*199 Decision will be entered under Rule 50.
Trust formed to hold property on behalf of former corporate shareholders pending discharge of mortgage liability thereon held, on facts, not conducting business and hence not taxable as a corporation so as to result in realization of capital gain by beneficiary upon termination of trust.
*372 Respondent determined deficiencies in income taxes and 5 per cent negligence penalty against petitioner as follows:
| Year | Income tax | Negligence penalty |
| 1943 | $ 264.48 | -0- |
| 1944 | 14,922.92 | $ 746.15 |
Respondent's determination for the year 1943 is not in dispute. Certain adjustments in the year 1944 are also uncontested. The issues to be decided are: (1) Whether a trust of which petitioner was trustee and a beneficiary was an association taxable as a corporation, and if so, whether there was a liquidation of that trust in the year 1944 within the meaning of section 115 (c), Internal Revenue Code, when petitioner purchased the last of the other outstanding beneficial interests and obtained a court order dissolving*200 the trust, so as to make petitioner taxable on a capital gain resulting from such liquidation; and (2) whether petitioner is also liable for a 5 per cent negligence penalty.
*373 The parties have stipulated the net capital gain realized if the trust was an association taxable as a corporation and such association was liquidated in 1944.
FINDINGS OF FACT.
Petitioner is an individual residing in Oak Hill, Volusia County, Florida. He filed individual income tax returns for the years 1943 and 1944 with the collector for the district of Florida.
On or about May 25, 1921, petitioner and a group of men who were living in the vicinity of Evansville, Indiana, organized the Fullerton Groves Corporation, a Florida corporation. The initial stock of the corporation was issued for citrus groves, which several of them owned in Volusia County, and for cash. Petitioner contributed both money and land in groves.
From the time of its organization until late in 1934 the corporation operated as follows: Petitioner managed its grove. He employed a foreman for the corporation, and had machinery and men employed to do the work on the grove. Annual stockholders' meetings and directors' meetings *201 were held at Evansville, Indiana.
During the summer of 1934, the corporation was in a precarious financial position. It needed to borrow money in order to meet its obligations and to continue operating. The corporation was unable to borrow the necessary funds. Finally the Federal Land Bank of Columbia, South Carolina, advised petitioner that, although the land bank would not lend money to the Fullerton Groves Corporation, the bank would consider the application of petitioner, as an individual, for a loan if the corporation would liquidate and convey its property to him.
Petitioner called a stockholders' meeting in Evansville, Indiana, to consider the problem and at that meeting, held September 25, 1934, the stockholders passed the following resolution:
WHEREAS, Fullerton Groves Corporation is indebted to Oak Hill Citrus Groves Association in a principal sum of approximately Seventy-five Hundred Dollars ($ 7500.00), which indebtedness is secured by a mortgage on the real estate of said company, which real estate is situate in Volusia County, in the State of Florida; and is also indebted to the Growers' Loan and Guaranty Company, of Tampa, Florida in the principal sum of approximately*202 Twenty-five Hundred Dollars ($ 2500.00), which indebtedness is also secured by a second mortgage on the real estate hereinabove referred to; and is also indebted for other obligations in a sum substantially Eight Thousand Dollars ($ 8000.00), and all of which indebtedness above set out is either due or will mature within the next six (6) months, and
WHEREAS, the company desires to refund said indebtedness and also to provide additional working capital for its enterprises, which under certain circumstances can be obtained at a lower rate of interest and can be matured over a longer period of time by means of a loan through the Federal Land Bank or some similar governmental agency, and
*374 WHEREAS, it is the sense of the stockholders of this corporation that the title to the company's property be conveyed and that thereupon this corporation should be dissolved in accordance with the applicable statutes:
NOW, THEREFORE, BE IT RESOLVED that the officers and directors of this corporation be and they are hereby authorized and directed to enter into all necessary negotiations and to do and perform all matters and things, sign, execute, acknowledge and deliver all papers, acquittances, *203 conveyances and other documents that may be proper, legal, necessary and required, whereby, in their discretion all the property of this corporation may be conveyed unto George I. Fullerton of New Smyrna, Florida upon such terms and conditions as may be hereafter agreed upon between the said George I. Fullerton, as grantee, and this corporation, acting by and through its officers and directors, as grantor.
AND BE IT FURTHER RESOLVED that if conveyance is made of said property unto said George I. Fullerton, the officers and directors of this corporation be and they are hereby further authorized, empowered and directed, in their discretion, to accept and receipt from him either in part or in full, payment therefor trust certificates or other evidences of equitable or legal ownership in and to the property to be conveyed to him.
AND BE IT FURTHER RESOLVED that thereupon the directors and officers of this corporation be and they are hereby authorized, empowered and directed to take all necessary steps and to do and perform all necessary things in their discretion in order to legally dissolve this corporation.
Pursuant to the foregoing authorization, the corporation, by warranty deed dated*204 December 4, 1934, conveyed all its real estate to petitioner, and by bill of sale of the same date sold to him all the equipment, machinery, and other personal property which the corporation owned.
A separate instrument of consent to such conveyances was then executed by all stockholders of the corporation under date of December 28, 1934, to comply with Florida law. That instrument is duly recorded in the public records of Volusia County, Florida. The State of Florida consented of record to the transfers or distribution. At no time did petitioner issue any certificates to the others who owned interests with him in the property. The shareholders of the corporation retained their stock certificates as evidence of their interests in the grove.
The distribution was made because the corporation could not operate successfully, and the stockholders were trying to save the grove property for themselves. Neither the stockholders nor the directors ever met after the assets were transferred to petitioner in 1934. Nor did the corporation ever function; it was forgotten.
The distribution which the Fullerton Groves Corporation thus made of its assets in December 1934, was a distribution in*205 complete liquidation of the corporation. Thereafter it had no assets and was a mere empty shell. On December 12, 1938, the corporation was formally dissolved by the State of Florida for failure to pay its corporation capital stock tax.
*375 Following liquidation of the Fullerton Groves Corporation, petitioner discharged the foreman and the men whom the corporation had employed and changed the method of operating the grove property. Instead of operating it with men under his supervision, petitioner, as grower, entered into a members crop agreement with the Oak Hill Citrus Growers Association. The Oak Hill Citrus Growers Association is a co-operative growers association of about 40 members with about 900 acres in groves.
Petitioner's first members crop agreement with the Oak Hill Citrus Growers Association is dated June 1, 1935, and was entered into at about the beginning of what is called the season in the fruit business. It was to continue for a period of 10 years, with privilege reserved to the grower to cancel under certain conditions. The agreement of June 1, 1935, granted the association the exclusive right and authority to pick, haul, handle, grade, wash, size, process, *206 can, pack, ship, sell, and market all the citrus fruits and the products thereof grown or controlled by grower on the grower's land, as described.
On July 20, 1936, the petitioner entered into a supplementary agreement with the Oak Hill Citrus Growers Association. This agreement recites that an application for the loan at the Federal Land Bank at Columbia, South Carolina, has been made and that the groves covered by the original agreement will be security for this loan. The supplementary agreement further provides that receipts from the sale of the crop shall be applied on the loan rather than turned over to petitioner as provided in the original agreement. Under the new agreement the association had the exclusive management of all the citrus groves situated on the property and it was covenanted that the association would
(b) * * * supervise the operation, maintenance, cultivation and care of said citrus groves in a husband-like manner, and will finance all work, fertilization, drainage and protection of said groves, and the marketing and selling of all the citrus fruit grown on the said property;
(c) * * * receive all gross receipts and returns from the sale of said citrus crops*207 and promptly disburse the proceeds received from the sale of said fruit [in a stipulated order of priority, the last of which was];
* * * *
(5) The remainder shall be paid to the Grower at the end of each shipping season;
* * * *
Under the latter agreement the Oak Hill Citrus Growers Association has complete control of the physical operation of the grove.Following the transfer of title to the assets to him, petitioner was not the beneficial owner of the entire interest in those assets. Some fourteen or fifteen other persons who were stockholders of the corporation at the time of the conveyances had an undivided interest with him in all the property, both real and personal.
*376 On September 28, 1936, petitioner executed a declaration of trust in respect to the corporate property on behalf of the stockholders of the corporation. Petitioner alone signed it. The preliminary and recital clauses of petitioner's instrument set forth the bare facts of the transfers of assets to petitioner on December 4, 1934, and stated that the transferred assets were the property of the corporate shareholders in proportion to their corporate interests, subject only to the mortgage liens*208 of the Federal Land Bank and the Land Bank Commissioner. It further declared that apart from the equitable interest owned by petitioner by virtue of his own stockholdings, he owned no other equitable interest in the assets and stood seized of legal title therein solely as trustee for all stockholders. The instrument gave to petitioner full "supervision, management and control" of the property
until such time as the mortgages hereinbefore mentioned executed by the said Geo. I. Fullerton unto The Federal Land Bank of Columbia and or the Land Bank Commissioner shall have been fully paid off and discharged. That after the above mentioned loans shall have been fully paid and discharged he does hereby promise, covenant and agree with each and every of the said beneficiaries hereinbefore named separately and severally that he will at any time thereafter upon the proper written request of any or all of said beneficiaries at their respective cost and expense by good issuance and conveyance at law convey and issue unto each of said beneficiaries all of the interest held in trust in said real estate and personal property unto such other person or persons as they shall nominate and appoint.
*209 The beneficiaries were not to insist on conveyance of the property until the mortgages were discharged. Petitioner agreed to render an annual accounting of his operations and to turn over to the beneficiaries any net operating profits remaining after deducting payments on the mortgage, operating expenses, and his remuneration as trustee.
The Oak Hill Citrus Growers Association cared for the grove here involved during the years which followed execution of the declaration of trust. That co-operative cultivated the grove, fertilized it, picked, hauled, and marketed the fruit. Petitioner just saw that it was done. Upon selling the fruit and getting paid, the co-operative took out the expenses incurred for cultivating, fertilizing, and everything else it had done for the grove and paid over the balance.
The books of the old Fullerton Groves Corporation, including its stock book and its minute book, were always kept in Evansville, Indiana. Originally B. L. Kruckemeyer was the corporation's secretary, and then in the latter years up to 1934, Dave Cohn served in that capacity. Cohn was secretary up to the time of dissolution and liquidation of the corporation in 1934. After 1934, *210 petitioner never saw the books which the corporation had kept in Indiana. All the old officers of the corporation, except petitioner, are now dead. The old books in Indiana burned in what was called the Main Street fire, *377 in Evansville, occurring some time during the 1940's. Petitioner kept a daybook or notebook. The only detailed records on the Fullerton groves after the liquidation of the corporation in December 1934, were kept by the Oak Hill Citrus Growers Association. The co-operative kept a careful account with each grower and charged and credited each grower with all items applicable to that grower.
Some time in 1938, an internal revenue agent interviewed petitioner. Some correspondence ensued in which petitioner was asked to send him a copy of his declaration of trust, and on September 19, 1938, he wrote the internal revenue agent-in-charge in Jacksonville, Florida, enclosing and transmitting a copy of the instrument.
Under date of September 21, 1938, the internal revenue agent-in-charge, Jacksonville, Florida, replied to petitioner's letter dated September 19, 1938, that
[based] on the trust instrument mentioned above and Regulations 94 dealing with the Revenue*211 Act of 1936, this trust is being taxed herewith as a corporation
and asserted a deficiency in tax of $ 871.73 for the period beginning January 1, 1937, and ending June 30, 1937. Petitioner did not contest this action. He filed corporate income and excess profits tax returns for the taxable years ended June 30, 1942, June 30, 1943, and June 30, 1944.
The corporation return for the taxable year ended June 30, 1942, disclosed a net income of $ 425.02 upon which an income tax of $ 89.25 was paid.
The corporation return for the taxable year ended June 30, 1943, disclosed a net income of $ 1,775.83 upon which an income tax of $ 443.95 was paid.
The corporation return for the taxable year ended June 30, 1944, disclosed a net income of $ 9,042.03 upon which an income tax of $ 2,313.87 was paid.
After he received the letter from the internal revenue agent-in-charge, petitioner paid the corporate income tax because he thought that it was cheaper to pay the tax than it was to attempt to litigate a matter of that kind. He also filed Form 1120 Federal income tax returns for subsequent years because of that letter. The Bureau of Internal Revenue kept insisting that petitioner's activity was*212 an association, and in his opinion the tax for those years was so small he could not afford to litigate the issue. Meanwhile, the operation at the grove continued in the same way under petitioner's agreement with Oak Hill Citrus Growers Association.
From time to time petitioner personally, and in his own right, bought the interests of other former stockholders of the dissolved Fullerton Groves Corporation in the assets which had been transferred and conveyed to him in the corporate liquidation of December 1934. *378 Petitioner got deeds from all such other coowners which were then duly recorded in the public records of Volusia County, Florida. Thus petitioner came into ownership of an undivided 100 per cent interest in and to all of the property, with improvements thereon. The interest of each coowner, save one, was purchased prior to the year 1944. Petitioner obtained the last quitclaim deed on May 18, 1944, paying $ 12,512.50 for it.
Petitioner acquired by deed the interests of the other beneficiaries between December 22, 1942, and May 18, 1944. Five original beneficiaries listed in the declaration of trust dated September 28, 1936, transferred their interests either *213 during their lifetimes or at death to the parties from whom those interests were acquired by petitioner. Petitioner was not informed of these transfers when made.
On July 3, 1944, some weeks after he had bought out the last of the other interest owners and had received quitclaim deeds from them, petitioner filed a petition in the Circuit Court in and for Volusia County, Florida, reciting that he was the owner by deeds of conveyance of all interests of the others and asking an order decreeing that the trust be terminated, extinguished, and dissolved as of June 30, 1944, and that he be discharged as trustee.
On July 10, 1944, the court entered an order dissolving the trust and discharging petitioner as trustee as of June 30, 1944.
Petitioner petitioned the Circuit Court because he considered that his recorded declaration of September 28, 1936, clouded his title and it should be removed by the court.
In his return for the year 1944 petitioner reported neither profit nor loss upon entry of the order of the Circuit Court of Volusia County, Florida, on July 10, 1944.
Fullerton Groves, with petitioner as trustee, was not formed or operated primarily for the purpose of engaging in business*214 so as to be taxable as a corporation.
Part of the deficiency for the year 1944 was due to negligence.
OPINION.
Before it may be determined that an association is taxable as a corporation we must first find that the purpose was to carry on business under the guise of a trust. 1 Where the operation *379 is undertaken either as a liquidating process or "to hold and conserve particular property with incidental powers as in the traditional type of trusts," Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344, it has been held that the business aspects are lacking.
It seems *215 to us evident from the facts that the present trust was but a step in the liquidation of the Fullerton Groves Corporation. In order to preserve the property for ultimate distribution to the stockholders it was necessary to obtain a mortgage which could not be done by the corporation. The corporation's orange groves were accordingly conveyed to petitioner as trustee for the former stockholders for the purpose of obtaining the mortgage and of holding the property while the mortgage remained in existence. As respondent states "he [petitioner] is given the entire supervision, management and control of the property only so long as the mortgages to the Federal Land Bank are outstanding. Then the trust instrument provides that Fullerton must reconvey to the beneficial owners."
It matters little whether we say the trust was but an instrument for the liquidation of the corporation, Frederick Pitzman et al., Trustees, 36 B. T. A. 81; Broadway-Brompton Buildings Liquidation Trust, 34 B. T. A. 1089; Myers v. Commissioner, (C. A. 7) 89 F. 2d 86; see Estate of Jacques Ferber, 22 T. C. 261;*216 Garrett v. United States, (Ct. Cl.) 120 F. Supp. 193">120 F. Supp. 193; or that it was created to hold and conserve specific property "with incidental powers." In neither event would the supervisory activities of petitioner and his distribution of the trust income to the beneficiaries constitute the carrying on of a business. A. A. Lewis & Co. v. Commissioner, 301 U.S. 385">301 U.S. 385; Chase National Bank, Trustee, 41 B. T. A. 430, affd. (C. A. 2) 122 F.2d 540">122 F. 2d 540. It accordingly becomes unnecessary to determine whether other characteristics of the corporate form under the classic Morrissey tests were present. Nor need we determine whether what took place in the instant year was a liquidation, except to observe that, since in respondent's view the trust was liquidated in the tax year before us, it cannot be said as it was in Morrissey, supra, that "The powers conferred on the trustees continued and could be exercised for such activities as the instrument authorized." We conclude on the essentially factual issue, Keating-Snyder Trust v. Commissioner, (C. A. 5) 126 F. 2d 860,*217 that the trust was not taxable as a corporation.
We cannot, however, escape the view that the negligence penalty for the year 1944 was properly applied. Petitioner may have been entitled to omit any reference to any liquidation of the trust but in *380 addition he appears to have entirely neglected to include in his income a part of the compensation as trustee which he unquestionably received. No effort is made to excuse this omission or to explain it. Under the circumstances we see no alternative but to sustain the negligence penalty, Thomas J. Avery, 11 B. T. A. 958, "although of course the amount will be modified in accordance with the modified deficiency." Gibbs & Hudson, Inc., 35 B. T. A. 205, 211.
Decision will be entered under Rule 50.
Footnotes
1. While the ultimate issue is whether petitioner received taxable capital gains upon liquidation of the trust, the parties discuss only the taxability of the trust as a corporation apparently on the assumption that this would necessarily require the taxation of its beneficiary on any distribution in liquidation of the trust corpus as if he were a corporate stockholder, and we shall correspondingly limit our consideration.↩