Rochester Theatre Trust Estate v. Commissioner

ROCHESTER THEATER TRUST ESTATE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Rochester Theatre Trust Estate v. Commissioner Docket Nos. 21341, 38910. United States Board of Tax Appeals 16 B.T.A. 1275; 1929 BTA LEXIS 2418; June 29, 1929, Promulgated *2418 The petitioner was created by an agreement and declaration of trust for the purpose of actively engaging in the theatre business and its ultimate control was vested in its beneficiaries. Held, that the petitioner is subject to income taxation as a corporation under the Revenue Act of 1924. Monte Appel, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. SMITH *1275 These proceedings consolidated for hearing and decision are for the redetermination of deficiencies in income tax of $2,033.94 for 1924, and $3,583.17 for 1925. The only question in issue is whether the petitioner is taxable as a corporation under section 230 or as a trust under section 219 of the Revenue Act of 1924. FINDINGS OF FACT. On June 30, 1921, Louis G. Roesner, Charles O. Roesner, Harry C. Mickleson, Glen E. Mickleson, Alice P. Mickleson, and Maude C. Riggs, beneficiaries, and Merchants Trust Co., and Herman H. Levin, trustees, entered into an agreement and declaration of trust by the terms of which the beneficiaries transferred in trust to the trustees legal title to certain property consisting of "Certain leases of real estate and buildings*2419 thereon, personal property, choses in action and cash." The trustees accepted the trust and agreed to hold the property as trustees in accordance with the terms and conditions of the agreement and declaration of trust. Article I of the agreement provided: The trust estate hereby created shall be known as "Rochester Theatre Trust Estate," and the Trustees shall conduct all business and execute all instruments in writing in the performance of this trust, under that name and designation. The term of the trust was from June 30, 1921, the date of the execution of the agreement and declaration of trust, to 21 years after the death of the last survivor among the six beneficiaries. The beneficial interest in the trust was divided into 12 units, each unit being an undivided one-twelfth beneficial interest, the division of such units between the beneficiaries being as follows: Undivided interest Louis G. Roesner 4/12 Charles O. Roesner 2/12 Harry C. Mickleson 2/12 Glen E. Mickleson 2/12 Alice P. Mickleson 1/12 Maude C. Riggs 1/12 *1276 The ownership of a beneficial interest in the trust did not entitle the beneficiary to any title in or to*2420 the trust property, or any right to call for a partition or division of the same or for an accounting. The death of a beneficiary did not determine the trust or entitle the representative of the deceased beneficiary to an accounting or to take any action in the courts or elsewhere against the trustees, but the representative of the deceased beneficiary succeeded to the rights of such decedent under the trust. No certificate or other evidence of the ownership of a beneficial interest in the trust was issued to any of the beneficiaries. The beneficial interests were assignable and title to them could be passed by a bill of sale. No assignment or sale of any beneficial interest could be made, however, until after two years from the date of the trust, and then only after opportunity given to the other beneficiaries to acquire such beneficial interest by purchase or otherwise. Article II of the agreement and declaration of trust provided in part: Thereafter, until the expiration of the term of this trust, as limited herein, such Trustees, so appointed, shall administer and carry out the terms of this trust under and subject to the jurisdiction, supervision and control of the*2421 said District Court. Said Trustee or Trustees shall, if said District Court shall so require, furnish a bond in such form and amount and of such character, adequate to protect this estate and the Beneficiaries, as said District Court shall prescribe and approve; and shall make such reports and accounting and such distribution of the income of the trust estate to the Beneficiaries as said District Court shall direct and approve. Said Trustee or Trustees shall receive such compensation as said District Court shall prescribe and approve. If at the time it becomes necessary to make application to the District Court, there shall be no such court in existence, then and in that event application shall be made to such court as shall then have and exercise substantially the same functions and authority now exercised by the said District Court. Article III provided: The Trustees are authorized: (a) To acquire, own, maintain, lease, and operate theatres and houses for the performance, exhibition and portrayal of all dramatic, operatic, musical, vaudeville, and burlesque productions, and any and all manner of film and screen productions, commonly known as motion pictures or photoplays, *2422 and any and all other forms and varieties of entertainment designated to amuse, inform or instruct the public. (b) To buy, sell, own, hold, mortgage, pledge, lease and to deal in real estate and personal property insofar as may be expedient or desirable in connection with the business to be carried on by said Trustees. (c) To acquire, own, manage, exchange, sell, pledge, and deal in stocks, bonds, notes, commercial paper and securities insofar as may be expedient or desirable in connection with the business to be carried on by said Trustees. (d) To so hold, use, employ and dispose of the trust funds and property, and the income therefrom as will in the judgment of said Trustees best serve and promote the business and general welfare of the trust and the Beneficiaries. *1277 The Trustees shall hold the legal title to all property any time belonging to this trust and, subject only to the specific limitations herein contained, they shall have absolute control, management and disposition thereof, and shall likewise have absolute control of the conduct of all business of the trust; and the following enumeration of specific duties and powers shall not be construed in any*2423 way as a limitation upon the general powers intended to be conferred upon them. The Trustees shall have authority to make all such contracts as they may deem expedient in the conduct of the business of the trust; from time to time to sell, mortgage, pledge, lease, exchange or otherwise dispose of, at public or private sale, any and all of the trust property, whether real or personal, for such prices, either in cash, or the stocks, shares or securities of corporations generally, whether designated as private, public, quasi public, municipal or otherwise, and in the securities and obligations or government, both state and national, and upon such terms as to credit or otherwise, as they may deem expedient; to guarantee or assume the obligations of corporation, trusts, association, partnerships or individuals, in connection with any business which may hereafter be conducted by the Trustees, as to them may seem expedient; to borrow money for the purpose of the trust and give the obligations to the trust therefor; to loan any money from time to time in the hands of the Trustees, with or without security, on such terms as they may deem expedient; to vote in person or by proxy on all shares*2424 of stock at any time held by them, and to collect, sue for, receive, and receipt for all sums of money at any time becoming due to said trust; to employ counsel, and to begin, prosecute, defend and settle suits at law, in equity or otherwise, and to compromise or refer to arbitration any claims in favor of or against the trust; and in addition to do all such matters and things as in their judgment will promote or advance the interests or business of the trust. No purchases from the Trustees shall be bound to see to the application of the money or other consideration paid or delivered by or for said purchaser to or for the Trustees. Article IV provided: The Trustees shall keep, or cause to be kept, such books of record and account as shall at all times clearly reflect and define the status and condition of the business, finances and property of the trust and of the individual Beneficiaries. The Trustees shall annually, and as soon as practicable subsequent to the first day of January, in each year, prepare and render to each Beneficiary a complete report of the business and affairs of the trust, including a balance sheet under the certificate of a certified public accountant, *2425 which report shall be so constructed as to disclose the net income accruing to each Beneficiary, whether such net income or any part thereof be distributed or not. The Trustees shall not be personally liable for any error of judgment or for any loss arising out of any act or omission in the execution of this trust, so long as the Trustees act in good faith. The Trustees named herein shall not be required to give bond, nor shall their successors be required to give bond, save and except as may be required of Trustees appointed by the District Court of Olmstead County, Minnesota, as hereinbefore provided. Article XI, paragraph two, provided: This trust may be terminated prior to the expiration of the term fixed herein and subsequent to two (2) years from the date of this instrument by majority *1278 vote of all of the Beneficiaries at a meeting of the Trustees and the Beneficiaries called for that expressly stated purpose. Ten (10) days notice of such meeting shall be mailed to the Trustees and to each and all of the Beneficiaries at their several addresses as disclosed by the records of the trustees. Such notice shall fix the time, place and purpose of such meeting*2426 and shall be subscribed by one or more of the Beneficiaries. At such meeting an officer of the Trustees shall preside, and a clerk who shall be elected from and by the Beneficiaries, shall make and keep a permanent record of the proceedings at said meeting, which record shall be delivered to the Trustees for sale keeping. The Trustees shall not be entitled to vote at said meeting. If the majority vote of all the Beneficiaries shall be in favor of the dissolution of this trust, the Trustee shall forthwith proceed to wind up the affairs of the trust, liquidate its assets, if necessary to a distribution thereof, and distribute the same among its Beneficiaries. The Merchants Trust Co., the corporate trustee, was to serve for the full term of the trust unless its dissolution, insolvency, receivership, reorganization, consolidation with another corporation or corporations, resignation, inability or refusal to act, should terminate its trusteeship. Herman H. Levin, the individual trustee, was to serve for the full term of the trust unless death, resignation, inability or refusal to act, should terminate his trusteeship. In the event of the happening of one of the foregoing contingencies, *2427 the beneficiaries at a duly called meeting could by affirmative vote of not less than two-thirds of the then existing beneficial interests, elect a successor trustee. In the event of the happening of one of the foregoing contingencies and the inability to secure an affirmative two-thirds vote of the then existing beneficial interests for a successor trustee, any beneficiary might petition the District Court for Olmstead County, Minnesota, to name the successor trustee. The beneficiaries by a majority vote could, at any time subsequent to two years from the date of the creation of the trust, dissolve it, in which event the trustees would liquidate the trust and distribute its assets among the beneficiaries in accordance with the then outstanding beneficial interests. The Merchants Trust Co. was to receive as full compensation for its services as trustees a sum equivalent to 2 1/2 per cent of the net annual income of the trust estate, subject to the proviso, however, that in no event should the compensation of the said trustee be less than $750 per annum. Herman H. Levin, the individual trustee, was to receive as full compensation for his services the sum of $100 per year. *2428 The trustees operated the properties entrusted to them in accordance with the terms of the declaration of trust. At all times during the taxable periods involved the trustees assumed and exercised full power and control over the administration of the property and the beneficiaries did not exercise any control of any kind or nature over the actions of the trustees. All decisions were made by the *1279 trustees without interference by the beneficiaries although the principal beneficiary was often consulted by the trustees with respect to the management of the properties. The taxpayer made fiduciary returns of income for the years 1924 and 1925 reporting net incomes for such years of $18,271.49 and $27,562.84, respectively, but paid no tax upon such incomes, claiming that it was acting as trustee and was under no liability to pay tax upon income received by it in such capacity. The Commissioner has held the petitioner to be an association taxable as a corporation for the years 1924 and 1925 and has determined deficiencies accordingly. OPINION. SMITH: The petitioner claims that it is taxable as a trust under the provisions of section 219 of the Revenue Act of 1924, *2429 whereas the respondent has held the petitioner to be an association taxable as a corporation in accordance with article 1502, Regulations 65, as amended by Treasury Decision 3748. The record discloses that the petitioner was actively engaged in the conduct of the theatre business in Rochester, Minn., and we are of the opinion that substantial control of the petitioner during the taxable years under review was vested in the shareholders under the provisions of article XI, paragraph 2, of the agreement and declaration of trust by which the petitioner was created. Cf. In re Associated Trust,222 Fed. 1012; Simson v. Klipstein,262 Fed. 823. Issues similar to the one raised in the instant proceedings have been decided by us in several earlier cases, Anderson Steam Vulcanizer Co.,6 B.T.A. 737; Durfee Mineral Co.,7 B.T.A. 231; E. A. Landreth Co. et al.,11 B.T.A. 1; Trustees for Gonzolus Creek .oil Co.,12 B.T.A. 310; Alexander Trust Property,12 B.T.A. 1226; *2430 Woodrow Lee Trust,14 B.T.A. 1420; and Extension Oil Co.,16 B.T.A. 1028. Each of the foregoing cases necessitated a construction of the particular trust agreement involved therein, and our decision in each case was based upon the facts applicable thereto. However, in Durfee Mineral Co., supra, we said: * * * That the better rule and the one used by the courts to-day in classifying such an organization either as a trusteeship or a partnership is the double test of (1) control, and (2) doing business, especially the latter, and that applying such double test would result in confining trusteeships to those declarations of trust where there is no control in the shareholders and the trust is not engaged in doing business. And in E. A. Landreth Co., supra, we said: * * * It thus appears that the court discards the test of control in determining whether such a trust is an association, under the revenue acts, and *1280 makes the test whether it was or was not organized for purely business purposes. This seems to be the true distinction. * * * *2431 We think that this case is controlled by the decision in Durfee Mineral Co., supra, and by the decisions of the Circuit Court of Appeals for the First Circuit in White v. Hornblower, 27 Fed.(2d) 777, and United States v. Neal, 28 Fed.(2d) 1022 (certiorari denied, 278 U.S. 659). Accordingly, the deficiencies determined by the respondent are sustained. Judgment will be entered for the respondent.