*691 By separate agreements four syndicate funds were created, which were used for the purchase, development, and sale of four real estate subdivisions. The subscribers thereto were to receive 6 percent interest upon their subscriptions and a share of the profits, if any, based upon the amount of their subscription. The personal liability of each subscriber was limited to the amount subscribed. Transferable shares or interests were created. Management and operation of the subdivisions and the funds were vested in corporate subscribers authorized to deal in real estate. During the taxable year each syndicate made distributions to its subscribers. Held, the syndicates are associations taxable as corporations.
*575 The above entitled proceedings, consolidated for hearing and decision, have one common issue, namely, whether the syndicates are associations taxable as corporations. Two of the proceedings, Saint Louis Hills and Wellston Hills, present an additional question, *692 namely, whether payments made by the syndicates to their subscribers constituted allowable deductions as interest paid.
Deficiencies were asserted for 1932 against each syndicate under the names and in the amounts following:
| Saint Louis Hills Syndicate Fund | $5,058.66 |
| Wellston Hills Syndicate Fund | 1,936.17 |
| Webster Hills Syndicate Fund | 204.94 |
| Kingshighway Hills Syndicate Fund | 2,606.49 |
*576 In each proceeding the petitioners are stated to be the named syndicate and the subscribers thereto. The name of each subscriber and the amount of his, her, or its subscription to the total fund is set forth in describing the petitioner in each proceeding. For convenience, the first names only will be used in designating each "Syndicate Fund."
FINDINGS OF FACT.
Each of the foregoing syndicate funds came into existence by virtue of syndicate agreements entered into on the dates following: Kingshighway, February 1, 1926; Webster, April 21, 1928; Wellston, September 15, 1928; and Saint Louis, May 1, 1929.
The principal subscriber to each fund was the Cyrus Crane Willmore Organization, Inc., hereinafter referred to as the Willmore Organization, a Missouri corporation*693 created March 23, 1922. All the capital stock of the Willmore Organization was owned by Cyrus Crane Willmore, and the stated purpose of its incorporation was:
To purchase or otherwise acquire, hold and own real estate, notes and bonds and mortgages securing notes and bonds, to subdivide and plat real estate acquired by the Company, to build houses and otherwise improve real estate, to sell, mortgage and otherwise dispose of the same, to lease or rent out or operate property belonging to the Company, and contract with respect to any and all of said purposes, and generally to engage in the real estate business.
By warranty deed of September 29, 1925, the Board of Trustees of the Missouri Botanical Gardens transferred to the Willmore Organization the tract of land which later became the subdivision known as Kingshighway Hills. The purchase price of the property was $274,961.50, part of which was paid in cash and part by notes secured by deed of trust executed by the Willmore Organization.
The parties to the Kingshighway Hills Syndicate agreement are the realty company, Willmore Organization, and the "subscribers hereto collectively." After reciting the acquisition, the terms*694 of purchase, and the proposed subdivision of the land, it is stated therein that the Willmore Organization:
* * * requires financial aid to enable it to develop and improve the said property with streets, alleys, sidewalks, gutters, sewers, water, electric light, gas, etc. and to pay the balance of the purchase price of the said property and to properly advertise the sale of the property and to employ a selling organization to sell the same;
The syndicate subscribers "agreed to furnish such aid", their total subscription amounting to $250,000, of which the Willmore Organization subscribed $200,000. It was provided that the fund "shall be kept on separate deposit * * * and shall be used * * * only for the following purposes; * * *"; to repay Willmore Organization *577 for disbursements in connection with the purchase of the property; (b) to pay the interest and principal due under the deed of trust; (c) to pay taxes; and (d) to pay engineering fees for platting, and to pay for improvements, including streets, alleys, sidewalks, gutters, sewers, water, electric light, gas, certificates of title, auditor's fees, legal fees, etc.
The Willmore Organization reserved the sole*695 right to determine where and what improvements were to be made and the prices and terms at which the lots were to be sold. Checks against the $250,000 fund were to be issued by the Willmore Organization as syndicate manager. The entire fund had to be paid in within two months, or the agreement became void and the money previously paid in was to be refunded by the Willmore Organization.
The agreement provides that the subscribers "shall not be regarded as partners of each other or of the Company (Willmore Organization). The Syndicate subscribers are advancing the amounts subscribed by them respectively solely to aid the Company, to enable it to finance the project, but the amounts paid in by subscribers shall not be regarded as a loan to the Company and said amounts are not to be repaid to them except as hereinafter stated." In the other three agreements the wording of the last three lines was changed to read "* * * but the amounts paid in by subscribers shall not be regarded as a loan for which the Company (Realty Company) assumes personal responsibility and said amounts are not to be repaid to the subscribers except as hereinafter stated."
The amount of the fund could be increased*696 by additional subscriptions if "a larger sum is required to enable it (Willmore Organization to finance the project; * * *." Upon increase each subscriber was to have the opportunity to subscribe for his pro rata share.
All the proceeds from the sale of lots were to be "deposited to the credit of Kingshighway Hills Syndicate Fund." The fund shall be used and applied as follows: (a) first 25 percent of sale price to Willmore Organization to cover salesmen's commissions, expenses of selling, advertising, postage, collecting deferred payments, keeping syndicate's accounts, clerical work, overhead expenses of every description, including compensation to Willmore Organization for managing; (b) next, out of Syndicate Fund, Willmore Organization "shall pay to the Syndicate subscribers, on account of their interest therein, a sum equal to 6 per cent per annum"; (c) next, pay all amounts which are to be paid out to fully pay for the property, improvements, taxes, interest, etc., also any income taxes the Willmore Organization has to pay because of profits resulting from sale of lots; (d) distributions to subscribers shall be made by Willmore *578 Organization only after reserves have*697 been set aside to guarantee all payments when due; distributions shall be based on the pro rata share of each subscriber in the total fund. The Willmore Organization was "authorized to discount and sell outstandings" in order to wind up the syndicate. If not wound up on or before December 31, 1935, any subscriber could demand termination of the syndicate and distribution of its remaining assets.
The agreement further provides that "no profits are to be retained" by the Willmore Organization except such profits as it may receive as a syndicate member, and the profit it is able to make out of the first 25 percent of all sales hereinbefore mentioned. The Willmore Organization guaranteed the subscribers "against any loss in excess of their subscription, * * *."
Transferable certificates or receipts were provided for, which were to be issued by the Willmore Organization in form substantially as follows:
No.
Amount $
KINGSHIGHWAY HILLS SYNDICATE CERTIFICATE.
St. Louis, 192
We hereby certify that (or his assignor) has subscribed and duly paid Dollars into the Syndicate known as Kingshighway Hills Syndicate, formed to enable this Company to purchase, develop, improve and*698 sell the property known as Kingshighway Hills Subdivision, as provided in the agreement entered into between this Company and the original Syndicate Subscribers, bearing date February 1, 1926. The Syndicate Fund originally subscribed is $250,000.00, but the Company reserves the right to accept additional subscriptions whenever the Company finds it necessary to do so. The registered holder hereof is entitled to participate pro rata with other Syndicate Subscribers in the distributions and profits of the Syndicate, upon presentation of this certificate to the Company for endorsement of such payment thereon. Distributions, not exceeding 6% per annum, may be made hereon to the registered holder hereof when and as may be determined by the Company without requiring the endorsement of such payments hereon. The rights hereunder are transferable only upon surrender to the Company of this certificate properly endorsed for transfer.
CYRUS CRANE WILLMORE ORGANIZATION, INC.,
By
President.
Assignment
For value received I hereby sell, assign and transfer unto all my right, title and interest in the within certificate and in the Syndicate therein referred to.
Dated 19
*699 Witness:
*579 Although the agreement provided for the issuance of the above certificate, the procedure actually followed was different. Each subscriber signed a master copy of the agreement and received in lieu of the certificate, as evidence of his interest, a counterpart of the syndicate agreement executed by the realty company owning the property.
Cyrus Crane Willmore followed the same procedure with respect to the Wellston, Webster, and Saint Louis syndicate agreements. On or about April 16, 1928, the Webster Hills Realty Co. was incorporated under the laws of Missouri. Its capital stock of $5,000 was all owned by the Willmore Organization. Its purpose and powers, as stated in its charter, are identical with those in the charter of the Willmore Organization, hereinabove set forth. Real estate acquired by Willmore was conveyed to the Webster Hills Realty Co. from a wholly owned subsidiary of the Willmore Organization by general warranty deed on or about April 25, 1928. The Webster Hills Syndicate agreement was between the Realty Co. and the subscribers collectively. The recitals therein are the same as hereinabove set forth for Kingshighway, except as to names*700 and amounts. The total fund subscribed was $100,000, of which the Willmore Organization subscribed $69,000 and the Webster Hills Realty Co., $5,000. Except for the amount of the purchase price to be paid for the property, $80,162.98, and the termination date, December 31, 1938, the provisions of this agreement are identical with the provisions of Kingshighway agreement as hereinabove analyzed.
On or about August 17, 1928, Willmore caused to be organized the Wellston Hills Realty Co., a Missouri corporation. It had a capital stock of $5,000, all of which was owned by the Willmore Organization. The purpose and power stated in its charter are identical with those of the Willmore Organization, hereinabove set forth. Willmore purchased certain unimproved property which he turned over to the Realty Co. for the purchase price that he had agreed to pay. The property was conveyed to the Wellston Hills Realty Co. by warranty deed on or about September 13, 1928. The Wellston Hills Syndicate agreement is between the Realty Co. and the subscribers collectively. The recitals in the agreement are the same as hereinabove set forth as to Kingshighway except as to names and amounts. The*701 total fund subscribed was $100,000, of which the Willmore Organization subscribed $67,000 and the Wellston Hills Realty Co., $5,000. If not wound up by December 31, 1928, the syndicate could be terminated upon the demand of any subscriber. Except for the purchase price of the property, $127,518, the Wellston agreement corresponded in every other particular with the provisions of the Kingshighway and Webster agreements hereinabove considered.
*580 While pushing his other subdivisions Willmore had been acquiring an undeveloped tract which later became known as Saint Louis Hills. It required about two years to secure the different parcels making up this tract. On or about August 17, 1928, Willmore caused to be organized the Saint Louis Hills Realty Co. It had $50,000 of capital stock, all of which was owned by the Willmore Organization. At different dates during September and October 1928 separate parcels of land composing the Saint Louis Hills Subdivision were conveyed to the Saint Louis Hills Realty Co. The syndicate agreement was between the Realty Co. and the subscribers thereto collectively, and it includes in the recitals, in addition to those common to the other*702 three agreements already mentioned, a provision for the possible acquisition of additional lands in the vicinity of the tracts already owned "for the purpose of improving and marketing the same in connection with lands now owned; * * *" The total fund subscribed was $750,000, of which the Willmore Organization subscribed $520,000 and the Realty Co., $50,000. In addition to the uses of the fund common to the other syndicate agreements, this syndicate's fund was to be used to pay interest on borrowed money, if any, and the principal amount of any such loans, and to pay the cost of arranging for suitable transportation facilities and to insure proper service, or to pay the cost of constructing such facilities and operating or contracting for the operation by others.
Payments to the Willmore Organization out of the proceeds from the sale of each lot were to be on a sliding scale rather than a flat 25 percent, but were to be used for the same purposes as specified in (a) of the Kingshighway agreement, supra. With the exceptions above noted, the provisions of the Saint Louis Hills Syndicate agreement were substantially the same as the provisions of the other agreements heretofore*703 considered.
The notes, deeds of trust, contracts for grading, sewers, paving, and all other improvement contracts were executed by the realty company owning the property. The Willmore Organization was the selling agent for all of the realty companies. It advertised the subdivisions extensively, either in its own name, or by stressing the name "Willmore", using newspapers, magazines, billboards, and direct by mail methods. Advertisements were written in English, German, Italian, and Jewish. All applications for the purchase of lots were made to the realty company owning the land, and sales contracts, earnest money receipts, and warranty deeds were executed by the realty companies.
Willmore's reason for forming separate realty companies to hold title to land in the various subdivisions was to prevent a loss to all if one failed. He was president of each company and the subscriptions to each fund were procured by him, individually. He told each *581 prospective subscriber of his plan, that his own funds were invested therein, and that there was a good chance of making more than 6 percent on their investment. He devised the syndicate plan in order to secure needed funds*704 without obligation to repay at any definite time.
The syndicate subscribers never held a meeting, they had no charter, bylaws, organization, or vote. No statements were furnished to syndicate subscribers, and no books or records were maintained for the syndicates as such, but books of account, consisting of a general ledger, cash receipts, cash disbursements, and journal, were kept by the realty companies. The realty company advised each syndicate subscriber by letter what portion of the profit the subscriber was entitled to and that such profit should be reported in all income tax returns.
The terms of the various syndicate agreements have been carried out, and none of the syndicates have been liquidated.
During the taxable year 1932, the following distributions were made to the syndicate subscribers as indicated:
| Kingshighway, as profits | $3,030.00 |
| Wellston, as return of capital | 21,000.00 |
| Do., as interest | 1,512.50 |
| Webster, as profits | 5,000.00 |
| Saint Louis, as interest | 22,550.00 |
The sums of $1,512.50 and $22,500, designated as interest payments by Wellston and Saint Louis, respectively, were deducted on the books and in the returns filed as interest*705 paid.
The syndicate subscribers in each of the above named syndicates were associated in a common enterprise for the purpose of transacting a real estate business. Each of the syndicates is an association taxable as a corporation.
OPINION.
ARNOLD: The principal issue in each of these proceedings is whether the syndicates are associations taxable as corporations. In discussing this issue it should be noted that the terms of the syndicate agreements are so nearly identical that a principle applicable to one is applicable to all. Likewise, we direct attention to the fact that the method of creating and operating each syndicate was so much alike that any principle applicable to one is applicable to all.
In addition we have certain factors in these proceedings which are undisputed, or are so clearly established as to be indisputable. We are satisfied that, whatever designation may be given to the enterprises, there can be no doubt that each was essentially a business undertaking. Each subscriber put in capital with the expectation and hope of realizing a profit. Their subscriptions were pooled and *582 the fund used to purchase unimproved property, previously acquired*706 by Cyrus Crane Willmore or by his wholly owned corporation, the Willmore Organization. Their subscriptions were further used to improve and subdivide the property purchased, and to pay the taxes thereon. The agreements, the testimony, and the other evidence of record indicate that the undertaking was one for mutual benefit and profit to all. The business of each enterprise was the subdivision and sale of tracts of land. There was no thought or even suggestion that liquidation of any sort was involved. Since the entire record points to the business nature of the enterprise, and since there obviously was a pooling of capital by the various subscribers who were participating, the question naturally arises whether the syndicates were not, from an income tax standpoint, associations taxable as corporations.
Petitioners contend that these subdivision projects were actually Cyrus Crane Willmore's, because he owned the Willmore, Organization 100 percent, and it in turn owned the realty companies 100 percent. It is their contention that Willmore acquired the properties, but needed capital for their development and improvement. The syndicate agreements, they say, were financial vehicles*707 which Willmore used to raise additional capital without being obligated to repay at any definite time and without any obligation to repay if the subdivision was a failure. Willmore was able to sell the idea because of his own ability and personality and because of the opportunity to share in the profits if his subdivisions proved successful. According to the petitioners, the subscriptions were loans or advances in the nature of loans.
The Willmore Organization was the syndicate manager as to each syndicate, issued checks against the syndicate fund, and determined the improvements necessary, the prices and terms of sale, and otherwise operated under the provisions of each agreement. The other operating party under the agreement was the realty company holding title to the property. It contracted for improvements, receipted for money, executed deeds of trust and purchase agreements for lots, conveyed the land sold, etc. Both the syndicate manager and the titleholder of the property were Missouri corporations. It was by virtue of the activity of these two subscribers that the syndicate members secured centralized management and conduct of the business. The subscriber, by executing*708 the agreement, specifically delegated to these two corporations the responsibilities of operating and managing the enterprise for the common benefit of all.
The realty companies, holding title to the separate tracts, were authorized, by virtue of the corporate powers stated in their charters, to hold title to and engage in the real estate business. Since *583 the fund subscribed was to be, and was in fact, first applied to the purchase of the unimproved property, and since title thereto was held in the name of one of the subscribers, it seems idle to contend that no subscriber, other than the titleholder, had any interest whatsoever in the property purchased. It seems to us that each subscriber had a proportionate interest in the assets of the undertaking even though title was taken in the name of another. Cf. Central Republic Bank & Trust Co., Trustee,34 B.T.A. 391">34 B.T.A. 391.
Each syndicate agreement provided expressly for the transferring of the subscriber's rights thereunder, and some of the agreements show that there were either transfers or reductions in members' interests during the existence of the syndicate. It does not appear that the death of any subscriber*709 would terminate or interrupt the continuity of the enterprise one way or the other. In these respects each enterprise secured the continuity of existence, without interruption by death or transfer of interest, which is peculiar to corporate organizations.
One other factor pointing to the ultimate answer is the express prohibition contained in each agreement against the unlimited liability that partners have in connection with their business. each syndicate agreement contains an express disclaimer as to any partnership liability between subscribers, or between a subscriber and the realty company holding the land. Each subscriber's personal liability was further limited by the guaranty of the realty company that his loss, if any, should not exceed the amount of his subscription. In this respect each subscriber secured a limitation of personal liability exactly like the liability of a corporate stockholder.
Recent decisions of the Supreme Court have set forth the distinguishing features of a trust which may be regarded as making it analogous to a corporate organization, where the trust is created and maintained as a medium for the carrying on of a business enterprise and sharing*710 in its gains, Morrissey v. Commissioner.296 U.S. 344">296 U.S. 344, and related cases in 296 U.S. at pages 362, 365, and 369. It is true that we do not have a trust here, but we do have "associates", and we do have resemblance to a corporate organization. In addition to considering trusts as associations, the Supreme Court in the Morrissey decision discussed associations as corporations, saying:
The inclusion of associations with corporations implies resemblance; but it is resemblance and not identity. The resemblance points to features distinguishing associations from partnerships as well as from ordinary trusts. As we have seen, the classification cannot be said to require organization under a statute, or with statutory privileges. The term embraces associations as they may exist at common law. Hecht v. Malley, supra. We have already referred to the definitions, quoted in that case, showing the ordinary meaning of the term as applicable to a body of persons united without a charter "but upon the *584 methods and forms used by incorporated bodies for the prosecution of some common enterprise." These definitions, while helpful, are not*711 to be pressed so far as to make mere formal procedure a controlling test. The provision itself negatives such a construction. Thus unincorporated joint-stock companies have generally been regarded as bearing the closest resemblance to corporations. But, in the revenue acts, associations are mentioned separately and are not to be treated as limited to "joint-stock companies," although belonging to the same group. While the use of corporate forms may furnish persuasive evidence of the existence of an association, the absence of particular forms, or of the usual terminology of corporations, cannot be regarded as decisive. [P. 357.]
In Swanson v. Commissioner,296 U.S. 362">296 U.S. 362, 365, the Court pointed out that the limited number of actual beneficiaries did not alter the nature and purpose of the common undertaking. Nor did the limitation of their operations to the property first acquired change the quality of that undertaking.
Again in Helvering v. Coleman-Gilbert Associates,296 U.S. 369">296 U.S. 369, 373, the Supreme Court points out that mere differences of formal procedure should not be unduly emphasized. It is stated:
*712 * * * If such differences were to be made the test in determining whether or not an enterprise for the transaction of business constitutes an association, the subject would be enveloped in a cloud of uncertainty, and enterprises of the same essential character would be placed in different categories simply by reason of formal variations in mere procedural details. The significant resemblance to the action of directors does not lie in the formalities of meetings or records but in the fact that, by virtue of the agreement for the conduct of the business of a joint enterprise, the parties have secured the centralized management of their undertaking through designated representatives. [Emphasis supplied.]
And so it is here. These subscribers formed an organization to conduct the business of holding, improving and selling real estate, with provision for the management of the undertaking through designated representatives (two Missouri corporations), Bing & Bing, Inc.,35 B.T.A. 1170">35 B.T.A. 1170, with continuity undisturbed by death or changes in ownership, and with limited liability. The subscribers were associated in a joint enterprise for the transaction of business*713 and the making of profits. In our opinion, therefore, each of the foregoing syndicates was an association taxable as corporations are taxed. Cf. Thrash Lease Trust,36 B.T.A. 444">36 B.T.A. 444.
Our decision on the taxable status of the syndicates disposes of the question raised in two of the proceedings, Saint Louis and Wellston, that distributions made by them represented interest paid. These distributions can not be treated as interest payments, and respondent's action in disallowing deductions claimed therefor is approved.
Decision will be entered for the respondent.