*1142 Held, that the petitioner was not taxable as a corporation in any part of the taxable year and that a corporation return including income and deductions for two months of such year was filed in error.
*327 The respondent has determined a deficiency for the period from January 1 to February 28, 1925, and a penalty for negligence in the respective amounts of $3,345.65 and $164.77. For its causes of action petitioner pleads (1) that it is not an association taxable as a corporation, and (2) that in any event respondent has erroneously determined the amount of its income in the taxable period.
FINDINGS OF FACT.
The Smathers Power Typewriter Co. is a trust, of which James Fields Smathers, J. H. Baird, and Clarence Barhydt are the trustees, and exists under and by virtue of a declaration of trust executed July 7, 1920, which declaration of trust was modified by a second declaration of trust dated November 28, 1921, and a third declaration of trust dated February 21, 1925, all of which were duly executed by the trustees*1143 and duly recorded in the office of the Recorder of Deeds for Jackson County, Missouri, at Kansas City, and all of which are a part of the record in this proceeding.
*328 The trustees were named in the respective declarations of trust and duly accepted the designation and were "collectively designated for all purposes and for convenience in handling said Trust property as the Smathers Power Typewriter Company, with the powers generally given to trustees", all as set forth in said declaration of trust.
The title to the property of the trust was vested in the trustees with full and absolute control thereof so that the cestuis que trustent had no right to the property of the trust nor any right of partition or division of the same, nor to the dissolution of the trust, nor to an accounting, nor to any control whatsoever of any kind, description or nature, over said trustees or said trust property or trust estate.
The trustees constituted a self-perpetuating body with power to increase their number, appoint additional trustees, fill all vacancies and carry out any and all provisions of the declaration of trust, free from direction and control or interference by the holders*1144 of the beneficial interest.
The exclusive right to manufacture and sell under the patents held by the trustees and constituting the entire trust estate was transferred and assigned on April 1, 1923, to the Northeast Electric Co. for the entire remaining life of the patents, including renewals thereof; and thereby the trustees divested themselves of all rights, property and means of carrying on any business of any kind or description, excepting the collecting, conserving and distributing of royalties from said patents payable to and belonging to the trust.
During the calendar year 1925 and at all times subsequent to April 2, 1923, the trustees carried on no business whatsoever, their sole duty and activity consisting of the collection of royalties on certain patents and the distribution of the amounts so collected to the holders of the beneficial interest in and to the trust estate. They had no place of business, no employees, nobody on a salary connected with the company, had no assets and nothing to do with the manufacture or sale of patented articles.
For the purpose of more definitely setting forth the nature of their operations so limited from and after the contract of*1145 April 2, 1923, and to prevent the trustees or any future trustees from carrying on any business which might be a violation of the aforesaid contract with the Northeast Electric Co., the trustees on February 21, 1925, amended the declaration of trust in such a manner as to limit the powers to conform with the things which they were actually doing; that is, to limit the trustees to the collection and distribution of royalties to 160 holders of beneficial interests, a limitation which they had for several years imposed upon themselves.
For the year 1925 the petitioner timely filed a fiduciary return on which it reported all its income and deductions for the entire taxable year. Some objection to this return, the nature of which is not disclosed *329 by the record, was made by the agents of the respondent. After an extended controversy petitioner, on June 19, 1928, filed a corporation return covering the period from January 1 to February 28, 1925. Upon audit of such return the respondent determined the deficiency herein. Such deficiency was based upon the holding that an amount of $25,000 was income in the taxable period.
The petitioner kept its books and made its returns*1146 on the accrual basis of accounting and only closed its books annually. The net income for the calendar year 1925 was $30,018.20.
OPINION.
LANSDON: The primary contention of the petitioner is that from its inception down to and through the taxable year it was a trust, the income of which was distributable to the beneficiaries at stated dates. The provisions of the trust instruments involved are summarized in our findings of fact. In the original instrument it is plain that the trustees were authorized to carry on business such as usually results in profit or at least with the hope of profit. The testimony at the hearing, however, shows quite clearly that no such business transactions occurred after April 2, 1923. On that date the petitioner assigned the use of its patents to the Northeast Electric Co. From that time the sole function of the trustees was to collect the income resulting from the contract with the assignee and distribute the same to the beneficiaries of the trust in proportion to their interests therein.
The record discloses that no new trust agreement was entered into at April 2, 1923, when such business operations as it may have theretofore carried on*1147 were abandoned. If the agreement of April 28, 1925, had been made on April 2, 1923, there is no question that thereafter the petitioner could not have been taxed as a corporation. Apparently this is conceded by the respondent, since he has held that after March 1, 1925, petitioner is taxable only as a distributable trust. There are several tests applicable to the situation here. There must be some resemblance to a corporation. Some courts have held that the beneficiaries must have some control after the selection and activities of the trustees. Others that the trust must be engaged in a business for profit. This last seems to have been generally adopted by the courts and this Board. Where the trustees merely hold the corpus for the benefit of others and operations are limited to the collection and distribution of income therefrom, the decisions are practically consistent that the trust cannot be taxed as a corporation. The test is not what may be done but what actually was done by the trustees.
In , where trustees held real estate for certain beneficiaries, all of whom were members of the same family*1148 and whose operations consisted *330 of collecting gross income, paying taxes, making repairs and distributing net income to such beneficiaries, the Circuit Court of Appeals for the Third Circuit, in reversing the decision of this Board, said:
* * * It is true that the trustees had powers of a broad character, but they did not exercise them and were not carrying on business after the form and manner of a corporation. When the trustees received the property it had all been leased for a period of five years from March 1, 1920. During this period of five years the trustees were not called upon to seek tenants or to do anything with reference to the property of any consequence, except to collect the rents and turn them over to the beneficiaries. By the terms of the lease, the lessees were to keep the premises in repair, pay the insurance and be responsible for all damages connected with the building. It is perfectly apparent that they were not doing business in any sense during the years 1923 and 1924, and we are of the opinion that during the years 1925 and 1926, they were not conducting business after the mode and manner of a corporation, but were doing nothing more than*1149 trustees ordinarily would be called upon to perform in the management of trust property. See , decided by this court February 19, 1931; ; ; ; ; .
In , the court, in affirming the decision of this Board, said:
While none of these cases are, on their own facts, exactly in point, the trend of expressed judicial opinion is that the crucial test must be found in what the trustees actually do, not in the mere existence of long unused powers. These two trustees have no business office; they hold no formal meetings; they merely consult with each other; they have hired no officers; employed no agents to procure subscriptions to the capital of their trust; they have sold one parcel of real estate and bought another, otherwise, their real estate holdings are as originally; *1150 they have so arranged their leases as not to require them to run heating plants, or even provide janitor or elevator service. In sum, their actual performance is indistinguishable from that of ordinary testamentary trustees.
On the facts established in this proceeding, we think the above cited authorities are controlling. In our opinion the petitioner was not taxable as a corporation in any part of the year in question. Having reached this conclusion, it is not necessary to discuss petitioner's allegation that respondent erroneously included $25,000 in its income for the alleged taxable period. The real taxable period in which such amount was received was the calendar year 1925. The corporation return was filed in error and the return required by law was the fiduciary return for the year in question, which was timely filed and disclosed all the income of the petitioner for the taxable year, including the $25,000 which the respondent has allocated to the first two months thereof. The determination of the respondent is reversed.
Decision will be entered under Rule 50.