*1805 Where a trust discounted real estate notes secured by mortgages, collected interest thereon, and reinvested such collections in additional mortgage notes, it is held that the trust constituted an "association" taxable as a corporation within the meaning of section 2(a) of the Revenue Act of 1924.
*736 The respondent has asserted a deficiency in income tax for the year 1924 in the amount of $811.81. The only issue is whether the petitioner is an association taxable as a corporation under the provisions of the Revenue Act of 1924, or whether it is taxable as a trust.
FINDINGS OF FACT.
In the taxable year the Tulsa Mortgage & Investment Co., hereinafter designated as the Company, was a trust created under the laws of Oklahoma. Its principal office was at Tulsa, where it engaged in the purchase of mortgage notes and the collection of interest on securities which it owned. Everett Petry, A. S. Burrows, and H. E. Hanna were the trustees. The trust instrument under which the Company was created provided in part as follows:
Said trustees, or a majority*1806 of them, shall have power to conduct in said name, anywhere in the United States, the business of loaning money, buying, selling discounting and rediscounting notes, mortgages, stocks, bonds and other securities, either as owner, agent, or broker; of owning, holding, buying, selling, renting, leasing or subleasing, building upon, or otherwise improving and dealing generally in realestate, either as owner, lessor, lessee, agent or broker, and for said purposes or any of them, said trustees are empowered to receive title to, hold, buy, sell, exchange, transfer, assign and convey such real or personal property as they may deem best suited to said business; to take and receive, invest, or disburse the receipts, rents, earnings, profits and returns of said estate; to execute in its trust name by its proper officers, all deeds, mortgages, assignments, releases or other instruments to make effective its purposes; to borrow money on the credit of said trust estate and execute such notes, certificates of indebtedness, bonds, mortgages or other evidence of debt as may in the judgment of the trustees, or a majority of them, seem useful to the progress of said trust estate and may mortgage or*1807 pledge the property of said trust estate as security therefor; to do generally any useful thing an individual might do for the accomplishment of the purposes above enumerated.
* * *
The entire beneficial interest in and to the profits derived from the property of this trust estate now owned or hereafter acquired, and from the conduct of its business shall be divided into one thousand equal parts to be designated as units of beneficial interest of no designated face or par value. One Hundred (100) of said units shall be issued to the donors hereof in consideration for their contribution to this trust estate, and the remaining Nine Hundred units of beneficial interest may be issued to such persons as shall contribute further money or property to this estate on such terms and in such amounts as the trustees may designate. The trustees shall issue such certificates of interest as shall suitably show the correct and relative interest of the beneficiaries of this estate and such certificates when recorded on the books of the estate shall be evidence that the holder is a beneficiary hereof to the extent shown by such certificate. Holders of certificates of such beneficial interest*1808 shall participate according to their class ratably in proportion to the number of such units issued and outstanding and not in proportion to the total number hereby authorized to be issued by such trustees.
*737 No beneficiary shall ever have any ownership, control or dominion over the property of this estate nor in the management of the business thereof unless he be duly designated as a trustee, it being the intent and purpose hereof to create a pure trust and such beneficiaries shall receive and take only such share of the profits from time to time as shall be ratably distributed by the trustees as profits, or as is their ratable interest in the corpus of the estate on dissolution.
The beneficiaries of this trust estate shall be divided into two classes, known respectively as preferred beneficiaries and common beneficiaries, and there shall be issued to each class suitable certificates of beneficial interest designating the class to which such beneficiary belongs and appropriately referring to this contract for a definition of the rights of such class of beneficiaries.
Preferred beneficiaries shall be entitled to receive out of the net earnings of this estate a fixed*1809 cumulative dividend of Eight Dollars per unit of beneficial interest per annum, before any dividend can be paid or credited to any holder of Common Units of beneficial interest in this estate, and in addition thereto shall receive one half of their ratable proportion of the net earnings of estate above Eight dollars per unit of beneficial interest per annum based upon the total units of beneficial interest (both common and preferred) issued and outstanding. The common beneficiaries shall be entitled to all the rest and residue of the net earnings of this estate not apportioned to the preferred beneficiaries as herein stated, and shall be paid or credited to them ratably in proportion to their several interest as appear upon the books of the estate.
In case of liquidation or dissolution of this estate the preferred beneficiaries shall be paid the sum of One Hundred dollars per unit of beneficial interest, plus any unpaid dividends credited thereto, before any amounts shall be distributed to the common beneficiaries.
Preferred units of beneficial interest shall be retireable after three years from the date thereof at the option of the trustees or a majority of them, upon paying*1810 to the holder thereof One Hundred dollars per unit plus any unpaid dividends credited thereto. No earnings shall be credited to any preferred unit of beneficial interest after thirty days notice by mail addressed to holder thereof at the address appearing on the books of the estate, notifying such holder of the election of the trustees to retire such certificate.
All net earnings shall be credited at the end of each fiscal year to reserve account, against which any and all losses of the estate may be charged. The net reserve after charging such losses thereto may be disbursed and distributed to the beneficiaries as their several interests therein may appear, at such times as in the judgment of the trustees or a majority of them the condition of the estates warrants such distribution and disbursement.
The trustees may designate one of their number as president who shall execute all instruments of writing authorized by the trustees. They may adopt a common seal to authenticate and attest their acts and designate the custodian thereof. They may select from their number a secretary and Treasurer and fix their duties. They may adopt such operative resolutions or promulgate such*1811 rules and regulations for the government of their deliberations and methods of transacting the business of the trust estate as to them or a majority of them may seem suitable.
The business of this trust estate may be wound up and discontinued and the corpus of the estate together with any additions or accretions thereto or undistributed profits in the hands of the trustees may be disbursed and distributed to the beneficiaries ratably in proportion to their several interests as they may *738 appear on the books of the trust at any time the trustees or a majority of them may decide such act to be for the best interest of the beneficiaries, and upon consent in writing of beneficiaries holding a majority in amount of the units of beneficial interest.
Upon the organization of the Company, in conformity with the terms of the trust instrument, A. S. Burrows and H. E. Hanna paid in to it certain notes aggregating in face value the amounts of $24,319.11 and $24,983.60, and each received for his contribution certificates of common beneficial interest of the par value of $25,000. At the same time, or a little later, certificates of preferred beneficial interest of the par value*1812 of $50,000 were issued to investors in exchange for mortgages and cash. Burrows subscribed for 50 shares and Hanna for a small number thereof, not disclosed by the record. No one other than Burrows and Hanna ever owned any common beneficial shares.
In the year 1923 A. S. Burrows and H. E. Hanna were engaged in the lumber and building business in the city of Tulsa, Okla. The manner of financing the business in general was to take a note secured by a first mortgage on property sold, and assign it for value to one of their clients, or take it direct to one of their clients from the purchaser of the property sold. Burrows would then look after the collection of the interest and principal of these loans and reinvest it for his clients in other properties as they were built and sold. This procedure involved the transmission of releases, assignments and other documents between various investors, which was inconvenient. To provide for a more convenient method of handling the business, Burrows, Hanna, and Petry organized the Company.
The Company discounted mortgage notes for the Hanna Lumber Co., which was a partnership composed of Burrows and Hanna, collected interest on such notes*1813 and other securities received in exchange for its certificates of beneficial interest, collected the principal as it become due, reinvested such collections in excess of dividend requirements in other mortgage notes offered it by the Hanna Lumber Co., and distributed its net earnings as dividends to beneficiaries in conformity with the terms of the trust instrument. It exercised no other powers granted to the trustees in the trust agreement.
The Company had no separate office, but used a desk in the office of the Hanna Lumber Co. It employed a bookkeeper who renewed notes, cared for the insurance on mortgaged properties, and attended to all matters relating to the company's business. The books consisted of a general ledger, journal, minute book and a loan register, which described the loans and real estate securing them and the insurance in force on the property. The Company's expenses included the salary of the bookkeeper, stationery, cost of recording *739 mortgages, and premiums on a portion of the insurance on property covered by loans.
For the year 1924 the Company filed a fiduciary income-tax return which, it alleges, was prepared under the advice and with the*1814 approval of an agent of the Bureau of Internal Revenue. Upon audit of such return, the Commissioner held that the Company was an association taxable as a corporation and determined the deficiency here in controversy.
OPINION.
LANSDON: The single question presented in this proceeding is whether the Company is taxable as a trust or as a corporation. Since its income-tax return was filed as a trust, section 704(a) of the Revenue Act of 1928 is applicable, and it is necessary to ascertain whether the Company was considered to be taxable as a trust under the respondent's regulations and rulings in force and effect when the return was filed. The similar question for 1924, as to a different taxpayer, is fully considered in , where we held adversely to the petitioner's contention. We think that decision disposes of the question raised here as to the application of section 704(a).
On numerous occasions this Board and the courts have passed upon the question whether an entity was taxable as a trust or as a corporation, and the distinction between those organizations which are taxable as corporations and those which are taxable*1815 as trusts has been fairly well defined. Holding trusts doing no business and merely engaged in collecting income and distributing it to the beneficiaries are regarded as trusts, while those which are actively engaged in business through forms similar to those of a corporation are regarded as associations taxable as corporations. ;; ; ; ; ; and .
We think that petitioner comes within the class taxable as corporations. It was not merely holding property and collecting the income therefrom, but was engaged in business, namely, discounting real estate notes, collecting the income, and investing and reinvesting the principal and interest. The Company was organized by Burrows and Hanna as a convenient method of marketing the real estate paper acquired by the Hanna Lumber Co. *1816 in connection with its lumber and real estate business.
*740 The respondent properly determined that the Company was an association taxable as a corporation. Cf.
Reviewed by the Board.
Decision will be entered for the respondent.