder during the continuance of this trust shall not operate to determine this trust nor shall it entitle the legal representative of the deceased to an accounting or to take any action in the courts or elsewhere against the trustees.
The ownership of shares hereunder shall not entitle the shareholder to any title in or to the trust property whatever, or right to call for a partition or division of the same or for any accounting, of, for any voice or control whatsoever, of the trust property, or of the management of said property or business connected with the management of the property or business connected therewith by the trustees.
The Trustees shall have no power to bind the shareholders personally, and the subscribers and their assigns and all persons and corporations extending credit to, contracting with, or having any claim against the trustees shall look only to the funds and property in trust in payment of such contract of claim, or for the payment of any debt, damage, judgment or decree, or of any money that may otherwise become due or payable to them*2220 from the trustees, so that neither the Trustees nor the shareholders shall be held personally under or by reason of any contract or obligation, and the Trustees and shareholders shall not be personally liable thereunder.
This trust shall not continue in any event for more than twenty years, at which time the board of trustees shall proceed to wind up the affairs, liquidate its assets and distribute the same among the shareholders, according to the number of shares held by them. Provided, however, that if prior to the expiration of this trust the holders of at least two-thirds of the shares then outstanding shall at a meeting called for the purpose vote to terminate or continue in existence for a like period or a shorter period of time as then may be determined.
The said C. B. Cowell, F. H. Cowell and Don F. Cowell, as Trustees, hereinbefore mentioned, have hereunto set their hands and seals in token of the acceptance of this trust herein specified for themselves and their successors.
In January, 1922, the interested parties conveyed the property which they inherited from C. W. Cowell to the C. W. Cowell Co. by quitclaim deed. The C. W. Cowell Co. sold all the real estate*2221 so *1277 conveyed to it, with the exception of two parcels, and converted the proceeds into interest-bearing real estate notes. The net income of the trust was distributed annually to the shareholders. In the taxable year $2,000 was distributed to Maria I. Cowell and $300 each to F. H. Cowell, C. B. Cowell, J. H. Cowell, and Don F. Cowell, respectively, and each of the recipients returned such amounts for taxation on their own individual income tax returns for 1924. On January 26, 1925, for the calendar year 1924, the petitioner filed an incometax return on corporation Form 1120, designating itself as "The C. W. Cowell Company, a Trust."
Items of income and deductions were stated as follows:
| GROSS INCOME | ||
| Interest on Bank Deposits, Notes, Mortgages, and | ||
| Corporation Bonds | $1,758.81 | |
| Rents | 2,170.00 | |
| Profit from Sale of Real Estate, Stocks, Bonds, and | ||
| other Capital Assets | 2,533.31 | |
| TOTAL INCOME | $6,462.12 | |
| DEDUCTIONS | ||
| Repairs | $103.95 | |
| Taxes | 488.50 | |
| Dividends | 3,200.00 | |
| Depreciation (resulting from exhaustion, wear and tear, | ||
| or obsolescence) | 200.00 | |
| Other Deductions not reported above: | ||
| (a) - | ||
| (b) Fire and Plate Glass insurance | 206.88 | |
| (c) Water rents | 117.55 | |
| (d) Attorney fees suit to quiet title on | ||
| building sold, on which profit is reported | 113.95 | |
| (e) Commission to sell notes to build building, on | ||
| which profit is being reported | 79.50 | |
| (f) Miscellaneous expense | 11.70 | |
| TOTAL DEDUCTIONS | $4,522.03 | |
| NET INCOME | $1,940.09 |
*2222 Under the heading "Computation of Tax" was the following statement:
| 25. Net Income (Item 24 above) | $1,940.09 |
| 26. Less credit of $2,000 (for a domestic corporation having a | |
| net income of less than $25,000) | 2,000.00 |
| 27. Balance (Item 25, minus item 26) | $ |
*1278 Respondent determined the deficiency as follows:
| Net income, return | $1,940.09 |
| Dividends disallowed in accordance with Article 561, | |
| Regulations 65 | 3,200.00 |
| Net income corrected | $5,140.09 |
| Exemption | 2,000.00 |
| Taxable at 12 1/2 per cent | $3,140.09 |
| Tax at 12 1/2 per cent | $392.51 |
| Tax previously assessed | None |
| Deficiency in tax | $392.51 |
OPINION.
BLACK: In this proceeding respondent has determined a deficiency against petitioner of $392.51 for the year 1924 by reason of his determination that the petitioner was during the year in question not a trust taxable under section 219 of the Revenue Act of 1924, but an association within the meaning of that term as used in section 2(2) of the Revenue Act of 1924, and therefore taxable as a corporation. The petitioner had filed a return for the year 1924 in which it asserts that it is a trust, thus making it necessary to consider*2223 the applicability of section 704, Revenue Act of 1928. In , and , we discussed section 704 and its application to returns which had been filed after the effective date of the decision of the Supreme Court of the United States in .
In our opinion, section 704 of the 1928 Act does not require that petitioner be taxable as a trust, because the facts show that petitioner's return for the year 1924 was filed January 26, 1925. At the time it was filed the Commissioner's rulings had been materially changed from what they were in former years, following the decision of the Supreme Court of the United States in We think that petitioner for the year 1924 is taxable as an association under the decision of There were three separate trusts involved in the decision of The Hecht Real Estate Trust case No. 99 was one of them and seems to have been substantially the same kind of an organization as the trust*2224 involved in the instant case. Said the Supreme Court, in describing the Hecht Real Estate Trust:
The Hecht Real Estate Trust was established by the members of the Hecht family upon real estate in Boston used for offices and business purposes, which they owned as tenants in common. It is primarily a family affair. The *1279 certificates have no par value; the shares being for one-thousandths of the beneficial interest. They are transferable; but must be offered to the trustees before being transferred to any person outside of the family. The trustees have full and complete powers of management; but no power to create any liability against the certificate holders. There are no meetings of certificate holders; but they may, by written instrument, increase the number of trustees, remove a trustee, appoint a new trustee if there be none remaining, modify the declaration of trust in any particular, terminate the trust, or give the trustees any instructions thereunder.
* * *
The court also 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*2225 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; this being true independently of the large measure of control exercised by the beneficiaries in the Hecht and Haymarket Cases, which much exceeds that exercised by the beneficiaries under the Wachusett Trust. We do not believe that it was intended that organizations of this character - described as "associations" by the Massachusetts statutes, and subject to duties and liabilities as such - should be exempt from the excise tax on the privilege of carrying on their business merely because such a slight measure of control may be vested in the beneficiaries that they might be deemed strict trusts within the rule established by the Massachusetts courts.
We can see no material difference in petitioner's operation for the year 1924 under the trust instrument set out in our findings of fact from that of the concerns which we held in *2226 ; ; and , to be associations and taxable as such. This would be true regardless of whether it was recognized as a partnership, as petitioner contends, under the laws of the State of Colorado. .
In , we endeavored to point out the distinction between a trust such as is created when an ancestor conveys property to trustees for the equitable benefit of designated beneficiaries and such a trust as the Hecht Real Estate Trust described in , and the trust described in the instant case, where persons who own property as tenants in common associate themselves together for their own convenience and profit for the purpose of holding title to property, collecting rents thereon, preserving the property, selling certain of the assets and reinvesting the proceeds, distributing the income and ultimately disposing of and distributing the property. In endeavoring to point out*2227 this distinction, *1280 we quoted from , wherein the court said:
* * * A distinction is to be made between an agreement between individuals in the form of a trust and an express trust created by an ancestor, although they may have some features in common. The controlling distinction is that one is a voluntary association of individuals for convenience and profit, the other a method of equitably distributing a legacy of donation. Congress has recognized this distinction, classing the former as associations, to be taxed as corporations, and at the same time providing for a separate and distinct method of taxing the income of estates and trusts created by will or deed, classing them together for that purpose. Section 219, Revenue Act of 1921 (42 Stat. 246).
We do not think the trust involved in the instant case can be classed as one falling within the classification involved in the , and , but is rather one where persons, members of the same family, owning property as tenants in common, have associated themselves together, *2228 under the designation of "C. W. Cowell Company," for purposes of convenience and profit, and although under the laws of Colorado such an association is classed as a partnership, it is, under the Revenue Act of 1924, an association taxable as a corporation.
Judgment will be entered for the respondent.