*1607 A syndicate, which was not a taxable entity under the revenue acts earned net income which was not distributed to the members during the years when earned. The time of making such distribution was, by agreement of the members, left to the discretion of one of their number, who was the syndicate manager. Held, the distributive net earnings of the syndicate constituted taxable income to the members in proportion to their respective interests.
*692 This proceeding is for the redetermination of deficiencies in income taxes asserted by the respondent, amounting to $716.01 for the year 1923, and to $1,455.01 for the year 1925. The latter deficiency arises from the respondent's action in adding to the petitioner's net income, as representing amounts credited to petitioner's account on the books of the Brighton Syndicate No. 1 and the Brighton Beach Hotel Syndicate, the following items:
| Income from Syndicate No. 1 | $258.00 |
| Income from Syndicate No. 1, capital net gain | 1,634.71 |
| Income from Hotel Syndicate, other income | 4,898.48 |
| Interest on capital, Hotel Syndicate | 165.03 |
*1608 The error specified as to each year is that the respondent erroneously added to petitioners' income amounts alleged to have been constructively received from certain syndicates.
FINDINGS OF FACT.
On November 1, 1919, petitioner and a number of others, including Realty Associates, by separate instruments entered into an agreement between themselves and with Realty Associates, a corporation, called the syndicate manager. The pertinent provisions of the agreement are as follows:
* * *
WHEREAS, the parties whose names are hereunto subscribed are desirous of forming a syndicate to be known as BRIGHTON SYNDICATE for the purchase and holding of the following securities issued by BRIGHTON-BY-THE-SEA INC., a domestic corporation, and now owned by DE KALB COMPANY, a like corporation, 45 shares of the common stock of $202,500 of Class B bonds, $63,000 of Class A bonds, $49,500 of notes, all subject to any and all agreements affecting said securities and representing a forty-five (45%) per cent interest in BRIGHTON-BY-THE-SEA INC.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH, that in consideration of the premises and of their mutual promises and the expected benefits from the performance*1609 hereof, the parties hereto severally agree with each other and with the Syndicate Manager, as follows:
FIRST: The parties of the first part, members of the Syndicate, do and each for himself, his legal representatives, assigns, successors and survivors does agree with the Syndicate Manager and with each other, that they will contribute to a syndicate fund, a sum equal to, but not in excess of, the amounts set opposite their respective signatures hereto, to be paid to the Syndicate Manager as it may call therefor.
* * *
SECOND: The Syndicate fund is to be used by the Syndicate Manager for the corporate seal and caused this Agreement to be signed by two of its officers bonds and notes above mentioned, and for such other purposes as in the judgment *693 of the Syndicate Manager may be advisable. The Syndicate Manager may, if it deem it wise, cause the certificates for such stock and the said bonds and notes to be transferred into the name of the Syndicate Manager, which shall immediately and duly endorse the same in blank.
THIRD: The Syndicate Manager shall have power to hypothecate or pledge for the Syndicate, all or any part of said stock, or bonds and notes and to*1610 borrow money thereon for the Syndicate; to vote upon and give proxies; to vote upon and make agreements of any and all kinds in respect to any and all of said stock at any and all meetings of the stockholders of said corporation, and in general to possess and exercise all the rights of stockholders of said corporation in respect to said stock and all their acts in respect to said stock in accordance with the powers hereby conferred expressly or by fair implication shall be binding and conclusive upon the Syndicate and each and every of its members.
* * *
This Agreement shall continue in force and operation until finally terminated at the option of the Syndicate Manager when notice thereof will be given to the subscribers. When terminated there shall be a distribution of all assets, stock, rights and profits, though there may be a partial distribution at any time prior thereto in the discretion of the Syndicate Manager. At the time of such termination the net profit that may accure through the carrying out of this Agreement and the operations of the Syndicate Manager hereunder shall be and remain the property of the several members of the Syndicate or their assigns, according*1611 to the amount and the ratio of their respective subscriptions, subject to the following deductions: The Syndicate Manager, in making distribution shall first retain its disbursements for expenses and return to each syndicate member the amount actually paid in by said member to the Syndicate, together with the interest thereon at the rate of six per cent. per annum. The said Syndicate Manager shall then retain twenty-five per cent. of the total net profits resulting from the operation of this Agreement for the services rendered by it as Syndicate Manager, and without other charge or deduction except as aforesaid, shall divide, pay over, and distribute to the parties entitled thereto, all other net assets, stock rights, net profits, and all other net benefits which it may have received as Syndicate Manager of the Syndicate.
SIXTH: This agreement is one of seventeen counterparts, each signed and executed by Realty Associates and a member of the Syndicate and the amount subscribed by said member is set opposite his name at the bottom of this Agreement and is hereby made a part thereof. By his signature the member does hereby agree to abide by the terms of this Syndicate and this Agreement*1612 as hereinabove set forth. If when and as all seventeen counterparts are duly signed, sealed and delivered by the respective parties this Agreement shall be in full force and effect.
* * *
IN WITNESS WHEREOF, the members of the Syndicate have hereunto attached their hands and seals and the REALTY ASSOCIATES has hereunto attached its corporate seal and caused this Agreement to be signed by two of its officers on the day of the year above written.
REALTY ASSOCIATES.
By: Frank Fox 3rd Vice President.
F. Joerissen, Assistant Treasurer.Frank G. Wild.
$5,000.
*694 During each of the years 1923 and 1925, the petitioner was a member of the above named syndicate, hereinafter called Syndicate No. 1. In August, 1923, and again in August, 1925, petitioner received $611.55 as his share of distributions of syndicate profits, but received nothing else from that source in either of the years mentioned.
On June 12, 1923, petitioner and others, by separate instruments, entered into an agreement between themselves and with Realty Associates, called the Manager. Following are the pertinent provisions of the agreement:
WHEREAS, DE KALB COMPANY has purchased from NEW*1613 YORK CONSOLIDATED RAILROAD COMPANY certain premises known as Brighton Beach Hotel Property, Brooklyn, New York, which premises are described in a certain deed made by NEW YORK CONSOLIDATED RAILROAD COMPANY, et al., to DE KALB COMPANY, dated the 4th day of May, 1923, and recorded in the Kings County Clerk's Office, on or about the 8th day of May, 1923, and DE KALB COMPANY is under contract to purchase an additional triangular parcel of the Brighton Beach Hotel property at such time as title thereto is clear; and
* * *
WHEREAS, the parties hereto desire to form a syndicate to be known as "Brighton Beach Hotel Syndicate" to pay for, own and develop the premises described in said contract and any other premises in accordance with the terms and conditions hereinafter mentioned, and the parties hereto desire that the Manager be vested with the complete and exclusive power to execute and deliver or cause to be executed and delivered, deeds upon the sale or exchange of the said Brighton Beach Hotel property, or any part thereof, to mortgage the same and have like power to manage, operate, develop and control the same:
NOW THEREFORE, in consideration of the premises and the mutual promises*1614 of the parties hereto, and the sum of ONE DOLLAR by each party to the others in hand paid, receipt whereof is severally acknowledged, the parties hereto severally agree with each other and with the Manager as follows:
FIRST: The parties of the first part, members of the Syndicate, do and each for himself, his legal representatives, assigns, successors and survivors does agree with the Manager and with each other, that they will contribute to the Brighton Beach Hotel Syndicate fund the sums of money set forth opposite their respective signature hereto, to be paid by the subscriber to the Manager as it calls therefor. * * *
SECOND: The Syndicate fund is to be used by the Manager for or on account of the purchase, ownership, management, development, exchange and/or improvement of the Brighton Beach Hotel property and all adjacent premises and for the payment of any and all expenses, costs and other disbursements incident thereto, and for such other purposes as in the judgment of the Manager may be advisable. The Manager shall have full power and authority in its discretion to borrow money and to manage, develop, improve, sell, exchange, convey, mortgage or lease, and to construct*1615 buildings and structures of all kinds upon all or any part of the property now or hereafter owned or controlled by the Syndicate without obtaining the approval of the members of the Syndicate. * * *
* * *
FOURTH: This Agreement shall continue in force and operation until finally terminated at the option of the Manager, when notice thereof will be given *695 to the said members of the Syndicate, and upon being so terminated there shall be a distribution of all assets and profits, though there may be a partial distribution at any time prior thereto in the discretion of the Manager. * * *
* * *
FOURTH-B: The Syndicate fund shall not exceed one million dollars and shall include as a part thereof the moneys now actually invested by the Manager on account of the purchase price of the Brighton Beach Hotel property, and such moneys as may be paid by the Manager in acquiring the parcel to which title is not yet clear.
* * *
SIXTH: This Agreement is a counterpart of an agreement signed and executed by the Manager and each member of the Syndicate and the amount subscribed by each member is set forth opposite his signature to the agreement signed by him and is a part thereof. *1616 If, when and as all counterparts are duly signed, sealed and delivered, by the respective parties, this agreement shall be in full force and effect. * * *
IN WITNESS WHEREOF this agreement has been duly signed and executed by the parties hereto the day and year first above written and the party of the first part hereby subscribes the amount of money set forth opposite his name in accordance with the terms of this agreement.
Amount of Subscription.
FIVE THOUSAND ($5,000.00) Dollars.
FRANK G. WILD.
REALTY ASSOCIATES
By: A. HARPER, Treasurer.
F. JOERISSEN, Asst. Treasurer.
Petitioner did not receive anything from the above named syndicate, hereinafter called the Hotel Syndicate, during either of the years 1923 or 1925.
In computing the deficiencies asserted against the petitioner, the respondent determined the net income of the two syndicates, and the amounts distributable to petitioner, as follows:
| Syndicate No. 1 | |||
| Distributable to petitioner | |||
| Year | Income | Other income | Dividends |
| 1923 | $649,411.30 | $670.71 | $7,187.17 |
| Capital | |||
| net gain | |||
| 1925 | 156,422.31 | 258.00 | 1,634.71 |
*696 In determining*1617 the net income of the syndicate for 1923 the respondent allowed as a deduction a syndicate manager's fee amounting to $16,875, but did not allow any deduction for like purpose in 1925.
| Hotel Syndicate | ||||
| Year | Income | Distributable to petitioner | ||
| 1923 | 1 $20,300.14 | $101,50 | ||
| Interest on capital | Other income | |||
| 1925 | 979,694.41 | $615.03 | $4,898.48 |
No deduction for 1925 was allowed for services rendered by the syndicate manager. No credits were made to petitioner's account on the books of Syndicate No. 1 until payments were actually made. No credits were made to this account on the books of the Hotel Syndicate in either 1923 or 1925.
As to each syndicate, distributions were made to members at the discretion of the manager at such times as the cash surplus was not anticipated in the conduct of the business.
Petitioner filed his income-tax returns on the cash receipts and disbursements basis. For the year 1923 he returned as income the $611.55 received in that year from Syndicate No. 1. He returned the same amount, from the same source, as income for the year 1925. He returned nothing as income from the Hotel*1618 Syndicate, for either year. Upon audit, the respondent determined the deficiencies set forth in the preliminary statement.
OPINION.
MARQUETTE: Each of the syndicates here involved realized net income, during either or both of the taxable years, which was not distributed to the members at the time. The respondent contends that the petitioner is taxable upon his proportionate share of such syndicate income for the years when earned, and bases his contention upon the ground that, otherwise, the syndicate members have it in their power to postpone indefinitely the taxation of income. The petitioner takes the position that under the syndicate agreement undistributed earnings were not available to him as having been constructively received, and, therefore, did not constitute taxable income to him.
In , we decided that one of the syndicates here involved, Brighton Syndicate No. 1, was not an association within the meaning of section 2(2) of the Revenue Act of *697 1921. The same conclusion applies to Brighton Beach Hotel Syndicate, for the essential structure of the two syndicates is the same.
*1619 Presumably the manager, Realty Associates, was a member of Syndicate No. 1, since it is one of the seventeen members named in the agreement, as well as being the syndicate manager with whom the members contracted. In the Hotel Syndicate agreement it is definitely set forth that the syndicate fund shall include the money already invested in the enterprise by the manager. It therefore appears that Realty Associates was a managing owner in both syndicates.
In , we held that:
* * * the managing owner of a vessel jointly owned by several co-owners is the agent of such co-owners and that net earnings received by him must be regarded as received by the several co-owners in the proportion of their interests in such vessel. While the co-ownership of a vessel does not constitute a partnership or a joint stock association, it does result in the creation of an operating entity that earns income by the use of capital. Such income is taxable.
See also .
We perceive no essential difference in principle between the case quoted, and the one now before us. In our opinion the syndicate constituted*1620 a joint adventure; the managing owner of the two syndicates was the agent of the petitioner and the other members, and the net earnings of each syndicate are properly to be included as gross income to the members for the year or years when earned.
Reviewed by the Board.
Judgment will be entered for the respondent.
Footnotes
1. Loss. ↩