*1182 Held, that the trust involed was not an association taxable as a corporation.
*1172 This proceeding is for the redetermination of deficiencies in income taxes for the years 1924, 1925 and 1926 in the sum of $17,616.75 for 1924, $11,794.42 for 1925, and $19,208.20 for 1926.
The petitioner alleged as grounds of error:
(1) That the respondent held that the income from the Chicago Stock Exchange Building and other income incidental thereto for the years 1924, 1925 and 1926 was taxable to the petitioners as an association and not as the individual beneficiaries of a certain purported trust, or
(2) That the respondent held that income for the years in question was taxable against the petitioners as an association and not to the petitioners as the individual owners, as joint tenants or as tenants in common, of premises conveyed by a certain trust deed.
FINDINGS OF FACT.
The petitioners are the persons named as trustees under a certain trust agreement dated April 7, 1900. Prior to the date of the execution of this*1183 instrument the petitioners had acquired all the capital stock of the Chicago Stock Exchange Building Company, which had constructed the building at 30 North LaSalle Street in the city of *1173 Chicago. They had bought in fee a portion of the land on which that building was situated and had purchased a long-term lease of the remainder of such land.
On April 7, 1900, the three petitioners, as individuals, caused the building situated at 30 North LaSalle Street, together with the portion of the land owned by them and the lease referred to, to be conveyed to themselves as trustees by a deed of trust executed on that day. This deed of trust provides, among other things, that upon its execution and delivery the trustees, namely, Cyrus H. McCormick, Harold F. McCormick and Stanley McCormick, should cause to be issued to themselves, respectively, receipts reciting that they were entitled to the benefit of their respective contributions to the funds and property held by the trustees under the deed, which contributions were in respect to each of them one-third of the value of the property described in the deed. The deed further provided the manner in which the transfer of the receipts*1184 to other persons might be accomplished through a transfer agent named in the trust deed.
The third, fourth and fifth paragraphs of the trust deed are as follows:
Third: All moneys received by the Trustees, from whatever source, shall be used and expended by them as follows:
(1) In such ways and for such objects as shall, in their judgment, be reasonably necessary or proper for the improvement, protection or conservation of the above described real estate and of the other funds and property of the Trust hereby created, at any time in the possession or control of the Trustees (which real estate, funds and property are hereinafter called the "Trust Estate"), or as shall seem to the Trustees, in the exercise of their discretion, to be calculated to enhance the value of the Trust Estate;
(2) In establishing and maintaining (if the Trustees shall, in their discretion, determine so to do) a contingent fund, or a sinking fund, or both, the amount of such fund or funds from time to time to be determined by the Trustees in their discretion; any such fund may be established and may be distributed one or more times or not at all, according to the Trustees' discretion;
(3) Moneys belonging*1185 to the Trust Estate, in The trustees' opinion not required for either purpose above enumerated, may (at such times as the Trustees shall determine) be divided among the holders of the Receipts issued in accordance with the foregoing provisions of this Deed, in proportion to their respective holdings of Receipts: provided, that any moneys belonging to the Trust Estate and awaiting permanent investment or disposal, may be temporarily put out at interest or invested, converted and re-converted in interest-bearing or dividend-paying securities, by the Trustees.
The title to all moneys and other property acquired by the Trustees as such shall be taken and held by them as Trustees under this Deed and as joint tenants and not as tenants in common.
Fourth: Subject only to the provisions of this Deed, the Trustees shall have as full and absolute control over and right to dispose of the Trust Estate and every part thereof as if they were the absolute beneficial owners thereof; including *1174 (among other things) the power and right to invest and re-invest; to convert and re-convert, to sell for cash or on credit, at public or private sale; to encumber for the purpose of securing*1186 the payment of money; to lease for a term or terms within or beyond the possible life of the Trust hereby created; to exchange, release, partition, grant and acquire easements; to improve, repair and rebuild. The Trustees may borrow money for the purpose of improving, repairing or rebuilding real estate belonging to the Trust Estate or for any other purpose which the Trustees may regard as beneficial to the Trust Estate. The Trustees shall also have such other powers and rights (with respect to the control, management and disposition of the Trust Estate) as are possessed and enjoyed by the absolute owners of similar property, including the power to execute and deliver all instruments and to do all acts necessary or proper to give effect to any other powers by this Deed conferred upon them. But anything in this Deed contained to the contrary notwithstanding, the Trustees shall not at any time within fifteen (15) years after the date hereof have power to dispose of the above described real estate or any part thereof, nor to borrow any money, nor to do any act or execute and deliver any instrument (except leases for ten (10) years or less) which shall have the effect of encumbering*1187 or charging with any lien or claim the real estate above described or any part thereof, without in each case first obtaining the consent in writing of the holders or at least three-quarters (in amount) of the Receipts at the time outstanding, issued in accordance with the preceding provisions of this Deed; which consent shall be expressed and evidenced only in the manner hereinafter provided; and every person whosoever shall be chargeable with notice of any shall be bound by this provision of this Deed from and after the recording hereof in the Office of the Recorder of Deeds of Cook County, Illinois.
In no event, however, shall any person lending or otherwise paying any money or transferring any property other than money to the Trustees be responsible for the proper application of such money or property.
Fifth: The beneficiaries of the Trust hereby created (whose rights shall at all times be subject to the terms and provisions of this Deed) shall have no right of possession, management or control of the Trust Estate, save only so far as is expressly provided in this Deed; no widow, widower, heir or devisee of any beneficiary shall have any right of dower or right to homestead*1188 or right of inheritance or any other real property right, statutory or otherwise, in any real estate belonging to the Trust Estate.
The beneficiaries hereunder shall always have a right of account against the Trustees. But the property interests of the beneficiaries under this Deed are confined to such personal property, being income and profits and proceeds of sale of the Trust Estate, as shall, under the provisions of this Deed, be subject to division from time to time among the Receipt-holders hereunder. Otherwise, the rights and remedies of the beneficiaries shall be exclusively against or through the Trustees.
The relation between the Trustees and the beneficiaries established by this Deed and intended so to be established, is the relation which exists between active Trustee and cestui que trust, and is no other relation; the relation between the Trustees (as among themselves) established by this Deed and intended so to be established, is the relation which exists between co-Trustees and joint-tenants of the legal title to property held in active trust, and is no other relation; the relation between the beneficiaries (as among themselves) established by this Deed and*1189 intended so to be established, is the relation between the co-owners of the realized net income and profits and proceeds of sale (when set apart for distribution) of an estate held in active trust, and is no other *1175 relation. The Trustees shall be the representatives of the beneficiaries in such a sense that in no suit affecting or relating to the Trust Estate to which the Trustees are parties (except suits between the beneficiaries themselves), shall the beneficiaries or any of them be necessary or proper parties by reason of their interest under this Deed, and in the Trust hereby created.
The trust deed further provides that, in the event of a vacancy occurring among the trustees, the remaining trustees or trustee shall continue to discharge the duties and exercise the powers conferred by the deed and appoint a successor or successors to the retiring trustee or trustees. Under the provisions of the deed three-fourths in interest of the receipt holders at any time may remove any trustee or trustees and appoint a successor or successors or fill any vacancy which the acting trustee or trustees might have filled, and, in the event that the trustees should refuse to act*1190 or in the case of a simultaneous vacancy of all three trusteeships, were authorized to fill vacancies or appoint three new trustees.
The immediate reason for the execution of the trust deed was the desire of the three McCormicks to create a security which could be used as collateral in raising funds to loan to the McCormick Harvester Machine Company, which needed money for improvements. The McCormicks wished to avoid the publicity attendant upon a loan secured by a recorded mortgage covering any of their realty. Upon the execution of the trust deed the three McCormicks borrowed approximately $1,000,000 from the Scottish Provident Institution of Edinburgh, Scotland, giving the lender their promissory note for that amount and causing receipts covering the beneficial interest under the trust deed to which they were each, respectively, entitled, to be issued to the lender as collateral to the note. This loan was renewed once, but in 1912 was entirely paid off out of the personal funds of the three McCormicks and not out of the income of the trust property. Upon payment of the note the beneficial interest receipts issued to the Scottish Provident Institution as collateral were canceled*1191 and new receipts declaring beneficial interest were issued to the McCormicks in accordance with the terms of the trust deed. Thereafter none of these receipts were transferred by them or by either of them.
The entire management of the Chicago Stock Exchange Building at all times material to this proceeding was under the direction of one Judson F. Stone, whose principal business consisted in managing and representing the McCormick interests, ordinarily known as the McCormick Estates, in Chicago and elsewhere. In that capacity and as an individual Stone was an officer and director of numerous corporations. As representative of the McCormick interests and as agent of the so-called McCormick Estates, Stone was in full charge of an office in which, under the name of the McCormick Estates, are *1176 pooled substantially all of the affairs of the various individuals who are heirs of Cyrus H. McCormick, Sr. In that capacity Stone held powers of attorney from the various interested individuals to act for them, respectively, in all matters as fully as they might act in their individual capacity.
The office managed by Stone was located in the Chicago Stock Exchange Building and*1192 in all the years in question and prior thereto had custody of all securities which the various members of the McCormick family owned. It managed all of their real estate and collected all dividends and all bond interest belonging to them. It also had possession of all their title papers and other evidence of property, and all books of account connected with such interests were kept by the office force. Under the direction of Stone all of the income-tax returns of all of the said individuals were prepared, and after they were signed by him were filed.
The real estate managed by the office directed by Stone consisted of from 25 to 30 parcels. The office made all leases connected with these parcels, made necessary repairs and alterations, bought the supplies connected therewith, engaged all the help necessary to the operation of the properties, compromised claims and paid all bills.
The Chicago Stock Exchange Building was managed by Stone in exactly the same manner as all of the other property owned by the McCormicks individually was managed. The building had from 200 to 300 tenants during the years in question and its gross income amounted to more than $400,000 in each of*1193 such years. The net income was distributed by Stone to the three McCormicks at irregular intervals. At times it was accumulated by him in considerable amounts to be used for purposes of improvement of the Stock Exchange Building.
A separate bank account was kept for the Stock Exchange Building. During the period in question it was the policy of the members of the McCormick family to hold real estate in the individual name of the owners. During these years the trustees had no formal meetings and no minutes of the operations of the trust or of meetings of the trustees were made. No official communications were ever sent by Stone to the trustees as such. The trust, as such, had no employees and paid no bills or accounts. In general the business of the property covered by the trust deed was managed by the office of which Stone was the head, without reference to the three McCormicks. In matters of large policy, however, Stone consulted them individually, though never as trustees.
Prior to 1912 Stanley McCormick, one of the trustees and a holder of a beneficial receipt, became incompetent to manage his business *1177 affairs. He was not, however, judicially adjudged*1194 incompetent until the year 1929.
The trustees filed fiduciary returns for each of the taxable years in question under the name of "Chicago Exchange Building Trustees, Cyrus H. McCormick, Harold F. McCormick and Stanley McCormick, Trustees." The net income shown on the respective returns was reported in equal amounts by the three McCormicks in their individual returns for the respective years. The respondent determined that the petitioners were an association, taxable as a corporation, thus creating the deficiencies in question.
OPINION.
VAN FOSSAN: The question here presented is whether or not petitioning taxpayers constituted an association, taxable as a corporation. In considering this question we must look to the form and purpose of the organization structure and the actual functioning of the organization during the taxable years.
An association is an unchartered organization employing the characteristics, form and procedure of a corporation in the prosecution of a business enterprise.
Here we find a trust charged with the management of a commercial office building. The creating deed denominated three trustees and gave them almost unlimited powers.
In actual*1195 fact, however, the three trustees had nothing more to do with the management of the building than had they been strangers to the matter. They never met as trustees. No minutes were kept by them or on their behalf. They had no separate books and records as trustees; no communications were ever sent or exchanged officially among themselves; they had no employees as trustees and to all practical ends completely ignored the trust relationship.
The property involved was one of some thirty similar properties owned by or on behalf of the several heirs of Cyrus H. McCormick, Sr., collectively known as the McCormick Estates. These properties were all managed by one office, directed by one Judson F. Stone. Stone held an unlimited power of attorney from the various heirs and dealt with the properties as fully as though individually owned by him. The heirs were seldom consulted and then only on matters of important policies. As funds became available for distribution they were placed to the credit of the respective heirs.
The property covered by the trust here involved was managed by Stone precisely as all other properties constituting the McCormick Estates - no distinction whatever*1196 being made in any respect because of the trust. No salary was paid to Stone or any of his office force by the trust, as such.
*1178 In this state of facts we see no resemblance to corporate operation. The trust was merely a shadow without substance and vitality. Respondent erred in holding the trust to be an association, taxable as a corporation.
Reviewed by the Board.
Decision will be entered for the petitioners.