Woodrow Lee Trust Co. v. Commissioner

WOODROW LEE TRUST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Woodrow Lee Trust Co. v. Commissioner Docket No. 15563. United States Board of Tax Appeals 17 B.T.A. 109; 1929 BTA LEXIS 2353; August 16, 1929, Promulgated *2353 Where the beneficiaries of a trust do not have a greater amount of control over the management and operation of trust property than to approve appointments on the board of trustees and consent to modifications of the trust agreement, the organization is, under rulings of the Bureau of Internal Revenue not reversed or revoked prior to March 24, 1921, the date on which the petitioner filed its return for the taxable year 1920, taxable as a trust and not as an association. Don F. Reed, Esq., for the petitioner. Bruce A. Low, Esq., and L. H. Rushbrook, Esq., for the respondent. ARUNDELL *109 In a decision promulgated January 18, 1929, reported in 14 B.T.A. 1420, the Board sustained the respondent's determination that the petitioner was taxable as an association for the period from February 5, 1920, to December 31, 1920. Subsequently, on March 5, 1929, the petitioner filed a motion for a reconsideration and revision of our findings of fact and opinion, claiming, inter alia, that the Board in its decision did not give full consideration to the provisions of section 704(a) of the Revenue Act of 1928. So much of said motion as*2354 applied to a reconsideration of the case under section 704(a) having been granted, argument was heard thereon May 13, 1929, after which the proceeding was set for hearing. At the hearing had on May 27, 1929, petitioner introduced additional evidence and directed our attention to regulations and rulings of the Commissioner bearing on the issue. From the evidence adduced at the hearing, we make the following additional findings of fact. *110 FINDINGS OF FACT. The petitioner's return for the period from February 5, 1920, to December 31, 1920, was filed with the collector of internal revenue, second district of Texas, on March 24, 1921, on Form 1041, this being a fiduciary form of return. At some undisclosed time the collector of internal revenue prepared and filed a return for J. D. Avis, Trustee, Woodrow Lee Trust, for the calendar year 1920. The return was made on Form 1040, which is the form for reporting income of individuals. By an instrument executed on September 26, 1925, and filed for record with the clerk of the County Court of Wichita, Tex., on September 29, 1925, J. D. Avis and W. H. Roberts, trustees of the Woodrow-Lee Trust, transferred and assigned*2355 to R. L. Gregg an oil and gas lease covering a certain 2 1/2-acre tract of land described in full in the trust agreement dated February 4, 1920, set forth in our findings of fact in the decision herein promulgated January 18, 1929, together with all personal property situated on the said leased premises. OPINION. ARUNDELL: The respondent's determination that the petitioner was an operating trust, taxable as a corporation, was made on March 9, 1926, based upon I.T. 2061 (C.B. III-2, p. 5), published August 11, 1924, as the result of the decision rendered in Hecht v. Malley,265 U.S. 144. The provisions of I.T. 2061 applied to the Revenue Act of 1918, under which the petitioner filed its return on March 24, 1921. Subsequent to the publication of I.T. 2061, the Revenue Act of 1928 was enacted, section 704(a) of which 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 a corporations, if such taxpayer was considered to be taxable as a trust and not as a corporation either*2356 (1) under the regulations in force at the time the return was made or at the time of the termination of its existence, or (2) 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, 1921, or 1924, which had not been reversed or revoked prior to the time the return was made, or under any such ruling made after the return was filed which had not been reversed or revoked prior to the time of the termination of the taxpayer's existence. Section 704(a) of the 1928 Act being retroactive to taxable years prior to 1925, our problem is to determine whether the petitioner comes within any of its provisions. *111 An examination of the Bureau's rulings published in cumulative bulletins for the period commencing in April, 1919, and ending in June, 1921, discloses that without a single exception the matter of control vested in beneficiaries under a trust was the basis used by the Bureau for determining whether a particular organization was in fact an association, taxable as a corporation, or a trust. This may be illustrated by the following*2357 statements appearing in rulings of the Bureau during that period: The question as to whether a trust of this nature is taxable as an association, under the several acts enumerated, depends upon the extent of the powers reserved to the holders of the certificates of beneficial interest to regulate the management of the affairs of the trust. Where the beneficiaries do not retain any substantial control over the affairs of the trust, it is held not to be an association or taxable as such. (S.M. 1205, C.B. No. 1 (April-December, 1919), p. 7.) It is the extent of the control vested in beneficiaries under a trust agreement, rather than the extent to which such control is exercised, that is determinative of the question whether the trust is in fact an association within the meaning of the Revenue Act of 1918. (O.D. 407, C.B. No. 2 (January-June, 1920), p. 11.) Whether or not a trust of the general nature of the one in the instant case is to be regarded as an association under the Revenue Act of 1918, depends upon the degree of control which the beneficiaries exercise over the management of the trust. (S.M. 1068, 1242). (Sol. Op. 56, C.B. No. 3 (July-December, 1920), pp. 10, 11.) *2358 It has been consistently held that it is the extent of the control vested in beneficiaries under a trust agreement that is determinative of the question whether the trust is in fact an association. (Art. 1504, Reg. 45; O.D. 407, C.B. 2, p. 11; S. 1337, C.B. 2, p. 9.) (O.D. 931, C.B. No. 4 (January-June, 1921), pp. 11, 12.) Other published rulings of the Bureau during the same period are to the same effect. S.M. 1068, C.B. No. 1, p. 5; S.M. 1337, C.B. No. 2, p. 9; O.D. 598-A, C.B. No. 3, p. 9; Sol. Op. 49, C.B. No. 3, p. 13. No evidence was offered by the respondent to show that any of the rulings referred to above were reversed or revoked prior to the date the petitioner filed its return. That none of them were not only not reversed nor revoked prior to that date, but that the rule announced therein continued in effect in the Bureau for several years thereafter, seems apparent from G.C.M. 6417, published in Internal Revenue Bulletin No. 25, of Volume VIII, June 24, 1929, wherein it is said: * * * The Department, relying on *2359 Crocker v. Malley (249 U.S. 223, T.D. 2816), had previously ruled that control by the beneficiaries was essential in order that a trust should be classified as an association. * * * * * * *112 * * * The most that can fairly be said is that * * * an examination of the Bureau rulings shows that, after the decision in Crocker v. Malley [March 17, 1919] and prior to the decision in Hecht v. Malley [May 12, 1924], a trust was not, by the Department, "considered to be taxable as a * * * corporation * * * under the regulations in force" unless the beneficiaries, in some sense, did control the trust. Having concluded that under rulings of the Bureau not reversed or revoked prior to March 24, 1921, the date petitioner's return was filed, the question of whether a particular organization was a trust or an association was determined by the Bureau by the degree of control vested in beneficiaries under the trust agreement, there remains for determination the question of whether the shareholders of petitioner were, under the declaration of trust, empowered to exercise a substantial amount of control over the affairs of the trust. Under*2360 the provisions of the trust agreement, as pointed out in our prior decision, the trustees, pending the conversion of the trust property into money and the distribution of the proceeds to the certificate holders, had unrestricted power and authority to manage and operate the trust property. The trustees were appointed for the life of the trust and no provision was made in the declaration of trust for meetings of shareholders. The control reserved to the beneficiaries was limited to the approval by a majority in interest of appointments made by the trustees to fill vacancies on the board of trustees and modifications of the trust agreement. None of the powers reserved to the beneficiaries pertained to the actual management and operation of the trust property. All of them had to be exercised jointly with the trustees. Under three of the trust agreements construed in S.M. 1068, supra, the shareholders had the exclusive right to fill vacancies on the board of trustees, notwithstanding which, however, the Bureau held the taxpayers to be taxable as trusts. The power of beneficiaries of a trust to suggest to the court a successor trustee was not in the case decided in O.D. 620, *2361 C.B. No. 3, p. 9, regarded by the Bureau to be a sufficient amount of control to classify the organization as an association. In both O.D. 790, C.B. No. 4, p. 10, and S.M. 1337, supra, the Bureau held the taxpayers to be trusts regardless of provisions in the declarations of trust giving the beneficiaries of the trusts authority to pass upon amendments made by the trustees to the trust agreements. Powers such as were vested in the shareholders of the trust agreement before us are not, under the provisions of article 1504, Regulations 45, sufficient control in the beneficiaries of a trust to classify it as an association. In Wilkins & Lange,15 B.T.A. 1183, where the shareholders of the trust reserved the right to increase or decrease the number of shares of the trust; to approve any changes made by the trustees in *113 the number of trustees, and to fill any vacancy on the board of trustees, we held, following E. A. Landreth Co. et al.,15 B.T.A. 655, that under the Bureau's rulings applicable to the year 1920, the taxpayer was a trust and not an association. No greater amount of control was vested in the beneficiaries of the trust*2362 before us here than was reserved to the shareholders under the trust agreement involved in the Wilkins & Lange case. It is our opinion that under the provisions of section 704(a) of the Revenue Act of 1928, the petitioner, during the period in question, is taxable as a trust and not as an association. Accordingly, our decision promulgated January 18, 1929, is overruled, and Judgment of no deficiency will be entered for the petitioner.