Lansdowne Realty Trust v. Commissioner

LANSDOWNE REALTY TRUST, ARTHUR H. TABER, WENDELL TABER, STURGIS COFFIN, TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Lansdowne Realty Trust v. Commissioner Docket Nos. 37478, 37479. United States Board of Tax Appeals 20 B.T.A. 119; 1930 BTA LEXIS 2197; June 24, 1930, Promulgated *2197 1. Articles 1502 and 1504, Reg. 62, 65, 69, defining associations and trusts, except for those organizations which fall unmistakably within one class or the other, must be interpreted not as an enumeration of express specifications, but rather as an outline of the more general attributes of the cases commonly dealt with. 2. Under them, holding trusts doing no business and occupied only in passively collecting income and distributing it are regarded as trusts; while those which are actively engaged in business, conducted by representatives of the group of holders of transferable shares acting with the essential powers of directors, are regarded as associations. 3. A lot and one-story building were held in trust, with power in the trustees, among other things, to convert the same into money and distribute the proceeds among the owners of beneficial interests, with discretion to defer conversion for not more than twenty years, and full power pending final conversion, to manage and control the property, including the power to sell, mortgage, lease, and improve and develop, and to collect the rents and income and distribute such portion as they may determine to be fairly distributable*2198 net income semiannually or oftener among the several beneficiaries. The trustees individually owned a majority of the beneficial interests. A partnership of which two of the trustees were members acted generally as agent for the trustees in collecting rents, renting portions of the building, insuring it, and operating a central boiler for the tenants, without specific contract and without compensation, and it distributed monthly among the beneficiaries one-twelfth of the estimated annual income, and, at the end of the year, the remaining balance. The income, expenses, and distributions were recorded on the books of the partnership. The trustees never held a meeting, had no bank account, and kept no books other than memoranda from the partnership records. A few improvements and necessary repairs were made; new leases and extensions of old ones were made and a mortgage on the property was extended, the necessary instruments being signed by some of the trustees. The trustees never considered a sale of the property. The income for the taxable years was reported in a fiduciary return. Held: (1) That the trust was not merely passively holding property and collecting the income, *2199 but was engaged in maintaining and renting a building which it owned, and was therefore taxable as a corporation under the applicable regulations and rulings of the Commissioner. Hecht v. Malley,265 U.S. 144; sec. 704(a), Revenue Act of 1928. (2) The fact that the building was maintained and rented through agents who took the burden of the activities makes it none the less the conduct of the group through their trustees, especially since the agents were themselves the principal trustees and beneficiaries. (3) Neither can the trustees be said to have been merely collecting rents during an interim before final disposition, since the agents were actively seeking tenants and making and renewing leases, and a sale of the property was never considered. (4) The facts that the trust instrument provided for little or no control by the beneficiaries and no meetings of trustees or beneficiaries were held are unimportant, since a majority of the beneficial holders were themselves trustees and thus in control, and formal meetings were unnecessary. Alonzo H. Garcelon, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. STERNHAGEN*2200 *120 These proceedings involve deficiencies in income tax of $1,586.53 for 1923, $1,342.44 for 1924, $800.11 for 1925, and $568.83 for 1926. Petitioner contends that it is a trust and not an association and therefore not liable to tax as a corporation. FINDINGS OF FACT. Petitioner was created by a declaration of trust, dated February 28,1920, signed by Arthur H. Taber, Wendell Taber, Sturgis Coffin, and Rodman Schaff, as trustees. Schaff has resigned since the petition herein was filed and no one has been appointed in his stead. The declaration of trust is as follows: LANSDOWNE REALTY TRUST DECLARATION KNOW ALL MEN BY THESE PRESENTS That we, Arthur H. Taber and Wendell Taber both of Cambridge in the County of Middlesex and Commonwealth of Massachusetts, and Sturgis Coffin and Rodman Schaff both of Brookline in the County of Norfolk in said Commonwealth, the grantees named in a certain deed from Arthur H. Taber, Sturgis Coffin and Frank A. Mason Trustees of the Hammond Real Estate Trust dated this day, by which deed there is conveyed to us certain lands and buildings situated in the city of Boston in the Commonwealth of Massachusetts, hereby declare and agree*2201 that we will and our heirs and successors shall hold said granted premises, (together with the other assets of said Hammond Real Estate Trust subject to the liabilities of said trust,) and all other funds and properties at any time transferred to and received by the Trustees hereunder for the purposes, with the powers and subject to the provisions hereof, for the benefit of the cestui que trusts, hereinafter called the beneficiaries (who shall be trust beneficiaries only, without partnership, associate, or any other relation whether inter sese, ) and upon the trusts following viz: 1. In trust to convert the same into money and distribute the net proceeds thereof among the persons at the time of such conversion holding and owning beneficial interests therein, as evidenced by the receipt certificates issued by the Trustees as hereinafter provided; it being however expressly understood and agreed that the Trustees may, in their uncontrolled discretion, defer or postpone such conversion and distribution, except that the same shall not be postponed beyond the end of twenty years from and after the date of this *121 declaration. During such postponement, and until such*2202 conversion, the interests of the beneficiaries shall be considered for purposes of transmission and otherwise as personal property. 2. In trust, pending final conversion and distribution of the property, to manage and control the same, the Trustees having, for such purposes and for all purposes of sale, lease, mortgage, exchange, improvement and development, and any and all arrangements, contracts and dispositions of the trust property, or any part thereof, all and as full discretionary powers and authority as they would have if they were themselves the sole and absolute beneficial owners thereof in fee simple. 3. In trust to collect and receive all rents and income from the property, and semi-annually or oftener at their convenience, to distribute such portion thereof as they may, in their discretion, determine to be fairly distributable net income, to and among the several beneficiaries according to their respective fractional interests, the Trustees in this connection having full authority, from time to time to use any funds on hand, whether received as capital or income, for purposes of any repair, improvement, protection or development of the property held hereunder, or*2203 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. The determination of the Trustees, made in good faith, as to all questions as between "capital" and "income" shall be final. 4. The Hammond Real Estate Trust having determined to wind up its affairs and be dissolved, without waiting for final cash sale of its real estate, this Declaration in trust is declared in favor, and for the benefit of the beneficiaries of the Hammond Real Estate Trust, according to their respective fractional interests, to whom the Trustees of the Landsdowne Realty Trust shall issue proper receipt certificates, which certificates and all others which may be hereafter issued in exchange or substitution therefor shall be deemed parts hereof and conclusively evidence the ownership of respective interests in this trust; and the said Trustees shall, from time to time, on request, (on surrender of the old) issue such new certificates as may be proper and necessary to evidence any new or subdivided interests. 5. The Trustee shall have authority to borrow money*2204 and fix the terms of any loans, and give any pledge, mortgage or other security which they may deem wise. No purchaser from or lender to the Trustees shall ever have any liability to see to the application of any proceeds. 6. The Trustees may employ all such agents and attorneys as they may think proper and find expedient, and prescribe their powers and duties, and shall not be personally responsible for any misconduct, errors or omissions of such agents or attorneys employed and retained with reasonable care. 7. The Trustees shall at all times keep full and proper books of account and records of their proceedings and doings, and shall, at least annually, render account of the trust to any beneficiary requesting the same, but no Trustees serving hereunder shall be obliged to give any bond, nor shall any Trustee have any liability except for the results of his own gross negligence or bad faith. 8. The recording of this Declaration shall be at such times and in such places as the Trustees may in their discretion determine to be necessary or expedient, and they shall in like manner determine the form and record of all muniments of title. *122 9. The Trustees*2205 shall have full power at any time, pending final termination of this trust, to transfer the whole or any part of the property then held by them hereunder to any corporation which they may acquire or cause to be organized for the more convenient or expedient holding or management of the property, taking any securities issued by such corporation in exchange and payment therefor, and the Trustees, or any of them, may at any time be or become directors or officers of any corporation any shares of which are held by them. 10. The Trustees shall be entitled to receive reasonable compensation for service not exceeding a total of one per cent reckoned upon the gross income received by them as such, unless, at any time, a majority in interest of the beneficiaries consent in writing to some larger compensation for any past service. The Trustees shall also be entitled to reimbursement and indemnification from the trust property for all their proper expenses and liabilities, and shall be entitled at all times to the advice of counsel; and traveling expenses to and from any meetings of the Trustees shall be considered proper expenses. 11. Any Trustee hereunder may resign by written instrument*2206 duly acknowledged and attached to the original of this Declaration, or recorded with Suffolk County Deeds if the original hereof be then there recorded. Any vacancy in the office of the Trustee, however occasioned, shall be filled by the remaining Trustees by an instrument in writing, signed by them and assented to in writing, by the holder or holders of a majority in amount of the beneficial interests herein, such appointment to be in like manner attached to the original of this Declaration, or recorded as in the case of resignation last above provided for. 12. If, at any time or times, a majority of the Trustees hereunder shall certify in writing that the remaining Trustees are either absent from the Commonwealth of Massachusetts or incapacitated through illness or otherwise from acting, then such majority shall, at such time or times, have, and may exercise, any and all the powers of the Trustees hereunder with like effect as if similarly exercised by all. 13. The terms and provisions of this trust may be modified at any time or times by instrument in writing, signed, sealed, and acknowledged by the then Trustees, assented to in writing by a majority in interest of the*2207 beneficiaries, and attached to the original of this Declaration, or recorded with Suffolk County Deeds if the original hereof be then there recorded. 14. The certificate in writing of the Trustees as to any resignation from the office of Trustee hereunder and as to the appointment of any new trustees hereunder and as to the existence or non-existence 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 certificates. 15. The title of this trust (fixed for convenience) shall be "Lansdowne Realty Trust" and the term "Trustees" in this Declaration shall be deemed to include the original and all successor trustees. 16. At the end of twenty years from and after the date of this Declaration (unless this trust shall heretofore have been otherwise lawfully terminated) all the property of every kind then held hereunder shall be sold by the Trustees and equitable distribution made of the net proceeds among the persons entitled. *123 IN WITNESS WHEREOF we have hereunto set our hands and common seal on this 28th day of February in the year nineteen*2208 hundred and twenty. ARTHUR H. TABER WENDELL TABER STURGIS COFFIN RODMAN SCHAFF The beneficial interests were held as follows and were evidenced by certificates: Per cent Sarah T. and Sturgis Coffin, trustees of William H. Coffin, deceased [40] Elizabeth W. Coffin for life with reversion to Sturgis Coffin [20] Arthur H. Taber [20] Wendell Taber [10] Elizabeth W. Taber [10] Wendell Taber and Elizabeth W. Taber are children of Arthur H. Taber and received their shares from him after the original creation of the petitioner. The property held under the foregoing instrument during all the taxable years here involved consisted of a lot and one-story building on the corner of Brookline Avenue and Lansdowne Street, Boston, Mass., and undistributed amounts of current cash. Some shares of stock received from the Hammond Trust were distributed in 1920. The rents from the building were collected by the real estate firm of Coffin & Taber, a partnership composed of the two trustees Coffin and Taber and one Dolben, which firm transmitted the sums so received directly to the beneficiaries according to their respective interests under the trust. A payment was made*2209 each month, usually by check, but sometimes by a credit of the amount to the beneficiary's account with the firm. This monthly distribution was one-twelfth part of the estimated annual income, and in some years amounted to $1,000 each month. After an accounting at the end of the year, any remaining balance, which might be a few hundred or a few thousand dollars, was likewise distributed. The partnership entered on its books the income received, the expenses paid, and the amounts distributed to the beneficiaries, and acted generally as agent of the trustees in collecting rents, looking after unrented portions of the building, insuring the property, operating a central boiler for the tenants, although it had no specific contract with them and received no compensation for these services. The trustees, as a body, never held a meeting, nor had a bank account, nor kept any books other than memoranda taken from the records of the partnership. The trust made few improvements on the premises, and made the repairs necessary to protect the property and attract new tenants. Since the beginning of the trust new leases and extensions of old ones have been made, and a $55,000 mortgage *124 *2210 on the property has been extended. The necessary instruments in such transactions were signed by some of the trustees. The trustees never considered a sale of the premises. Petitioner reported its taxable income for the years in question on fiduciary return Form 1041. OPINION. STERNHAGEN: The deficiency is embodied in the respondent's determination that petitioner was during the years in question not a trust, taxable under section 219, Revenue Acts of 1921, 1924, and 1926, but an association within the meaning of that term as used in section 2 and therefore taxable as a corporation. The petitioner had filed fiduciary returns for those years as a trust. The petitioner's argument is founded primarily upon an alleged similarity with the organization considered in Crocker v. Malley,249 U.S. 223, the contention being that petitioner was not doing business, and that corporate similitude was lacking. Hecht v. Malley,265 U.S. 144, is attempted to be distinguished. No reference is made to section 704, Revenue Act of 1928, although the trial took place in 1930. It is clear that, as the petitioner filed its return as a trust, section*2211 704(a), Revenue Act of 1928, is applicable, and that by virtue of that statute is is necessary to ascertain whether the petitioner was considered to be taxable as a corporation under the regulations and rulings of the Commissioner. See E. A. Landreth,15 B.T.A. 655; Wilkens & Lange,15 B.T.A. 1183; Extension Oil Co.,16 B.T.A. 1028; J. W. Pritchett et al., Trustees,17 B.T.A. 1056; Van Cleave Trust,18 B.T.A. 486; Mary L. Dutton et al., Trustees,18 B.T.A. 1151. The regulations under these several acts were uniform in their provision describing associations under the statutes. Regulations 62, 65, and 69, Art. 1502. This article is as follows: ART. 1502. Association. - Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the members or shareholders on the basis of the capital stock which*2212 each holds or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. A corporation which has ceased to exist in contemplation of law but continues its business in corporate form is an association or corporation within the meaning of section 2, but if it continues its business in the form of a trust, it becomes subject to the provisions of section 219. The salient features of an association under this article are that it does business in an organized capacity, and makes proportionate distribution of its income among shareholders or investors. *125 Article 1504 of each of these regulations is entitled "Association distinguished from trust," and because the articles differ in the several regulations, they are all set forth: Reg. 62, ART. 1504. Association distinguished from trust. - Where trustees hold real estate subject to a lease and collect the rents, doing no business other than distributing the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among the trustees*2213 and of consenting to a modification of the terms of the trust, no association exists and the cestuis que trust are liable to tax as beneficiaries of a trust the income of which is to be distributed periodically, whether or not at regular intervals. But in such a trust if the trustees pursuant to the terms thereof have the right to hold the income for future distribution, the net income is taxed to the trustees instead of to the beneficiaries. See section 219 of the statute and articles 341-348. If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute. Reg. 65, ART. 1504. Association distinguished from trust. - Holding trusts, in which the trustees are merely holding property for the collection of the income and its distribution among the beneficiaries, and are not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business, are not associations within the meaning of the law. The trust and the beneficiaries thereof will be subject to tax as provided in articles*2214 341-347. Operating trusts, whether or not of the Massachusetts type, in which the trustees are not restricted to the mere collection of funds and their payments to the beneficiaries, but are associated together in much the same manner as directors in a corporation for the purpose of carrying on some business enterprise, are to be deemed associations within the meaning of the Act, regardless of the control exercised by the beneficiaries. Reg. 69, ART. 1504. Association distinguished from trust. - Where trustees merely hold property for the collection of the income and its distribution among the beneficiaries of the trust, and are not engaged, either by themselves or in connection with the beneficiaries in the carrying on of any business, and the beneficiaries have no control over the trust, although their consent may be requied for the filing of a vacancy among the trustees or for a modification of the terms of the trust, no association exists, and the trust and the beneficiaries thereof will be subject to tax as provided by section 219 and by articles 341-347. If, however, the beneficiaries have positive control over the trust, whether through the right periodically to elect*2215 trustees or otherwise, an association exists within the meaning of section 2. Even in the absence of any control by the beneficiaries, where the trustees are not restricted to the mere collection of funds and their payment to the beneficiaries, but are associated together with similar or greater powers than the directors in a corporation for the purpose of carrying on some business enterprise, the trust is an association within the meaning of the statute. These articles are not so clear as by their headings they purport to be, and, except for those organizations which fall unmistakably within one class or the other, they must be interpreted not as an enumeration of express specifications, but rather as an outline of the more general attributes of the cases commonly dealt with. Used *126 in this way as a guide rather than a code, the articles lose some of the apparent inconsistencies which a rigid application of their language discloses. Holding trusts doing no business and occupied only in passively collecting income and distributing it are regarded as trusts; while those which are actively engaged in business, conducted by representatives of the group of holders of transferable*2216 shares acting with the essential powers of directors, are regarded as associations. The regulations are an attempt to express the rule applied in Hecht v. Malley,265 U.S. 144 (see I.T. 2061, C.B. III-2, p. 5) and, by section 704(a), Revenue Act of 1928, they have sanction as an official guide. The rulings 1 made by the Bureau in specific cases pursuant to these regulations have generally adhered to the view that doing business as a group by representation is a primary indication of an association. We think the evidence brings the petitioner within the class of associations provided for in the statute, recognized*2217 in Hecht v. Malley,265 U.S. 144; Burk-Waggoner Oil Assn. v. Hopkins,269 U.S. 110; and Little Four Oil & Gas Co. v. Lewellyn, 29 Fed.(2d) 137, and described in the regulations and rulings of the Bureau. This group was not merely passively holding property and collecting income therefrom. It was engaged in maintaining and renting a building which it owned, being thus similar to the Hecht Real Estate Trust. That this was done through agents who took the burden of the activities makes it none the less the conduct of the group through their trustees; especially since the agents were themselves the principal trustees and beneficiaries. Nor can it be said that they were merely collecting rents during an interim before final disposition, for they were actively seeking tenants and making and renewing leases, and Coffin testified that he, a trustee, beneficiary and agent, had never considered selling the property. The trust instrument provided for little or no control by the beneficiaries and no meetings of trustees or beneficiaries were held; but these facts have little importance when it is remembered that the majority of*2218 the beneficial holders were themselves trustees and thus in control, and formal meetings were entirely unnecessary. The Commissioner correctly held the petitioner to be taxable as an association. Judgment will be entered for the respondent. Footnotes 1. I.T. 2061, C.B. III-2, p. 5 (1924); S.M. 4104, C.B. IV-2, p. 8 (1925); S.M. 4180, C.B. IV-2, p. 274 (1925); S.M. 5382, C.B. V-1, p. 8 (1926); G.C.M. 621, C.B. V-2, p. 5 (1926); G.C.M. 715, C.B. V-2, p. 7 (1926); G.C.M. 2405, C.B. VI-2, p. 10 (1927); G.C.M. 1736, C.B. VI-2, p. 11 (1927); G.C.M. 1881, C.B. VII-1, p. 42 (1928); G.C.M. 1940. C.B. VII-1, p. 46 (1928); G.C.M. 3412, C.B. VII-1, p. 49 (1928); G.C.M. 5504↩, C.B. VIII-1, p. 142 (1929).