*2189 Held, that the petitioners constituted an "association" taxable as a corporation under the Revenue Act of 1924. J. W. Pritchett et al., Trustees for Hillsboro Court Syndicate,17 B.T.A. 1056">17 B.T.A. 1056.
*1072 This is a proceeding for the redetermination of a deficiency in income tax for the period June 1 to December 31, 1925, in the amount of $1,395.48, and penalty for failure to file return in the amount of $348.87.
The sole issue is whether the Memorial Apartment Hotel Syndicate is a trust, taxable only as such, or whether it is an association, taxable as a corporation.
FINDINGS OF FACT.
The petitioners are trustees for the Memorial Apartment Hotel Syndicate, with their principal office at Nashville, Tenn.Said syndicate was organized pursuant to the following agreement:
MEMORIAL APARTMENT HOTEL SYNDICATE AGREEMENT.
(1) J. W. Pritchett, Geo. G. Thomas and John A. Pritchett, partners under the style and firm name of Pritchett-Thomas Company, and engaged in business, Struve Building, Huntsville, *2190 Alabama, are the owners of a certain tract or parcel of land in Davidson County, Tennessee, particularly described as follows:
(Technical description of property omitted.)
(2) Said Pritchett-Thomas Company agree to organize a Syndicate or Trust, to be known as "MEMORIAL APARTMENT HOTEL SYNDICATE" with an authorized capital of $990,000.00 divided into 4950 shares of $100.00 each, to be known as "Preferred Certificates," and 4950 shares of $100.00 each, to be known as "Common Certificates," to be disposed of as hereinafter set forth, provided, however, that "Preferred Certificates" shall only be issued in such manner and amount as when added to the amount of a loan authorized in Section 7 hereof, (if such loan shall be made) shall aggregate the total of $495,000.00. And provided further that said "Common Certificates" shall not be issued in any amount, except as and when "Preferred Certificates" are issued, and then not to a greater extent or greater in amount than the face value of the issued and outstanding "Preferred Certificates."
(3) The objects and purposes of those becoming interested in, said Trust, are to acquire interests, according to their respective investments, *2191 in the rents, issues and profits accruing from said above described lot and the buildings and improvements to be erected thereon, title to all of which shall be vested in trust, in J. W. Pritchett, Geo. G. Thomas and John A. Pritchett, as Trustees, and their successors and assigns, and said Trust shall be fixed on the proceeds of any sale or conversion of said property, by said Trustees. The improvements to be erected on said lot will consist of a modern apartment hotel according to the plans and specifications of Asmus & Clark, Architects, Stahlman Building, Nashville, Tennessee, to be built by some reliable contractor or contractors, to be bonded in some reliable Bonding Company, to insure the faithful performance of all the requirements of the contract for the erection of said building and in accordance with the plans and specifications of said Architects and under supervision of said Architects, and said Trustees.
(4) Said Trustees shall give active attention to the making of all contracts for the erection and equipment of said buildings and improvements on said lot, and shall use due diligence in requiring and securing full and faithful performance of all obligations on the*2192 part of any and all contractors in connection *1073 with said work. Said Trustees alone are empowered to make any changes in plans and specifications of said Architects, which, in their judgment, are for the best interest of the certificate holders, or beneficiaries. Upon the completion of said improvements, said Trustees shall have full control of the operation and management of said property, including the renting and leasing of all apartments in said building and collecting the rents therefor. For securing tenants, collecting rents, and giving active supervision to the management and control of said property and all matters appertaining thereto, said Trustees shall receive the usual commission of 5% charged for such services by Real Estate Agents in Huntsville, Alabama, where this contract shall be deemed to be executed.
All contracts, obligations, and other written instruments, including lease contracts executed by said Trustees, shall be in the name of said Trustees. Said Trustees alone are fully empowered to employ any and all agents and employees which may be necessary in the operation and management of said property, and fix their compensation or wages, and to*2193 discharge same; to employ and compensate legal counsel whenever in the opinion of said Trustees, it is necessary for their guidance or the protection of the property and interests under their management and control, and to do all other things, which in their judgment may be necessary to carry out the objects and purposes of this trust.
(5) Said preferred certificates shall be signed by the Trustees, and shall be dated on the day of issuance, and be due and payable on or before the first day of December, 1940. Said certificates shall bear interest at the rate of 6% per annum from date of purchase until the first day of December, 1925, and from and after that date until the date of maturity, or prior retirement of same, shall bear interest at the rate of 8% per annum, payable semi-annually, and the first semi-annual payment of interest shall be due and payable on the first day of June, 1926, and thereafter, at periods of six months, until the maturity or retirement of same. Said Preferred Certificates shall be sold at their par or face value, for cash or on such terms as to payment as said Trustees may, in each case, fix or determine.
Said preferred certificates may be called*2194 in and paid by said Trustees at any time, after one year, from date of same, whenever in the judgment of said Trustees, a sufficient among has accumulated in the sinking fund, (provided for in section 10 hereof) to justify such retirement, and in event any certificate is so called and retired, the holder of same shall receive a premium of $5.00, therefor making $105.00 for every $100.00 par value of same, provided, however, that said Trustees, may at any time when in their judgment said sinking fund so justifies, retire any such Preferred Certificate, on application of the holder of same, at not more than face value and accrued interest.
(6) Said preferred certificates shall constitute a first charge against the total net income arising from the conduct and operation of said lot and all improvements thereon, and from the proceeds arising from any sale or conversion of said property.
(7) In event the proceeds arising from the sale of said preferred certificates are not sufficient to complete and equip said building and improvements on said lot, then said Trustees are fully empowered to make a building loan upon said lot and improvements, for such length of time as said Trustees*2195 may deem desirable, but the amount of money so borrowed shall not exceed or be greater than, the difference between the aggregate face value of said preferred certificates, issued or sold, and the sum of $495,000.00, and said Trustees are further fully empowered to make, execute and deliver to the persons loaning said money, the notes or other obligations of said Trustees, bearing interest at a *1074 rate not greater than 8% per annum, and to secure same by deed of trust, mortgage, or other instrument required by the person or persons so advancing or loaning said money, conveying the real property herein described. Said Trustees are empowered to pay out of the money so borrowed any commissions or brokerage required in making said loan.
(8) Said Common Certificates in an amount equal to the par value of the Preferred Certificates sold and disposed of, shall be issued by said Trustees to Pritchett-Thomas Company as compensation (in addition to the 10% hereinafter provided for in Section 12) for services rendered and to be rendered by said Pritchett-Thomas Company in the promotion, organization, erection and equipment of said apartment building and improvements on said lot, *2196 and said Certificates shall not represent any interest in said lot and building; shall not bear interest and shall not participate in the profits or earnings resulting from the conduct and operation of said property, until after all of said Preferred Certificates have been paid off in full and cancelled, after which they shall be entitled proportionately to all the net earnings and profits of said building and improvements, and to share proportionately, in the proceeds arising from the sale or conversion of said property.
(9) Said Pritchett-Thomas Company will give to the original purchasers or holders of preferred certificates, a common certificate, or certificates equal in face value to one-half the face value of such preferred certificate, or certificates, so held.
(10) The entire rents or income arising from the operation of said apartment hotel and improvements upon said lot, after the payment of all fixed charges, including insurance, repairs, taxes, and assessments, interest and payments on any loan or loans, brokerage on loans, or renewals of same and operating expenses, shall be applied to the payment of interest accruing upon said preferred certificates and the balance*2197 remaining shall be placed in a sinking fund to be held by the Trustees, and used solely by them for the purpose of retiring said preferred certificates at maturity or prior thereto, as hereinbefore provided.
(11) Said Pritchett-Thomas Company (and the individuals composing same) will, when the preferred certificates to the aggregate face value of $100,000.00 have been issued or sold, convey said lot hereinbefore described to J. W. Pritchett, Geo. G. Thomas and John A. Pritchett, Trustees, to have and to hold the same in trust, subject to the terms, provisions and conditions of this instrument, and said conveyers will accept in payment therefor, preferred certificates in the aggregate amount, or face value of $50,000.00.
(12) For services rendered in selling and disposing of said Preferred Certificates, said Pritchett-Thomas Company will deduct, as compensation, 10% of the total cost of said lot and the building and improvements thereon.
(13) At any time after two years from the date hereof, said Trustees are hereby fully empowered to organize and convert said Syndicate or Trust into a corporation, if in their judgment the best interests of said certificate holders so require; *2198 said corporation to be organized with an authorized capital in such sum as said Trustees may determine based upon a fair valuation of the Trust property, to be divided into shares of common stock of the par value of $100.00 per share, to which corporation all property and assets then held in trust under this instrument, by said Trustees shall be conveyed. In the organization of said corporation said Trustees are fully empowered to associate with themselves two or more other certificate holders to act as Incorporators in securing a charter for said corporation.
*1075 All certificate holders hereby agree and bind themselves, their heirs, representatives and assigns, to accept and receive from said corporation its capital stock, securities or other obligations, in proportion to their then certificate holdings: provided, that the holders of preferred certificates are required to receive and accept bonds or other obligations of said corporation, equal in face value to said preferred certificates so held, bearing interest at the rate of 8% per annum, if such rate of interest then be lawful, if not, then the lawful rate of interest, secured by a lien upon said lot and improvements*2199 thereon, but subject to prior liens, if any, and said holders of common certificates bind themselves, their heirs, representatives and assigns to take and receive in proportion to their then holdings of such common certificates, and in exchange therefor, all common stock of said corporation, which it may issue, in exchange for, or on account of the property and assets conveyed by said Trustees to said corporation.
In the event said corporation, as hereinbefore provided for, shall be organized, and a bond issue is made to take up or replace said unpaid preferred certificates, the period for which said bonds, shall run, or at which they shall mature, shall be determined by the proper authorities or officers of said corporation, under provisions of law applicable, provided, said bonds shall not be issued for a period longer than twenty years; Provided further that said corporation in issuing said bonds shall make provision for their retirement before maturity, at any time after three years from the date of issuance of same, at not more than $105.00 for every $100.00 represented by said bonds, with the further power on the part of said corporation to suspend any further interest*2200 payments on said bonds after the date fixed in said call for their retirement.
(14) The Huntsville Bank & Trust Company of Huntsville, Alabama, or some other Bank or Trust Company is Huntsville, alabama, or Nashville, Tennessee, shall be chosen by said Trustees, as depository for all funds of the Syndicate, which can only be drawn out or expended on the joint check of not less than two of said Trustees.
(15) Said Trustees shall give bond, in a reliable Bonding or Surety Company, authorized to do business in Alabama or Tennessee, in the sum of $15,000.00 for the faithful performance of their duties and obligations as Trustees under the terms and provisions of this agreement, which bond shall cover the period of one year from the date hereof, during which period it is contemplated that all contracts for the erection of said building and improvements shall be made and said improvements completed, but after said first year and the completion of said building said bond shall be in the sum of $5,000.00 with like conditions, and all funds of the Trust, until otherwise determined, shall be subject alone to the control and disbursement of said Trustees. The premium on such bond or bonds*2201 shall be paid out of said trust fund by said Trustees, and charged as a part of the operating expenses.
(16) The Trust created by this instrument shall terminate on the first day of December, 1940, unless before that date the same may have been terminated by the organization of a corporation, as hereinbefore provided, or unless said Trustees may have sold and conveyed said property, as they are hereby fully empowered to do, whenever in their judgment a sale of said property will be for the the best interests of all certificate holders, Provided, however, no such sale shall be made for less than the sum of Five Hundred Fifty Thousand ($550,000.00) Dollars; Provided further that such sum is the then fair market value of said property. And in event of such sale, said Trustees shall have the power, to sell said property at public or private sale, as they may deem best, and convey same, by deed duly executed by them, to the purchaser, without joinder of any beneficiary, and they may make such sale for cash, or *1076 upon such terms as to cash and deferred payments as they may deem proper, without obligation on the part of the purchaser as to the investment, or re-investment*2202 or disposition of the proceeds arising therefrom. In event of any such sale, prior to the time fixed for the duration or termination of this trust, as hereinafter provided, the proceeds arising therefrom shall be distributed, by said Trustees, to those in interest in the same mode and manner, and to the same extent, as if such sale had been made upon the termination of said trust, on the first day of December, 1940. If, however, this trust shall not have been terminated, as hereinbefore provided, on or before the first day of December, 1940, then, and in such event said Trustees are fully empowered to sell said property at public or private sale, upon such terms as they may deem best, with full power and authority on the part of said Trustees, to make. executed and deliver a deed to the purchaser, without the joinder of any beneficiary, and apply the proceeds arising from said sale, FIRST, To the payment of any expense necessary to such sale; SECOND, To the retirement of any and all outstanding Preferred Certificates, at not more than par varue; and THIRD, To the holders of Common Certificates in proportion to their then holdings.
(17) As soon as Preferred Certificates of the*2203 aggregate face value of $100,000.00 have been sold or issued, a contract or contracts, will be let for said building by said Trustees. Said Trustees shall also have the power to enforce this agreement either by suit in their names as Trustees, against each of said Preferred Certificate purchasers or holders, or by forfeiture as liquidated damages, of all payments made by such certificate purchaser or holder, in default, and may deprive the same of any right to participate in the benefits of this Trust.
In the event Preferred Certificates to the aggregate face value of $100,000.00 shall not be sold or disposed of on or before the 1st day of July, 1924, then said Trustees shall return to said preferred certificate holders the full amount paid by them for or on account of said preferred certificates.
(18) It is further understood, without which understanding this instrument would not be signed, that no holder of any certificate, either Preferred or Common, shall in any way be individually or personally liable for any act, contract or obligation of said Trustees in the operation, control, maintenance and final sale or disposition of said property, as hereinbefore provided for, or*2204 for any act, conduct, contract or obligation of any other Certificate holder, and shall only have an interest in the net income from said property during its operation and management by said Trustees, and in the proceeds arising from any sale or disposition of same, as hereinbefore provided for.
All contractors, creditors and other persons dealing with said Trustees shall look alone to the funds and property held by them in trust under the terms of this instrument, and all contracts made by said Trustees shall contain a provision to this effect.
(19) In all matters to be passed upon or determined by said Trustees the decision of the majority shall be conclusive and binding upon all, and the action of the majority of said Trustees in consequence or pursuance of such decisions shall be deemed and considered the act of all of said Trustees.
(20) In event a vacancy should occur in the office of any of the Trustees by death or resignation, or in event any of said Trustees should otherwise become incapable of acting, or should fail or refuse to act when action under the provisions of the foregoing instrument is necessary, then a majority of said Trustees may fill such vacacies or*2205 may elect a successor to such Trustee.
Said Trustees shall keep books showing the condition of the business and their transactions and dealings affecting the Trust property.
*1077 (21) The purchasers or holders of certificates may assign the same, subject to the terms and provisions of this instrument, and said Trustees will record said transfer and issue to said Transferee or Transferees, a new certificate or certificates, in lieu of the certificate, or certificates, so assigned, marking said certificate so assigned as cancelled, and pasting same on the original stub in the book from which it was taken.
(22) The death of any certificate holder shall not oeprate to terminate or otherwise disturb or interfere with the terms and provisions of this Trust Agreement, and shall not entitle his legal representative to any accounting.
(23) It is understood and agreed that this instrument constitutes the entire contract and agreement between the parties in interest, or those who may become such, and no agent, representative or other person shall have any authority whatsoever to add to, take from, or vary or alter the same.
The land referred to in the foregoing instrument*2206 was conveyed to the petitioners herein by deed dated January 18, 1924. Said deed contained, among other things, the following provisions:
TO HAVE AND TO HOLD said tract or parcel of land with the appurtenances, estate, title and interest thereto belonging to the said J. W. Pritchett, George G. Thomas and John A. Pritchett, Trustee, their successors in trust and assigns forever with full authority and power hereby expressly granted to and vested in said Trustee to manage and control said property according to the terms and provisions of a paper writing entitled Memorial Apartment Hotel Syndicate Agreement; entered into between Pritchett Thomas Company a partnership composed of J. W. Pritchett, George G. Thomas and John A. Pritchett, and other persons signing said agreement and becoming interested in said Syndicate.
Reference is here made to said Memorial Apartment Hotel Syndicate Agreement a copy of which is herewith delivered to said trustees for their control and guidance and in pursuance of which said agreement this conveyance in trust is made to said Trustees.
The petitioners hold the property above mentioned as trustees for 142 certificate holders. The authority of the*2207 trustees is confined to the ownership and operation of the one apartment house, known as the Memorial Apartment Hotel, under the syndicate agreement. The trustees hold no regular meetings, and do not keep any minutes of their proceedings. They hold no official positions in said syndicate, but are equal in rank. The trustees do not exercise or undertake to exercise any function or power other than as granted by the syndicate agreement.
The certificate holders do not exercise any control over or participate in the management of the said apartment hotel, and have never held a meeting since the organization of the syndicate.
The trustees made all contracts in connection with building the apartment house, employed the architect, adopted plans, selected the contractors, executed all necessary contracts, and selected the materials; and after the completion of the building, they fixed the amount of rent, passed upon the desirability of tenants, rented the apartments, and generally managed and operated the property. The *1078 trustees have never consulted the certificate holders in regard to these matters. The certificate holders do not associate together as such, and in general*2208 do not know who all the certificate holders are. The trustees never make any report to the certificate holders, who have never directly or indirectly had any voice in the management of the affairs of the said syndicate. The Memorial Apartment Hotel Syndicate has no connection with any other syndicate. It is a complete entity, owning and operating for profit the one apartment hotel hereinabove referred to.
The individual certificate holders personally paid income tax on the income received by them from said syndicate.
OPINION.
TRAMMELL: The respondent determined a deficiency against the Memorial Apartment Hotel Syndicate for the period June 1 to December 31, 1925, and asserted a 25 per cent penalty for failure to file a return. There is no complaint respecting the correctness of the respondent's computations of tax and penalty, but the question is whether said syndicate is an "association" taxable as a corporation, under the provisions of the Revenue Act of 1924, as determined by the respondent, or whether it is a trust and taxable only as such, as contended by the petitioners.
The same question was before us in *2209 , decided this date, wherein we held that since the syndicate, acting through its trustees, was actively engaged in carrying on a business enterprise for profit, it constituted an "association" taxable as a corporation, under the provisions of the statute. Our decision in the Hillsboro Court Syndicate case is controlling here. Accordingly, the determination of the respondent is approved.
Judgment will be entered for the respondent.