*2203 TRUSTS. - Four individuals purchased a tract of land and created a trust in which each held an equal interest and with a single trustee, who held title and liquidated the property by subdivision and sale of lots through a real estate agent. No business was transacted by the trustee except the execution of deeds to lots sold by the agent, the collection from the agent of amounts received from lot sales, payment of expenses incurred by the agent for improvements, and the making of distributions to the four beneficiaries. Within one year from the date of enactment of the Revenue Act of 1928, the trustee notified the respondent in writing of his exercise as to the calendar years 1924 and 1925 of the option permitted by section 704(b) thereof. Held, that for the years in question, the trust must be considered as a trust and not as an association, and its income, whether distributed or not, taxed in equal amounts to its four beneficiaries.
*1362 By these proceedings, consolidated for hearing and decision, redetermination is sought of deficiencies*2204 in income taxes of the several *1363 petitioners asserted by respondent for years and in amounts as follows:
| Deficiency | |||
| Petitioner | Docket No. | Year 1924 | Year 1925 |
| Lucian S. Moore, Jr., Trustee for the Lucian S. Moore, Jr., Trust | 38011 | $1,109.60 | $1,065.48 |
| Gaylord W. Gillis | 42742 | 270.81 | 739.85 |
| James S. Holden | 42854 | 1,509.95 | 930.65 |
| David S. Carter | 42940 | 283.59 | 465.89 |
The deficiencies arise by reason of respondent's action in determining the Lucian S. Moore, Jr. Trust to be an association taxable as a corporation and recomputing its tax on that basis, and, as to the individuals, by treating as dividends subject to surtax the amounts distributed by it to them as its beneficiaries.
FINDINGS OF FACT.
Shortly prior to April 1, 1916, the four individual petitioners in this proceeding, who were residents of Detroit, Mich., acquired for their joint interest several pieces of real estate lying together and constituting one tract of approximately 28 acres. Title to this property was taken in the name of Lucian S. Moore, Jr. The said Moore was a salesman for the real estate firm of James S. Holden & Co. The petitioner, James S. Holden, *2205 was a member of that firm and a prominent real estate operator. The petitioner, Gaylord W. Gillis, was an officer of a wholesale dry-goods business, and the petitioner, David S. Carter, was an overall manufacturer. The two last named were not real estate operators. They occasionally bought a piece of real property or sold one through some agent.
Thereafter, on April 1, 1916, these four individuals executed the following declaration of trust and indenture:
WITNESSETH: That, whereas, on the day first above written there was conveyed to said Trustee, certain moneys as set forth in "Schedule A" attached hereto and made a part hereof, and identified by the signatures of the parties thereto, to be held by him upon the Trust hereinafter set forth:
Now, THEREFORE, I, the said Trustee, Lucian S. Moore, Jr., speaking in my own behalf and for any successor or successors or future associate Trustee, do hereby declare said Trust as follows:
1. This Trust shall be binding upon the Trustee as well as to future Trustees, present holders or future purchasers of shares.
2. The affairs of the Trust created hereby shall be conducted in the name of Lucian S. Moore, Jr. and all Trust property*2206 and Trust funds shall be held under that name.
3. The Trustee herein provided, or his successor, successors or associates, shall have legal title to the Trust property and exercise full power and authority over the same.
4. The Trustee herein named shall hold office during the full term of the Trust created hereby, unless incapacitated through death, disability or *1364 operation of law, or until resignation. In the event of any such incapacity or resignation, the cestui que trust shall have the power to appoint a Trustee to fill the vacancy thus created, and such Trustee shall succeed to the title of the Trust property as fully as did his predecessor.
5. This Trust shall continue in force until December 31, 1930.
6. The Trustee thus provided shall hold the legal title to all property at any time belonging to the Trust, in trust however, for the benefit of all the shareholders from time to time constituting the Trust, in proportion to the number of shares held by each, and the said Trustee shall have absolute control, management and disposition of the property, and that without giving bond.
7. The beneficial interests in this Trust shall be divided into*2207 one hundred (100) shares and as evidence of the ownership of said shares the Trustee shall cause to be issued to each shareholder a negotiable certificate or certificates in such form as they may by resolution adopt, said shares to be without par value.
8. The cestui que trust shall have no legal right to the Trust property or any title therein, or the right to call for a partition of the same, a dissolution of the Trust, or an accounting, but shares hereunder shall be personal property, giving only the rights in the instrument and certificates thereof, specifically set forth, and to a division of the Trust funds upon the dissolution of the Trust.
9. The death, insolvency, or bankruptcy of any shareholder, the transfer of his or her interest by sale, gift, devise or descent or otherwise, during the continuance of this Trust shall not operate as a dissolution of this Trust nor shall it have any effect whatever upon the Trust, its operation or mode of business, but his or her heirs, assigns or representatives shall simply and only succeed to the rights of the original shareholder.
10. The shares of beneficial interest shall be deemed personalty, transferable only on the books*2208 of the Trustee upon surrender of the certificates therefor, and then only upon the written consent of all of the other holders of beneficial interest then constituting the cestui que Trust. Transferees shall, upon becoming shareholders, be entitled to all of the rights and subject to all of the liabilities of the original subscribers hereto.
11. It is hereby expressly declared that a Trust and not a corporation, association or partnership is hereby created, and neither the Trustee, his successors nor the holders of beneficial interest, either present or future, shall ever be personally liable hereunder as partners or otherwise, in their individual capacities.
12. The Trustee shall not be liable in any event for the act or omission of any other person whatsoever, whether employed by such Trustee or not, or for any act or omission other than his own personal breach of trust.
13. The Trust funds and property of this Trust shall stand primarily charged with the burden of the payment of all debts, claims, demands against and liabilities of the Trust.
14. The Trustee is hereby authorized to engage in and carry on the business of buying and selling real estate; buying, improving*2209 and subdividing acreage into city lots and selling the same; buying and selling land contracts; selling real estate for others on a brokerage or a commission basis; employing salesmen to so purchase and sell real estate and land contracts; and to transact such other business as may be directly connected with the above-stated activities or that may be incidental thereto or convenient and desirable to the furtherance of the interests of the said Trust.
15. The Trustee shall have as full power and discretion as if the absolute owner of the funds in question to invest and reinvest, to sell, transfer and *1365 convey any part or all of the said Trust funds or property growing out of the use or investment of said funds upon such terms and conditions as he may see fit, and he may at his own discretion and in his own judgment accumulate or distribute periodically, all or a portion of any net profits or earnings which may arise from the investment or employment of the funds constituting this Trust. The Trustee may borrow money and mortgage or pledge as security for such loan or loans any property or funds belonging to the Trust.
16. The Trustee shall keep such records as he*2210 may deem expedient and that will, at the close of the Trust period, intelligently and accurately set forth the true results of the business transacted by the said Trustee in the name of the Trust, during the life of the Trust.
IN WITNESS WHEREOF, the said Trustee has subscribed his name hereto in token of his acceptance of this Trust, the day and year first above written.
(Signed) Lucian S. Moore, Jr.
"SCHEDULE A"
THIS INDENTURE made this first day of April, 1916, by and between James S. Holden, Gaylord W. Gillis, David S. Carter, and Lucian S. Moore, Jr., holders of beneficial interest for themselves and their assigns, and the undersigned Trustee for himself and his successors,
WITNESSETH, That the following described property has this day been transferred to the undersigned Trustee as a Trust Estate to be known as Lucian S. Moore, Jr. Trust, in accordance with a certain Agreement and Declaration of Trust between the said parties of even date herewith to which this Schedule is attached and of which it is made a part.
| LIST OF CASH AND PROPERTY | |
| Cash | $12,000.00 |
It is understood and mutually agreed that the above fund was contributed equally by*2211 the above-mentioned holders of beneficial interest, that is to say, the above Trust fund is equitably owned as follows:
| James S. Holden | $3,000.00 |
| Gaylord W. Gillis | 3,000.00 |
| David S. Carter | 3,000.00 |
| Lucian S. Moore, Jr | 3,000.00 |
| Total | $12,000.00 |
And that certificates of beneficial interest shall be issued by the Trustee upon the above stated basis, and that any distributions made by the Trustee, either by way of distribution of profits or in final liquidation, shall be made to the above mentioned shareholders or their assigns in the same proportion as the above contribution.
IN WITNESS WHEREOF, the parties have hereto set their hands and seals the day and year first above written.
(Signed) JAMES S. HOLDEN
LUCIAN S. MOORE, JR.
GAYLORD W. GILLIS
DAVID S. CARTER
Holders of Beneficial Interests.
LUCIAN S. MOORE, JR.,
Trustee.
*1366 Following the execution of the above declaration of trust, Lucian S. Moore, Jr., as trustee, made arrangements with the owner of an adjoining tract of some 22 acres to join in having a survey and plat made of the entire tract of some 50 acres, for the purpose of subdivision and sale. This was done, the*2212 trust dividing the cost of survey and platting with this other party. Thereupon, Lucian S. Moore, Jr., as trustee, entered into a contract with a real estate firm for the sale by it of the lots as shown by the plat on the property of the trust, these sales to be on long terms of payment, the agent to receive 20 per cent commission for sale and 5 per cent commission on collections.
In the following years all of this property was sold for the trust by this agent, and the only activities of Lucian S. Moore, Jr., as trustee, were the receiving of remittances from the agent representing collections, the execution of deeds in transactions of sale of the lots by such agent, the distribution of profits to the several beneficiaries, and the disbursing of funds for improving the subdivision, these improvements being supervised and carried out by the agent making sales of the property.
At no time has this trustee received any compensation for services as such. The certificates of interest provided for by the trust instrument were never issued, no meetings of the beneficiaries were ever held, the administration of the trust being left wholly to the trustee. The trust has carried on no*2213 business whatsoever except the improvement and sale through its agents of this particular tract of land and the collection and distribution of the proceeds of those sales. It has neither bought nor sold other property. Under the plan adopted for sale of these lots on the basis of a small down payment and the balance over a long term of years, the property would be liquidated in 1930, the termination of the life of the trust.
Lucian S. Moore, Jr., as trustee, has for each year reported the income as that of a trust and computed the tax on the basis of that of an individual. On May 18, 1929, this trustee notified respondent in writing as follows:
Reference is made to the Income Tax Returns of the Lucian S. Moore, Jr., Trust, for the years 1925 to 1927 inclusive, which were executed and filed by the undersigned Lucian S. Moore, Jr., as Trustee.
This Trust was created and was actually operated for the express purpose of liquidating a single parcel of real estate and for none of the years in question has the Trust filed a tax return as an association.
Request is hereby made that the said Trust be considered a Trust and not an association or corporation and taxable under the*2214 provisions of section 219 of the Revenue Act of 1926, and not as an association or corporation.
OPINION.
TRUSSELL: It is contended by counsel for petitioners that the letter from the trustee to the respondent under date of May 18, 1929, and *1367 set out in our findings of fact, constituted an election by the former under section 704(b) of the Revenue Act of 1928, which provides:
For the purpose of the Revenue Act of 1926 and prior Revenue Acts, a trust shall, at the option of the trustee exercised within one year after the enactment of this Act, be considered as a trust the income of which is taxable (whether distributed or not) to the beneficiaries, and not as an association, if such trust (1) had a single trustee, and (2) was created and operated for the sole purpose of liquidating real property as a single venture (with such powers of administration as are incidental thereto, including the acquisition, improvement, conservation, division, and sale of such property), distributing the proceeds therefrom in due course to or for the benefit of the beneficiaries, and discharging indebtedness secured by the trust property, and (3) has not made a return for the taxable*2215 year as an association.
Respondent admits that the Lucian S. Moore, Jr. Trust complies with conditions 1 and 3 of the quoted section, but denies that condition 2 is met, it being insisted by him that sections 14 and 15 of the declaration of trust preclude a claim by petitioners that the organization of the trust was with the sole intention and purpose of liquidating this real estate. In reaching this conclusion, it is evident that these sections have been considered by respondent as declarations of purpose, whereas they are merely grants of power, and it is indicated from the record that these general powers were given the trustee as probably necessary to protect the interests of the trust where occasions might arise calling for reacquisition and resale of the lots in cases where the original purchasers had failed to make their payments.
We can see in the granting of these powers nothing inconsistent with an intention to merely liquidate this one tract in a single venture and, as a matter of fact, the activities of the trustee appear to have been limited to the execution of a contract with a real estate firm to sell the property, the execution of deeds to property sold by that*2216 firm, the receipt of remittances from the agent, payment of expenses incurred by such agent, and the distribution of the remaining funds to the four beneficiaries.
We can see in the creation of the trust here in question nothing more than action toward simplifying and making easier the carrying out of the transactions necessary in liquidating the property by placing the title in one party as trustee, and this view is fully borne out by the history of the trust activities. It is insisted by respondent that the trust instrument shows that the creation of the trust was to carry on a general real estate business, but we can see nothing in that instrument inconsistent with an intention merely to sell the trust estate and distribute the proceeds, and it must be admitted that the activities of the trust have been limited to this alone. The trust is one created by four individuals, two of these active real estate men with other businesses occupying their time and wholly distinct and *1368 separate from the business of the trust, and the other two not real estate operators. These four individuals had just acquired a tract of property with the intention of reselling it in small*2217 parcels or lots through a real estate agent and accordingly created a trust with a single trustee to hold title. This is a usual and customary procedure in such cases, as otherwise every lot sold by the agent employed would necessitate a joint conveyance by all parties and the death of one party might make exceedingly difficult the handling of the property by the agent, even to the point of requiring the filing of a bill in chancery to approve each sale in case the deceased left minor heirs.
We hold that the trust complies with all three of the conditions prescribed by section 704(b) of the Revenue Act of 1928 and is entitled to be considered as a trust and to have its income for 1924 and 1925 taxed to its four beneficiaries under the option exercised by it within one year from the enactment of that act.
Judgment will be entered pursuant to Rule 50.