*788 1. A syndicate, formed to acquire, develop, improve, manage and sell real estate, was by agreement of the subscribing members operated and controlled by petitioner and another as managers, with full power to buy and sell and handle its moneys and other assets as their own, and to make distributions of profits in their discretion. Held, that the syndicate is an association to be treated as a corporation for all purposes of the revenue Act.
2. The income of a syndicate, qualifying as a statutory association, is not taxable to its members until distribution has been made or accrued similar to the declaration of a dividend.
3. No part of a loss sustained by a syndicate, qualifying as a statutory association, is deductible by the syndicate members.
4. The earnings or profits of an association, when distributed to a member corporation, are to be regarded as an ordinary dividend, deductible by the recipient corporation under section 234(a)(6), Revenue Act of 1926.
5. The taxpayer acquired an interest in an association by a cash contribution under a contract providing that the amount of the contribution plus interest be first returned to it upon a distribution, by the*789 association. The taxpayer's share of the first distribution, which was less than the amount of the association's available earnings or profits, must be treated as an ordinary dividend under section 201(b), Revenue Acts of 1924 and 1926, regardless of the language of the contract.
6. The taxpayer was entitled to 25 percent of the total net profits of an association, upon the association's termination, as compensation for its services as manager. Held, no part of such compensation accrued as income in a year prior to termination.
7. The taxpayer's claim for a greater deduction of debts recoverable only in part, held, not sustained by the evidence.
*1170 The Commissioner determined the following deficiencies in petitioners' income taxes for 1925:
| Bing & Bing, Inc | $43,396.07 |
| Clark Henry Corporation | 1,504.91 |
*1171 The following deficiencies were determined for the period March 21 to December 31, 1925:
| Ashley Realty Corporation | $1,252.42 |
| 117 Corporation | 336.30 |
| 1980 Corporation | 362.49 |
| Salva Realty Corporation | 480.81 |
| 906 Corporation | 294.09 |
| 2311 Corporation | $282.19 |
| 840 Corporation | 409.29 |
| 5421 Corporation | 261.75 |
| Thirty Nine Realty Corporation | 336.15 |
*790 Deficiencies of $11,733.83, $17,934.68, and $46,194.33 were determined in the income taxes of Bing & Bing, Inc., for 1926, 1927, and 1928, respectively.
Petitioners assail the Commissioner's inclusion in income of any portion of the profits of a syndicate, contending that the syndicate was taxable as an association. Bing & Bing, Inc., contests the inclusion of an unpaid fee determined to be due it from the syndicate. It also contends that debts owed it by an insolvent corporation became partially worthless and are deductible in 1927 and 1928 to a greater extent than determined.
FINDINGS OF FACT.
1. Bing & Bing, Inc., a New York corporation, hereinafter called the petitioner, was a member and one of the managers of the Carbarn Syndicate. It paid $330,000 for an interest of 41 1/4 percent. This syndicate was the result of identical agreements, executed in 1924, between several subscribers, as parties of the first part, and petitioner and Realty Associates, a New York corporation, as parties of the second part, designated as the "Manager." It was formed for the purpose of buying a block of land in New York City, bounded by Sixth and Seventh Avenues and by Fiftieth and*791 Fifty-first Steets. The subscribers promised to contribute specified percentages of a fund, the amount of which was determinable by the managers and subject to change in their discretion. The subscription was payable upon the managers' demand, and the fund was to be used for:
* * * the purchase, ownership, sale, management, development, and/or exchange of said above described premises and/or improvement by construction of buildings or other structures on the said described premises and for the payment of any and all expenses, costs and other disbursements incident thereto, and for such other purposes as in the judgment of the Manager may be advisable.
The "Manager" was given full power:
* * * to borrow money and to manage, develop, improve, sell, exchange, convey, mortgage or lease, and to construct buildings and structures of all kinds upon all or any part of any property now or hereafter owned or controlled by the Syndicate without obtaining the approval of the members of *1172 the Syndicate or any of them. * * * this agreement shall give the Manager all the power and authority that it would have if it were the sole owner of the entire above described premises * *792 * *.
The "Manager" was also given complete charge of records and accounts and the custody and disbursement of the syndicate's funds. The agreements were to continue in force until terminated at the option of the "Manager", whereupon all the assets and profits of the syndicate were to be distributed. There might, however, in the discretion of the "Manager", be a partial distribution at any time prior to termination.
* * * At the time of such termination, the Manager in making distribution shall first be credited with its disbursements in connection with acquiring, selling, managing, operating, developing, and improving said premises. Thereafter, it shall return to each Syndicate member the amount actually paid in by each member of the Syndicate together with simple interest thereon at the rate of six per centum per annum. Thereafter, the Manager shall retain twenty-five per centum of the total net profits resulting from the operation of this agreement for the services rendered by it as Syndicate Manager, and without other charge or deduction except as aforesaid, the Manager shall pay over and distribute to the parties thereto, proportionately to their respective investments, *793 all other net assets, profits and other benefits owned by or accruing to said Syndicate.
The subscribers or their respective legal representatives, successors and assigns were subject to the obligations and entitled to the benefits ratably according to the amounts of their several subscriptions.
The syndicate acquired the block as contemplated, and sold it in five parcels, as follows:
| Year | Parcel | Cost | Selling price |
| 1925 | A and D | $2,387,333.74 | $3,720,000 |
| 1926 | B | 226,327.98 | 500,000 |
| 1927 | E | 940,000.00 | 1,200,000 |
| 1929 | C | 1,595,183.50 | 3,050,000 |
The syndicate is still in existence, but since 1929 it has been engaged in the collection of amounts due on purchase money mortgages on the properties sold.
Parcel A, the first piece sold, was a plot 100 feet by 200 feet, fronting on Seventh Avenue. The managers were very desirous of making this sale because the prospective purchaser contemplated the erection on it of a hotel, which was expected to enhance the value of the remaining parcels. The contract for sale, executed October 21, 1924, fixed the purchase price at $1,500,000, of which $250,000 was payable immediately; $250,000 on January 10, 1925, and*794 $1,000,000 on delivery of the deed. The syndicate managers, as sellers, agreed to lend the purchaser $500,000 for use in the final payment; the purchaser *1173 undertook to erect a hotel, and the sellers agreed to advance the cost of construction exclusive of certain fees and the cost of furnishings, repayment to be secured by a first mortgage not under $500,000 and the balance by a second mortgage.
The sale was consummated in 1925; a deed was given, the managers advanced $500,000 for application to the final payment, made further advances of $444,085.06 during 1925, and aggregate advances of $485,914.94 during 1926 and 1927, pursuant to the contract. They received junior mortgages subject to prior mortgages of $870,000 and $2,730,000. A hotel, first known as the Manger and later as the Taft, was constructed on the premises.
The sale of parcel B was made to the same purchaser for an addition to the hotel, and a deed was given in 1926. Pursuant to the terms of a contract similar to that of October 21, 1924, the managers advanced $150,000 of the purchase price of $500,000, and agreed to advance all moneys necessary for construction, exclusive of certain fees and the*795 cost of furnishings, repayment to be secured by a first mortgage not under $300,000 and the balance by a second Mortgage. In 1926 and 1927, the managers advanced an aggregate of $706,000 under the contract, which was secured by junior mortgages on the property. On December 22, 1927, the junior mortgages on parcels A and B were consolidated into a single mortgage for $1,636,000 subject to prior mortgages aggregating $4,650,000. No principal payments on the former mortgages were received prior to January 1, 1928; on that date and at six-month intervals thereafter, specified amounts of principal and interest were payable under the consolidated mortgage agreement.
During 1925 the managers distributed to the syndicate members amounts equal to their respective subscriptions, with interest thereon at 6 percent. Petitioner received $330,000, the amount of its contribution, and $18,729.57 as interest. There were no other distributions in 1925, 1926, 1927, and 1928. On October 26, 1930, $280,000 was distributed among the members and $93,333.33 was paid as a fee to the managers. Petitioner received one-half of this fee, $46,666.67, which it included in gross income on its income tax*796 return for 1930.
Petitioner keeps its books and files its income tax returns on an accrual basis. The syndicate filed a fiduciary return only for 1925. This indicated a net income of $373,208.50, of which 41 1/4 percent or $153,948.51 was designated as petitioner's share. Among deductions reported was a manager's fee of $272,431.18. The only fee ever paid to the managers was $93,333.33, paid in 1930, of which petitioner received one-half. No charge for a managers' fee for 1925, 1926, 1927, or 1928 appears on the syndicate's books. In its *1174 income tax return for 1925 the petitioner reported in its income 41 1/4 percent of the syndicate's net income as given in the accountant's statement submitted to it, or $153,948.51. On February 25, 1929, it filed a claim for refund, alleging error in so doing. It also reported the $18,729.57, designated as interest, in its gross income for 1925. In its consolidated return for 1926 it reported $103,226.56 as income of its affiliate, 6065 Corporation, from the syndicate. A claim for refund, alleging error in so doing, was filed March 13, 1930.
In determining petitioner's income tax for 1925 the Commissioner included in income*797 $136,215.59 as accrued managers' fee, and $337,133.59 as the share of syndicate income distributable to petitioner or its affiliate. For 1926 and 1927 he similarly included $104,876.56 and $49,315.34, respectively, as the distributable shares for those years. Neither of these amounts was credited to or received by petitioner. He determined that the syndicate's net income was as follows: 1925, $817,293.56; 1926, $254,246.21; 1927, $119,552.34. The syndicate books indicate a gross income of $1,089,724.74 for 1925, without any deduction on account of a manager's fee. In computing the syndicate's income for 1925, the Commissioner arrived at profit from the sale of parcel A by using $1,500,000 as the selling price, and for 1927 he similarly used a selling price reflecting the junior mortgage received on the sale of parcel E at face value. This mortgage was paid in full on January 15, 1929. For 1928 he determined that the syndicate had a net a loss of $16,675.28, and allowed petitioner's affiliate an unclaimed deduction of $6,878.56 on account thereof.
2. In November 1925 the Temple Terrace Construction Co. was incorporated for the purpose of building 30 houses in Temple Terrace*798 subdivision, Tampa, Florida. Petitioner and Realty Associates each contributed $2,500 in cash and received one-half of its capital stock of $5,000. The houses were constructed in 1926 with the aid of cash advances made in equal amounts by the two shareholders as loans. Real estate values declined thereafter, and sales of the Temple Terrace houses were made at successively lower prices in 1927. The cash payments received were small, defaults were made by purchasers in the payment of interest and taxes, and some properties were deeded back by the purchasers and resold at prices lower than the amount of the former mortages on them. In other cases the company accepted interest without any principal payment if the purchaser paid the taxes. No mortgages were paid off until 1935, when some properties were refinanced through the Home Owners' Loan Corporation. The company continuously endeavored to save its property and to realize as much as it could on the mortgages. To enable it to do so, the *1175 shareholders made further loans, of which petitioner advanced the following amounts:
| 1927 | $9,028.54 |
| 1928 | 4,000.00 |
| 1929 | 5,500.00 |
| 1931 | 5,500.00 |
| 1932 | 1,000.00 |
*799 The company's total indebtedness to petitioner on December 31, 1927, was $232,975; its balance sheet then showed a net loss of $140,260.77 for the year; assets of $370,119.11, consisting chiefly of Temple Terrace real estate, which was unencumbered, $223,219.70; mortgages receivable, $112,242.04; and other real estate, $32,846.52, subject to a mortgage of $16,636.32. Its liabilities, consisting chiefly of loans owed to the shareholders, amounted to $505,379.88; the resulting book deficit being $135,260.77. Among the liabilities were real estate agents' commissions of $2,793.56. Payment of these was thought necessary to retain the agents' interest in marketing. In 1927 the petitioner charged off $70,130.38 of its loans to the company as a worthless part of the debt. The Commissioner allowed the amount as a deduction in determining petitioner's income tax for 1927.
On December 31, 1928, the petitioner charged off on its books as a partial bad debt an additional $32,500 of the indebtedness, then amounting to $236,975. The company's balance sheet of that date indicates a net loss of $65,234.14 for the year and a total deficit of $200,494.91. The liabilities consisted of the*800 company's loans from its shareholders and $2,828.85 owed to real estate agents as commissions. In 1928 the petitioner charged off $32,500 of its loans to the company as a worthless part of the debt. The Commissioner allowed the amount as a deduction in determining petitioner's income tax for 1928.
OPINION.
STERNHAGEN: The principal controversy in this proceeding is as to the legal character of the Carbarn Syndicate. The syndicate is not a corporation, partnership, joint stock association, or trust, as those terms are commonly used, and the question is how it shall be classified under the revenue acts. This very syndicate and others similar were considered in ; ; ; ; . But the more recent decisions of the Supreme Court in ; ; *801 , and , considering in broader scope organizations of various *1176 kinds, covered such as this into the category of associations. Hence it is to be treated as a corporation for all purposes of the act, Revenue Act of 1926, sec. 2(a)(2), and this means as well when considering distributions by it as when its own income and taxes are in question. The income of an association is not taxed to the members until distribution has been made or accrued by an appropriation similar to the declaration of a dividend, and the respondent was clearly in error in including in petitioner's income any part of the syndicate's income before actual or accrued distribution.
In 1925 the petitioner received from the syndicate $348,729.59. It treated this as return of capital, $330,000, the amount of its original contribution, and $18,729.59 as interest, only the latter amount being returned as taxable gross income. This treatment is also incorrect because it is at variance with the concept of corporate distribution. By section 201(b), Revenue Acts of 1924 and 1926, "every distribution*802 [by a corporation] is made out of earnings or profits to the extent thereof." There were earnings and profits of $1,089,724.74, of which petitioner's proportionate share of 41 1/4 percent was $449,511.46. The amount received was $348,729.59, and is therefore all to be regarded as an ordinary dividend. ;. Since, however, petitioner is a corporation, the amount thus received as a dividend "shall be allowed as a deduction." Revenue Act of 1926, sec. 234(a)(6); .
The Commissioner now argues that if Carbarn Syndicate was an association it should have paid a tax upon its income, and that its failure to do so gives foundation for an equitable set-off as in . But the record is inadequate to supply the basis for the argument, even if the reasoning be sound. The evidence shows that the syndicate filed only a fiduciary return for 1925. It does not show whether tax was determined or paid, and there is intimation that proceedings covering the syndicate's taxes*803 for 1925, 1926, and 1927 were settled by stipulation. An injustice clearer than this must affirmatively appear to produce a judgment against a member of an association to recoup for the uncollected tax of the association. Cf. .
As to the years 1926 and 1927, when the syndicate made no distributions whatever, the Commissioner's inclusion of $104,875.56 and $49,315.34 as petitioner's distributable share of the earnings of the syndicate was in error.
Likewise the deduction for 1928 of $6,878.56, being 41 1/4 percent of a syndicate loss of $16,675.28, is inconsistent with the treatment *1177 of the syndicate as an association and, therefore, was in error, as affirmatively pleaded by the respondent in Docket No. 60397.
2. The petitioner assails the Commissioner's inclusion of $136,215.59 in its income for 1925 as an accrued manager's fee. No amount was received by petitioner on this account and none was accounted for by either the syndicate or the managers. The respondent urges a construction of the syndicate agreement that would give the manager a right to an annual fee computed upon the basis of current earnings*804 or distributions, and points to the actual payment of such a fee in 1930, before the syndicate was terminated, as indicating a practical construction. The terms of the instrument are quoted in the findings and show clearly that during the tax years now under consideration the manager's fee was to be paid "at the time of such termination" of the syndicate after proper capital distribution with "interest" and before the distribution of profits. No interim fee was provided for, and the fact that one was paid in a later year does not support a holding that a right to a fee accrued prior thereto. The Commissioner's determination as to the manager's fee for 1925 is reversed.
3. For 1927 and 1928 the petitioner, having made advances to the Temple Terrace Construction Co., in which it owned half the stock, charged off on its books, and apparently upon its returns, as bad debts $70,130.38 for 1927 and $32,500 for 1928, which were one-half the amounts of the Construction Co.'s book deficits. Both these deductions were allowed by the Commissioner, and there is, therefore, no reference to the item in the deficiency notice for either of these tax years. The petitioner, however, attacks*805 the Commissioner's failure to allow additional deductions as bad debts of the Construction Co. to the extent of $166,117.55 for 1927 and $164,764.13 for 1928.
These deductions are claimed under that portion of section 234(a)(5), Revenue Act of 1926, which provides "when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part." The Commissioner is not "satisfied" that this debt was in the taxable years recoverable only to the extent which the petitioner now claims, and the question is whether the evidence is suffciently strong to require a holding that he reasonably should have been so satisfied. The petitioner relies upon an estimate, made apparently for the first time at the hearing of this proceeding in 1936, of the actual value in 1927 and 1928 of the Construction Co.'s assets, consisting largely of mortgages and real property in the State of Florida. This estimate was made by its comptroller, who kept the corporation's accounts in its office in New York, and his opinion expressed *1178 at the hearing of the value of these properties at the close of the years in question was entirely inadequate to establish that*806 the Commissioner's official determination, which was identical with that expressed by the petitioner upon its own books, was incorrect or that his failure spontaneously to make a more favorable determination was unreasonable. The petitioner's allegations, therefore, as to this item must be dismissed for insufficiency of proof to support a finding of nonrecoverability greater than that already allowed.
Other items which are covered by the pleadings have all been disposed of by withdrawal, concession, or stipulation.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Clark Henry Coporation; Ashley Realty Corporation; 117 Corporation; 1980 Corporation; Salva Realty Corporation; 906 Corporation; 2311 Corporation; 840 Corporation; 5421 Corporation; and Thirty Nine Realty Corporation. ↩