*149 Decision will be entered under Rule 50.
A trust created for the purpose of operating a screw products manufacturing business, of which the grantor's five sons were the trustees and the beneficiaries, held an association taxable as a corporation.
*71 The respondent determined deficiencies in petitioner's income tax, declared value excess profits tax, and excess profits tax for the years 1942, 1943, and 1944, as follows:
| Declared | |||
| Year | Income tax | value | Excess profits |
| excess profits | tax | ||
| tax | |||
| 1942 | $ 1,329.28 | $ 890.55 | |
| 1943 | $ 2,285.77 | 107,938.24 | |
| 1944 | 230.17 | 110,049.43 | |
| Total | 1,329.28 | 2,515.94 | 218,878.22 |
*72 The sole question for our determination is whether the petitioner is an association taxable as a corporation. Should that question be decided affirmatively, the parties have stipulated the amounts deductible as compensation for officers and the excess profits tax credit to be used in recomputing the petitioner's tax liability.
FINDINGS OF FACT.
The petitioner was created*150 under a deed of trust dated September 17, 1924, executed by Richard G. Berry, Sr., hereinafter referred to as the grantor. Fiduciary returns for the years involved were filed with the collector of internal revenue for the eleventh district of Ohio. The respondent rejected the fiduciary returns, holding that the petitioner is taxable as a corporation and should have filed corporate returns on Form 1120.
The petitioner operates a bolt and nut factory at Columbus, Ohio. The business was founded by the grantor about 1881. Soon thereafter he was joined by his brother and together they operated the business for a number of years as a partnership under the name of Berry Brothers. In 1913 the brother withdrew and thereafter the business was operated by the grantor as a sole proprietorship until 1924. In that year the grantor retired and transferred the business to his 5 sons under the trust deed referred to above. The eldest of the sons was then about 36 years of age and the youngest about 26. They had all grown up in the business and were familiar with all phases of the work. All of them were then working full time. They drew no salaries or fixed compensation for their services. *151 From time to time the grantor made them gifts of considerable value.
The three older sons had been in control of the business since about 1915. In that year the grantor retired from active management. He retained ownership of the business and made occasional visits to the plant.
It was the grantor's lifelong intention to have his sons succeed him in the business and continue to operate it jointly. However, there was considerable dissension among them over policies and management. The eldest son, Paul, left the business in 1920 or 1921, but the grantor persuaded him to return, promising him a part ownership interest.
By the trust deed of September 17, 1924, the grantor transferred to his five sons, as trustees, the real estate and other assets pertaining to the Berry Brothers business upon the following terms and conditions:
First: The grantees, as Trustees hereunder, in their collective capacity, shall be designated, so far as practicable, as the Berry Brothers Trust. They shall own, control, operate and manage said property, works, plant and business until the expiration of the period provided for in this Instrument.
*73 The Trust hereby created shall not terminate or *152 be held to have terminated upon any theory of merger based upon the fact that the same persons are by the terms of this instrument made sole beneficiaries and sole trustees of said Trust; and said grantees are each expressly given the right and privilege to participate in said property and business, and the profits, dividends, earnings and increase thereof, without regard to the relation as Trustee which each grantee may bear to said Trust.
Second: Said grantees, as such Trustees, may adopt such rules and regulations, not inconsistent with the terms of this instrument, as may seem to them just, proper and desirable for the conduct and management of the affairs of the Trust and of said business.
Third: Each of the five several interests of said grantees shall be evidenced by a certificate, which they shall cause to be printed, and which shall be in the form hereinafter set forth, which shall be alienable and transferable. The holder of each thereof shall be entitled to one-fifth of all dividends which shall be declared and paid from the net profits arising from the operation of the business, at the end of each quarter yearly period next following the creation of this Trust.
No beneficial*153 interest could be sold or otherwise disposed of without the consent of a majority of the trustees or without first having been offered to the trustees. The instrument contained a form of certificate of interest and also a form of transfer. The certificate reads, in part, as follows:
This certifies that is the owner of one of the five shares of the Berry Brothers Trust, of Columbus, Ohio, and is held subject to the provisions of the Deed of Trust, executed on the day of September, 1924, by Richard G. Berry, and recorded in Deed Book , pp. , in the office of the Recorder of Franklin County, Ohio.
This certificate is alienable and transferable, and represents a full one-fifth interest in the property and business of said Trust, and entitles the owner and holder, at all times, to one-fifth of all net profits and dividends that may be declared and paid thereby.
The trustees were not to be liable for losses except that they were required to restore impairments of capital due either to mistakes of management or certain casualties. The death of a shareholder was not to terminate the trust or to entitle the deceased's representatives to an accounting, but such*154 representatives or heirs would succeed to the rights of the deceased without any interruption of business. No successor in interest, whether by transfer or inheritance, was to be entitled to participate in the management of the business. The survivors of the original trustees were to continue as the trustees until the termination of the trust. The trust was to continue until only one of the original trustees survived. At that time the business was to be liquidated and the assets distributed among the parties entitled to receive them. In the meantime, however, the trustees by unanimous vote could liquidate and dispose of the business or convert it to corporate form.
The sons were all twenty-one years of age at the time the trust deed was executed. They are all still living and there has never been any change in the trustees or beneficiaries. There has been some dissension *74 among the brothers. In 1941 the youngest brother, Urban, brought suit in the Court of Common Pleas of Franklin County, Ohio, against the other brothers for an accounting and for recovery of his full one-fifth share of the profits of the business. Some of those profits had been withheld from him by*155 the other trustees. The court entered a decision in which it found "that the trust here under consideration is a continuing and subsisting trust." The court ruled that the four other brothers during the years in which they had operated the business without any assistance from Urban were entitled to remuneration for their services as trustees before distribution of the distributable profits in which Urban was entitled to share equally with them under the trust agreement. The sons later agreed upon the amounts of such compensation and the suit was settled out of court. Urban withdrew from active participation in the business before the close of 1931, and since that time it has been operated by the four other brothers without any substantial change in policy or management.
No certificates of interest such as were provided for in the trust deed were ever issued. The business has always been carried on in an informal manner with all of the active trustees participating and performing various services. The eldest son, Paul, keeps the ledger, the only permanent record kept, and is the only person authorized to draw checks on the firm's bank account. Another of the sons looks after *156 production and sees that orders are properly filled. All of them make sales from time to time and perform various other duties jointly. There are about sixty regular employees.
The trustees have never held regular meetings, elected officers, or formally agreed upon any division of their duties as trustees or their services. They have never drawn regular salaries, but each year they have divided the petitioner's earnings among themselves. The earnings were large in some of the years, amounting to over $ 215,000 in 1929, the peak year. In one of the other years the withdrawals amounted to only $ 1,500 for each of the trustees. There have never been any distributions of assets or impairments of capital.
On the whole, the petitioner's business has been highly profitable. The machinery and equipment have been kept in repair and petitioner's products have always been acceptable in competitive trade. There have been no extensive improvements or additions to the plant since 1924.
In 1929 there were some negotiations for sale of the business, but that did not materialize. The trustees put a tentative sale price of about $ 2,000,000 on the business at that time. Since that time no *157 steps have been taken and no efforts made to sell or otherwise dispose of the business.
Under protest, the petitioner filed corporate income tax returns on Form 1120 for the years 1925 to 1941, inclusive. For 1942, 1943, *75 and 1944, it filed fiduciary returns. There was attached to the 1942 return the following statement, signed "Berry Brothers Trust, by Paul F. Berry, Member":
We are filing herewith the 1942 Income Tax Return for Berry Brothers Trust.
You will note that we are filing it on a Fiduciary form for the reason that we contend and have always contended that we are a strict trust and taxable as such. There has been contention back and forth concerning our exact status and we therefore request an early hearing and determination so that this matter may be properly settled once and for all.
The balance sheet attached to the 1929 return (there were no balance sheets in the earlier returns) shows total assets of $ 149,030.51 at the close of the year and a surplus of $ 148,722.75. The petitioner's total assets, as shown by its books at the close of 1941, amounted to $ 417,924.32, and at December 31, 1944, they amounted to $ 468,341.31. The 1944 balance sheet shows, *158 at the close of the year, an investment of $ 155,288.01 and a surplus of $ 170,692.76.
The fiduciary returns filed for 1942, 1943, and 1944, show the following amounts of distributable income:
| 1942 | 1943 | 1944 | |
| Paul F. Berry | $ 20,000.00 | $ 40,000.00 | $ 40,000.00 |
| Girard F. Berry | 20,000.00 | 40,000.00 | 40,000.00 |
| Edward A. Berry | 20,000.00 | 40,000.00 | 40,000.00 |
| Richard G. Berry, Jr | 20,000.00 | 40,000.00 | 40,000.00 |
| Urban J. Berry | 11,359.55 | 30,106.40 | 30,250.00 |
| Total | 91,359.55 | 190,106.40 | 190,250.00 |
The respondent determined that the petitioner was an association taxable as a corporation in each of the taxable years, and in computing taxable income he made allowance for compensation for the trustees. In this proceeding the parties have stipulated that, if it should be determined that the petitioner is an association taxable as a corporation, the compensation allowed to each of the four older brothers, Paul, Girard, Edward, and Richard, is $ 20,000 in 1942 and $ 32,500 in 1943 and 1944, and that Urban, the young brother, is entitled to $ 5,000 in each taxable year. Those amounts exceed the amounts allowed in the deficiency notice by $ 5,000 in 1942 and $ 55,000 in*159 each of the years 1943 and 1944.
The petitioner was an association taxable as a corporation in each of the years 1942, 1943, and 1944.
OPINION.
The only question for our consideration is whether the petitioner is an association taxable as a corporation. The petitioner contends in its brief that it is not an association, but is a liquidating *76 trust, "the primary and sole purpose of which is to liquidate the corpus at the proper time and to conserve it in the interim." The petitioner further contends in its brief that the only business in which the trustees engaged was purely incidental to their main function of conserving the trust property until it was time to sell.
The evidence of record falls far short of supporting these contentions. To the contrary, it shows that the grantor's purpose in establishing the trust was to provide a means by which his five sons might continue to operate the business for their joint lives as a family enterprise. The grantor chose the trust form upon the advice of his attorney and as the best means of carrying out that purpose. There was no specific direction in the trust deed for liquidating or disposing of the business at any particular *160 time. On the other hand, the trust deed provided that the grantees were to own, control, operate, and manage the properties and business until only one of the five of them survived. The business could be terminated and disposed of sooner by their unanimous consent. There is no evidence that the grantor had any intention whatever of providing for liquidation of the business as long as more than one of the grantees survived. Paul testified that it was always his idea to sell the business at an opportune time. Under the trust deed, however, he had no power to sell except with the consent of all the other grantees. The evidence permits of no other conclusion than that the petitioner was intended to and did operate as a going business rather than as a liquidating trust.
The purpose of the trust must be determined from the trust deed itself. ; . The Supreme Court said in the Morrissey case that:
* * * In what are called "business trusts" the object is not to hold and conserve particular property, *161 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. * * *
Certainly there is nothing in the trust deed to indicate that its purpose was to conserve the trusteed assets rather than to enable the trustees to carry on a regular business for profit.
There is no question either but that the trustees acted together in carrying on the business for profit, as they were intended to do, thus giving the petitioner the essential characteristics of an association taxable as a corporation.
In , the court said:
Many of the indicia of the business trust as referred to by the Supreme Court in the Morrissey case, 296 U.S. at page 359, 56 S. Ct. 289, 80 L. Ed. 263, are present. The trustee holds the title to the property "embarked" in the enterprise. The *77 trustee as a continuing trustee affords uninterrupted management of the property. Management is centralized in the trust and continuity remains uninterrupted except by the death of the last surviving beneficiary*162 or the termination of the lease. The transfer of beneficial interests to minor children of the beneficiaries is contemplated. The liability of the trustee is limited expressly to the property in its hands.
* * * *
The trustee possesses the broad powers necessary to carry on a business for profit. For example, with the consent of a majority in interest of the beneficiaries it may borrow money to construct a building upon the premises and sell at public or private sale the whole or any part of the real estate. It is our opinion that these powers transcend those of a trustee under a traditional trust. The broad powers conferred upon the trustee by the indenture were not exercised, but we think this to be immaterial. Such powers may be exercised by the trustee if necessary. We conclude that the trust is a business trust and the trustee is engaged on behalf of the beneficiaries in the handling of their real estate for profit. In short, the trustee is doing precisely that which the Marshall Land Company, a business corporation, did, and the beneficiaries associated themselves in the trust to that end.
See also ;*163 certiorari denied, .
Although in its organization the petitioner lacks some of the common characteristics of a corporation, it can not for that reason escape classification as an association. In determining this question the purpose and actual operations are of more importance than form. ; .
The petitioner is unlike an ordinary partnership in several important respects. In the first place, there was no intention on the part of any of the parties to form a partnership or to conduct a business as a partnership. The participants did not voluntarily join together, but were brought together as trustees and grantees under their father's trust deed. They contributed their services, but no assets. The fact that petitioner may be classified as a partnership under the laws of the State of Ohio is not controlling as to its status for Federal income tax purposes. .
We find no error in the*164 respondent's determination that during the taxable years 1942, 1943, and 1944, the petitioner was an association taxable as a corporation.
In the recomputation of petitioner's tax liability for the years involved, compensation for the services of the trustees will be allowed in accordance with the stipulation.
Decision will be entered under Rule 50.