*2101 1. Trustees of what in fact was an association who filed their income tax return for 1924 on January 30, 1925, as a trust, are not entitled to the benefits of section 704(a) of the Revenue Act of 1928.
2. Where devisees owning undivided interests in certain parcels of real estate associated themselves together for the purpose of transacting business and have transacted business, held, that the organization is taxable as an association, although the ultimate purpose of the organization was the sale of the realty and a division of the proceeds and further that this is true though the certificate holders had no control over the actions of the trustees and though the organization was given no particular name and did not possess a seal.
*564 Respondent has determined deficiencies in income tax for the calendar years 1924 and 1925 in the respective amounts of $3,052.24 and $5,672.65. The errors alleged are (1) that respondent has determined that petitioners were taxable as an association; and (2) that the petitioners*2102 having made their return for 1924 as a trust are taxable as such under section 704(a) of the Revenue Act of 1928.
FINDINGS OF FACT.
On July 29, 1922, John F. Broadbent died testate, a resident of and domiciled in Boise, Idaho. His last will and testament was admitted *565 to probate by the Probate Court of Ada County, Idaho, in August, 1922. The material parts of said will read:
All the rest and residue of my estate, real, personal and mixed, including all the rents, issues and profits thereof due or to become due, wheresoever situate, I give, bequeath and devise unto Emma Broadbent and Nettie Broadbent Curtis, both of Sandusky, Ohio, Martha Willis, of Chicago, Illinois, Elizabeth Broadbent Vernoy, and Catharine V. Alexander, both of Albany, New York, John F. Broadbent, of Scranton, Pennsylvania, Sadie McNeil and Florence Holland, both of San Francisco, California, Joseph Holland, of Imperial, California, Joseph Calvert, John Holland and May Kammerer, all of San Jose, California, equally, share and share alike, to them and their heirs forever.
Henry G. Johnson of Boise, Idaho, John F. Broadbent of Scranton, Pa., and Lloyd M. Willis of Chicago, Ill., were nominated*2103 and appointed as executors by said will. They qualified as such on August 16, 1922. The residue of said estate consisted, among other things, of about 52 pieces of real estate which were appraised by appraisers appointed by said probate court, at a total of $1,529,500, and of three mortgages; two for $35,000 each and one for $6,500. The realty included one office building, the Sonna Building; one bank building; several store buildings; buildings used for Chinese and Japanese restaurants and for pool halls, and several lots covered with shacks. The real property could not be equitably divided between the twelve devisees. The devisees resided as shown in the will of said testator. Four or five weeks prior to the execution of the deed of trust hereafter referred to, nine of the devisees met to determine what course should be pursued with reference to the property devised to them. The remaining three were represented by attorneys in fact. All were anxious to sell the property. Some offered to sell their undivided interests. No purchasers who would pay anything approximating a fair price could be found. In arriving at an agreement as to the term of the trust hereafter set forth*2104 several of the devisees desired that it should be limited to a term of six months, but those with more experience insisted upon a term of two years as therein provided.
On December 18, 1923, the said probate court entered a decree setting over the residuary real estate and the three mortgages to the devisees in twelve equal and undivided shares. Under the same date the devisees executed the following deed:
TRUST AGREEMENT.
THIS AGREEMENT, made this 18th day of December, A.D. 1923, by and between Emma Broadbent, of Sandusky, Ohio, Nettie Broadbent Curtis, of Sandusky, Ohio, Martha Willis, of Chicago, Illinois, Elizabeth Broadbent Vernoy *566 of Albany, New York, Catharine V. Alexander of Albany, New York, John F. Broadbent, of Scranton, Pennsylvania, Sadie McNeil of San Francisco, California, Florence Holland Farnsworth, (formerly Florence Holland) of San Francisco, California, Joseph Holland, of Highland, California, John Holland of Fresno, California, Mary C. Kammerer of San Jose, California, and Joseph Calvert, of San Jose, California, by May Baker, his attorney in Fact, parties of the first part,
AND Lloyd M. Willis, Joseph Holland and Franklin F. Vernoy, hereinafter*2105 referred to as "Trustees", parties of the second part, WITNESSETH:
WHEREAS, the parties of the first part, by deed of even date herewith, have caused to be conveyed to the parties of the second part, as Trustees hereunder, the following described real estate, situate in the city of Boise, County of Ada, and State of Idaho, to-wit:
REAL ESTATE
[Here follows description of the various parcels of realty, which composed said residuary estate.]
TOGETHER with all and singular the tenements, hereditaments and appurtenances thereunto belonging or in anywise appertaining;
Subject, however, to any and all liens and encumbrances now existing upon any of the above described property;
Also hereby granting and conveying to the said Trustees herein, all right, title and interest of every kind and description, in any to, any property whether now known or discovered or not, which may have belonged to the estate of John B. Broadbent, deceased, or in which said estate may have had any interest whether included in the description in the decree of distribution of said estate or not; and
WHEREAS, the parties of the first part have this day caused to be endorsed, assigned, transferred and*2106 delivered to the parties of the second part, as Trustees hereunder, the following described promissory notes and mortgages, to wit: [Here follows a description of the notes and mortgages.] said above described real and personal property, and all other property hereafter conveyed to or acquired by the Trustees under the trusts hereof, being hereinafter for convenience referred to as the "trust property"; and
WHEREAS, the parties of the first part did heretofore agree and determine that title to all of said property, real and personal, hereinabove described, should be conveyed to said parties of the second part, as Trustees hereunder, to be held by said parties of the second part, upon the trusts and for the uses and purposes, with the powers, and subject to all the terms, covenants, conditions and provisions hereof, for the benefit of the parties of the first part, who shall be trust beneficiaries only, without partnership, associate or any other relationship whatever among themselves;
NOW, THEREFORE, in consideration of the premises and of One Dollar ($1.00) the parties of the first part do hereby declare that the title to the above described real and personal property was conveyed*2107 and transferred to, and is now held by, said Trustees, in trust for the uses and purposes, with the powers, and subject to all the terms, convenants, conditions and provisions hereinafter expressed; and the said parties of the second part do hereby declare and agree that they hold, as Trustees, the title to all of said above described real and personal property so acquired by them as aforesaid, and that they will hold the title to any and all other property hereinafter acquired by them, as *567 Trustees hereunder, in trust for the uses and purposes, with the powers, and subject to all the terms, covenants, conditions and provisions contained in this agreement, as follows, to-wit:
ARTICLE I.
That the object of this trust shall be the acquisition, management, improvement and disposition of said trust property and all such other property as may be acquired from time to time for the benefit of the beneficiaries hereunder, and the division of the income, proceeds and avails of said trust property among the certificate holders as hereinafter provided.
ARTICLE II.
The Trustees shall hold all the trust property in trust as follows:
1. To sell and convert the same into*2108 cash or other personal property;
2. To manage, improve, protect, maintain and control the same pending final conversion and distribution;
3. To rent, lease, and demise, from time to time, in possession or reversion, said trust property or any part or parts thereof with the improvements thereon or to be erected thereon, for any length of time even for terms extending beyond the duration of the trust, but not exceeding in the case of any single lease the term of 20 years;
4. To contract to make leases, and to grant options to lease and options to renew leases, and to contract respecting the manner of fixing the amount of present or future rentals, and generally and without limitation or restriction, except as aforesaid, to lease from time to time upon any terms, in any manner and upon any conditions whatsoever, the whole or any part or parts of the trust property;
5. To collect and receive all rents and income from the trust property;
6. To grant options to purchase, to contract to sell and to sell the trust property and any part or parts thereof on such terms as said Trustees may deem best;
7. To mortgage, pledge or otherwise encumber the same with the improvements*2109 thereon or to be erected thereon;
8. To partition or to exchange the trust property, or any part or parts thereof, for other real or personal property, incumbered or unincumbered, and to repartition or reexchange such property, or any part or parts thereon as often as desired, to sell, contract to sell, to lease and sublease, assign, dispose of, convert and reconvert the same, and in general to deal with such property, or any part or parts thereof, whenever and howsoever and as often as desired;
9. To grant easements or charges of any kind;
10. To make contracts or agreements for party walls or in relation thereto or for building or building restrictions or in relation thereto or otherwise;
11. To release, convey or assign any right, title or interest in or about the trust property or any part or parts thereof, to give consent on behalf of the trust property, or any part or parts thereof, to any use of any streets, alleys, parks, or public places for railroads, street railroads, gas or electric light poles, lines, pipes, conduits or other equipment, or other public or semi-public or private improvement or use;
12. To erect, repair, remodel and reconstruct buildings or*2110 other improvements upon the trust property, or any part or parts thereof;
13. To construct sidewalks and to grade, fill curb and pave streets and alleys, to lay and maintain sewer, water and gas pipes, and other conduits of facilities, *568 and do all other work and make all other improvements in streets and alleys as said Trustees may desire, and also to petition any properly constituted municipal corporation for the construction of any sidewalk or for paving or otherwise improving any street or for any other public or semi-public improvement or use;
14. To grant any and all rights (and to lease, sublease, sell, assign and otherwise dispose of any right, title or interest) concerning or in relation to subsidewalk spaces or concerning or in relation to any part of the streets and alleys adjacent to any of the trust property;
15. To deal with the trust property and every part thereof in all other ways and for such other considerations as it would be lawful for any person owning the same to deal with the same, whether similar to or different from the ways above specified;
16. To begin and defend law suits and legal proceedings and compromise or arbitrate claims.
*2111 17. To sign, seal, execute, deliver and acknowledge such deeds, leases and assignment of leases, covenants, indentures, agreements, options, mortgages, notes, receipts, evidence of debts, releases and satisfaction of liens, mortgages, judgments and other debts, and such other instruments in writing of whatever kind and nature as may be necessary or proper in the premises.
18. To generally do all acts and things which, in their judgment, are necessary, proper, advantageous or expedient to promote the complete and most successful execution of this trust and the interests of the beneficiaries herein;
19. The naming of any specific duties and powers herein shall not be construed as limiting the general powers conferred upon the Trustees.
ARTICLE III.
That the Trustees shall have authority to borrow money for the purposes of this trust and to fix the terms of any loan, and execute as security for the money so borrowed its trust deeds or mortgages conveying the trust property or any portions thereof, or to give as security therefor and pledge, or to execute as Trustees as aforesaid, their principal and interest notes in such form as the Trustees may determine, to evidence*2112 such indebtedness, provided that any and all such trust deeds, mortgages and notes may contain provisions exempting and exonerating the Trustees from all personal obligation and liability whatsoever by reason of the execution of such trust deeds, mortgages and notes, and shall contain provisions exempting and exonerating the beneficiaries and certificate holders under this trust from all personal obligation and liability whatsoever by reason of the execution of such trust deeds, mortgages and notes, and from any and all personal obligation or liability for the repayment of the borrowed money evidenced and secured thereby.
ARTICLE IV.
That no purchaser, contractee, lessee, sublessee, assignee or mortgagee of any of said trust property from the Trustees and no personal dealing with the Trustees, shall be required to see to the application of the rents, purchase money or moneys borrowed or advanced on said premises, or be obliged to see that the terms of this trust have been complied with, or be obliged to inquire into the necessity or expediency of any act of the Trustees, or to inquire into any limitations or restrictions on the power and authority of the Trustees.
*569 *2113 ARTICLE V.
That the Trustees are hereby given full authority, from time to time, to use any funds on hand, whether received as capital or income, or to raise or borrow further sums by loans, for purposes of any repair, improvement, protection or development of the property held hereunder, or the acquisition of other property as the Trustees may determine to be wise and expedient, for the protection and development of the trust property as a whole, pending its conversion and distribution, or in payment of any note, mortgage or other indebtedness of the Trustees or against the trust property.
ARTICLE VI.
The Trustees may, from time to time, set apart, out of the income of the trust property, as and for a surplus or sinking fund, such sums, if any, as they may deem proper, to meet the payments to become due upon the mortgage now existing upon certain of the trust real estate or to meet any further mortgages that may be given under this trust, or to meet any taxes, assessments or other trust indebtedness.
ARTICLE VII.
That said Trustees, whenever they sell or convert any of said trust property into money, may distribute the net proceeds, or any part thereof, among the persons, *2114 at the time of such conversion, holding and owning beneficial interest therein as evidenced by the certificates issued by the Trustees as hereinafter provided; it being, however, expressly understood and agreed that the Trustees may, in their discretion, defer or postpone such conversion and distribution except that the same shall not be postponed beyond the life of this trust.
ARTICLE VIII.
That said Trustees shall, semi-annually, or oftener, as they may determine, make distribution of such portion of the net proceeds arising from the rents and income from the trust property as the Trustees may, in their discretion, determine to be fairly distributable net income, not required for other purposes under this trust, among the persons, at the time of such distribution, holding and owning beneficial interests therein, as evidenced by the certificates issued by the Trustees as hereinafter provided.
ARTICLE IX.
That the Trustees shall prepare a book containing forms of certificates and shall deliver to each beneficiary hereunder, certificate or certificates showing the fractional part or interest in the trust such beneficiary is entitled to under the provisions hereof; said certificates*2115 shall be substantially in the following form:
No. .
THIS IS TO CERTIFY that is the owner of, and is entitled to of the net income, proceeds and avails of the property held by , and , as Trustees, under that certain Trust Agreement, dated December 18th 1923, by and between Emma Broadbent, Nettie Broadbent Curtis, Martha Willis, Elizabeth Broadbent Vernoy, *570 Catharine V. Alexander, John F. Broadbent, Sadie McNeil, Florence Holland Farnsworth, Joseph Holland, John Holland, Mary C. Kammerer and Joseph Calvert, By May Baker, his attorney in fact, and said trustees, which Trust Agreement is duly recorded in the office of the County Recorder of Ada County, State of Idaho, and all the terms thereof are, by reference, made part hereof and expressly assented to, and this certificate and the interest represented hereby are subject to all the terms and conditions contained in said Trust Agreement, under the provisions whereof this certificate is issued.
And it is expressly agreed that the holder hereof as such has no claim or interest, legal or equitable, in the trust property described and referred to in said Trust Agreement, but only an interest in the net income, *2116 proceeds and avails thereof as in said instrument provided.
This certificate is transferable only on the books of the Trustees, by the holder hereof in person or by attorney, upon the surrender of this certificate properly endorsed.
DATED: Boise, Idaho.
, 192 .
TRUSTEES.
(Endorsement on back)
For value received, the undersigned hereby sells, assigns and transfers unto an of the fractional interest represented by the within certificate and does hereby irrevocably constitute and appoint attorney, to make transfer accordingly on any books or records of the Trustees.
DATED: , , 192 .
WITNESS:
Said certificates may be transferred from time to time by the holder thereof, or his personal representative, by assignment and surrender thereof. The transfer shall be registered in a book kept for that purpose by the Trustees, and a new certificate shall be issued in the place of the one so surrendered, and no holder thereof or party interested therein shall be entitled to recognition as such by the Trustees for any purpose, unless the same be so registered, but said register shall be conclusive as to such ownership; and the Trustees are hereby fully authorized*2117 to treat the person in whose name such certificates respectively, are registered on the books of the Trustees as the owner thereof for all purposes.
Such fractional parts constituting the beneficial interest hereunder and in said certificates are declared to be and shall be personal property and not real estate, and on the death of any certificate holder the interest of such holder shall go to the personal representatives of such holder, and neither the beneficiaries hereinafter named, nor the holders of any of the certificates hereunder at any time, shall have any claim, title or interest, legal or equitable, in or to the lands and other assets and property at any time held by the Trustees under this trust, but only an interest in the net income, avails and proceeds thereof.
ARTICLE X.
That the net avails, income and proceeds arising from said trust property belong, at the institution of this trust, to the following named persons, in *571 proportion to the interest held by them, respectively, as set opposite their respective names in the following list, to-wit:
| NAME: | INTEREST: |
| Emma Broadbent | One-twelfth |
| Nettie Broadbent Curtis | One-twelfth |
| Martha Willis | One-twelfth |
| Eliz. Broadbent Vernoy | One-twelfth |
| Catharine V. Alexander | One-twelfth |
| John F. Broadbent | One-twelfth |
| Sadie McNiel | One-twelfth |
| Florence Holland Farnsworth | One-twelfth |
| Joseph Holland | One-twelfth |
| Joseph Calvert | One-twelfth |
| John Holland | One-twelfth |
| Mary C. Kammerer | One-twelfth |
*2118 ARTICLE XI.
That all dividends declared and distributions made at any time during the continuance of this trust shall be made pro rata to the owners of the interest certificates issued hereunder as shown by the records kept by the Trustees in proportion to the interests held by them, respectively, and no assignee or transferee in interest hereunder shall be entitled to share in any of the moneys coming into the hands of the Trustees until a certificate shall have been issued to such assignee or transferee in accordance with the provisions hereof and his ownership of such certificate shall have been duly registered on the books of the Trustees.
ARTICLE XII.
That all the powers and duties of the Trustees may be exercised by a majority thereof with the same effect as if all had joined therein. The trustees are not required to hold meetings, or meet together, for the purpose of exercising their powers and duties hereunder. Said Trustees may adopt any method they deem advisable for ascertaining the vote, approval or disapproval of the individual Trustee on any matter wherein they are exercising their powers and duties hereunder.
ARTICLE XIII.
That the Trustees shall, *2119 at all times, keep full and proper books of account and records, in which shall be included a description of all the property from time to time constituting the trust estate hereunder, and an account of all receipts and disbursements, and said Trustees shall, at least once every 3 months, render account of the trust to each certificate holder hereunder, but no Trustee, serving hereunder, shall be obliged to give a bond.
ARTICLE XIV.
That any certificate holder in this trust shall have the right and privilege, with the consent of the Trustees, of purchasing, at any time or times, any portion or portions of the trust estate, real, personal or mixed, for such price or prices, payable either in cash or for part cash and part credit, as in the judgment of the Trustees may seem proper, and in the discretion of said *572 Trustees, may pay for the same in whole or in part by the surrender to the Trustees of his or her interest in the trust and the certificate, or certificates, representing the same, who thus avails himself or herself of this privilege.
ARTICLE XV.
That the Trustees may also, at any time or times, purchase for the beneficiaries hereunder, any portion or portions*2120 of the interest or certificate in the trust at any time outstanding hereunder, paying therefor in cash or property of the trust at such price, or prices, as the Trustees in their own sole discretion may deem best, such interests or certificates so purchased may be held by the Trustees and either cancelled or, from time to time, reissued and sold for cash or on terms, or exchanged for other property, real or personal, acquired for the trust, or as the Trustees may deem best.
That for all the purposes of this Article and of each provision thereof, the value of any property of the trust, or acquired for the trust, and the value from time to time of the interest of the fractional parts or interests in the trust, and the application and construction of every provision hereof, shall be determined by the Trustees, whose judgment shall be final and conclusive and binding on the trust hereby created, and all present and future certificate holders therein.
ARTICLE XVI.
That the Trustees shall have the right and power to, from time to time, make division or partition among the certificate holders of this trust of such portions of the trust property, either real or personal, or both, *2121 as in the judgment of the Trustees may seem to be for the best interests of the certificate holders of this trust, and upon such terms and in such sum and manner, and for such consideration as to said Trustees may seem advisable.
ARTICLE XVII.
That said Trustees shall have full power to employ and have all such agents, clerks, managers, employees, attorneys and other assistants as they shall deem necessary and expedient, and prescribe their powers and duties, and may employ brokers and salesmen in their dealings with said trust property, and any and all other property that may come into the hands of the Trustees under this trust and to pay for their services such commission, brokerage and salaries, out of the trust funds, as said Trustees shall deem reasonable and advisable, and said Trustees shall not be personally responsible for any misconduct, errors or omissions of such persons, employed and retained with reasonable care.
ARTICLE XVIII.
That it is expressly agreed and understood that said Trustees and their successors in office, shall respectively use their judgment and discretion in all things, and shall be personally liable in no case whatever, either in action or*2122 non-action, unless there shall have been gross negligence or actual and intentional bad faith, and in such case no Trustee shall be liable for the wrongful act, negligence or bad faith in any other Trustee.
ARTICLE XIX.
That any Trustee hereunder, now acting or hereafter to be appointed, may resign at any time by giving thirty days witten notice of his intention so to *573 do to the remaining trustees and filing with them his written resignation, duly acknowledged, which resignation shall be the Trustees be recorded in the office of the County Recorder of Ada County, Idaho, and after the recording thereof and return to the Trustees it shall be by them attached to the original of this instrument.
Any vacancy in the office of Trustee, by resignation, death or however occasioned, shall be filed by the remaining Trustees by written instrument, duly executed and acknowledged, and such appointee who is not required to be a certificate holder, shall accept such appointment in writing, duly acknowledged by him, and then said appointment and acceptance shall be by said Trustees duly recorded in the office of the County Recorder of Ada County, Idaho, and after the recording thereof*2123 and return to the Trustees, such appointment and acceptance shall be by them attached to the original of this instrument.
A trustee so appointed shall have all the powers and duties of his predecessor. The acting Trustees for the time being, whether surviving or remaining, shall have all the powers and discretions of the original Trustees. The title of the outgoing Trustee shall vest in the remaining Trustees, and, upon the filling of any vacancy, the title to the whole trust property shall vest jointly in those who shall then be trustees hereunder. Any Trustee may, by power of attorney, delegate his powers for a period not exceeding six months at any one time to any other Trustee or Trustees hereunder.
If two of the Trusteeships shall be vacant, or if one be vacant and one of the remaining Trustees be, for any reason temporarily unable to act, or, if without a vacancy, two of the Trustees be for any reason temporarily unable to act, the other Trustee, acting alone, may do such things and only such things as are necessary for the preservation of the trust and its administration in regular routine. But all vacancies shall be filled as soon as practicable after their occurrence.
*2124 The certificate in writing of the Trustees as to any resignation from the office of trustee hereunder, or as to the death of any Trustee and as to the appointment of any new Trustee hereunder, and as to the existence or nonexistence of any modifications hereof, may always be relied upon, and shall always be conclusive evidence in favor of, all persons dealing in good faith with said Trustees in reliance upon such certificate.
ARTICLE XX.
That said Trustees shall be entitled to receive such compensation for their services in this trust as may be agreed upon in writing between a majority in interest of the beneficiaries hereunder and the Trustees. The trustees shall also be entitled to reimbursement from the trust property for all their proper expenses, and shall be entitled to all traveling expenses to and from any meetings of the Trustees or for transacting any matter or business connected with this trust.
ARTICLE XXI.
That this Agreement may be amended and modified from time to time, in any particular whatever, except as regards the liability of the Trustees, by an instrument in writing, signed, sealed and acknowledged by the then Trustees, assented to in writing by*2125 a majority in interest of the beneficiaries of this trust, which amendment or modification, and assent thereto shall by the Trustees be recorded in the office of the County Recorder of Ada County, Idaho, and after the recording thereof and return to the Trustees, shall be by them attached to the original of this instrument.
*574 ARTICLE XXII.
That this trust shall terminate on the 31st day of December, 1925, provided however, that if, prior to the expiration of said period, those then owning and holding in the aggregrate a majority of the beneficial interests in this trust, agree to continue this trust, then the said trust shall continue in existence for such further period as may then be determined, provided, however, that such agreement to continue must be by an instrument, or instruments, in writing, signed by such majority and duly acknowledged by them, which said agreement shall be duly recorded in the office of the County Recorder of Ada County, Idaho, and after the recording thereof and return to the Trustees, it shall be by them attached to the original of this instrument.
If this trust shall not be continued as herein provided, and the same terminates on said*2126 31st day of December, 1925, then said Trustees shall upon the written direction and authorization of those then owning in the aggregate a majority of the beneficial interests in this trust, proceed to wind up the affairs of this trust by either partitioning the trust property, or any part thereof, then remaining, among the certificate holders entitled thereto, or by liquidating, selling and disposing of the same and distributing the net proceeds among such certificate holders according to their respective interests, or by reconveying undivided interests therein to those holding such certificates, according to their respective interests, or by conveying the trust property then remaining to such persons, association, company or corporation, as may be designated in said writing, for the further handling, managing and disposition thereof, or to otherwise dispose of said trust property, or any part thereof, in such manner as directed in said writing. For the purpose of carrying out such directions the then Trustees shall continue in office until such duties have been fully performed and they are hereby given full power to execute all conveyances and instruments necessary for so doing and*2127 to do any and all things necessary or proper to carry into effect such directions.
This Trust Agreement and all amendments and modifications thereof and additions thereto shall be recorded in the office of the County Recorder of Ada County, State of Idaho, and in such other places as the Trustees may, in their discretion, from time to time, determine to be necessary or expedient.
ARTICLE XXIII.
If any provision, or provisions, of this Trust Agreement shall be declared illegal, invalid or void by the Courts of Idaho, or by any Court of competent jurisdiction, such judicial decision shall not render illegal, invalid or void any other provision, or provisions of this Trust Agreement.
IN WITNESS WHEREOF The parties hereto have hereunto set their hands and seals the day and the year first above written.
On the same day the devisees conveyed to said trustees the said residuary real estate. Under date of November 10, 1925, by duly signed and acknowledged instruments in writing a majority of the devisees extended the trust agreement to and including December 31, 1950. This term was agreed upon after advice of counsel to the effect that one extension would exhaust the power*2128 contained in the original deed.
The trustees upon qualification appointed Harry K. Fritchman of Boise their resident agent and paid him for his services during the *575 years in question the sum of $4,500 per year. He occupied one room in the Sonna Building and employed one person who was both bookkeeper and stenographer. Fritchman was instructed by the trustees to use his utmost endeavor to sell the property or such parts thereof as he could; to make repairs and alterations so as to render the property attractive to purchasers; to pay the taxes and all other charges; to collect the rents; to lease and release the properties, and he was given general charge and management thereof. These duties he has performed. The properties when taken over by the trustees were in bad physical condition. Very little money was then on hand and the trustees borrowed on a mortgage on four pieces of the realty the sum of $125,000. On this mortgage the trustees have paid the interest. The sum of $10,000 was paid on the principal in 1924 and the same amount in 1925.
During 1924 the trustees collected the two mortgages amounting to $70,000. They sold in one sale three pieces of real*2129 estate of the total appraised value of $22,500 for a total sale price of $12,000. During the same years they made an exchange of property in which they paid the sum of $15,000 as part of the consideration. They also erected a new office building at a cost of approximately $55,000. These two amounts absorbed the proceeds of the two mortgages. These transactions occurred under the following circumstances: The trustees owned the Sonna Building, which contained about 100 offices and 8 stores. At the corner was a lot of 50 feet which was owned by one Alexander on which was a building which had formerly been a part of the Sonna Building. This part of the building was supplied with heat and elevator services from the Sonna Building. There were party wall agreements which had been the source of trouble. The trustees also owned a 50-foot lot on the opposite corner on which was a building which had been rented by a bank, but which had been vacated on December 1, 1923. The vacated building was in bad condition and the building inspector would not permit it to be remodeled so as to make it a permanent structure, for the reason that it extended two feet over the street. Behind the bank*2130 building was a lot owned by the trustees on which were situated unsightly shacks. The trustees wished to make an exchange of the two 50-foot lots. Alexander would not come to terms unless the shacks on the rear lot were removed. This the trustees did, and erected the new office building. The trustees deemed it good business policy to thus round out their holdings. The property acquired from Alexander was the only piece of property that has been acquired by the trustees from persons other than the grantors in said deed of trust.
During 1925 no sales were made. From the inception of the trust to June 2, 1930, the trustees had sold ten lots, the total appraised *576 value of which amounted to $122,000, for a total sale price of $79,000, and on said date they were negotiating two additional sales.
In April, 1924, the trustees began to pay each of the certificate holders at the rate of $150 per month. This was raised in February, 1925, to $200 per month. At the end of each year additional payments were made. The total of such payments made in 1924 amounted to $28,200, and the total payments in 1925 amounted to the same sum.
The income and expenditures of petitioners*2131 from operations in 1924 were as follows:
| Income: | |
| Rents | $118,808.44 |
| Miscellaneous receipts | 1,758.11 |
| Interest | 2,736.15 |
| Total | 123,302.70 |
| Expenditures: | |
| Interest paid | 7,779.17 |
| Taxes | 46,337.80 |
| General expense | 704.02 |
| Maintenance and repairs | 5,920.30 |
| Pay roll | 6,812.00 |
| Salaries | 4,300.00 |
| Fuel | 2,037.33 |
| Light and power | 1,187.20 |
| Office expense | 424.33 |
| Water | 805.90 |
| Supplies | 438.14 |
| Hot water heating | 272.50 |
| Telephone and telegraph | 101.37 |
| Insurance | 2,634.86 |
| Legal fees | 1,176.80 |
| Abstracts and recording | 215.70 |
| Rent refunded | 123.75 |
| Vacancies | 229.50 |
| Total | 81,500.67 |
Petitioners also sustained a loss of $10,500 on the sale of real estate. The Commissioner allowed depreciation of $6,061.25 in computing taxable income.
The income and expenditures of petitioners from operations in 1925 were as follows:
| Income: | |
| Rents | $132,521.25 |
| Miscellaneous receipts | 110.00 |
| Interest | 767.04 |
| Total | 133,398.29 |
| Disbursements: | |
| Interest paid | $6,700.00 |
| Salary | 4,500.00 |
| Wages | 7,377.25 |
| Legal expense | 150.00 |
| Maintenance and repairs | 8,223.02 |
| Insurance | 89.61 |
| Fuel | 1,922.30 |
| Light and power | 1,427.45 |
| Water | 139.29 |
| Office expense | 279.68 |
| General expense | 2,313.67 |
| Taxes | 46,612.03 |
| Vacancies | 278.30 |
| Total | 80,012.60 |
*2132 *577 The Commissioner allowed depreciation of $9,543.38 and uncollectible rent of $206.50 as deductions in computing taxable income.
The assets and liabilities of petitioners for the years 1924 and 1925 were as follows:
| Jan. 1, 1924 | Dec. 31, 1924 | Dec. 31, 1925 | |
| ASSETS | |||
| Cash | $16,192.47 | $18,536.33 | |
| Rents receivable | $1,190.83 | 135.00 | 215.00 |
| Interest receivable | 205.00 | ||
| Warrants | 150.00 | ||
| Stores (stock) | 84.65 | 549.89 | |
| Mortgages receivable | 76,000.00 | 6,000.00 | |
| Tools and equipment | 127.28 | 165.73 | |
| Furniture and fixtures | 395.25 | 560.25 | |
| Real property | 1,529,500.00 | 1,522,000.00 | 1,582,722.50 |
| New construction | 50,029.48 | ||
| Sinking fund exp | 833.34 | 833.33 | |
| Prepaid insurance | 6,724.74 | ||
| Total assets | 1,606,895.83 | 1,595,947.47 | 1,610,307.77 |
| LIABILITIES | |||
| Accounts payable | 3,600.00 | ||
| Taxes payable | 23,489.46 | 22,582.33 | |
| Accrued interest payable | 575.00 | 525.00 | |
| Mortgages payable | 125,000.00 | 115,000.00 | 105,000.00 |
| Advance rents | 18.00 | 92.00 | |
| Reserve for mortgage redemption | 833.34 | 833.33 | |
| New construction | 50.00 | ||
| Dividends payable | 12,000.00 | ||
| Total liabilities | 152,089.46 | 139,008.67 | 118,500.33 |
The trustees have*2133 received no compensation for their services but the trust has paid their traveling expenses. They have had four meetings. They have transacted the affairs of the trust by correspondence. No by-laws have been adopted. The certificate holders have not met with themselves or with the trustees and have not participated in the management of the affairs of the trust.
Just prior to his death and on February 24, 1924, Joseph Calvert assigned his certificate to his wife, daughter and two sons in equal shares and the transfer was recorded on the books of the trustees. *578 No other transfers of certificates have been made. Subsequent to the institution of this proceeding Joseph Holland, one of the trustees, died and the remaining trustees appointed Florence Holland Farnsworth to fill the vacancy.
On January 30, 1925, petitioner filed their income tax return for the year 1924 as a trust and upon Form 1041.
OPINION.
PHILLIPS: There is no contention that respondent has erred in determining the amount of taxable income. The principal question presented is whether the organization created by the deed of December 18, 1923, is taxable as a trust or as an association. The*2134 Revenue Act of 1924 provides for the taxation of both entities and the line of demarkation between them is often very fine. Where, however, individuals have voluntarily associated themselves together without a charter to engage in business upon methods and forms used by incorporated bodies and do so engage in business, the organization is an association, even though the form of a trust is adopted. ; . Here the parties voluntarily associated themselves together. No trust was imposed upon them. Cf. . Transferable certificates similar to stock certificates were issued to the beneficiaries. Because of the terms of the trust instrument and the issuance of certificates their interest in the corpus and income of the property is substantially that of a stockholder in a corporation, rather than that of a beneficiary of a trust. The general purpose of the trust as stated in the trust instrument (Art. I) was the acquisition, management, improvement and disposition of the trust property*2135 and of all such other property as might be acquired from time to time and the division of the income, proceeds and avails among the certificate holders. Then follow the specific provisions, among which are, to sell and convert the property into cash or other personal property (Art. II-1); to lease the property together with improvements thereon, "or to be erected thereon" (Art. II-3); to mortgage or pledge the property (Art. II-7); to partition or exchange or re-exchange; to convert and reconvert and in general to deal with such property or any parts thereof whenever and howsoever, and as often as desired (Art. II-8); to grant easements (Art. II-9); to enter into party wall agreements (Art. II-10); to erect, repair, remodel and reconstruct buildings upon the trust property (Art. II-12); to construct sidewalks and grade alleys and to lay and maintain sewer, water and gas pipes (Art. II-13); to deal with the trust property in all other ways and for such other considerations *579 as it would be lawful for any person owning same to deal with it "whether similar or different from the ways above specified" (Art. II-15); to begin and defend lawsuits and legal proceedings and compromise*2136 and arbitrate claims (Art. II-16); and, finally, it is provided that the enumeration of the specified powers and duties should not be construed as limiting the general powers conferred upon the trustees (Art. II-19). By Article V power was conferred upon them to use the funds of the trust, whether capital or income, or to borrow money for the repair, improvement and development of the trust property or for the acquisition of other property. By Article VII the trustees were authorized to distribute the proceeds of property sold or, at their discretion, to postpone such distribution, but not beyond the term of the trust, and by Article VIII to distribute such part of the net proceeds arising from rents and income as was not required by other purposes of the trust.
The functions outlined in the deed of trust are not unlike those possessed by the Broadway Realty Company involved in , the Hecht Realty Estate Trust (), and by the Minneapolis Syndicate before it had parted with the control of its property under a 130-year lease. *2137 . Viewed solely from the standpoint of the provisions of the deed of trust it seems clear that the certificate holders voluntarily associated themselves together under the form of a Massachusetts trust for the transaction of business and that the organization possesses the elements of an association.
The contention that an association can not exist where the certificate holders have no control over the trustees was discussed at length in We there held that what was in fact an association was not changed into a taxable trust by the absence of such control. See also the following decisions of the Circuit Court of Appeals: ; ; certiorari denied, ; and . The matter of control is one which is to be considered in determining whether the business is carried on in corporate form, but*2138 is not in itself determinative of the issue.
It is contended that the purpose was not to operate a business, but to wind up an estate, and reliance is placed upon the short life of the trust as first created. This might give us pause, in so far as the year 1924 is concerned, but for the activities of the trustees during that year. Their acts taken as a whole looked not to the closing out and liquidation of the property held by them but to continued activities. In that year only one sale of three pieces of property was *580 made and then only of property appraised at $22,500. On the other hand, the trustees in that year exchanged one piece of realty and $15,000 for another property and also erected an office building at a cost of approximately $55,000. To put it succinctly, they sold property appraised at $22,500 and acquired property at a cost of $70,000. In view of these transactions we can not close our eyes to the fact that before the expiration of 1925 the term of the trust was extended for an additional 25 years. The necessity for an extension was apparent before the close of 1924.
We must also consider the very extensive powers given to the trustees and exercised*2139 by them. The trustees were not merely empowered to sell the real estate and preserve it pending such sale, but to carry on a general business, even to the extent of acquiring additional property. While all the sales of realty except one have been made at prices below the appraised value, and that one at the appraised value, the trustees have during the whole period of their existence carried on an elaborate business. They have constructed one office building and have operated it and another such building with the attendant costs and pay rolls; they have leased and released; made repairs and alterations; collected rents, and in fact conducted a general business. No sales were made in 1925. In the whole existence of the trust to date, about six and one-half years, total sales were made of realty of the appraised value of $122,000 out of property originally appraised to the trustees at $1,529,500, and during this period real property was acquired at a cost of $70,000. It thus appears that in these years the net excess of the value of the property sold over property acquired was only about $52,000. While it is true that the ultimate result of this elaborate scheme will probably*2140 be the sale of all the realty and the distribution of the proceeds, the deed authorizes the trustees to carry on, and in our opinion they have carried on, a business under forms and powers analogous to those enjoyed by corporations. The decision in , is to be distinguished upon two grounds: (1) there was no attempt to carry on business under corporate forms, and (2) the primary purpose to liquidate the properties of the trust and distribute the proceeds was evidenced by action.
The very able brief prepared by counsel for the petitioners analyses several of the decisions of the Board and the courts. It can not be denied that certain inconsistent statements have found their way into the opinions, as counsel points out. This is regrettable but understandable when it is considered that the line of demarkation between organizations taxable as trusts and those taxable as associations has never been clearly drawn and perhaps is incapable of being clearly drawn because of different circumstances in each case. *581 Differences of opinion are bound to find their way into the opinions and contradictory statements result. *2141 As new cases are presented and decided by the Board and the courts, new light is shed upon the darkness and new opinions may be formed. The basic principles, however, have remained unchanged and the inconsistencies relate more to detail and language than to the substance of the decisions.
The petitioner claims that for 1924 it falls within the provisions of section 704(a) of the Revenue Act of 1928. On this point we must also decide against its claim. ;
Reviewed by the Board.
Decision will be entered for respondent.