Wilkens & Lange v. Commissioner

WILKENS & LANGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Wilkens & Lange v. Commissioner Docket Nos. 10649, 29037. United States Board of Tax Appeals 15 B.T.A. 1183; 1929 BTA LEXIS 2712; March 30, 1929, Promulgated *2712 During the calendar year 1920, the petitioner operated under a declaration of trust, which vested in the three trustees, named therein, the unrestricted management and control of its affairs. The petitioner filed a return for said years as a trust, and under the rulings of the Bureau of Internal Revenue, which had not been reversed or revoked prior to the time the return was made, petitioner was considered to be taxable as a trust and not as a corporation. Held, that under the retroactive provisions of section 704 of the Revenue Act of 1928 the petitioner is taxable for the year 1920 as a trust and not as a corporation. E. A. Landreth Co.,15 B.T.A. 655, followed. William S. Hammers, Esq., for the petitioner. Stanley Suydam, Esq., and O. J. Tall, Esq., for the respondent. TRAMMELL *1183 These are proceedings for the redetermination of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $12,169.91. The only issue for decision here is whether the petitioner is subject to tax for the calendar year 1920 as a trust, or whether it is taxable as an association at the rate applicable to*2713 corporations for said year. The respondent sent a notice of deficiency to the petitioner under date of November 10, 1925, stating that a deficiency had been determined *1184 "for the calendar year 1919," in the amount of $12,169.91, which deficiency was in fact computed upon the petitioner's income for the calendar year 1920. From this determination, the petitioner appealed under Docket No. 10649. Thereafter, the respondent sent a notice of deficiency to the petitioner dated May 21, 1927, in which it was stated that a deficiency in tax had been determined "for the calendar year 1920" in the same amount set forth in the prior deficiency notice. From said last mentioned determination, the petitioner filed an appeal under Docket No. 29037. The proceedings were consolidated for hearing and decision. FINDINGS OF FACT. For some years immediately preceding 1920, the partnership known as Wilkens & Lange conducted a wholesale grocery business in Galveston, Tex. By a trust instrument, effective January 1, 1920, this business was transferred and assigned to Alvin T. Lange, Henry Wilkens and Ballinger Mills, as trustees, who continued to conduct the same character of business, *2714 with principal office in Galveston, Tex. The trust instrument provided in part material here as follows: DECLARATION OF TRUST OF WILKENS & LANGE ARTICLE I WHEREAS, by transfer dated January 1, 1920, the former firm of Wilkens & Lange transferred and assigned to Alvin T. Lange, Henry Wilkens and Ballinger Mills in their capacities as Trustees of Wilkins & Lange, certain personal property described in said transfer, reference to which is hereby made, to be held by them upon the trusts hereinafter set forth; NOW, THEREFORE, We, the said Alvin T. Lange, Henry Wilkens and Ballinger Mills do hereby declare said trusts and agree as between ourselves and for the benefit of all persons now or who may hereafter become interested in the trust estate, and for the benefit of all persons who may convey or deliver property of any kind to the trust estate, and especially for the benefit of all persons who may become owners of, or in any wise interested in any of the shares or certificates of beneficial interest that may be issued hereunder that we and our successors in the office of Trustees of Wilkens & Lange will hold and administer all property, real, personal or mixed in which we or*2715 they as such Trustees have an interest, including particularly the personal property hereinabove mentioned, or which we or they as such Trustees may in any way hereafter acquire in trust for the uses and purposes, and subject to the stipulations and conditions hereinafter contained. The name of this trust shall be Wilkens & Lange; its principal office shall be at Galveston, Texas; it shall exist for a period of Ten (10) years from January 1, 1920, unless sooner terminated by an affirmative vote of fifty (50) per cent of all of the holders of the certificates of beneficial interest, each share thereof having one vote. *1185 ARTICLE II Purposes The general purpose of this Trust is to acquire by purchase or otherwise, and to hold, own, lease, rent, maintain, improve, sell, convey and generally to deal in and with real, personal and mixed property, and all interests or rights therein or incident thereto without limitation as to amount or situation, and particularly to engage in the general business of wholesale grocers, and to have the power in connection with such business to buy, sell and deal in goods, wares and merchandise. Said Trustees shall further have power*2716 to make loans and advances of money on open accounts, notes or other evidences of debt, secured or unsecured, and to borrow money in such amounts for such times, upon such terms and upon such occasions as the Trustees may consider for the best interest of the trust estate, and to execute and deliver the promissory notes and other evidences of debt of the association with or without security, and to convey, mortgage or otherwise encumber any property said trust estate may own at any time, and to execute and deliver through their proper officers instruments securing the payment of any debt in whole or in part, and to exercise such other powers and perform such other duties as are hereinafter set out in this instrument. ARTICLE III Capital The trust estate shall in the first instance be divided into two thousand (2,000) shares of the par value of One Hundred Dollars ($100.00) each, and all of which has been paid by the transfer and sale to the trust estate of a certain stock of goods and accounts formerly belonging to the partnership conducted under the name of Wilkens & Lange. To each member or shareholder of the association a certificate or certificates shall be issued*2717 for the amount of stock owned by him or her. The number of shares of beneficial interest may be increased or diminished from time to time by a unanimous vote of all of the shares then issued and outstanding at any meeting of the shareholders held pursuant to these Articles of Association, and such by-laws as may be adopted from time to time. The registered holder of the certificates issued, by the Trustees, for the time being, and no one else, shall be the beneficiaries of the trust estate held by the Trustees. * * * ARTICLE V Meeting of Certificate Holders The fiscal year of the trust estate shall end on the 31st day of December of each year. Meetings of certificate holders shall be called by the Secretary (a) when ordered by the Trustees, or (b) upon the request made upon the President or to the Trustees by Fifty (50) per cent in amount of the holders of the certificates. * * * The Trustees shall be three in number at the outset, but the number of Trustees may from time to time be increased or reduced to not more than eleven or less than three by vote of the Trustees, provided that such increase or reduction *1186 shall not become effective until approved*2718 by a majority vote of all of the certificate holders at the next meeting after the passage of such vote by the trustees. * * * ARTICLE VII Board of Trustees - Powers, Duties The entire affairs of the trust estate shall be managed by a Board of Trustees consisting of three members, each of whom shall own at least one share of beneficial interest. The Board of Trustees, which is hereby appointed, shall be composed of Alvin T. Lange, Henry, Wilkens and Ballinger Mills, who shall continue in office during the term of this trust, or until death, insanity or resignation. Each Board shall elect its own President, Vice-President, Secretary and Treasurer, prescribing the duties appertaining thereto as they may deem necessary or convenient to carry on the business of the trust estate. The title of all property acquired or to be acquired from time to time by the trust estate shall be taken and stand in the names of the Trustees as such, and all assets of the trust estate shall belong to and be the property of the said Trustees as such, the survivor or survivors of them, under this declaration of trust for and on behalf of the trust estate. Such Trustees shall hold said*2719 property as joint tenants at common law, and not as tenants in common. The Trustees in their capacities as such, may sue or be sued in any court of law or equity, and the trust estate may sue or be sued in the trust estate's name, as provided for by the Statutes of Texas. The Trustees shall be a vote of a majority of the Board, have full power and authority to conduct the business of the Trust estate to do all of the things specified in this Declaration of Trust, and generally to do all things which in their judgment are necessary and prudent in the management and conduct of the business of the trust estate, and to execute proper leases, deeds and conveyances binding upon the trust estate and its certificate holders as such. The Board of Trustees may fix and regulate the time and place of its meetings and a majority thereof shall constitute a quorum, and possess and exercise all powers of a full board. Should any vacancy or vacancies occur in the Board of Trustees from death, resignation or removal of a member or members of the Board, or inability from any cause to act, the remaining members may fill the vacancy or vacancies subject to the right of the shareholders to do*2720 so instead should they see fit to exercise such right at any meeting of such shareholders. The survivor or survivors of the Trustees, or in case of resignation, the remaining Trustees shall have all the powers and rights, and exercise all the functions of a full Board until the vacancy or vacancies are filled. ARTICLE VIII The Trustees shall annually elect from among their own number a President, a Vice-President and a Secretary and Treasurer. ARTICLE IX Distribution of Capital or Income The Trustees shall, from time to time, distribute to the certificate holders ratably all or any part of the surplus earnings or net income of the trust estate, *1187 or they shall retain all or any part thereof in the trust estate, or they shall make distribution of capital, as the certificate holders may direct at any meeting thereof. ARTICLE X Under no circumstances, and in no event shall this instrument, or any of its provisions be deemed or construed to create a partnership, nor anything except a fiduciary or trust estate. The rights and obligations of the certificate holders and the Trustees hereunder shall be construed in accordance with the law and decisions of*2721 the Commonwealth of Massachusetts. The accounts and books of the trust estate shall be upon to the inspection of certificate holders at all reasonable times. At the time the trust estate was created, Alvin T. Lange, who had not had any investment in the partnership of Wilkens & Lange, paid in $25,000 in cash, and received therefor a certificate for 250 shares, less one qualifying share issued to Ballinger Mills, one of the trustees. Certificates of shares, evidencing the interest of each beneficiary, all bearing date January 1, 1920, were issued by the trustees as follows: Shares Certificate No. 1. Mrs. Pauline Wilkens Estate [500] 2. Mrs. H. C. Lange [750] 3. Alvin T. Lange [249] 4. Henry Wilkens [499] 5. Ballinger Mills [1] 6. Ballinger Mills [1] Total 2,000 The trustees owned individually, including the two qualifying shares issued to Ballinger Mills, a total of 750 shares out of a total of 2,000. The the calendar year 1920, the petitioner, on March 15, 1921, filed with the collector of internal revenue for the first district of Texas a fiduciary return of income on Form 1041, executed by Henry Wilkens as vice president and*2722 treasurer, showing the items of gross income and statutory deductions, and the distributive share of the total net income to which each beneficiary was entitled. In December, 1924, a deputy collector investigated the petitioner's tax liability and executed a corporation income and profits-tax return for the calendar year 1920 in behalf of the petitioner, under the provisions of section 3176, Revised Statutes of the United States. This return was filed with the Commissioner, and shows the gross income, deductions, net income and invested capital of the petitioner, and the assets and liabilities at December 31, 1920. *1188 OPINION. TRAMMELL: The Commissioner advised the petitioner under date of November 10, 1925, that an audit of its income and profits-tax return "for the calendar year 1919," had resulted in the determination f a deficiency in tax in the amount of $12,169.91. The deficiency was in fact computed on the petitioner's income for the calendar year 1920. The petitioner appealed from the said determination by filing a petition with the Board on January 5, 1926, under Docket No. 10649, in which it was alleged that "the deficiency letter * * * states a deficiency*2723 of $12,169.91 for the calendar year 1919 (although 1920 is meant)." Thereafter, the Commissioner, by letter dated May 21, 1927, advised the petitioner of his determination of a deficiency in tax "for the calendar year 1920" in the same amount as was stated in the prior notice. From this determination, the petitioner appealed by filing a petition with the Board on June 8, 1927, Docket No. 29037. Thus, the two proceedings involve a single deficiency only, for the calendar year 1920, and were consolidated for hearing and decision. In the petition based on the second deficiency notice the petitioner alleged that assessment and collection of the deficiency for 1920 were barred by limitations. Subsequently, the petitioner, by an amendment to its original petition based upon the first deficiency notice, claimed that the assessment and collection of any deficiency for 1919 were The proceedings, after consolidation, were heard together upon the question whether the statute of limitations had barred assessment and collection of the deficiency, and we held that the statute did not constitute such bar. See *2724 . The only issue raised by the pleadings which remains for consideration here, is whether, as contended by the petitioner, it is subject to tax for the calendar year 1920 as a trust, or whether, as contended by the respondent, it is subject to tax as an association at the rate applicable to corporations. The Revenue Act of 1918 provides in section 230 that there shall be levied, collected and paid for each taxable year subsequent to 1918, upon the net income of every corporation, a tax of 10 per centum of the net income in excess of the credits provided in section 236. Section 1 of said Act defines the term "corporation" as including associations, joint-stock companies, and insurance companies. The respondent determined that the petitioner was an "association" within the meaning of section 1 of the 1918 Act, and therefore taxable at the corporation rate. *1189 The Revenue Act of 1928 provides - SEC. 704. TAXABILITY OF TRUSTS AS CORPORATIONS - RETROACTIVE. (a) If a taxpayer filed a return as a trust for any taxable year prior to the taxable year 1925 such taxpayer shall be taxable as a trust for such year and not as*2725 a corporation, if such taxpayer was considered to be taxable as a trust and not as a corporation * * * under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue applicable to any of such years, and interpretative of any provision of the Revenue Act of 1918, * * * which had not been reversed or revoked prior to the time the return was made * * *. The uncontroverted facts show that the petitioner herein filed a return for the calendar year 1920 as a trust. This was a fiduciary return on Form 1041, and was filed with the collector of internal revenue for the first district of Texas, on March 15, 1921. The respondent determined for the first time on November 10, 1925, that the petitioner was taxable as an association or corporation. It follows that, under the retroactive provisions of section 704 of the 1928 Act, supra, the petitioner is taxable as a trust for said year and not as a corporation, if it was considered to be so taxable "under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue" applicable to said year, and "which had not been reversed or revoked prior to the time the return was*2726 made." The question, then, is whether or not the petitioner was considered to be taxable for said year as a trust under any ruling of the Bureau of Internal Revenue which had not been reversed or revoked prior to the time the return was made. In , we reviewed at length the rulings of the Bureau on this question, and in that connection, said: * * * Beginning in the year 1919 and including the period July-December, 1922, the Bureau of Internal Revenue was consistently ruling that irrespective of whether the taxpayer was engaged in business under the corporate forms, it was taxable as a trust in all cases where the share-holders could not control the actions of the trustees. The evidence in these proceedings clearly establishes that during the year 1920 the petitioner operated under a declaration of trust, whereby the three trustees named therein were vested with the complete, exclusive, and unrestricted control and management of its business. Otherwise, the form of organization was substantially similar to that of corporations. Since the shareholders of the petitioner herein could not control the actions of its trustees, *2727 we can only conclude that the petitioner was considered to be taxable for the year 1920 as a trust under the rulings of the Bureau of Internal Revenue, set forth in our opinion in the *1190 Landreth case, supra, and which rulings had not been reversed or revoked prior to the time the return was made. We hold, therefore, that for said year the petitioner is taxable under section 704 of the 1928 Act, supra, as a trust and not as an association. And, since the total net income of the trust was distributable to the beneficiaries and was reported by them as income, it follows that the petitioner, as a trust, is not taxable thereon for said year. Section 219(d), Revenue Act of 1918. Accordingly, there is no deficiency and the action of the respondent is reversed. Judgment of no deficiency will be entered for the petitioner.