*20 Decision in Docket No. 27157 will be entered for the respondent.
An order will be entered dismissing Docket No. 29936 for lack of jurisdiction.
1. Main-Hammond Land Trust filed its petition with this Court at a time when there was no question about its legal existence and ability to do so. Held: Upon the filing of the petition our jurisdiction attached, and having so attached continues unimpaired until we have decided the controversy.
2. The petition in Docket No. 29936 was filed with this Court after Orpheum Theatre Land Trust had made complete distribution of trust assets to its certificate holders and had notified respondent of its complete termination. The only asset that remained was some cash deposited with the Trustee as indemnity for any liability that might have been incurred. Held: Orpheum was completely terminated prior to the filing of a petition; is not shown to be the proper party to represent its former certificate holders; and, therefore, the petition in Docket No. 29936 is dismissed.
3. Although Main-Hammond's principal activity consisted of collecting rent from trust property and distributing a designated portion thereof to its certificate holders, *21 the trust instrument gave it authority to exercise much broader powers. Held: Main-Hammond was a business trust created and operated in behalf of its beneficiaries for their profit, and was an association taxable as a corporation.
*942 These cases were consolidated for hearing, and respondent has moved that the petitions be dismissed for the reason that both trusts have previously been terminated and that petitioners are not the proper parties to continue the proceedings.
The Main-Hammond Land Trust case, Docket No. 27157, involves a deficiency in income tax for the fiscal year ended June 30, 1949, in the amount of $ 1,940.77.
*943 The Orpheum Theatre Land Trust case, Docket No. 29936, involves a deficiency in income tax for the fiscal year ended October 31, 1949, in the amount of $ 1,917.70.
The question presented in both cases is whether the petitioner, in each instance an Ohio land trust, is taxable as a trust or is an association taxable as a corporation.
FINDINGS OF FACT.
The stipulation of facts filed in *22 each case is hereby adopted and made a part hereof by this reference.
The Main-Hammond Land Trust (hereinafter sometimes called Main-Hammond), and the Orpheum Theatre Land Trust (hereinafter sometimes called Orpheum), the petitioners herein, were two Ohio land trusts formally created by declarations of trust of the Southern Ohio Savings Bank & Trust Co. of Cincinnati, Ohio (hereinafter sometimes called the Trustee). For the period in controversy in both instances, fiduciary income tax returns were filed with the collector of internal revenue for the first collection district of Ohio.
The corpus of each trust consisted of certain real estate located in the city of Cincinnati, which was conveyed to the Trustee by, or at the direction of, one Stanley M. Cooper. Cooper is a resident of Cincinnati, and is president and treasurer of Stanley Cooper Co., Inc. (hereinafter called the Corporation). The Corporation is licensed by the State of Ohio as a dealer and broker in securities. It is also licensed as an investment advisor by the Securities and Exchange Commission.
Cooper has heretofore purchased and sold various parcels of business real estate in Cincinnati, either as an individual*23 or in the names of corporations owned and controlled by him. Main-Hammond was the first land trust to be created and marketed by him. Orpheum was the second such trust. The property involved in both trusts was purchased by Cooper for resale.
I.Facts Especially Applicable to Respondent's Motions to Dismiss.
(a) Docket No. 27157.
In his notice of deficiency dated March 3, 1950, the respondent ruled that Main-Hammond was an association taxable as a corporation within the meaning of section 3797, Internal Revenue Code. The petition for redetermination thereof was filed with this Court on March 9, 1950. Subsequently, and as a result of respondent's aforementioned ruling, all of the holders of Main-Hammond Land Trust Certificates requested the Trustee to terminate the trust. In response *944 to this request the Trustee of Main-Hammond, on July 27, 1950, mailed each such holder the following letter:
You and all other registered holders and owners of the Main-Hammond Land Trust Certificates have requested us to terminate the Trust and have surrendered your Land Trust certificate for cancellation.
Paragraph 23 of the Agreement and Declaration of Trust authorizes its termination*24 by mutual agreement between the Trustee and all the beneficiaries. All beneficiaries have requested such termination and the Trustee is pleased to abide by their wishes, but in so doing, must make the following reservations for its protection:
1. It must be indemnified against tax liability which may be assessed against the Trustee in the future in relation to this Trust Agreement. The Trustee is holding the Guarantee Fund of $ 1,650, plus interest paid thereon to date, amounting to $ 10.33 plus a small balance out of the remaining funds in its hands, said balance being less than $ 100.00, to indemnify itself not only against tax liability, but against any other liability which may be assessed against it, or any expenses which may be incurred by it, including counsel fees in connection with the contesting of the aforesaid tax liability. Mr. Stanley M. Cooper has met this requirement by a deposit in this bank, and has personally agreed to supplement that deposit if it proves to be inadequate after first exhausting the funds remaining in the hands of the Trustee.
2. The Trustee must reserve the right to decide in its discretion to pay or to protect any tax assessment hereafter made. *25 Since Mr. Cooper will be personally responsible for any such taxes paid, if the funds remaining in the hands of the Trustee are insufficient, the Trustee will, of course, consult with Mr. Cooper before making any decision.
3. The Trustee must receive from Stanley M. Cooper an undertaking to hold harmless and indemnify the Trustee for any expense or liability which the Trustee may incur or which may be asserted against the Trustee in the future, which undertaking has been delivered to the bank.
4. An acknowledgment which is typed on the receipt form attached to the enclosed check from each one of the certificate holders, upon payment to them of $ 2.08 per interest out of the July 1950 rent, that the Trustee has satisfied all obligations to the certificate holders and has returned to them all interest in the Trust, except their proportionate share of what may be left out of the funds aforesaid remaining in the hands of the Trustee after the payment of any tax liability heretofore or hereafter assessed against the Trustee, and after the payment to and indemnity of the Trustee out of said funds of any expenses, including counsel fees, incurred by the Trustee in connection with any tax*26 liability or in any other manner.
We understand from a discussion with Mr. Cooper that all of the foregoing is acceptable to him and will be acceptable to you.
Accordingly, we have executed the accompanying deed for your proportionate interest in the property. We also enclose rental distribution check for your proportionate share of the July 1950 rent at the rate of 1/12 of $ 25.00, or $ 2.08 for each interest. Distribution at the rate of $ 25.00 per year for each interest has been made for the year ending June 30, 1950.
If you are not agreeable to the foregoing, please return the deed and the check.
If you are agreeable, endorse the check and record your deed promptly in the Registered Land Department in the office of the Recorder of Hamilton *945 County, Ohio at the Court House. We are informed by Mr. Leo Weinberger, attorney for Mr. Cooper, that inasmuch as the deed includes Registered as well as Unregistered land, the deed will be recorded, but the original deed must remain at the Court House, and consequently, when you record your deed in the Registered Land Department you should request and pay for a photostatic copy of the deed to be mailed to you.
Enclosed with the*27 foregoing letter was a deed for the recipient's proportionate interest in the trust estate plus a rental distribution check at the rate of $ 2.08 for each land trust certificate held. The check so enclosed had the following notation attached thereto:
In full satisfaction of all obligation to and interest of the undersigned in Main-Hammond Land Trust Agreement, dated as of July 1, 1948 recorded in Mortgage Book 2220, page 50, Hamilton County, Ohio Records, and the Land Trust Certificate issued thereunder to the undersigned, except the undersigned's proportionate share of any amount remaining out of the sum of $ 1,721.39 retained by the Trustee as indemnity for taxes and expenses, including counsel fees heretofore or hereafter assessed against or incurred by the Trustee.
Respondent received a Form 966 sent him in behalf of Main-Hammond on August 24, 1950. Attached thereto was a typewritten statement reading, in part, as follows:
Pursuant to the foregoing instructions the trustee on July 27, 1950, mailed to each certificate holder a deed for his proportionate interest in the fee to the real estate described in said trust agreement. The trustee, likewise, mailed to each certificate*28 holder his proportionate share of all rentals under said trust agreement then in the hands of the trustee so that the trust was completely terminated on that day except that the trustee retained in his hands $ 1,721.39 as indemnity for taxes and expenses, including counsel fees, heretofore or hereafter assessed against, or incurred by the trustee.
On August 25, 1950, respondent received a letter from Main-Hammond dated August 21, 1950, in which Main-Hammond recited that on the same date it had filed its fiduciary income tax return for the fiscal year ended June 30, 1950. The letter also contained the further statement:
At the same time we filed the final fiduciary income tax return for the same Trust for the fiscal year beginning July 1, 1950, and ending July 27, 1950, said Trust having been terminated on July 27, 1950.
(b) Docket No. 29936.
On May 31, 1950, Orpheum's trustee mailed to each holder of Orpheum Land Trust certificates the following letter:
You and all other registered holders and owners of the Orpheum Theatre land trust certificates have requested us to terminate the trust, and have surrendered your land trust certificates for cancellation.
Paragraph 15 of the*29 Agreement and Declaration of Trust authorizes its termination by mutual agreement between the Trustee and all the beneficiaries. All beneficiaries have requested such termination and the Trustee is pleased to *946 abide by their wishes, but in so doing it must make the following reservations for its protection:
(1) It must be indemnified against tax liability which may be assessed against the Trustee in the future in relation to this trust agreement. Mr. Stanley Cooper has personally met this requirement by a deposit in this bank, and has personally agreed to supplement that deposit if it proves to be inadequate.
(2) Trustee must reserve the right to decide in its discretion to pay or to protest any tax assessment hereafter made. Since Mr. Cooper will be personally responsible for any such taxes paid, the Trustee will, of course, consult with Mr. Cooper before making any decision.
(3) Trustee must receive from 941 East McMillan Street, Inc., an undertaking to hold harmless and indemnify the Trustee for any expense or liability which the Trustee may incur or which may be asserted against the Trustee in the future, which undertaking has been delivered to the Bank.
(4) Acknowledgment*30 from each one of the certificate holders upon payment to them of the balance of rent on hand and in the guarantee fund that the Trustee has satisfied all obligations to the certificate holders and has returned to them all interest in the trust.
We understand from discussion with Mr. Cooper that all of the foregoing is acceptable to him and will be acceptable to you.
Accordingly, we have executed the accompanying deed for your proportionate interest in the property and enclose herewith a check in the amount of $ for your proportionate interest in the guarantee fund. If you are not agreeable to the foregoing, please return the deed and the check. If you are agreeable, endorse the check and record your deed promptly in the Office of the Recorder of Hamilton County, Ohio, at the Court House.
Your rental distribution check due June 1, 1950, is enclosed as a separate check.
We have detached the stock certificate in 941 East McMillan Street, Inc., from the land trust certificate and are returning the former to you herewith.
Enclosed with the letter was a deed for the recipient's proportionate interest in the trust estate, together with two checks for the recipient's interest *31 in the rent and the guarantee fund held by Orpheum. The checks so enclosed had the following notation attached thereto:
In full satisfaction of all obligation to and interest of the undersigned in Orpheum Theatre land trust agreement dated as of November 1, 1948, Deed Book 2330, page 332, Hamilton County, Ohio Records and the land trust certificate issued thereunder to the undersigned.
Respondent received the Form 966 filed on behalf of Orpheum on July 28, 1950. Thereafter, on August 3, 1950, respondent issued his notice of deficiency. The petition for redetermination thereof was filed with this Court on August 11, 1950. Subsequently respondent received a letter on August 21, 1950, from the Southern Ohio Savings Bank & Trust Co., Trustee, stating that the Orpheum trust had been terminated on June 1, 1950. The letter also requested prompt assessment of any deficiency.
*947 II.
Additional Facts Applicable to the Merits.
(a) Docket No. 27157.
On April 5, 1946, Stanley M. Cooper offered to purchase the property at the southwest corner of Fourth and Hammond Streets in Cincinnati, Ohio, from the Central Trust Company of that city. The purchase price involved was $ 90,000. *32 A $ 5,000 deposit was to be made with an additional $ 25,000 payable within 30 days from the date of acceptance of the offer, at which time title was to be conveyed to Cooper. The remaining $ 60,000 was to be evidenced by a note secured by a first mortgage on the property, due on or before 3 years after date, with interest at 3 1/2 per cent per annum, payable semiannually. In addition, Cooper was to pay the real estate broker handling the transaction a commission of 6 per cent of the sales price. The additional $ 25,000 was paid and the $ 60,000 note and mortgage dated March 27, 1947, were duly executed.
To reimburse himself for the $ 30,000 and the $ 5,400 commission paid or to be paid, Cooper made a loan of $ 35,000 from one Mildred J. Bode. The loan took the form of a deed to Bode and a lease back to Cooper, both subject to the $ 60,000 mortgage. The lease from Bode to Cooper commenced July 23, 1947, and expired March 27, 1950, the date of maturity of the note and mortgage from Cooper to the Central Trust Company. Cooper was to make the payments on the $ 60,000 note to the Central Trust Company and was to pay Bode 5 1/2 per cent per annum on $ 35,000. Cooper had a privilege*33 of purchase at any time during the term for $ 35,000, subject to the aforementioned mortgage to the Central Trust Company.
There were two other parcels of real estate adjoining this tract of land. These two parcels together fronted approximately 50 feet on the east side of Main Street south of Fourth Street and formed an "L" with the first parcel referred to above. The purchase price of these two parcels was $ 50,000 for both. In addition thereto Cooper agreed to pay a commission of 6 per cent or $ 3,000 to the real estate broker. After having paid such purchase price, Cooper borrowed $ 30,000 from one Edith A. Baker, and $ 20,000 from one Florence B. Harrell.
On May 4, 1948, Cooper entered into an agreement to lease all three lots to I. E. Clayton, who was then the month-to-month tenant of all such lots and was operating parking lots thereon. Clayton had been such a tenant prior to the purchase of the lots by Cooper. The lease *948 was to be a perpetual lease from July 1, 1948, at an annual net rental of $ 10,000, payable in equal monthly installments in advance. Clayton was to pay taxes and assessments, carry fire insurance with extended coverage and public liability*34 insurance.
The lease from Cooper to Clayton was executed May 28, 1948, and commenced July 1, 1948. It was for the term of 99 years, renewable forever. Rental was $ 10,000 per year net, payable monthly. This lease contained a privilege of purchase on the terms set out therein. It likewise provided that upon the exercise of the privilege of purchase, title would be conveyed by good and sufficient trustee's deed of special warranty, it being understood by Clayton that the deed would come from the Trustee of the land trust to be created.
On July 27, 1948, Cooper paid the Central Trust Company the balance of $ 60,000 due on its mortgage and forthwith on the same date executed two deeds to the Southern Savings Bank & Trust Co. as Trustee for these three parcels. Thereafter title to the property was to be held by the Trustee, as a continuing entity, during the existence of the trust. Such existence would not be interrupted nor terminated by the death of an individual certificate holder. These conveyances to the Trustee were all subject to the perpetual lease from Cooper to Clayton.
Also on the same day that the above transactions took place, July 27, 1948, the Trustee executed an *35 Agreement and Declaration of Trust as of July 1, 1948. The agreement was with such persons, partnerships, associations, and corporations as became parties to the agreement by the acceptance of certificates of equitable ownership issued under the Declaration of Trust. The certificates were known as Main-Hammond Land Trust certificates. The Declaration of Trust recited that the Trustee would hold the real estate so conveyed to it in trust for the holders of Main-Hammond certificates and that the premises were subject to the perpetual lease from Cooper to Clayton, some of the provisions of which were set out therein.
The equitable ownership and beneficial interest in the trust estate was divided into 330 equal interests represented by Main-Hammond Land Trust certificates. The trust agreement provided that out of the rents received by the Trustee, it was to pay its compensation and expenses, including legal fees which might be incurred. After making such payments and paying all taxes and any income taxes which it might be required to pay, it was to distribute $ 25 per annum on each land trust certificate.
The agreement further provided that after making the above payments the Trustee*36 would set aside $ 825 a year in a fund to be known as the guarantee fund, to guarantee the payment of $ 25 a year on each certificate and the performance of the other provisions of the lease. If there then remained any surplus income in the hands of the Trustee, *949 such income would be distributed on July 1 of each year to the certificate holders in proportion to their respective interests as evidenced by the total amount of certificates issued and outstanding at that time. Each fractional interest was subject to purchase for the guarantee fund at a price of $ 550 the first year, $ 547.50 the second year, $ 545 the third year, and reducing $ 2.50 each year thereafter so that in the twenty-first year and subsequent thereto each interest was subject to purchase at $ 500, plus its proportionate share of rental distributable in respect thereto.
The agreement also provided that whenever there was $ 500 or more in cash in the guarantee fund, the Trustee could purchase Main-Hammond certificates obtainable upon tender to it or in the open market at no more than $ 500 for each interest. If the funds in the guarantee fund were not exhausted in the voluntary purchase of certificates*37 at $ 500 for each interest, then on July 1 of each year, provided there was at least $ 1,100 in cash in the guarantee fund, the Trustee was to purchase certificates by lot for the appropriate amount. These certificates were not to be canceled but were to constitute a part of the principal of the guarantee fund. The sum of $ 825 per year to be set aside in the guarantee fund, was one-half of one per cent of $ 165,000, the sale price of the Land Trust certificates by Cooper, so that not more than an average of one-half of one per cent of the outstanding certificates could be redeemed in any one year.
The trust agreement further provided for centralized management by the Trustee as representative of the certificate holders, one such provision reading, in part, as follows:
In the event any Lessee shall make default in any of the provisions of its lease and it becomes necessary, or in the sole opinion of the Trustee, advisable for the Trustee to terminate the same, or in the event of the termination of said lease in any other manner, the Trustee shall give two (2) weeks' notice of such termination to the beneficiaries by Registered Mail addressed to their respective addresses as the *38 same appear on the books of the Trustee, and such notice shall be deemed to commence with the mailing thereof. The Trustee shall thereupon manage said trust estate and be fully authorized to take such steps with respect to selling, leasing, operating or otherwise disposing thereof as it may deem advisable and for the best interests of the beneficiaries, without reference to the beneficiaries and as if it were the sole legal and equitable owner thereof, and no person dealing with the Trustee shall be bound to inquire concerning the authority of the Trustee so to act or see to the application of the purchase money.
In the event that the lessee under the Clayton lease exercised the privilege of purchase, the Trustee was authorized to complete the sale and convey the trust estate to the lessee without securing the consent of the beneficiaries. The proceeds of the sale were then to be distributed equally among the beneficiaries upon the surrender by them of their respective certificates. In such event the certificates in *950 the guarantee fund would not participate. In case of default by the lessee, the Trustee could sell, as he saw fit, part of the guarantee fund and use the *39 proceeds to pay rentals and to perform lessee's obligations. Alternatively, the Trustee could forfeit the lease and hold the guarantee fund for the benefit of the certificate holders.
The trust agreement could be terminated at any time by mutual consent between the Trustee and all beneficiaries. Unless terminated it was to continue as an entity during the existence of the Clayton lease, any renewal thereof, or any lease or leases made by the Trustee. The beneficiaries had equitable but not legal title and could not require partition. No assessment could be made upon the certificate holders and their personal liability was limited to their initial investment. The Trustee could borrow funds needed to meet a temporary exigency or to comply with the provisions of the lease. In so doing it could bind the assets of the trust estate but not the Trustee or the beneficiaries personally. It specifically provided that in any written contract reference should be made to the agreement and declaration of trust and all parties contracting with the Trustee should look only to the trust estates.
The Trustee kept a register with the names and addresses of the beneficiaries and proper books of*40 account. There was a provision for issuing new certificates in case of loss or destruction, upon furnishing bond.
The agreement contained certain exculpatory provisions for the Trustee's protection. It was entitled to indemnity from the trust estate for all personal liability or expense incurred by it except such as rose from its own act, neglect or omission.
There was a provision for resignation of the Trustee and appointment of a new trustee by beneficiaries representing three-fourths or more of beneficial interests, or by the Common Pleas Court of Hamilton County, Ohio, in case the beneficiaries failed to appoint a successor trustee.
The Trustee and the lessee under the Clayton lease or any leases thereafter made by the Trustee, might from time to time amend leases or the trust agreement as they might deem necessary to carry out its purposes not inconsistent with the terms and purposes of the lease or agreement.
The land trust certificates provided for their transfer by assignment executed in the presence of two witnesses, with the formalities of a deed under Ohio law, including acknowledgement before a Notary Public.
On the same day the Trustee issued to Cooper 330 Land Trust*41 certificates in exchange for the three parcels deeded by him to the Trustee, Cooper transferred 60 interests, 40 interests, and 70 interests, respectively, to Baker, Harrell and Bode for the amounts due them on the *951 privileges to purchase from each. Cooper sold the remaining Land Trust certificates at $ 500 for each interest.
Prior to creating the land trust and issuing the certificates, Cooper had qualified the Land Trust certificates with the Division of Securities of the Department of Commerce of the State of Ohio.
The receipts and disbursements of the Trustee for the fiscal year in question were as follow:
| Rent received from Clayton | $ 10,000.08 | |
| Disbursements: | ||
| Check printing | $ 10.30 | |
| Trustee's fee | 300.00 | |
| Attorney's fee | 213.93 | |
| 524.23 | ||
| Balance | $ 9,475.85 | |
| Amount distributed to beneficiaries | 8,540.50 | |
| Net income taxable to fiduciary if the | ||
| trust is taxable as a trust estate | $ 935.35 |
The above distribution of $ 8,540.50 included quarterly distributions at the rate of $ 25 per year on 330 interests, or a total of $ 8,250, plus a distribution of 85 cents per interest as of July 1, 1949, or a total of $ 280.50 out of the balance of*42 the rent on hand July 1, 1949.
The only activity of the Trustee during the taxable year consisted of receiving the rent from its lessee; making the three disbursements set out above; making distribution quarterly by check to the beneficiaries; keeping records of receipts and disbursements to the beneficiaries and of transfers of Land Trust certificates; issuing new certificates on transfers; and holding the liability insurance policy delivered to it by Clayton. No Land Trust certificates were ever purchased, by call or otherwise, for the guarantee fund.
Cooper's total cost, including expenses, for the Main-Hammond Land Trust, was $ 152,256.01. His sale price of the Land Trust certificates was $ 165,000.
(b) Docket No. 29936.
On November 23, 1947, the Orpheum Theatre Company, an Ohio corporation (hereinafter called the Theatre), and Cooper, entered into an agreement whereby the Theatre agreed to sell Cooper the Orpheum Theatre building on McMillan Street in Cincinnati, Ohio, together with the furniture, furnishings, fixtures, equipment and the name "Orpheum Theatre." The purchase price was $ 1,000 for the name "Orpheum Theatre" and $ 199,000 for the real estate and chattels. *43 This amount was payable as follows: $ 25,000 on or before January 9, 1948; $ 25,000 on or before July 1, 1948; and the remaining $ 150,000 *952 on or before December 26, 1949, with interest thereon at 6 per cent per annum from January 9, 1948, payable monthly. A small portion of the real estate was a perpetual leasehold estate with an annual ground rent of $ 98. The contract provided that when the initial $ 25,000 was paid, the Theatre would continue to manage the property and collect the rents. It was to account for the rents and expenses. If the rents were insufficient to pay expenses and certain other payments, Cooper was to make up the difference monthly and was to be given appropriate credit at the final closing.
Cooper paid the balance of the purchase price amounting to $ 141,993.83 on October 25, 1948. In order to pay such an amount Cooper, on October 21, 1948, made a loan of $ 150,000 at The First National Bank of Cincinnati, secured by various stock certificates as collateral.
In accordance with written instructions from Cooper to the Theatre, the latter conveyed the premises directly to the Trustee by a general warranty deed using the record description and by *44 a quitclaim deed using the correct description as shown by a survey. Such conveyances were made subject to an existing lease to R. K. O. Midwest Corporation, for a portion of the premises and subject to the ground rent of $ 98 per year. Title to the chattels was transferred to the Trustee by a bill of sale.
The above transaction was closed and the delivery of the deeds and the bill of sale to the Trustee took place on October 25, 1948. Simultaneously therewith the Trustee executed a perpetual lease for 99 years, renewable forever, with privilege of purchase to 941 East McMillan Street, Inc. (hereinafter referred to as McMillan), an Ohio corporation owned and controlled by Cooper. The corporate proceedings of McMillan had been completed at the same time, and Cooper had subscribed for its entire 500 shares of common stock at $ 1 per share. He paid the $ 500 to the Corporation, and the stock was issued to him on October 25, 1948, in the form of an interim stock certificate. These shares were to be issued in conjunction with the Orpheum Theatre Land Trust certificates. They were only to be issued to and might only be held and owned by holders of such certificates. There were 500*45 interests represented by Land Trust certificates and one share of stock was to be issued with each. The stock certificates and Land Trust certificates were printed on one sheet and were inseparable until the privilege of purchase was exercised by McMillan. The above provision, contained in Article Fourth of McMillan's Amended Articles of Incorporation, was printed on the back of the stock certificates.
Under the lease from the Trustee to McMillan, the latter was to pay the former rent at the rate of $ 11,250 per year up to December 31, 1950, *953 and at the rate of $ 12,500 yearly thereafter. All such rent was payable in quarterly installments. In addition, the lessee was to pay not less than $ 1,250 per year in equal quarterly installments into a guarantee fund. In lieu of cash, it could deliver Orpheum Theatre Land Trust certificates. The lessor was to invest these payments in legal investments or in Orpheum Theatre Land Trust certificates. All income from the guarantee fund was to be reinvested and added to the principal thereof. In the event of default by the lessee, the lessor could cancel the lease or sell part of the guarantee fund, using the proceeds therefrom*46 to make good such defaults.
The lessee was to pay the lessor its compensation as Trustee, all taxes and assessments, insurance, expenses and repairs. In case of default continuing for 60 days after written notice the lessor might repossess the premises. Lessee had a privilege of purchase on any rent-paying day for $ 250,000.
On the same day that the above deeds were delivered and the lease executed to McMillan, the Trustee executed an agreement and declaration of trust. The trust agreement did not include the chattels. It recited that it was subject to the lease executed simultaneously by the Trustee to McMillan, referred to above.
As noted above, there were 500 equitable interests represented by Land Trust certificates in the Orpheum Trust. The Trustee after paying all taxes, charges, expenses and income tax required to be paid by it, was to distribute among the beneficiaries out of the rents received by it, $ 22.50 per annum for each such fractional interest up to December 31, 1950, and $ 25 per annum thereafter.
The terms and conditions of the Orpheum Trust Agreement were substantially the same as those in the Main-Hammond Trust agreement. Title to the property which constituted*47 the Trust estate was held by the Trustee as a continuing entity during the existence of the Trust. There was centralized management by the Trustee as representative of the certificate holders. The death of a certificate holder would not interrupt nor terminate the existence of the Trust. The personal liability of the certificate holders was limited to their initial investment and their interests were transferable by assignment. The Trustee had the same privilege of purchasing Orpheum Trust certificates either in the open market or by call, as in the Main-Hammond Trust. The privilege of purchase, in the case of Orpheum, was the fixed amount of $ 250,000.
The Orpheum Trust certificates, having been qualified with the Division of Securities, were issued to Cooper simultaneously with the execution of the trust agreement in the form of an interim certificate.
In order to repay his loan of $ 150,000 made on October 21, 1948, the proceeds of which had been used by him to pay the balance of the *954 purchase price of the Orpheum Theatre, Cooper, on November 11, 1948, obtained a new loan of $ 150,000. This new loan was secured by the deposit of the 500 shares of stock of McMillan, *48 the 500 Land Trust certificates of Orpheum, and additional shares. From time to time Cooper made payments on this loan. He obtained thereby the release of some Land Trust certificates and McMillan stock. He sold such certificates and stock until the note was paid in full and all of the Land Trust certificates were released and sold. Cooper sold all of the Land Trust certificates at $ 500 for each interest, or a total of $ 250,000 for the 500 interests. With each interest, he also sold one share of stock in McMillan at $ 1 per share, for a total of $ 500.
The Trustee, during the year in question, had nothing to do with the management or operation of the leased property. Up to June 1, 1949, McMillan, all of whose stock was owned by Orpheum certificate holders, managed such real estate. It collected the rents from the tenants, managed the building, paid all the expenses, and made its payments to the Trustee as called for in the lease. During the fiscal year here involved, the only activities of the Trustee consisted of receiving three quarterly installments of rent from McMillan of $ 2,812.50, totaling $ 8,437.50; receiving three quarterly installments of payments into the guarantee*49 fund by McMillan of $ 312.50 each, totaling $ 937.50; receiving $ 7.43 interest on the guarantee fund; making three quarterly disbursements by check to the Land Trust certificate holders, totaling $ 8,437.50; keeping a record of receipts and disbursements to the beneficiaries and of transfers of Land Trust certificates; issuing new certificates in case of transfer of any certificates; and holding the insurance policies on the building delivered to it by McMillan. No Land Trust certificates were ever purchased, by call or otherwise, for the guarantee fund. During the fiscal year here in question, McMillan paid the Trustee the following:
| Rent | |
| Nov. 11, 1948 (paid in advance) | $ 2,812.50 |
| May 10, 1949 | 2,812.50 |
| Aug. 1, 1949 | 2,812.50 |
| Total | $ 8,437.50 |
| Guarantee fund | |
| Nov. 16, 1948 (paid in advance) | $ 312.50 |
| May 10, 1949 | 312.50 |
| Aug. 1, 1949 | 312.50 |
| Total | $ 937.50 |
Only three quarterly payments were made to the Trustee during this fiscal year, the fourth payment being made November 2, 1949. In addition, the Trustee earned $ 7.43 interest on the guarantee fund, making the total income $ 9,382.43. The Trustee paid the holders of Land Trust certificates $ 8,437.50, *50 leaving a net income to the Trustee of $ 944.93.
For the fiscal year ended October 31, 1949, McMillan showed a net profit of $ 2,606.36. That profit arose from the fact that in that *955 year it made only three quarterly rent and guarantee fund payments to Orpheum. Had it made the four quarterly payments it would have shown an operating loss of $ 518.64.
Cooper's cost for the enterprise was $ 216,616.61. He received $ 250,000 from the sale of the Orpheum Theatre Land Trust certificates so that his gross profit therefrom was $ 33,383.39.
OPINION.
Respondent has moved to dismiss the petitions in these proceedings, assigning as the reason that both trusts have previously terminated and do not constitute the proper parties to continue therewith. Our jurisdiction having thus been challenged, we first determine that question before proceeding to consider the merits of the issue involved.
On March 3, 1950, respondent issued to Main-Hammond Land Trust the statutory notice of deficiency upon which this action, Docket No. 27157, is based. On March 9, 1950, the Trustee filed its petition with this Court on behalf of the Trust. Subsequently, the holders of Main-Hammond trust certificates*51 requested the Trustee to terminate the trust. The Trustee complied with this request and made distribution to them of their interests in trust assets except for a certain amount retained as indemnity for tax liability or any other liability that might be assessed against it, and for any expenses incurred in connection therewith. Thereafter, by letter dated August 21, 1950, respondent was notified by the Trustee that the trust had been terminated on July 27, 1950, and on that same date a Form 966 was forwarded in which it was stated that the trust estate had been distributed and the trust completely terminated except that the above-mentioned amount had been retained as indemnity.
Respondent raises no question as to the propriety of the petition here involved at the time it was originally filed. Rather, he argues that Main-Hammond was terminated while the action was pending before this Court and that, therefore, it is not the proper party to continue to act for its former certificate holders.
On the other hand, Main-Hammond contends that it was obligated under the trust agreement to pay any income taxes which might be assessed against it; that funds were specifically retained for*52 this purpose; and that as long as any tax liability remained outstanding it did not terminate, any statements to the contrary notwithstanding.
The only authority cited by respondent in support of his position is Fancy Hill Coal Works, 2 B. T. A. 142. That case is clearly distinguishable on its facts from the one before us. The trust there involved had been dissolved some five years before the petition was filed. Its termination was uncontroverted. The only issue presented was *956 whether its last trustee continued as its legal representative to originate and to prosecute an action in its name. Here, however, the petition was filed during the legal existence of Main-Hammond, and respondent raises no question as to the validity thereof.
Whether or not Main-Hammond still remains in existence, is immaterial. Upon the filing of the petition in accordance with the law and our rules of procedure, the petitioner then being in existence, we acquired jurisdiction. Michael Duggan, 18 B. T. A. 608; Southern California Rock & Gravel Co., 26 B. T. A. 296. Such jurisdiction remains unimpaired*53 until we here have decided the controversy. James Duggan, 21 B. T. A. 740. No curtailment occurs upon the death of a petitioner pendente lite. Michael Duggan, supra.Therefore, it is clear that even though we assume the legal death of Main-Hammond prior to the disposition hereof, that fact does not have the effect of ousting us of jurisdiction. Respondent's motion to dismiss, in so far as it applies to Docket No. 27157, is denied.
Respondent's motion to dismiss in Docket No. 29936 presents a different question.
At the earlier request of Orpheum Trust certificate holders, the Trustee, on May 31, 1950, made distribution to them of their respective proportionate interests in the trust assets. A Form 966 was duly filed with the respondent on June 28, 1950. On August 3, 1950, respondent issued his statutory notice of deficiency for the redetermination of which a petition was filed with this Court on August 11, 1950. Thereafter respondent was advised by letter dated August 18, 1950, that the Orpheum Trust had been completely terminated on June 27, 1950.
Similarly, as in the case of Main-Hammond, Orpheum advances the argument*54 that it is obligated under the original trust agreement to pay any income taxes assessed against it; that it retains funds adequate to meet such obligation; that these funds were deposited with it by Cooper prior to any distribution made to the certificate holders; that it did not completely terminate as long as it was faced with an outstanding tax liability despite the fact that all the assets in its hands, other than the deposit by Cooper, had been distributed to its certificate holders; and that, therefore, it is still in existence for the purpose of prosecuting this action, any previous statements by it to the contrary notwithstanding. We do not agree.
There is no evidence that any Orpheum Trust certificates remained outstanding subsequent to June 27, 1950. Nor is there any showing that any part of the trust assets was retained. To the contrary, the record clearly shows, and Orpheum admits, that the funds held by the Trustee after that date were only those deposited with it by Cooper as indemnity against any liability that might be assessed against it. *957 Moreover, Orpheum admits on brief that one of the considerations for effecting the distribution was the indemnity*55 agreement with Cooper.
Under the laws of most states a corporation remains in existence for a period following its dissolution for the purpose of settling its affairs and retiring any outstanding indebtedness. However, there has been no authority cited, and we know of none, for the proposition that the same is true of a trust following distribution of its assets, simply because one of its former beneficiaries deposits indemnity money with the last trustee as consideration for such distribution. Accordingly, we are of the opinion that Orpheum was completely terminated and, in all respects, legally died on June 1, 1950, leaving no legally recognizable successor.
The burden of proving that this Court has jurisdiction of a proceeding is upon the petitioner. Orpheum has failed to meet its burden.
The instant case is to be distinguished from James Duggan, supra, where it was held that the jurisdiction of the Board of Tax Appeals having once attached is not abated by the death of a petitioner before final decision. Here, our jurisdiction has never been effectively invoked. Wherefore, the petition in Docket No. 29936 is dismissed.
Having thus disposed of*56 respondent's motions to dismiss, we turn now to consider the merits of the issue presented in Docket No. 27157. The sole question involved is whether, during the taxable year, Main-Hammond was an association within the purview of section 3797 (a) (3) of the Internal Revenue Code, 1 and, therefore, taxable as a corporation, or whether it was a pure trust concerned only with the conservation of trust property and the distribution of income therefrom to its beneficiaries. The parties being in substantial agreement as to the facts, the question posed is entirely one of interpretation.
The term "association" is not precisely defined anywhere in the Code. But the courts have had many occasions to construe its meaning and have set forth the elements*57 of an association organized in the form of a trust in numerous decisions. These decisions have laid down the rule that to be classified as an association a trust must bear substantial similarity in form and powers to a corporation and must be employed in carrying on a business for the profit of its beneficiaries. Thus the instrument creating such trust must be carefully scrutinized.
No useful purpose would be served by our elaborating in detail upon the quasi corporate powers and possible functions of Main-Hammond as set forth in the declaration of trust. Suffice it to say that *958 that instrument provided for the transferability of trust certificates, the continuity of the trust undisturbed by the death of a certificate holder, the centralization of control and management, and the limitation of liability to the trust assets. Such provisions are salient features of a corporate organization. Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344. In addition, it must appear that the trust was organized for a business purpose and could or did operate as such.
Main-Hammond takes the position that it was a pure trust created and utilized as a method *58 of financing a loan on real estate. In support thereof it cites Cleveland Trust Co. v. Commissioner (C. A. 6, 1940), 115 F. 2d 481, reversing 39 B. T. A. 429, certiorari denied 312 U.S. 704">312 U.S. 704, and argues that it comes within the rationale of that case.
On the other hand, respondent points to Title Insurance & Trust Co. v. Commissioner (C. A. 9, 1938), 100 F.2d 482">100 F. 2d 482, affirming a Memorandum Opinion, Board of Tax Appeals, entered March 31, 1938, and contends that it is more clearly applicable in the instant situation.
It is true that the situation here in some respects resembles that in the Cleveland Trust Co. case. The same might be said, however, of Sherman v. Commissioner, 146 F. 2d 219, in which the same court which decided the Cleveland Trust Co. case reached the opposite result. In the Sherman case, the court observed:
* * * "the line of separation between trusts and associations is often so vague as to make them almost indistinguishable." Each case must be adjudicated upon its own facts. We regard the powers*59 vested in the trustee in the instrument under the present consideration far more extensive than those possessed by the Cleveland Trust Company -- so extensive, indeed, as to differentiate the cases. In the present litigation, the intent underlying the creation of the trust was obviously more corporate-minded; and the entire set-up of the trust bore greater resemblance to corporate practice and procedure.
The foregoing is particularly apposite here.
Bearing in mind the vagueness of the line of separation of which the court above speaks, we have read many cases falling on either side of the line and have concluded that the present case more closely parallels the situation existing in Title Insurance & Trust Co. v. Commissioner, supra, relied on by respondent. We hold that Main-Hammond was a business trust created and operated in behalf of its beneficiaries for their profit. Accordingly, respondent is sustained in his determination that Main-Hammond was an association taxable as a corporation.
In view of the action taken above with respect to Docket No. 29936, the merits of the question raised therein need not now be considered.
Decision in Docket*60 No. 27157 will be entered for the respondent.
An order will be entered dismissing Docket No. 29936 for lack of jurisdiction.
Footnotes
1. SEC. 3797. DEFINITIONS.
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof --
* * * *
(3) Corporation. -- The term "corporation" includes associations, joint-stock companies, and insurance companies.↩