*2966 Under the facts in these proceedings it is held that the Commissioner erred in holding the petitioner to be an association taxable as a corporation.
*509 These proceedings are for the redetermination of deficiencies in income and profits taxes for the calendar years 1921, 1922, and 1923. The Commissioner, by his deficiency notice mailed January 9, 1926, determined a deficiency in tax of $9,359.44 and a delinquency penalty of $2,339.88, making a total of $11,699.30. By his deficiency notice mailed March 3, 1927, he determined deficiencies in tax of $20,563.97 for 1922, and $15,554.70 for 1923, no penalties being asserted for the latter two years.
There is only one assignment of error - "The determination of the tax as contained in said deficiency letter is based upon the error of the Commissioner holding that the Wilson Syndicate Trust should be classified as an association taxable in the same manner as a corporation, whereas it is in truth an ordinary trust not taxable as a corporation."
The evidence was submitted in*2967 the form of stipulations, exhibits admitted without objection, and brief testimony of one witness, from all of which we make the following findings of fact.
FINDINGS OF FACT.
J. B. Wilson, a resident of Dallas, Tex., died on or about January 27, 1920, having previously accumulated a large community estate, more particularly described in the legal proceedings hereinafter introduced in evidence. J. B. Wilson left no separate property. He left surviving him a widow, Laura D. Wilson, and five married daughters, Mabel Richards, wife of J. R. Richards; Fay Munger, wife of L. R. Munger; Bess Schoellkopf, wife of J. Fred Schoellkopf; Lucile Pattullo, wife of George Pattullo; and Geraldine Knight, wife of R. E. L. Knight, Jr.
J. B. Wilson left a will, but his widow declined to take thereunder and claimed her community interest, which she had a right to do. The court ordered a partition, and appointed a commission to make the partition. The commission so appointed made its report, which was duly approved by the court, by which she took one-half of the estate, consisting of real estate and personal property of an approximate value of $1,000,000.
Mrs. Wilson executed a trust deed*2968 which conveyed her part of the property to a trust, and, eliminating the detail description of the property, is as follows:
WHEREAS. I, Laura D. Wilson, of Dallas, Texas, am the owner in fee simple of the following described property set apart to me in that certain partition suit in the District Court of Dallas County, Texas, 14th Judicial District, styled *510 Laura D. Wilson v. J. R. Richards, et al., No. 34150, by decree entered in said cause this 21st day of May, 1920, confirming the report of Commissioners of Partition in said cause, towit:
1. 25 X 100 ft. lot on the South side of Elm St., in the City of Dallas.
2. 100 X 100 ft. on the North side of Main St. with the improvements thereon.
3. A lot in the City of Dallas, fronting 95 ft. on the North line of Main St.
4. 25 X 100 ft. in the City of Dallas, fronting on the North line of Main St.
5. A lot in said City of Dallas 50 X 100 ft. on the South side of Elm St.
6. An undivided 1/2 interest in that certain lot on the North side of Elm St. fronting said street 50 ft. and running back in a northerly direction 80 ft. known as the Washington Theatre.
7. An undivided 3/4 interest in that certain*2969 lot in said City of Dallas at the Southwest corner of Main & Murphy Sts.
8. An undivided 1/2 interest in that certain lot fronting 50 ft. on the South side of Main St. in the City of Dallas, and known as the Elks Building, said property being in the name of George H. Schoellkopf.
9. An undivided 1/3 interest in what is known as the Eddleman Ranch, in Parker County, Texas, belonging to a partnership composed, at the date of his death, of J. B. Wilson, W. H. Eddleman and J. H. Furneaux, each owning an undivided 1/3 interest, the land constituting said ranch consisting of 3,262.3 acres. In addition to said land, said partnership has funds on deposit in the City National Bank at Dallas, Texas. There is owing to the said Laura D. Wilson by J. H. Furneaux, for his 1/3 interest, $29,567.91 and by W. H. Eddleman to Laura D. Wilson for his 1/3 interest in said firm property, $29,567.90, so that the interest of the said Laura D. Wilson in the assets of aforesaid firm is her 1/3 thereof, plus the two sums aforesaid.
10. An undivided 2/3 interest in that certain ranch property situated in the State of New Mexico, about 40 miles Southwest of Albuquerque, consisting of 85,603.72 acres*2970 of land, the Antonio Sedillo Land Grant, cattle and horses, this property being the partnership property at the date of his death of J. B. Wilson and J. H. Furneaux. The said Furneaux has never paid anything on account of his interest in said property, but has a right under contract with the said J. B. Wilson to a 1/3 interest therein upon payment, so that as a matter of fact at the present time the said Laura D. Wilson's interest in said property is the whole thereof.
And whereas, by aforesaid decree of confirmation I am required to pay, when definitely ascertained and due, one-half of all unpaid obligations proper charges against the whole of the community property of J. B. Wilson, deceased, and myself, the whole of which unpaid obligations it is now estimated will amount to about $83,876.87, to which decree, exhibits and proceedings in aforesaid cause reference is hereby made for full details;
And whereas, I desire to make provision out of aforesaid property for my five daughters, to-wit, Mabel Richards, wife of J. R. Richards, Fay Munger, wife of L. R. Munger, Bess Schoellkopf, wife of J. Fred Schoellkopf, Lucile Pattullo, wife of George Pattullo, and Geraldine Knight, wife*2971 of R. E. L. Knight, Jr., all of Dallas, Texas, except the said Mabel Richards and husband, J. R. Richards, who reside in the City of Chicago, Illinois.
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS: That I, Laura D. Wilson, widow, for and in consideration of love and affection for my aforesaid daughters, and for other good and valuable considerations to me moving, the receipt whereof is hereby acknowledged, have granted, and conveyed, and by these presents do grant and convey unto Roy Munger and J. Fred Schoellkopf of Dallas, Texas, Trustees, and to the survivor of them, their and his successors *511 or successor, and their and his heirs and assigns, forever, all of the above described property; to have and to hold the above described premises, together with all and singular the rights, members, hereditaments and appurtenances thereto in anywise belonging unto the said Roy Munger and J. Fred Schoellkopf, Trustees, and to the survivor of them, and to their and his successors or successor, and their and his heirs and assigns, forever, in trust, however, for the uses and purposes and upon the terms, conditions and agreements herein set forth and declared; and I do hereby bind*2972 myself, my heirs, executors and administrators to warrant and forever defend all and singular the said premises unto the said Roy Munger and J. Fred Schoelkopf, Trustees, the survivor of them, and their and his successors or successor and their and his heirs and assigns, against every person whomsoever unlawfully claiming or to claim the same or any part thereof.
1. Where the context does not require a different construction, "trustees or trustee" as herein used shall mean the trustees or trustee for the time being acting hereunder, whether the said Roy Munger and J. Fred Schoellkopf, their survivor, or their or his successors or successor.
Any trustee hereunder shall have the right at any time at his pleasure to resign his trusteeship, said resignation to be in writing, signed and acknowledged by him as deeds are required to be acknowledged under the laws of Texas, and to be delivered to his co-trustee, if there be one, and if not, to at least two of the beneficiaries hereunder, and said resignation shall take effect at the date of such delivery, unless a different date is named in said instrument.
Any trustee hereunder may at any time, for or without cause, be removed by*2973 beneficiaries hereunder constituting at least a majority in interest of such beneficiaries. Such removal shall be in writing, signed and acknowledged by said removing beneficiaris as deeds are required to be acknowledged under the laws of Texas, except that if any person making such removal is a married woman she need not be joined by her husband, but whether so joined or not, her acknowledgment shall be in the form prescribed by the laws of Texas for married women. A duplicate of such instrument shall be delivered to said trustee so removed, and shall take effect from the date of such delivery unless a different date is specified in said instrument.
Should any trusteeship be vacant by reason of the death incapacity or act resignation or removal of the trustee, the persons constituting the majority in interest of the beneficiaries shall have the power at any time during the existence of this trust to fill such vacancy by the appointment of a successors, existence of this trust to fill such vacancy by the appointment of a successor, acknowledged as deeds are required to be acknowledged under the laws of Texas, except that if any person making such appointment is a married woman*2974 she need not be joined by her husband, but whether joined or not, her acknowledgement shall be in the form prescribed by the laws of Texas for married women.
Any trustee appointed hereunder may be either a natural person or a corporation authorized to execute trusts.
All powers conferred upon the trustees by this instrument may be exercised by them jointly or by either of them separately, where there is more than one trustee, and where there is a sole trustee acting hereunder such sole trustee shall have all powers hereby conferred upon the trustees or trustee.
No trustee hereunder shall be liable for the acts, defaults or misconduct of his co-trustee or for his own acts or conduct, except in case of fraud or misconduct involving moral turpitude.
*512 2. Said trustees or trustee shall hold an undivided one-seventh (1/7) interest in the property hereby conveyed, and the income and revenue thereof, for the use and benefit of each of my above named five daughters, her heirs and assigns, and the remaining undivided two-seventh (2/7) interest therein for the use and benefit of myself, my heirs and assigns.
3. Said trustees or trustee shall have the following rights*2975 and powers:
They shall have full and exclusive possession, management and control of aforesaid property and each part and parcel thereof, and any additional property that may be acquired under the power hereinafter given, all of which will be sometimes hereinafter called the trust property, until the same is disposed of, or until this trust is terminated.
They shall have the right and power at their discretion to continue the business and joint ownership existing as to items 9 and 10 of above described property, or any of them.
They shall receive all rents, revenues, incomes and returns of every nature arising from said trust properties or any of them, and shall give full and final receipts and acquittances therefor.
They shall have the right and power to employ all managers, lawyers, clerks, agents and servants that in their judgment may be necessary or desirable in and about the proper management, protection and sale, or other disposition, of said property or any part thereof, and pay them such compensation for their services as they may deem wise and just.
They shall keep said trust property in good condition and repair and pay all taxes and other Governmental charges*2976 thereon, and to the extent that they may deem necessary and wise in order to protect the value of any of said property, or make it more easily disposed of to advantage, may improve the same by the erection of buildings or other structures thereon, or may buy controlling, adjoining or adjacent property; any new property so acquired to be part of the trust property hereunder, owned in the same manner and in the same proportion and subject to the same trusts, rights and powers. They shall pay, when ascertained, and as due, the one-half of any community obligations with which I am now chargeable estimated to be approximately $83,876.67, as first herein set out.
They shall pay to each of said trustees, as compensation for his services as such trustee hereunder, the sum of $5,000 per year.
They shall sell or otherwise dispose of said trust property as rapidly as the same can in their judgment be done to advantage, and are hereby authorized in their uncontrolled discretion to sell, trade, exchange, or otherwise dispose of said property, in such lots or parcels, for such price or consideration, and on such terms as to cash or credit as to them seems proper, and convey the property so*2977 sold, traded, exchanged or otherwise disposed of to the purchaser or purchasers thereof, with or without covenants of title, as to them may seem best. The grantee in any conveyance made as aforesaid shall not be under obligation to see to the application of the purchase money or consideration paid by such grantee, but the receipt of the trustees or trustee therefor shall be a full and final acquittance, to such grantee. In case said trustees or trustee acquire in any trade, exchange or other disposition of any of said trustees or property, other property, the property so acquired shall become part of said trust poperty hereunder, and shall be owned in the same manner and subject to the same trusts, rights and power herein set out.
The cost and expenses incurred by said trustees or trustee in the exercise and performance of the powers and duties herein set out and declared shall be paid out of the revenues, incomes and returns received from said trust property, and the proceeds of sale of said trust property, or any part thereof, and *513 when all such cost and expense has been so paid, the remainder, of such income, revenues and proceeds of sale shall be divided and paid*2978 by said trustees or trustee as follows:
1/7 thereof to each of my aforesaid five daughters, her heirs or assigns, and 2/7 thereof to me, my heirs or assigns. Said net revenues income and proceeds of sale shall be divided and paid by said trustees or trustee to aforesaid beneficiaries in the proportions aforesaid as and when same are available, but said trustees or trustee shall pay to each of my daughters semi-annually, at least the sum of $5,000 and to myself, for a like period, at least the sum of $10,000, the sums so paid to be taken into consideration in adjusting any future division in excess of said amounts so paid.
4. This trust shall continue until all of said trust property both that above described and such, if any, as is hereafter acquired, has been disposed of and the proceeds thereof divided as above directed, provided this is accomplished within fifteen (15) years from the date hereof. But if any of said trust property remains on hand at the expiration of said fifteen years, said trustees or trustee shall convey the same to the beneficiaries hereunder, 1/7 thereof to each of my aforesaid five daughters, her heirs or assigns, and 2/7 thereto to me, my heirs or*2979 assigns. And this trust shall thereupon cease and end.
5. At any time that all beneficiaries hereunder desire to terminate this trust, and in writing request said trustees or trustee to terminate and close the same, said trustees or trustee shall, upon the receipt of such request, settle their said accounts, and thereupon convey said trust property to the beneficiaries hereunder; that is, an undivided 1/7 thereof to each of my aforesaid five daughters, her heirs or assigns, and an undivided 2/7 thereof to me, my heirs or assigns.
Witness my hand this 21st day of May, 1920.
LAURA D. WILSON.
The trust agreement conveyed ten items of real estate, situated in Dallas, Tex., four items of which together comprised what is known as the Wilson Building property. The same is what is known as the Wilson Building structure, eight stories high, the first two stories of which were occupied by the Titche-Goettinger Co. at the date of J. B. Wilson's death, under a lease having about 12 years to run. The upper six stories of said building constituted an office building. A part of the Wilson property was what is known as the Annex, a structure 12 stories high and occupied exclusively*2980 by Titche-Goettinger, under a lease having about 12 years to run.
Another item known as the North Texas Building was an office building six stories high. In another item, known as theWashington Theatre Building, Fred P. Wilson owned an undivided one-half interest, and in Item 7, Fred P. Wilson owned an undivided one-fourth interest at the time of J. B. Wilson's death. Also, at the time of J. B. Wilson's death there were outstanding against the items of real estate located at Dallas, Tex., leases other than those above mentioned, ranging in length from one to five years. Another item, known as the Eddleman Ranch, was the feeder ranch, and Item 10 in New Mexico was a breeding ranch.
*514 Upon the consummation of the partition above mentioned. Laura D. Wilson, desiring to make further provision for her daughters, above mentioned, divided in kind among them the personal property above referred to, and to the real estate described above, she executed and delivered the trust agreement herein set out.
Mrs. Wilson was advised and believed that the real estate items owned by her could not then be readily sold to advantage or divided equitably among her daughters and herself*2981 without serious disputes arising, and hence she executed and delivered said trust instrument and said trustees therein named served until October 31, 1921, on which date they resigned.
Thereupon, by instruments each dated October 31, 1921, the City National Bank of Dallas, a national banking corporation with trust powers, was appointed and designated successor trustee and the original trust instrument, dated May 21, 1920, was modified, all as shown by true copies of said instrument of appointment and of said modification of said trust instrument, which is as follows:
WHEREAS, Mrs. Laura D. Wilson, of Dallas, Texas, did by deed dated May 21, 1920, and duly recorded in the Deed Records of Dallas County, Texas, grant and convey to Roy Munger and J. Fred Schoellkopf, of Dallas, Texas, as Trustees, and to the survivor of them, their and his successor, and their and his heirs and assigns, forever, the property in said instrument described, upon the trusts, terms and conditions therein set out, for full particulars of which, including a particular description of the property thereby conveyed, reference is hereby made to said deed and the record thereof; and,
WHEREAS, said deed provides, *2982 that, "Should any trusteeship be vacant by reason of the death, incapacity to act, resignation or removal of the trustee, the persons constituting the majority in interest of the beneficiaries shall have the power at any time during the existence of this trust to fill such vacancy by the appointment of a successor, such appointment to be in writing, executed by the persons making same and acknowledged as deeds are required to be acknowledged under the laws of Texas, except that if any person making such appointment is a married woman she need not be joined by her husband, but whether joined or not, her acknowledgment shall be in the form prescribed by the laws of Texas for married women," and
WHEREAS, the said ROY MUNGER and J. FRED SCHOELLKOPF, Trustees under aforesaid deed, have, by an instrument of even date herewith, resigned as such Trustees so that each of said trusteeships is now vacant; and
WHEREAS said LAURA D. WILSON, MABEL RICHARDS, FAY MUNGER, BESS SCHOELLKOPF, LUCILLE PATTULLO and GERALDINE KNIGHT, all of the beneficiaries under aforesaid deed, the last five joined by their respective husbands, towit: J. R. RICHARDS, L. R. MUNGER, usually called ROY MUNGER, J. FRED*2983 SCHOELLKOPF, GEORGE PATTULLO, and R. E. L. KNIGHT, Jr., desire to fill the vacancies in the trusteeship caused by the resignations of said ROY MUNGER and J. FRED SCHOELLKOPF by the appointment, as the successor to each of the aforesaid Trustees, and as sole Trustee under aforesaid deed of The City National Bank, a national banking corporation its principal office in the City of Dallas, Texas.
NOW, THEREFORE, We, the beneficiaries above named, joined by their respective husbands, as aforesaid, pursuant to the power conferred upon us by the *515 aforesaid deed, do hereby appoint said City National Bank as successor of the said ROY MUNGER and the said J. FRED SCHOELLKOPF, Trustees, and as sole trustee under aforesaid deed of May 21, 1920; said CITY NATIONAL BANK, as Trustee, to have and exercise all the estate, power and authority conferred by aforesaid deed upon the said ROY MUNGER and J. FRED SCHOELLKOPF, as Trustees.
WHEREAS, Mrs. Laura D. Wilson, of Dallas, Texas, did by deed dated May 21, 1920, and duly recorded in the Deed Records of Dallas County, Texas, grant and convey to Roy Munger and J. Fred Schoellkopf, of Dallas, Texas, as Trustees and to the survivor of them, *2984 their and his successor and their and his heirs and assigns, forever, the property in said instrument described, upon the trusts, terms and conditions therein set out, for full particulars of which, including a particular description of the property thereby conveyed, reference is hereby made to said deed and the record thereof; and,
WHEREAS, said deed provides that any Trustee thereunder shall have the right at any time, at his pleasure to resign his trusteeship, in the manner in said instrument pointed out; and further provides, among other things, that should any trusteeship be vacant by reason of the resignation of the Trustee, the persons constituting a majority in interest of the beneficiaries shall have the power at any time during the existence of said trust to fill such vacancy by the appointment of a successor, in the manner in said deed provided, and,
WHEREAS, said Roy Munger and J. Fred Schoellkopf desire to resign as Trustee under said deed, and the beneficiaries thereunder, towit: the said Laura D. Wilson, Mabel Richards, wife of J. R. Richards, Fay Munger, wife of said Roy Munger, Bess Schoellkopf, wife of said J. Fred Schoellkopf, Lucille Pattullo, wife of George*2985 Pattullo, and Geraldine Knight, wife of R. E. L. Knight, Jr., desire to appoint in the stead and as the successor of the said Roy Munger and J. Fred Schoellkopf and each of them, and as sole Trustee under aforesaid deed, the City National Bank, a national banking corporation, with its principal office in the City of Dallas, Texas, and at the same time to modify, amended and supplement aforesaid deed and the terms, conditions and trusts thereof, as hereinafter set out;
NOW, THEREFORE, in consideration of the premises, it is hereby agreed between Roy Munger and J. Fred Schoellkopf, Trustees, all the beneficiaries under said deed, and their respective husbands hereinbefore mentioned, and said City National Bank, as follows:
(1) It is agreed that the resignation of said Roy Munger and J. Fred Schoellkopf as Trustees, of even date herewith, and the appointment of City National Bank as their successor and sole Trustee under aforesaid deed, also of even date herewith, shall become effective and operative when this instrument is duly executed by all parties hereto, towit, the present Trustees, the beneficiaries and said City National Bank, and delivered to said Bank; but until then such*2986 resignation and appointment shall have no force or effect.
(2) If this instrument is duly executed and acknowledged by all parties aforesaid, and aforesaid resignation and appointment become effective as above provided, then said deed of May 21, 1920, and the terms, conditions and trusts thereof shall, from the date of delivery of this instrument to said City National Bank, Trustee, stand modified, amended and supplemented as in this instrument provided, but except as so modified, amended and supplemented shall remain in full force and effect.
(3) No sale of any of the trust property shall be made by the Bank, Trustee, unless and until the same is approved by a majority in interest of the beneficiaries of aforesaid trust, such approval to be in writing, duly witnessed by one or more witnesses, or acknowledged in the manner provided for the appointment of a trustee under aforesaid deed.
*516 (4) The Bank, Trustee, shall not purchase other property for said trust, or make improvements, other than those required for proper maintenance and repair, without the written consent of five-sevenths (5/7) in interest of the beneficiaries.
(5) No reduction shall be made by the*2987 Bank, Trustee, in the schedule of rates of rentals or leases of rooms in the Wilson Building until approved by a majority in interest of the beneficiaries under said trust.
(6) The present working arrangements with J. H. Furneaux as to the ranch properties covered by the trust shall remain in full force and effect, and such working arrangements shall be recognized by the Trustee and carried out. Said arrangements are now in writing, and a copy of said writing will be delivered to the Bank, Trustee, contemporaneously with the delivery of this instrument.
(7) Aforesaid beneficiaries, under their working arrangements with co-owners of properties, owned jointly by them and other persons, are committed to finance the ordinary operations of said properties. Without definitely committing or obligating itself as to details, the Bank, Trustee, will endeavor, subject to general banking conditions and other demands upon it, to advance from time to time such funds as may be needed by such properties, which in no event shall exceed in the aggregate the legal loan limit of the trustee and at a rate not to exceed 7% per annum. Its policy shall be to exercise that liberality which its conceptions*2988 of sound policy may permit it to exercise towards a valued customer. Advances so made will be liquidated so far as possible out of the particular properties for whose account the advancements are made, provided however that if the particular property, on account of which such advances are made does not liquidate its indebtedness within a reasonable time, then it shall be liquidated from the net current income received by the Trustee from the trust properties in its hands; provided further, that not more than one-half of the net current income for any year shall be applied to liquidation of such indebtedness during that year. If a property on account of which advances have been made under this paragraph should be sold by the owners thereof, then all such advances then unpaid shall be paid out of the purchase price receive therefor.
(8) Fred P. Wilson is to have entire management and control of all of the trust properties in which he owns an interest, and shall collect the rents and revenues, therefrom, and pay to the Bank, Trustee, the proportion thereof to which the trust estate is entitled. And the persons owning the Schoellkopf interest in the old Elks Club Building on Main*2989 Street, in the City of Dallas, are to have the entire management and control of that building, and shall collect the rents and revenues therefrom and pay to the Bank, Trustee, the proportion thereof to which the trust estate is entitled.
(9) In full for all services rendered by the Bank, as Trustee, it shall receive the following fee and commissions:
In full for its services as Trustee (except the commissions on sales hereinafter provided) said Bank shall be paid annually the sum of Five Thousand Dollars ($5,000).
In case of sale of any of the trust properties, said Trustee shall receive and be paid the following commissions on the purchase price. "Purchase price" as here used, shall mean only that part of the purchase price to which the trust estate is entitled, except in case of the ranches, as hereinafter specified.
(a) On the sale of any of said property, except the Wilson Building and the three ranches, said commission shall be five per cent (5%) on the first $50,000, four per cent (4%) on the next $25,000, three per cent (3%) on the next $25,000, and two and one-half per cent (2 1/2%) on the remainder, provided the *517 amount of such 2 1/2 per cent shall not*2990 exceed $3,250, it being agreed that the commission paid said Trustee on any one sale shall not exceed $7,500 regardless of the amount of the purchase price.
(b) On sale of the Wilson Building, the commission shall not exceed 2 1/2%.
(c) In case of sale of one or more of the ranches in bulk, the commission shall be 2 1/2%, but if it is determined to cut up and sell any part of said land in parcels, then the sale of said land so cut up shall be turned over to and controlled by J. H. Furneaux; but the Trustee shall nevertheless receive 2 1/2 per cent on the amount of the purchase price. The purchase price, in case of the ranches, shall mean the entire price for which sale is made, and not only that part thereof belonging to the trust estate.
In case the sale of any piece of the trust property is made by any beneficiary or beneficiaries of the trust, then the Trustee shall receive no commission. The commissions above provided to be paid to the Trustee are the only commissions to be paid by the trust estate or the beneficiaries, and the Trustee hereby agrees to indemnify and protect the trust estate and the beneficiaries against any and all other claims for commission.
(10) *2991 No legal fees shall be charged by the Bank, Trustee, for drawing contracts, leases, deeds, deeds of trust, or for other legal services rendered in the usual and ordinary management and protection of the trust property, but in case of litigation or other legal proceedings of any character rendering it necessary for the Trustee to employ outside legal assistance, reasonable fees paid for such outside legal assistance shall be charged as an expense against the trust estate.
(11) The Bank, Trustee, hereby agrees to make such advances of money, not in excess of the legal loan limit of the Trustee, as may from time to time be necessary in the proper management and operation of said trust property, other than the ranch property, and shall charge on said advances not exceeding one-half of one per cent per month.
(12) The Trustee shall render to each of the beneficiaries on January 1, 1922, a written report of its receipts and disbursements as Trustee up to that date, and a like report at the end of each three months thereafter, showing receipts and disbursements for the three months preceding. A copy of such report shall be mailed to each beneficiary at the address furnished by such*2992 beneficiary. The Trustee shall in the report made January 1, 1922, receive such part of its annual fee provided for in paragraph 9 above as has been earned up to that date, and shall, at the end of each three months thereafter receive one-fourth of its said annual fee, which payment on account of fee shall appear as one of the expense charges for the period covered by such report.
The taxes payable on the trust property shall be paid each year in the quarter ending December 31, and charged as an expense in the report for such quarter.
Any advances made by the Trustee under this instrument shall be paid and deducted when and as hereinafter set out.
(13) The advances made under paragraph 7 hereof shall be repaid as therein provided, and the advances made under paragraph 11 hereof shall be repaid out of the rents, revenues, and proceeds of sale of the Trust property other than the ranch properties.
At the time of making each report above provided for, said Trustee, after paying out of said rents, revenues, and proceeds of sale all expenses, fees, taxes and advances properly deductible therefrom, shall pay to the beneficiaries the net balance remaining in the hands of the*2993 Trustee, paying to each the share to which she is entitled under aforesaid deed.
*518 In case of a sale of a portion of the Trust property, if the proceeds thereof are not necessary in the payment of advances, then the Trustee shall divide among the beneficiaries, in proportion to their respective interests, that part of the proceeds of sale not necessary to be applied to the payment of advances; such payment to be made as soon after such proceeds of sale are received as can be conveniently done, and without waiting for the end of the three months period to be covered by the next report.
(14) In Paragraph 1, of aforesaid deed of May 21, 1920, from Laura D. Wilson to Roy Munger and J. Fred Schoellkopf, Trustees, it is among other things provided that any Trustee may at any time, for or without cause be removed by the beneficiaries under said instrument constituting at least a majority in interest of such beneficiaries.
And further, that should any trusteeship be vacant by reason of the death, incapacity to act, resignation or removal of the Trustee, the persons constituting the majority, in interest of the beneficiaries shall have the power at any time during*2994 the existence of said Trust to fill such vacancy by the appointment of a successor. It is hereby agreed that from this date forth there shall be substituted for the word "majority" in said Paragraph 1 "five-sevenths" so that the powers conferred by said paragraph on a majority in interest of said beneficiaries can not hereafter be exercised by less than five-sevenths in interest of said beneficiaries.
(15) Said Bank, Trustee, is hereby expressly authorized to protect said trust estate, at any time in its hands, against loss and damage by fire and other insurable hazards, by carrying insurance against same. Said insurance to be in such amount or amounts and in such company or companies as said Trustee may deem proper and sufficient, the expense thereof to be borne by said trust estate.
(Signed by all the parties.)
The City National Bank of Dallas accepted appointment as successor trustee, and since that time has served as such.
The trustee from time to time intrusted the management of the Wilson Building and of the North Texas Building to one W. R. Page, who served as manager of those buildings and accounted for his management to the trustees and turned in all his funds*2995 to the trustees.
One Fred P. Wilson owned an undivided one-half interest in what is known as the Washington Theatre property and an undivided one-fourth interest in the property at the corner of Main and Murphy Streets, known as Item 7, and the entire management and control of said two properties were in the hands of said Fred P. Wilson, who controlled the rents and revenues and from time to time turned them into the hands of the trustees.
One G. H. Sohoellkopf owned an undivided one-half interest in what is known as Elks property and had entire management and control of that building and controlled the rents and revenues therefrom and paid to the trustees from time to time the proportion to which the estate was entitled.
The trust estate involved herein owned an undivided one-third interest in what was known as the Eddleman Ranch, hereinbefore *519 mentioned, and an undivided two-thirds interest in the New Mexico ranches hereinabove mentioned.
At the time of his death, there was in effect a contract between J. B. Wilson and one J. H. Furneaux, whereby Mr. Furneaux, who owned an interest in each of said ranches, should conduct and operate same and from time to time*2996 Mr. Wilson would advance such moneys that might be needed for the conduct and operation of same and Mr. Furneaux was to turn over to Mr. Wilson such share of the net profits from the conduct and operation of same as he was entitled to.
This contract at the time of J. B. Wilson's death had about three years to run and the arrangement was continued by the trustee until its expiration in May, 1923, at which time it was renewed by the trustees for five years.
It was found that cattle breeding on the New Mexico ranches was not profitable and it was further found impossible to sell such New Mexico ranches to advantage, and so cattle ranching was gradually abandoned thereon and sheep ranching previously conducted thereon was enlarged and additional sheep purchased with money furnished by the trustees, and further in the hope of improving the chances of disposing of such property to advantage, furnishing feed for the livestock and sheep on the ranches, a dam was built in two certain streams on the property for the purpose of impounding water to irrigate several thousand acres. This was done at an expense of about $50,000, advanced by the trustees. The dam turned out to be a failure*2997 and before final completion was washed away.
The Eddleman ranch, above mentioned, was used for cattle feeding, which contemplated the sale of fat cattle on the ranch each year and the purchase of other cattle to take their place and to be fed in turn and sold.
The trustees from time to time have made effects to find purchasers for the trust properties on terms deemed by them to be advantageous and have succeeded only in making the following sales:
1. The property known as the North Texas Building was traded by the trustees for 20,000 acres of ranch land located in Randall and Deaf Smith Counties, Texas. An arrangement was made by the trustees with J. H. Furneaux, covering the conduct and operations of said ranch property, similar to the arrangement made with Furneaux for the conduct and operation of other ranch property above mentioned. Said ranch properties in Randall and Deaf Smith Counties were operated as feeding ranches.
2. The undivided one-half interest belonging to the trust estate in what is known as the Elks Building, being Item No. 8, mentioned above, was sold by the trustees in 1922 to Whitfield Harrell and the profits divided in accordance with the terms*2998 of the trust.
3. The undivided one-half interest belonging to the trust estate in what is known as the Washington Theatre Building, being Item 6, *520 above mentioned, was sold in 1927, to the estate of J. B. Wilson for about $112,500 and the profits distributed in accordance with the terms of the trust.
The trustees in 1928 made 25-year leases with new tenants, covering the ground floor of the main Wilson Building and of the Wilson Building Annex, to begin on the vacation of the premises by the present tenant, Titche-Goettinger Co., aforementioned.
The petitioner in due time filed fiduciary returns on Form 1041, for the years 1921, 1922, and 1923, showing no tax due. The Commissioner held that the petitioner was taxable as an association and, in addition to the deficiencies in tax, asserted the 25 per cent delinquency penalty for the year 1921.
OPINION.
LOVE: In this case the only issue in controversy is a question of law rather than one of fact. Is the petitioner, in view of all the facts, taxable as a trust, or as an association taxable as a corporation?
It is not controverted that in the creation of the agency or organization designed by the grantor, *2999 to manage, dispose of, and distribute her estate for the use and benefit of her children, that she did create a trust, and that under the laws of the State of Texas, the domicile of that organization and the situs of practically all of the assets entrusted to it, that entity is a trust, so regarded by its creator, by its beneficiaries, by the trustee, and by the courts of that State.
But arriving at that conclusion, does not solve the problem presented to the Board. In the case of , the Supreme Court held that notwithstanding the fact that the association involved in that case was, under the laws of the State of its domicile, a partnership, and as such subject to all the liabilities of a partnership, yet by reason of its internal organization and machinery of operation, as well as its actual operations, it came within the ambit of associations which Congress prescribed should be taxed as a corporation. See also . Neither the act of Congress relating to the taxing of associations as corporations nor the decision of the court construing that act affects the*3000 status of such organizations under the laws of the State. The court only holds for the purpose of Federal taxation that when a group of individuals organize themselves with the characteristic elements of a corporation, and operate in form and manner as a corporation, they come within the ambit of associations (unchartered organizations) which Congress prescribed should be taxed as corporations, and that Congress had the constitutional right to so tax them. We are, therefore, brought face to face with the problem of determining whether or not the Wilson Syndicate Trust in its internal organization and *521 in its machinery of operation, as well as in its operations and purposes, possessed and was controlled by the characteristic features of a corporation.
From a consideration of the record in this case, we believe that this petitioner did not possess the identifying characteristics of a corporation. The term "association" as used in the Revenue Act means a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise. *3001 ;. See also Hornblower v. White,U.S. Dist. Ct., Mass., decided July 26, 1927, and , and cases cited.
The Supreme Court has held that when a partnership which under the laws of the State of its domicile has present in its organization and operation the characteristic features of a corporation, and carries on a business for profit, it may be taxed as a corporation. A fair construction of that holding would include the converse, that is, that a partnership which has not present in its organization or operation the characteristic features of a corporation, may not be taxed as a corporation.
The statute specifically provides how the net income of an estate or trust shall be taxed, and yet, following the logic of the Burk-Waggoner case, a trust which has present in its organization and operation the characteristic features of a corporation organized for the purpose of carrying on a business, would be subject to be taxed as a corporation, and a fortiori, a trust which has not present those features shall be taxed as a trust and not as*3002 a corporation.
We are, therefore, brought to a consideration of the features incident to and inherent in the creation and prescribed method of operation of the Wilson Syndicate Trust.
It was not chartered under any statutory law but was created by deed, as permitted under the general trust laws of the State of Texas. The trust held only the legal title to the assets, the beneficial interest therein being in the beneficiaries. It did not issue certificates evidencing proportional interest owned by each beneficiary. The beneficiaries had no voice in or control over the fundamental policies of the organization. They could only remove a trustee and designate another by written declaration, executed in the form prescribed for the execution of a deed. There was no board of directors. At first there were two trustees, each empowered to act alone if he deemed it necessary. Later, the bank was sole trustee. There was no periodical or regular manner of distribution of profits among the beneficiaries. It is true that the trustees continued to carry on the several businesses in which J. B. Wilson was engaged prior to his death, and they sold assets, bought other assets, improved*3003 ranches, *522 and kept the property in repair, none of which activities is inconsistent with a trust. They were within the purview of the deed creating the trust.
The trust was not created for the purpose of carrying on a business, and the trustee bought and sold, and carried on other transactions, such as making repairs, only for the purpose of conserving the assets until a favorable time should arrive when a liquidation could be effected under fairly favorable circumstances, and make a distribution among the beneficiaries.
In view of all the facts in this case we hold that the Wilson Syndicate Trust should be taxed as a trust and not as a corporation. It follows therefore that there was no deficiency for any year, and the delinquency was improperly asseted.
Reviewed by the Board.
Judgment of no deficiency will be entered.