Wilson Trust v. Commissioner

WILSON TRUST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Wilson Trust v. Commissioner Docket No. 39383. United States Board of Tax Appeals 20 B.T.A. 549; 1930 BTA LEXIS 2090; August 13, 1930, Promulgated *2090 Under the facts in these proceedings, it is held that the Commissioner erred in holding the petitioner to be an association taxable as a corporation. B. B. Pettus, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. BLACK *550 The petitioner is a trust created by Walter H. Wilson in December, 1923, and holds title to several pieces of real estate in Chicago, Ill. For the year 1924 respondent determined that the petitioner was an association in the nature of a corporation and taxable as such. He determined a deficiency of $3,683.61 in income tax for said year. Petitioner alleges as error that it is not an association in the nature or form of a corporation, that it is not engaged in business, and that it is not taxable as a corporation. FINDINGS OF FACT. The address of the petitioner is No. 1166, the Rookery, 209 South La Salle Street, Chicago, Ill. Prior to December 31, 1923, Walter H. Wilson, of Chicago, Ill., was the owner of ten parcels of real estate in Chicago, Ill. Some of these were occupied by garages and filling stations, which were rented out, and two were leased on a ground rent. Walter H. Wilson at that*2091 time was in bad health and about to undergo a serious operation. Fearing the results of his illness, he determined to create a trust for the benefit of himself and four children by conveying his real estate to trustees for the purpose of holding title thereto, collecting the rents, preserving the property, distributing the rents after the payment of all necessary expenses, and to ultimately dispose of and distribute the property. To accomplish this purpose on December 31, 1923, Walter H. Wilson conveyed to himself and his two sons, Walter O. Wilson and Lawrence O. Wilson, as trustees, the various pieces of property mentioned and at the same time the trustees executed a declaration of trust. This declaration of trust is a lengthy document and provides succinctly as follows: Business of the trust estate may be carried on by the trustees under the name of the "Wilson Trust." The purpose of the trust is the preservation and development of the properties conveyed or hereafter acquired, and the sale and disposition of said properties and the distribution of the proceeds thereof. Powers of Trustees. The trustees have power to manage, sell, exchange, lease, sublease, *2092 partition, maintain, improve, execute necessary agreements, in respect of the property acquired and to be acquired; employ and fix compensation of agents for conducting business of trust; appoint secretary and managing trustee and fix their salaries and revoke such appointment; fix their own salaries and acquire shares in trust; give powers of attorney; increase or decrease number of trustees; shall not be liable for anything done or omitted by them in good faith; may act with or without a meeting and by proxy, and a majority shall be binding; shall keep a record of their proceedings; shall be entitled to *551 indemnity out of the trust estate; shall represent shareholders and trust estate in all suits in relation to the trust without joinder of shareholders; shall keep books of all transactions and make annual reports to shareholders; may borrow money and give security for same; making distributions after paying taxes, interest, all indebtedness of trust, and shall retain sufficient funds for administration of trust including developments and improvements and acquisition of additional property; invest in bonds, mortgages, notes, stock, make improvements to enhance value of*2093 the trust property and further the purpose of the trust. Nor shall the trust fail or determine by death or resignation of the trustees. Certificates and Certificate Holders. It was provided that a certificate book, containing shares showing the proportion of the income, proceeds, and avails of the trust property to which the beneficiaries are entitled, shall be kept, and the shares shall be delivered to them; that the shares shall be personal property and the shareholders shall have no legal or equitable title to the trust property itself; that the shares shall be transmissible and transferable; register of future transfer shall be kept; and the shareholders shall be furnished an annual report. Termination. The trust is created for a term of twenty (20) years; trustees may at any time prior to termination, if, in their uncontrolled discretion, they shall deem it advisable, terminate said trust, or two-thirds of the shareholders have power to shorten the duration of the trust and fix date for disposition of the trust properties. And Article V further provides that before the termination of said trust by limitation or otherwise, the trustees may sell and convert*2094 into money the whole of the trust estate and apportion the net proceeds thereof among the certificate holders ratably, according to the number of shares held by them respectively, or distribute to said certificate holders in like proportions said trust estate in kind, and in making any sale under this provision the trustees shall have power to sell by public auction or private contract and to buy in or rescind or vary any contract of sale and to resell without being answerable for loss and for the said purpose to do and execute all proper deeds, instruments and things. Miscellaneous Provision. The terms and provisions of the trust agreement may be amended or changed in any manner or to any extent by a majority of the trustees, and concurred in by two-thirds of all the outstanding shareholders and such changes shall be recorded in the office of the Recorder of Deeds. Prior to the creation of the trust Walter H. Wilson, the grantor, had for many years been engaged in the real estate business in the form of a corporation. The property involved herein was his individual property, but was looked after and managed by the regular employees of his real estate business, who collected*2095 the rents, obtained tenants and looked after repairs under the general supervision of Walter H. Wilson. *552 Contrary to his fears, Walter H. Wilson recovered from his operation and on January 8, 1924, was nominated and appointed as managing trustee under the trust. No beneficiaries are mentioned by name in the trust agreement, but it is provided therein that the income shall be distributed to the holders of certificates of beneficial interest. A book of certificates or shares of interest in the trust in the form prescribed in the declaration of trust was obtained and 5 certificates for 40 shares each were filled out in the names of the creator of the trust, and his two sons and two daughters, namely, Walter H. Wilson, Walter O. Wilson, Lawrence O. Wilson, Irene Wilson and Marjorie W. Fisher. The five certificates were signed but never detached from the certificate book. No meetings of the trustees were ever held relative to the affairs of the trust, but is entire business was attended to under the supervision of Walter H. Wilson, just as he had handled the property prior to the creation of the trust. None of his sons or daughters took any part therein, nor were*2096 any of them consulted by Walter H. Wilson as to any of the trust affairs. There were no officers of the trust, although there was a provision in the instrument for a secretary. No compensation was paid to the trustees. There was no office of the trust. The book of accounts of the trust was kept in the office of Walter H. Wilson & Co. The only employee was a bookkeeper, who also kept the books of Walter H. Wilson & Co. There was no reinvestment of funds in 1924. The bookkeeper was paid mainly by Walter H. Wilson & Co. Only a small amount of the expense was charged to the trust. Bills for rent were sent out on the billheads of Walter H. Wilson & Co. and were paid to that company, but were deposited at the bank in the name of the Wilson Trust. The trust did not engage in the real estate business and had no broker's license. During the taxable year 1924 the net income of the trust was $28,931.92, made up entirely of rents collected. A return was filed on Form 1041, "Fiduciary Return of Income for Calendar Year 1924," showing $6,681.92 income of the trust undistributed, and the balance distributed to certain beneficiaries named therein. The distributed part of the income*2097 was distributed equally to Walter H. Wilson and his four children, $4,450 each, but the children were required to contribute to a reserve fund for taxes the following amounts: Marjorie W. Fisher, $600; Irene Wilson, $2,400; Walter O. Wilson, $600; and Lawrence O. Wilson, $600. The reason the daughter, Irene Wilson, was required to contribute $2,400 to the reserve for taxes instead of $600, as was required of the other children, was because she lived with her father, Walter H. Wilson, and *553 did not have to defray the expenses of keeping up a household of her own. The amounts which were distributed to Marjorie W. Fisher, Irene Wilson, Walter O. Wilson and Lawrence O. Wilson, as beneficiaries of the trust, were about the same as those made to them by their father in years prior to the creation of the trust. The entire arrangement as to the naming of the beneficiaries, the interest of each, the payments to each, and the amounts they paid into the reserve fund, was arranged, dictated, and ordered by the father, Walter H. Wilson, without consultation with any one else and of his own voluntary act. No property was sold during the taxable year and the only business conducted*2098 was to collect the rents and conserve the estate. OPINION. BLACK: In this proceeding respondent has determined a deficiency against petitioner of $3,683.61 for the year 1924, stating his reasons therefor in the 60-day letter, as follows: "Your contention that your organization is a trust and not an association has been denied, inasmuch as it has the general form, mode of procedure and effectiveness in action of a corporation and the beneficiaries have absolute control of its affairs, whether or not such control has been exercised by them." Petitioner attacks this determination of the Commissioner in the following assignment of error: "(a) The Commissioner of Internal Revenue has erroneously held the Wilson Trust to be an association, taxable as a corporation within the meaning of the Revenue Act of 1924, whereas in truth and in fact it is a mere holding trust taxable under said law as a fiduciary." Petitioner filed a fiduciary return of income for year 1924 on Form 1041, and reported thereon the amount of income of the trust, together with the amount distributed to the respective beneficiaries named therein. Consequently, in our decision in this proceeding, we must give consideration*2099 to section 704(a), Revenue Act of 1928, which reads: (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 corporation, if such taxpayer was considered to be taxable as a trust and not as a corporation either (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. Article 1504, Regulations 65, Revenue Act of 1924, reads as follows: *554 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*2100 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 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. We think that under the provisions of the regulations just quoted and the decisions of this Board and the courts, petitioner is entitled to be taxed as a trust for the year 1924 and not as an association doing business as a corporation. We think the facts in the instant proceeding are similar to those in the , which was affirmed by the Circuit Court of Appeals, 5th Circuit, *2101 . In that case a mother, desiring to provide for her children, created a trust and conveyed a number of pieces of property to trustees with almost plenary powers as to disposition, control, lease and exchange of property. The trustees handled the properties for a number of years, improved some, and traded other parts for a number of years. The court held that the trust was not engaged in business as a corporation and was not taxable as such. The court there said: It is contended that the test is whether the respondent was conducting a business and the beneficiaries had control of the trustees. To sustain this a number of cases dealing with the doing of business are cited. They need not be reviewed as it may be considered settled, within the meaning of the taxing laws, that if a corporation is doing that for which it was organized, for the purpose of earning profit, very slight activity is sufficient to constitute the doing of business. . On the other hand, if a corporation is not organized for profit but merely to hold real estate for ultimate disposal*2102 and liquidation it is not doing business although it incidentally collects the rents and distributes them. , . * * * The difference between the respondent and the Massachusetts Trusts considered in , is very marked. The respondent was not organized for the purpose of doing business for profit nor for doing business at all. Its purpose was to liquidate and distribute an estate. The beneficiaries, other than its creator, had no vested interest in the property and no voice in instituting the trust. They received their distributive portions purely as donations from their mother and could not dispose of their interests, except by an equitable assignment of their rights, subject to the orderly administration *555 of the trust. Such slight business activities as the trustee conducted were in furtherance of the ultimate purpose of liquidation and distribution. The similarity as to the provisions for terminating the trust, amending the deed and removing and electing trustees are hardly material as they are not unusual*2103 in express trusts. See also ; . It will be conceded that if the beneficiaries of the Wilson Trust, petitioner in this proceeding, had been the owners of the several tracts of real estate conveyed to the trustees and had organized themselves together in such a voluntary association for the purpose of renting and leasing the property, collecting and disbursing the rents, keeping up the improvements, selling some tracts and buying others, paying the expenses and distributing the profits, it would be an association carrying on a business and would be taxable as a corporation, regardless of the form of its organization or whether it was recognized as a partnership or trust in some States. ; ; . But where the facts show, as they do in this case, that the beneficiaries, save the grantor Walter H. Wilson, had no legal or equitable title to the property conveyed to the trustees, but were only the beneficiaries*2104 of an interest which their father was setting up in their behalf as a gift, and that the trust was created to hold and administer this interest, we think a different rule would apply. We think the distinction was correctly stated in , wherein the court said: * * * A distinction is to be made between an agreement between individuals in the form of a trust and an express trust created by an ancestor, although they may have some features in common. The controlling distinction is that one is a voluntary association of individuals for convenience and profit, the other a method of equitably distributing a legacy or donation. Congress has recognized this distinction, classing the former as associations, to be taxed as corporations, and at the same time providing for a separate and distinct method of taxing the income of estates and trusts created by will or deed, classing them together for that purpose. Section 219, Revenue Act of 1921 (42 Stat. 246). Under the authorities above cited and section 704(a) of the Revenue Act of 1928, and article 1504 of Regulations 65, Revenue Act of 1924, we hold petitioner was taxable for*2105 the year 1924 as a trust and not as a corporation. Judgment will be entered under Rule 50.