*1007 Petitioner, a trust, owns several parcels of real estate located in the city of Detroit. These properties are valuable business properties and wherever possible are leased on a net basis and for long terms. They are substantial income-producing properties. With respect to the form of its organization, its methods of operation, the rights of the beneficiaries in the trust and its properties, and the powers of the trustees, the petitioner is substantially similar to a statutory corporation. Held, that it is an association within the meaning of section 1111(a)(2) of the Revenue Act of 1932.
*612 This is a proceeding for the redetermination of deficiencies in income tax for the years 1932 and 1933 in the amounts of $9,422.24 and $7,340.52, respectively. The sole issue presented is whether petitioner is an association taxable as a corporation.
FINDINGS OF FACT.
The petitioner is a trust created under the Williams trust agreement, which was executed on September 22, 1920, by the Security Trust Co., a Michigan corporation, Luther S. Trowbridge*1008 and Edwin C. Lewis, individuals, as trustees, and Josepha W. Douglas, Gershom Mott Williams, and the estate of John R. Williams by Maie H. Williams and William J. Gray, as the original beneficiaries under the said declaration of trust. The instrument was also signed by Maie H. Williams, Juliette Leiter, Dorothy McCombs, and Francise Pitney, the widow and three daughters of John R. Williams, deceased. The Security Trust Co. was designated as corporate trustee, while Luther S. Trowbridge and Edwin C. Lewis were termed managing trustees.
It was recited in the trust instrument that the Security Trust Co., by accepting delivery of deeds theretofore executed by the record owners, was about to take fee simple title to seven described parcels of real estate in the city of Detroit. This real estate was to be held by the Security Trust Co. in accordance with the provisions of the *613 trust instrument and subject to the management and control of Luther S. Trowbridge and Edwin C. Lewis, and their successors. The managing trustees were to collect all income, rents, and profits from the properties and to pay all taxes, assessments, and public charges of any kind. They were given*1009 full power and authority to lease the properties for any term, "to erect, construct, tear down, alter, reconstruct, rebuild or remodel such buildings or other improvements * * * on said real estate or any part thereof" as they in their sole discretion might think best, and in order to carry out these purposes the trustees were to have the power to borrow such sums of money as the managing trustees might consider necessary, giving as security for the payment of the money so borrowed a mortgage or deed of trust on any or all of the properties. They were given the power "at any time to sell and convey the fee simple title in and to any or all of said real estate or the buildings or improvements thereon" and to determine the mothod and terms of the sale as their judgment indicated. They could grant and acquire easements, make contracts for party walls and foundations, execute contracts with public officials relating to sewers, sidewalks, etc., insure the buildings, make repairs, hire suitable offices, employ agents and attorneys, settle claims, and incur and pay proper expenses.
It was expressly covenanted and agreed that the legal title to the seven parcels of real estate heretofore*1010 referred to and to any lands thereafter acquired by the trust was to be vested solely in the corporate trustee. The corporate trustee was required, however, to acknowledge or otherwise validate and deliver such conveyances, mortgages, or other documents necessary to effect and carry out the acts and desires of the managing trustees.
With respect to long term leases or the sale of property belonging to the trust, the trust agreement contained the following:
It is, however, expressly provided that the Trustees shall not exercise the power to make absolute sale, or to make any lease for a term longer than twenty-five (25) years, of said real estate, or any part thereof, without first having obtained the consent in writing of the owners of a majority in amount of the registered trustees receipts issued hereunder and outstanding.
By the terms of the trust instrument any trustee might resign or might be removed by the vote or action of two-thirds in amount of all the beneficiaries of the trust "holding registered receipts, evidenced by a written declaration to that effect, executed and acknowledged and recorded in said Register's Office, or other proper Office, as in the case of*1011 a deed of real estate." Vacancies in the number of trustees were to be filled similarly by action of two-thirds in amount of the beneficiaries. It was further provided that any trustee, by power of attorney, might delegate to any person full authority to execute all of the powers of such trustee.
*614 The managing trustees were given the power, during the life of the last survivor of Gershom Mott Williams, Josepha W. Douglas, Maie H. Williams, Juliette W. Leiter, Dorothy F. McCombs, and Francise Pitney or for 21 years after the date of the trust instrument, to set aside a portion of the net annual income not in excess of 10 percent as a contingent fund which was to be disposed of in whole or in part in the payment of expenses, debts, costs, or charges authorized to be incurred or paid by the trustees, or in distribution to the beneficiaries. In the case of sale of any of the lands the proceeds thereof were to be forthwith distributed to the owners of trustees' receipts, and the trustees were given no power of reinvestment of such proceeds. The contingent fund and income accumulated prior to distributions could be invested in such bonds as are open to investment of the*1012 funds of savings banks in the State of Michigan. The net income was to be distributed to the beneficiaries quarterannually, or oftener in the discretion of the managing trustees, and the latter were required to furnish each beneficiary with an annual inventory of the estate and a statement of all moneys received and paid out. The trustees were to be entitled to reasonable compensation to be fixed from time to time by agreement between themselves and a majority in amount of the beneficiaries. Under the terms of the agreement neither the trustees nor the beneficiaries were to be personally liable for any money borrowed or for any other debt or liability of the trust, and all persons dealing with the trust were required to look only to the property of the trust for the payment of their claims.
The original beneficiaries of the Williams trust agreement and the respective interests owned by each were as follows:
| Gershom Mott Williams | One-third |
| Josepha W. Douglas | One-third |
| Estate of John R. Williams, deceased | One-third |
The agreement provided that the beneficiaries had no right of possession, management, or control of the trust estate and no widow, widower, heir*1013 or devisee of any beneficiary had any right of dower, homestead, inheritance, or partition in the trust properties; that the rights of the beneficiaries were solely against and through the trustees and such rights were personal and not a claim, title, or interest in the property; and further that the trustees were the absolute representatives of all the beneficiaries and it was not necessary that the latter be named as parties in any suit of any kind brought against or on behalf of the trust.
The corporate trustee was required to issue to each beneficiary a receipt showing the proportional part to which he was entitled and each receipt was to provide on the face thereof that such receipt *615 should not be sold or otherwise disposed of to any person outside of the immediate family of the holder thereof, without first notifying all other registered receipt holders of the price and terms of the proposed disposition and giving them the prior right to purchase. The corporate trustee was to keep a written register and the receipts could be transferred only on the register by the beneficiary named therein. All books of the trust were to be kept open for inspection.
The agreement*1014 further provided that at the expiration of 20 years after the death of the last survivor of the original beneficiaries and the children of Gershom Mott Williams and Josepha W. Douglas, or earlier with written direction from holders of two-thirds of the receipts, the trustees were to terminate the trust by selling, conveying, and transferring all of the property held by them as trustees and by dividing the proceeds of such sales among the registered beneficiaries. This clause was inserted by counsel in order to avoid failure of the agreement through the creation of a forbidden perpetuity. The agreement could be amended upon the consent in writing of holders of three-fourths in amount of the receipts.
Gershom Mott Williams, Josepha W. Douglas, and John R. Williams were the children of Thomas Williams and the grandchildren of General Johm R. Williams. General Williams died October 20, 1854, leaving part of his extensive real estate holdings in and about the city of Detroit to his son Thomas and his daughter Mary, referred to herein as Mary W. McKinstry. Thomas Williams died on August 5, 1862. He devised all of his real estate to his three children, Gershom Mott Williams, Josepha*1015 W. Douglas, and John R. Williams, with an intervening life estate in his widow, Mary N. Williams, who died January 31, 1914. Mary W. McKinstry died March 2, 1876. She devised two stores to a brother, J. Devereux Williams, for life with remainder over to the three children of Thomas Williams. The residue of her property was devised in trust, eventually to be distributed to the three children of Thomas Williams. That trust terminated on December 31, 1918. John R. Williams died on March 24, 1919. His estate, part of which consisted of his interest in the properties devised to him by his father, Thomas Williams, and his aunt, Mary W. McKinstry, and which had not been disposed of at the time of his death, was devised in trust for the benefit of his widow, Maie H. Williams, and his three daughters, Juliette Leiter, Dorothy McCombs, and Francise Pitney.
Properties devised by Thomas Williams and Mary W. McKinstry to or for the benefit of Gershom Mott Williams, Josepha W. Douglas, and John R. Williams consisted of 126 descriptive units which, with a few exceptions, were city lots. These units, according to the detailed statement attached to and made a part of a stipulation of the*1016 parties, *616 were grouped into 57 parcels. During the period beginning with August 10, 1864, up to and including the year 1916, 47 of the 57 parcels were disposed of. Two other parcels, described as properties located in the village of Mottville, St. Joseph County, Michigan, were disposed of in a manner and on dates unknown. Another parcel was conveyed by warranty deed, executed by the trustee of the Mary W. McKinstry estate, but the record fails to disclose the date of conveyance. From another parcel sales were made from 1915 through 1923. The remaining 6 parcels were included in the 7 parcels conveyed to the corporate trustee under the trust agreement previously described herein. Of the 47 parcels sold between 1864 and 1916, 13 parcels were business properties located in the downtown section of the city of Detroit. These 13 parcels were sold on the following dates: July 16, 1866; May 1, 1872; March 27, 1875; December 15, 1882; December 9, 1885; January 10, 1889; December 20, 1890; August 21, 1895; November 1, 1896; July 12, 1902; April 14, 1905; July 5, 1911; March 18, 1912. The relative size and importance of these parcels of real estate with reference to each other*1017 or with respect to the 6 parcels transferred to the trust herein are not shown by the record.
In September 1920 Josepha W. Douglas was 59 years of age, was in ill health, and shortly thereafter became a semi-invalid. She resided in Colorado and had one child. She died in March 1938. Gershom Mott Williams was 62 years of age, and was suffering from angina pectoris. He resided in Annapolis, Maryland, but spent a greater part of the summers in Europe. He died in Paris in 1923. He had seven children. Maie H. Williams was over 50 years of age and resided in Washington, D.C., where she owned extensive real property. Her three daughters likewise resided out of Detroit and also had children.
For some time prior to September 1920 the properties devised by Thomas Williams and Mary W. McKinstry to Gershom Mott Williams, Josepha W. Douglas, and John R. Williams had been managed by successive law firms acting informally as agents for the heirs. Some of the heirs became dissatisfied with the informal manner in which the properties were being handled, and Maie H. Williams and Juliette Leiter and her husband, Joseph Leiter, went to Detroit to discuss the matter with the two attorneys, *1018 Luther S. Trowbridge and Edwin C. Lewis, who were acting as managing agents. Joseph Leiter, who acted as spokesman and to some extent also spoke for other members of the family, expressed the feeling that the properties should be handled in a more formal manner and the attorneys should be given formal authority. The John R. Williams branch of the family desired to facilitate liquidation and some concern was expressed over legal complications which might arise in the event any *617 of the older heirs died leaving minor children or testamentary trusts. They felt that such complications might delay liquidation of the properties or even hinder the making of suitable leases. Most of the negotiations were carried on between Joseph Leiter and Edwin C. Lewis, and as a result of the discussions the Williams trust agreement was prepared and executed as previously stated.
Of the seven parcels of real estate conveyed to the corporate trustee under the trust agreement herein, four were properties devised by Thomas Williams to his children, Gershom Mott Williams, Josepha W. Douglas, and John R. Williams, two were properties devised to these same individuals by Mary W. McKinstry, and*1019 the seventh property was a small parcel purchased in 1912 by the said three individuals in order to round out the block in which parcel No. 2 was located, upon the belief that such purchase would facilitate the sale of the latter. At the time the trust was created the seven parcels conveyed to it were free of lien or mortgage indebtedness. All seven parcels were improved and located in downtown Detroit. Following is a descriptive summary thereof:
| Use of floors | |||||
| Type of | Parcel | Location | Floors | First | Upper |
| building | number | ||||
| Mercantile | 1 | 27 East Jefferson | 4 | Retail | Storage. |
| Do | 2 | Woodward and Jefferson. | Theatre and retail | Poor condition. | |
| Do | 3 | 2026 Woodward | 2 | Dime Savings Bank | Dime Savings Bank. |
| Do | 4 | 2100 Woodward | 2 | Retail | |
| Do | 5 | 2218-22 Woodward | 2 | do | |
| Do | 6 | 1403 Woodward | 6 | One occupancy (S. S. Kresge Co.) | One occupancy (S. S. Kresge Co.). |
| Dock properties. | 7 | Facing Detroit River | 2 | Freight (White Star Line). | Offices (White Star Line). |
Parcel No. 1 was in somewhat of a wholesale district and, though relatively unimportant when considered with the other parcels, the annual rents increased from $3,000*1020 for 1921 to $6,000 for 1929. Thereafter the rents dropped to as low as $750.38 in 1933 and during part of 1932 the property was unoccupied.
Parcel No. 2 was a large piece of property located on Woodward Avenue in a portion of the best retail district in Detroit. It was known as the Avenue Theatre property and was one of the two most valuable parcels transferred in trust. It was under lease to the Woodward Jefferson Realty Co. for a term of 99 years, at a rental of $4,166.56 per month, or $49,999.92 per year, for the first 20 years of the term, which began May 1, 1916. The expiration date was April 30, 2015.
Parcel No. 3 had a frontage of only 48 feet, but was so situated that it was an important part of the trust estate. For 1921, the first full year after transfer to the trust, it produced rents in the amount *618 of $6,999.96. Thereafter the rents increased steadily to $20,000 per year in 1930. They continued at the same rate through 1932 and into 1933 when the tenant, the Dime Savings Bank, failed. The property was vacant during the remainder of the year.
Parcel No. 4 was small but well located. For 1921 the rents on this parcel amounted to $3,499.92. For*1021 1925 through 1928 it produced $9,999.96 per annum; for 1929, $11,666.60; and for 1930 and 1931, $12,499.92 per annum. For 1932 the rents were reduced to $10,416.61 and for 1933 the total amount received was $6,458.68.
Parcel No. 5 had a frontage of 50 feet, but was out of the retail district and was therefore of lessor importance. It was rented on a net basis for the years 1921 and 1922, at annual rentals of $12,343.41 and $6,099.84, respectively. Thereafter it was rented on a gross basis. For 1923 the rent was $5,400; for 1924, $11,600; for 1925, $12,000, at which figure it remained through 1929. For 1930, 1931, 1932, and 1933 the amounts received were $4,500, $3,100, $2,700, and $1,428.13, respectively.
Parcel No. 6 ranked with parcel No. 2 in importance. It was under lease to the S. S. Kresge Co. for a period of 30 years from May 1, 1920, at a rental of $5,000 per month, or $60,000 per year. The lease was on a net basis and the rental continued at the same figure throughout the entire period from the creation of the trust through 1933.
Parcel No. 7, referred to as the White Star Dock properties, was situated along the water front and extended for approximately a*1022 block. It was occupied by the White Star Line, a Michigan corporation, and at the time of its conveyance to the trust herein was under option to that company for a price of $150,000.
With the exception of leases on parcel No. 1 for 1929 through 1933, parcel No. 4 for 1933, and parcel No. 5 for 1923 through 1933, the leases on the above properties contained provisions requiring the tenants to pay all or part of the taxes, insurance, and other items of expense necessary for the maintenance and upkeep of the properties.
The law firm of Trowbridge & Lewis had been managing the properties of the Williams family for some time prior to the execution of the trust agreement, and thereafter they served as managing trustees under the trust. The duties performed by them before and after the execution of the trust instrument were comparable. Lewis was suceeded as trustee on September 29, 1924, by John B. Williams, a son of Gershom Mott Williams, and Trowbridge was succeeded as trustee on April 20, 1925, by Renville Wheat. Williams and Wheat have continued as managing trustees up to the present time. Williams took care of the management details personally until 1929, when the J. B. Williams*1023 Co., a property managing corporation organized and operated by Williams, was employed to take over such *619 duties. As compensation for its services that company receives a collection fee of 5 percent. Wheat handles the legal matters connected with the management of the trust. The Security Trust Co., the corporate trustee, was merged with the Detroit Trust Co. in 1929 to form the Detroit & Security Trust Co. The name of the merged company was later changed to the Detroit Trust Co. It has continued to act as corporate trustee.
Since the execution of the trust agreement in 1920, the trust has maintained no offices, had no telephone, and kept no minutes. No formal meetings have been held and, beyond the substitution of John B. Williams and Renville Wheat as managing trustees for Trowbridge and Lewis, no officers have been elected.
The principal activities of the managing trustees have been the depositing of rent checks, distributing the proceeds to the beneficiaries, supervising repairs, and making leases. It was the policy of the trustees to make net leases when possible because such leases required less activity on their part. During the period from the inception*1024 of the trust to the close of 1933, the trustees executed approximately twenty-one leases and approximately seven extension and rental reduction agreements. Of the leases executed approximately five were net leases which required the tenant to pay all taxes, insurance premiums, and repairs and alterations to the interior and the exterior of the buildings, etc.; approximately three were gross leases which required the petitioner to take care of such items of expense; and the remainder can not be strictly classified as net or gross leases, since such items of expense were divided between petitioner and lessee.
In 1920 a $300,000 mortgage was placed on parcel No. 6 to provide the executors of the estate of John R. Williams with funds to pay death taxes. Of that sum the trustees distributed $188,000 to the executors of the John R. Williams estate and $30,000 to Gershom Mott Williams for personal use, and used the balance to pay indebtedness incurred on the properties prior to the formation of the trust. In 1924 another mortgage for $200,000 was placed on parcel No. 6 and the entire amount so procured was turned over to the executors of Gershom Mott Williams to pay death taxes. In*1025 1926 the trust had on hand sufficient funds to pay off the two mortgages, but since they had approximately three years to run the mortgagee refused to take payment in full. The trustees invested these funds in one, two, and three-year bonds, some of which were redeemed while others were defaulted. In 1935 the balances due on the mortgages were $135,000 and $37,500, respectively.
Parcel No. 7 was sold in 1921 to the White Star Line for a consideration of $150,000, pursuant to the terms of a contract made prior to the formation of the trust herein, The proceeds from this sale *620 were applied in part to reduce the mortgage which had been placed on parcel No. 6 by the trustees late in 1920 to accommodate the estate of John R. Williams as above described. The proceeds not so used were distributed to the beneficiaries of the trust. Parcel No. 2 was sold in 1926 for $1,200,000. The proceeds from the sale of parcel No. 2 were divided into three parts, one part to Josepha W. Douglas, one to the estate of Gershom Mott Williams, and the third to the estate of Johm R. Williams. In making distribution the trustees withheld the amounts owed by the estates of Gershom Mott Williams*1026 and John R. Williams in respect of the mortgages previously described.
The trustees have taken no active or affirmative steps toward the sale of the trust properties. Because of the size of the properties the market therefor is limited, and, since the commissions upon the sale of such properties would be substantial in amount, it has been their opinion that the real estate operators would not overlook any reasonable opportunity to make such a sale. It has further been their opinion that the advertising of the properties for sale would tend to reduce the prices that might be obtained instead of aiding in their disposition.
About the time the Williams trust was created the question of widening Woodward Avenue, one of the principal streets of Detroit, was being considered and discussed by various civic groups. All during the 1920's and up through the taxable years this matter was in such a state of indecision that persons owning footage on that avenue were reluctant to erect new buildings and the market for such property was adversely affected. The widening of the avenue was not completed until 1936. Parcels 3, 4, and 5 are located on Woodward Avenue within the sidened area. *1027 The real estate depression in Detroit, which started in the late 1920's, adversely affected the market for all of the properties belonging to the trust.
The beneficiaries of the John R. Williams estate desired to liquidate their interests in the trust at a faster rate than was being accomplished, and at or shortly after the date on which the Avenue Theatre property was sold their interests in the trust were acquired by Josepha W. Douglas and the estate of Gershom Mott Williams in equal parts. The proceeds from the sale of the Avenue Theatre property were utilized in this transaction. At the time the trust was created on September 22, 1920, trustees' receipts in the amount of one-third each had been issued to Josepha W. Douglas, Gershom Mott Williams, and the estate of Johm R. Williams. Gershom Mott Williams died in 1923 and on July 18, 1924, a trustees' receipt covering his interest was issued to John B. Williams and the Security Trust Co., trustees under his will. On November 4, 1926, trustees' receipts were issued to Josepha W. Douglas and the estate of *621 Gershom Mott Williams for interests of one-sixth each to reflect the acquisition of the one-third interest previously*1028 owned by the estate of John R. Williams.
From 1920 to the close of 1933 the total operating receipts of the trust were $1,661,465.65, of which amount $1,541,946.31 represented rentals, $26,228.19 represented taxes collected from net lease tenants, and $93,291.15 was interest received on mortgages, bonds, bank balances, notes, and accounts receivable. During this same period the total disbursements were $347,022.90, leaving an excess of receipts over disbursements in the sum of $1,314,422.75 prior to distributions to holders of trustees' receipts. The disbursements consisted of real estate taxes paid, $106,123.63; insurance, $11,234.48; repairs, $3,630.06; interest, $100,606.73; appraisals and commissions to real estate agents, $25,888.70; legal expenses, $5,582.83; miscellaneous fees and expenses, $8,806.29; trustees' fees, $85,150.18.
On its financial statement dated December 31, 1932, the Williams trust listed assets in the aggregate amount of $2,012,133.88, consisting of cash, $9,100.90; accounts receivable, bonds, loans receivable, and mortgages receivable of a total amount of $212,649; and real estate in the amount of $1,790,383.98. Its liabilities, exclusive of the outstanding*1029 beneficial interests shown in the amount of $1,796,943.38, consisted of a reserve for depreciation in the amount of $13,317.25, mortgages payable in the amount of $172,500, and surplus in the amount of $29,373.25. Its revenues for the year 1932 were shown as $94,893.57, while the expenses shown totaled $29,950.91, leaving an excess of revenues over expenses in the amount of $64,942.66. On the financial statement of the trust for December 31, 1933, assets were shown totaling $2,039,531.94, consisting of cash in the amount of $22,967.03; cash in closed banks, $10,513.01; accounts receivable, bonds, and loans receivable, $158,967.92; real estate, $1,790,383.98; and stocks, $56,700. Its liabilities, exclusive of the outstanding beneficial interests shown in the amount of $1,796,943.38, consisted of accounts and mortgages payable, $172,828.80; reserve for depreciation, $15,980.70; and surplus, $53,779.06. Its revenues for 1933 were shown in the amount of $72,568.34, while the list of expenditures totaled $19,762.50, leaving an excess of revenues over expenses for the year 1933 in the amount of $52,805.81.
Facts relating to the filing of the returns, payment of the deficiencies herein, *1030 and added depreciation have been stipulated by the parties and are found as stipulated.
OPINION.
TURNER: That some trusts are of such nature as to require their classification as associations and hence as corporations within the meaning of the revenue acts (in the instant case, section 1111(a)(2) *622 of the Revenue Act of 1932) 1 is well settled. ; ; ; ; ; ; . Due, however, to the great variety of trusts, the dissimilarities in their purposes and operations, and the many variations in the powers of the trustees and the rights of the beneficiaries, it is at times difficult to distinguish between trusts which, as associations, are taxable as corporations and ordinary trusts dealt with under the statutory heading of estates and trusts. *1031
Noting as an impossibility the translation of "the statutory concept of an 'association' into the particularity of detail that would fix the status of every sort of enterprise or organization", the Supreme Court, in , after reviewing its prior decisions on the subject and after discussing the development and trend of rulings and regulations seeking to apply these decisions to cases arising from time to time, declared that the recurrent disputes emphasized "the need of a further examination of the Congressional intent". The Court then proceeded to pronounce certain principles which may be applied in determining whether or not a trust is an association and therefore a corporation within the meaning of the statute. The Court said in part:
What, then, are the salient features of a trust - when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains - which may be regarded as making it analogous to a corporate organization? *1032 A corporation, as an entity, holds the title to the property embarked in the corporate undertaking. Trustees, as a continuing body with provision for succession, may afford a corresponding advantage during the existence of the trust. Corporate organization furnishes the opportunity for a centralized management through representatives of the members of the corporation. The designation of trustees, who are charged with the conduct of an enterprise, who act "in much the same manner as directors", may provide a similar scheme, with corresponding effectiveness. Whether the trustees are named in the trust instrument with power to select successors, so as to constitute a self-perpetuating body, or are selected by, or with the advice of, those beneficially interested in the undertaking, centralization of management analogous to that of corporate activities may be achieved. An enterprise carried on by means of a trust may be secure from termination or interruption by the death of owners of beneficial interests and in this respect their interests are distinguished from those of partners and are akin to the interests of members of a corporation. And the trust type of organization facilitates, *1033 as does corporate organization, the transfer of beneficial interests without *623 affecting the continuity of the enterprise, and also the introduction of large numbers of participants. The trust method also permits the limitation of the personal liability of participants to the property embarked in the undertaking.
With respect to the form of its organization, its methods of operation, the rights of beneficiaries in the trust and its properties, the powers of the trustees, and the relationship of the trust and its beneficiaries to third parties, there can be no doubt that the Williams trust meets the above test of an association. The legal title to the real estate is vested solely in the corporate trustee and the rights of the beneficiaries are declared to be personal. The beneficiaries have no right of possession, management, or control of the trust estate and no widow, widower, heir, or devisee of any beneficiary has any right of dower, homestead, inheritance, or partition in the trust properties. The rights are solely against and through the trustees and do not constitute a claim, title, or interest in the properties themselves. Suits are to be brought and defended*1034 in the name of the trust and the beneficiaries are not necessary parties. The beneficial interests are represented by trustees' receipts which may be sold and transferred without termination of the trust and the existence of the trust is not affected by the death of any beneficiary. Neither the trustees nor the beneficiaries are personally liable for any money borrowed or for any other debt or liability of the trust and all persons dealing with the trust are required to look only to the property of the trust for the payment of their claims. Subject to the control of the beneficiaries through a majority vote, or a two-thirds vote on certain matters, the trustees, similar to the directors of a corporation, have the authority and power to do and perform any and all acts necessary in the management and operation of the properties belonging to the trust. The divorcement of the properties, their management, and operation from the beneficiaries is as well defined and distinct as if the properties had been transferred to any standard business corporation. And while it is not essential to the classification of a trust as an association that the beneficiaries have control over the trust*1035 comparable to that of stockholders over a corporation, , and , such comparable control is present in the instant case. Among other things the beneficiaries have the right, by a two-thirds vote, to remove and elect trustees. The property of the trust may not be sold and leases for periods of more than 25 years may not be entered into except with the consent of the majority in amount of the registered trustees receipts outstanding. It is also provided that the beneficiaries, by a tow-thirds vote, may terminate the trust.
In stating "the salient features of a trust * * * which may be regarded as making it analogous to a corporate organization" and *624 which formed the basis for the comparisons just concluded, it is noted that the Court assumed a trust "created and maintained as a medium for the carrying on of a business enterprise and sharing in its gains." Previously in its opinion the Court, in discussing the characteristics of an association as distinguished from an ordinary trust, had said: "But the nature and purpose of the co-operative undertaking will differentiate*1036 it from an ordinary trust. In what are called 'business trusts' the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains." On the thought there expressed the petitioner rests its principal argument, which is that the Williams trust is not a trust organized "to provide a medium for the conduct of a business" and the sharing by the beneficiaries in its gains, but rather that it is a trust of the "traditional type" organized "to hold and conserve" the trust properties and to effect the sale thereof.
With this contention of the petitioner we are unable to agree. If, for instance, the beneficiaries herein had elected to organize a statutory corporation and to transfer the properties to it for purposes and functions similar to those of the Williams trust, there is little or no likelihood that it could be successfully contended that such a corporation, in owning, managing, leasing, and even selling the said properties, was not a business corporation engaged in business activities for profit. The only substantial difference between such a case and*1037 the instant case would be that on the one hand the functions were performed by an organization existing under statute, while on the other, by an organization of substantially the same form but existing under common law. Neither is it at all likely that the petitioner, with respect to a claim for the deduction of its operating expenses, would concede or argue that those expenses were not paid or incurred in the carrying on of a trade or business.
We are unable to conclude, as we did in , that the trust was organized for the "single purpose of liquidation." Nor does the trust instrument herein contain any declaration of a purpose to liquidate or sell the trust properties such as was present in . Furthermore in that case there was an absence of operation for profit such as we have in the instant case. That same obvious distinction exists between the instant case and , a case strongly relied upon by petitioner.
Looking to the trust instrument for the purposes of organization, *1038 as we are directed to do by the Supreme Court in , and ,*625 we find no specific expression of purposes, but from examination of the powers and duties of the trustees it appears that the trust was to own, manage, operate, and lease the properties transferred to it, to pay all expenses incidental to such operations, and to distribute the gains derived from such activities to the beneficiaries at specified intervals, or, at the discretion of the trustees, oftener. The petitioner argues, however, that the inclusion in the trust instrument of a provision to the effect that the proceeds from the sale of any parcel of real estate were to be distributed to the beneficiaries and the omission of any provision authorizing reinvestment were tantamount to the declaration of a dominant purpose to sell the property. In our opinion, no such conclusion is indicated.
It may well be that the parties creating the trust did not desire the operations to extend beyond the management of the specific properties conveyed to the trust, but that fact alone does not change or alter*1039 the intent to own and operate the properties for profit unless and until they should be sold. Provision may be made for the termination of a corporation or association if, as, and when the property of such corporation or association is sold, but such provision is not, in our opinion, sufficient ground for the conclusion that liquidation or sale of the properties of the particular corporation or association was the dominant purpose for its organization. In , the operation was limited to a single property which the trustees had the power to sell. Furthermore it was provided that the trust might be terminated by such sale. There is no indication in the report of the case of any power in the trustees to reinvest the proceeds of such sale, and yet the Supreme Court held the trust to be an association. In , we have found nothing to indicate a power in the trustees to reinvest the proceeds from the sale of the trust property, but to the contrary the statement of powers and duties of the trustees indicates that the proceeds from such a sale were to be distributed. *1040 The trust instrument in , as in the instant case, required distribution of the proceeds from the sale of trust property and there appears to have been no power to reinvest. Similarly, in , there appears to have been no specific power to reinvest the proceeds from the sale of the trust property, and yet at the time of its transfer to trust the said property was under option to sell. In each of the cases cited the organization in question was held to be an association.
In our opinion the facts of record indicate that the desire to unify and simplify the ownership and management of the properties for profit furnished the primary and dominant motive for the creation of the trust rather than the desire to sell or liquidate the properties. *626 The properties conveyed in trust obviously had a value of three million dollars or more and were producing for the trustors a substantial annual revenue. The management of the properties through an agent was becoming more complicated and increasingly difficult. John R. Williams had died the previous year, leaving*1041 his widow and three daughters to share in his estate, none of whom resided in Detroit. The daughters were married and had children of their own. Josepha W. Douglas, who resided in Colorado, was 59 years of age and in ill health. She had one child. Gershom Mott Williams, who had seven children, was 62 years of age and was suffering from angina pectoris. According to the record he spent all of his time away from Detroit. His death occurred in 1923. It is at once apparent therefore that centralized ownership and control of the properties were equally if not more essential and desirable to their continued operations for profit than for the purpose of effecting their sale.
The record does contain some testimony tending to show an expectation that the properties transferred to petitioner should ultimately be sold. There is also some testimony to the effect that the John R. Williams beneficiaries desired to speed liquidation of the properties, which desire played its part in the creation of the trust. It also appears, however, that these same beneficiaries desired that the activities relating to the management and leasing of the properties be conducted in a more formal manner*1042 than had been the case up to that time. They felt that the divorcement of actual ownership and management of the properties from the beneficiaries by transfer to such a trust would not only facilitate conveyance in the case of sale, but would also facilitate the management and leasing of the properties. it is not without significance that the speedier liquidation of the interests of the John R. Williams beneficiaries was accomplished as a result of the organization of the Williams trust but without the sale of more than two of the parcels of real estate transferred in trust, and, further, without interference with the continued activities of the trust in holding, managing, and leasing the remaining properties and in distributing the income derived therefrom to the remaining holders of trustees' receipts. We do not overlook the fact that two of the seven parcels of real estate were sold after conveyance to petitioner, but it should be noted that one parcel was under option of sale when the trust was created (in this connection see *1043 ), and the circumstances and occasion for the sale of the second parcel do not, so far as the record shows, indicate anything of particular significance unless it is that the sale provided the means for the John R. Williams beneficiaries to more speedily liquidate their interests in the trust without interfering with its continued existence as owner and manager of the remaining properties.
*627 As an indication that the trust was never intended to serve any purpose other than that of holding and conserving the particular properties pending their sale, the petitioner points also to its policy of making net leases whenever possible so as to minimize its work. In that connection we do not understand that it necessarily follows that activities regularly carried on do not constitute the conduct of a business merely because the party in charge of the enterprise has through a particular method of operation been able to reduce those activities to a minimum. We are rather of the opinion that it is the nature and effect of the activities when related to the subject matter, due regard being given to the circumstances, *1044 which determine the question as to the conduct of a business. Furthermore only a minority of the leases negotiated in this instance were in a strict sense net leases, while the majority were either gross leases or had some features of a gross lease. In , the trust was determined to be an association, and yet it owned one parcel of property and that parcel was under a long term net lease. A similar situation existed in
The petitioner also regards as significant the fact that six of the seven parcels conveyed to it in 1920 were all that remained of some 126 descriptive units, or 57 parcels, of real estate devised to Josepha W. Douglas, Gershom Mott Williams, and John R. Williams in 1862 and 1876, all other parcels having been sold prior to 1920. Petitioner stresses the fact that 13 of the parcels sold were also located in the downtown section of the city of Detroit. The last of the said 13 parcels was sold in 1912. As we have indicated in our facts, the relative size and importance of the parcels sold with reference to each other or with reference to the parcels*1045 transferred in trust are not shown, and, in the light of other facts of record, we can not conclude that the sale of the 13 parcels and the other parcels sold necessarily has any bearing on the motive for transferring the remaining parcels in trust in 1920.
That the owning, managing, and leasing of properties for gain was of major and not minor importance is further indicated by the results of those operations as disclosed by the statement of operating cash receipts and disbursements. Although the evidence of record does not disclose the relative importance of the seven parcels of real estate transferred in trust in dollars and cents, it does appear that parcel No. 2 and parcel No. 6 were the major properties and were of approximately equal importance, while parcel No. 1 and parcel No. 5 were of the least importance. Parcel No. 2 was sold in 1926 for $1,200,000. Parcel No. 7 was sold in 1921, in accordance with the option existing prior to the creation of the trust, for $150,000. Taking into consideration the prices at which these properties were *628 sold as some indication of the value of the respective parcels, the rent derived from the leasing of the properties over*1046 the period of years from September 1920, when the trust was created, through the taxable year 1933 was not insignificant. The excess of receipts over disbursements amounted to $1,214,442.75, and this even though parcel No. 2, which had been second in the production of income, was sold in 1926.
In explanation of the fact that five of the seven parcels have not been sold but are still maintained as rental properties, the petitioner cffered testimony to the effect that the market for certain of these properties was adversely affected throughout the period from its organization to 1936 by the agitation over the widening of Woodward Avenue, and from the late 1920's on by the general depressed state of the Detroit real estate market. We note, however, that in spite of these depressing factors the trustees, in keeping with the powers given to them and in the performance of their duties as prescribed by the trust instrument, succeeded in maintaining the properties as income-producing properties from the inception of the trust in September 1920 throughout the taxable years 1932 and 1933, which are before us. It is also noticeable that, except for the one or two years when the general*1047 business depression was most pronounced, the trustees succeeded in procuring substantially increased rents on practically every parcel of real estate it owned. According to the testimony of Williams, one of the managing trustees, parcels No. 1 and No. 5 were relatively unimportant, but even so, the rent on parcel No. 1 ranged from $3,000 net in 1921 to $6,000 under a gross lease for 1929, while on parcel No. 5 the rent was $12,343.41 for 1921, $6,099.84 for 1922, and from $5,400 to $12,000 per annum for 1923 through 1929, although the rents were substantially reduced on both properties for the years 1930 through 1933. In the case of parcel No. 3 the rents increased during the period from 1921 through 1932 from $6,999.96 to $20,000.04, and continued at the latter rate until the lessee became insolvent in 1933. In the case of parcel No. 4 the rents increased from $3,499.92 in 1921 to as high as $12,499.92 in 1931. Thereafter, even though the lease did not expire until April 30, 1934, the rents were reduced to $10,416.61 in 1932 and to $6,458.68 for 1933. For parcel No. 6 the rents were maintained throughout the entire period at $60,000 per year as provided by a long term lease with*1048 S. S. Kresge Co. The production of income through the ownership and leasing of the properties was obviously of major importance.
It is our opinion therefore that the facts in this case definitely show that a primary objective in the organization of the Williams trust was the unified and simplified ownership and management of its properties for the purpose of producing profits, and, since it was *629 organized and operated in much the same manner as a corporation, it is an association within the meaning of section 1111(a)(2) of the Revenue Act of 1932. The fact that the properties may be, or might have been, sold if a favorable market had developed or should develop, thereby resulting in the dissolution of petitioner, does not alter the nature of the organization nor the character of its operations prior to such termination or dissolution.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 1111. DEFINITIONS.
(a) When used in this Act -
* * *
(2) The term "corporation" includes associations, joint-stock companies, and insurance companies. ↩