Neal v. Commissioner

J. HENRY NEAL, EDMUND C. CAMPBELL, WILLIAM F. KENNEY, WILLIAM R. SAMPSON, WILLIAM H. HITCHCOCK, TRUSTEES OF THE FIRST PEOPLES TRUST, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Neal v. Commissioner Docket No. 45403. United States Board of Tax Appeals 26 B.T.A. 551; 1932 BTA LEXIS 1291; June 29, 1932, Promulgated *1291 Where in 1920 the Commissioner made a specific ruling that taxpayer was a trust, taxable as such, and sent personal written notice of such ruling to taxpayer, the ruling was not reversed or revoked by various court decisions, departmental rulings or interpretations general in character. Such a ruling was not revoked prior to the receipt by taxpayer of a specific notice of revocation in 1927. William H. Hitchcock, Esq., for the petitioners. Brooks Fullerton, Esq., for the respondent. VAN FOSSAN *551 Respondent determined a deficiency of $24,593.19 for the year 1924. Petitioners allege that they are entitled to be taxed as a trust and not as a corporation, under the provisions of section 704(a) of the Revenue Act of 1928. From the stipulated facts we make our findings as follows. FINDINGS OF FACT. For the calendar year 1924 the petitioners filed two income-tax returns as a trust and not as an association - Form 1041 showing a total net income of $245,210.78, all of which except $21,635.03 was distributed to preferred shareholders, and Form 1040 reporting a tax on the amount not thus distributed, that is, on $21,635.03 at individual*1292 rates, of $1,211.12, which was assessed and paid. The distributions to shareholders, as shown on return Form 1041, were paid in 1924. The First Peoples Trust was formed on October 28, 1919, by a declaration of trust. The petitioners, being the present trustees under this declaration of trust, now concede that, in accordance with a judgment of the United States Circuit Court of Appeals for the First Circuit rendered on October 30, 1928 (United States v. Neal, 28 Fed.(2d) 1022), this trust constitutes an association within the meaning of the revenue acts of the United States and is accordingly for the purposes of the income tax to be dealt with as a corporation. It began business on January 1, 1920, and it is conceded that at all times since that date it has been carrying on business in Boston, Massachusetts. Under date of December 2, 1920, the Commissioner of Internal Revenue, over his personal signature, sent to William H. Hitchcock, *552 one of the trustees of this trust and its counsel, a letter which reads in part as follows: Reference is made to your letter of April 26, 1920, with which you transmit a copy of the declaration of trust of the*1293 First Peoples Trust, recently organized in Massachusetts. You request a ruling as to the manner in which the trustees of this trust shall make a return of its income for the current year. * * * It appears from the trust agreement that preferential dividends are to be paid upon both the first and second preferred shares in regular quarterly installments, but that as to the common stock the declaration and distribution of dividends is left entirely to the discretion of the trustees. In accordance with the provisions of Treasury Decision 2987, Internal Revenue, such a trust is not taxable as an entity, that is to say the beneficiary to whom income is to be distributed periodically must include in computing his net income the amount actually distributable to him, and any gain, profit, or income which is not periodically distributable, is taxable to the trustees. It is accordingly held that income of the First Peoples Trust paid out as dividends of the first and second preferred shares is taxable to the holders of those shares, and that all other income being held for the beneficial interest of the common shares and subject to distribution only in the discretion of the trustees*1294 is taxable to the trustees. Thereafter, and until the decision of the Circuit Court of Appeals, above mentioned, the petitioners filed income-tax returns on the theory that petitioners were a holding trust, and not an association taxable at corporation rates. Under date of February 9, 1923, the collector of internal revenue at Boston sent to petitioner a letter reading as follows: Reference is made to claim of nonliability to capital stock tax return. Please be informed that the Bureau at Washington sent forward a decision to this office under date of January 20, 1923, that no capital stock tax returns are required of your organization. This office desires to express its appreciation of your cooperation in straightening out this matter. On May 12, 1924, the United States Supreme Court decided the case of Hecht v. Malley,265 U.S. 144. On June 7, 1924, the Secretary of the Treasury approved and promulgated Treasury Decision No. 3598, amending article 8 of Regulations 64, concerning capital-stock tax. This Treasury decision was first published June 16, 1924, and reads as follows: To collectors of internal revenue and others concerned: *1295 In order to give effect to the decision of May 12, 1924, by the United States Supreme Court in the case of Hecht v. Malley and in the other cases named therein (Nos. 99, 100, 101, and 119 - October Term, 1923), article 7 of Regulations 50 (revised edition, approved June 21, 1920) and article 8 of Regulations 64 are amended so as to read as follows: Trusts. - Two distinct classes of trusts are recognized by the Department, namely, holding trusts and operating trusts. *553 Holding trusts are those in which the trustees are merely holding property for the collection of the income and distributing it among the beneficiaries and are not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business. Such trusts are not associations within the meaning of the law and are not subject to the tax. Operating trusts are those in which the trustees are not restricted to the mere collection of funds and paying them over to the beneficiaries but are associated together in much the same manner as directors in a corporation for the purpose of, and are actually engaged in, carrying on some business enterprise. These trusts, whether*1296 of the Massachusetts type or otherwise, are to be deemed associations within the meaning of the Act, independently of any control exercised by the beneficiaries, and subject to the tax. D. H. BLAIR, Commissioner of Internal Revenue. Approved June 7, 1924 A. W. MELLON, Secretary of the Treasury. On August 11, 1924, the Commissioner of Internal Revenue promulgated Income Tax Ruling No. 2061, which reads as follows: The general rule in regard to holding trusts and operating trusts which is announced in the decision of the Supreme Court of the United States in the case of Hecht v. Malley and in Treasury Decision 3598 (C.B. 111-1, 489) is applicable under all titles of the Revenue Acts of 1918 and 1921. On July 9, 1924, the solicitor of internal revenue, by Solicitor's Memorandum No. 2291, ruled that the decision in Hecht v. Malley, supra, was applicable to the income-tax provisions of the Revenue Acts of 1921 and 1924. This ruling was first published August 18, 1924. Regulations 65, relating to income tax under the Act of 1924, was signed by D. H. Blair, Commissioner of Internal Revenue, and approved and promulgated by A. W. Mellon, *1297 Secretary of the Treasury on October 6, 1924. Article 1504 of said regulations reads as follows: Association distinguished from trust. - Holding trusts, in which the trustees are merely holding property for the collection of 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 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. *554 Under date of December 5, 1924, R. M. Estes, Deputy Commissioner of Internal Revenue, sent to the petitioners a letter which reads in part as follows: The report of a field investigation made of your*1298 association by Internal Revenue Agent G. K. Benson, in connection with capital stock tax, has been received in this office. It is noted therefrom that your association does not agree that it is an association liable for capital stock tax. The word "association" is used in the Revenue Act of 1918 in its ordinary meaning, and includes "Massachusetts Trusts" having quasi-corporate organizations under which they are engaged in carrying on business enterprises, irrespective of the measure of control vested and exercised by the beneficiaries, as beneficial certificate holders. In a comparatively recent decision on this question in the case of Hecht, et al., Trustees, v. Malley, the Supreme Court of the United States stated that the Revenue Act of 1918, levying a capital stock tax upon corporations, associations, joint stock companies and insurance companies, extends to "organizations exercising the privilege of doing business as associations at the common law." An examination of the declaration of trust of your association discloses that it is strictly a business enterprise and, as such, it is an association within the meaning of the Revenue Act of 1918, and liable for capital stock*1299 tax. to Joseph F. Timilty, Supervisor of Accounts and Collections, Boston, Massachusetts, to Joseph F. Timilty, Supervisor of Accounts and Collections,- Boston, Massachusetts, which has been forwarded to this office, it is contended that your organization is not an association within the meaning of any statute in force since January 1, 1920, and that therefore, it is not required to make capital stock tax returns or to pay capital stock tax. Accordingly, request is made for a hearing before final action is taken by this office. In view of the decision referred to above, there appears to be no question relative to the liability of your organization or reason why it should not file capital stock tax returns. A conference under the circumstances in so far as the liability of your organization to the tax is concerned, is not believed necessary. However, it is not the desire of this office to be arbitrary in the matter, and if a hearing is still desired, it will be granted if you will advise the approximate date which will be agreeable. * * * The petitioners at once objected to the assessment of capital-stock taxes as proposed in the letter mentioned, and requested a conference. *1300 Such a conference was held with the representatives of the capital stock tax division in Washington on December 17, 1924. At this conference the petitioners furnished certain information requested, but contended that they were not subject to a capital-stock tax. Under date of January 15, 1925, Fred E. Page, Acting Deputy Commissioner, sent to the petitioners a letter containing a tabular statement of computation of capital-stock-tax liability. Under date of March 25, 1925, notices were received by petitioners from the collector of internal revenue in Boston of the assessment of the taxes listed in the above letter of January 15, 1925, with a demand for payment. These taxes were paid under protest on April 4, 1925. *555 On September 20, 1927, the petitioners filed claim for refund of the capital-stock taxes paid by them under protest on April 4, 1925, on the ground that they did not constitute an association. On the rejection of that claim for refund petitioners brought suit to recover these payments in the United States District Court for the District of Massachusetts. In this action the District Judge ruled that the First Peoples Trust did not constitute an association*1301 and gave judgment for the repayment of these taxes to the petitioners (Neal v. United States, 26 Fed.(2d) 708). On an appeal to the Circuit Court of Appeals of the First Circuit this judgment was reversed, it being there held that the petitioners constituted an association within the meaning of the Revenue Laws (United States v. Neal, 28 Fed.(2d) 1922). On February 18, 1929, the Supreme Court denied a petition for certiorari to review this judgment (278 U.S. 659). Under date of August 27, 1927, the petitioners received from the collector of internal revenue in Boston a letter reading as follows: Under date of June 15, 1927, the office of the Commissioner of Internal Revenue was requested to review the trust instrument of the First Peoples Trust in order to determine the status of the Trust for income tax purposes. After a review of the provisions of this instrument the Commissioner of Internal Revenue has ruled that the First Peoples Trust is an association within the meaning of the various Revenue Acts and liable for filing income tax returns on Form 1120, (corporation income tax returns). A copy of the Commissioner's*1302 ruling is attached hereto for your information. Your attention is invited to the revocation of the former ruling dated December 2, 1920, in which it was held that the First Peoples Trust was a strict trust, for income tax purposes. Your tax liability for prior years will be adjusted on this basis. Enclosed therewith was a copy of a letter over the signature of the then Commissioner of Internal Revenue to the collector, dated August 23, 1927, which reads as follows: Reference is made to your letter dated June 15, 1927 with subsequent letter of July 1, 1927 presenting for consideration the question as to whether the status of the First Peoples Trust, 20 Kilby Street, Boston, Massachusetts, is that of a trust or an association for income tax purposes. The organization in question was held to be a trust for income tax purposes by ruling dated December 2, 1920, although it was subsequently held to be subject to the capital stock tax as in the case of a corporation. With reference thereto you are advised that the status of the organization in question for the purpose of income tax has been reconsidered, particularly in the light of Treasury Decision 3595 and 3598 based on the*1303 decision by the United States Supreme Court in the case of Hecht v. Malley. With reference to the classification of such organization under Section 2 of the Revenue Act of 1926, which is equally applicable under the prior Acts, attention is directed to the following provisions of Articles 1502 and 1504 of Regulations 69: "Associations and joint stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business *556 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 shareholders on the basis of the capital stock which 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. "* * * 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*1304 of carrying on some business enterprise, the trust is an association within the meaning of the statute." The organization in question is authorized to purchase, sell and otherwise deal in real and personal property including stocks, bonds, and commercial paper, and in fact it may engage in an almost unlimited line of business activities. The business is conducted in the name of the organization. The organization is authorized to employ a seal and the usual officers are provided for as in the case of the corporate form of organization with the trustees acting in the capacity of a board of directors. The capital is represented by transferable shares divided into first preferred, second preferred and common shares on which dividends are paid as in the case of corporate stock. In fact the form of organization, powers vested in the trustees, and mode of procedure cannot be distinguished in any essential particular from those of a corporation. Since the organization is engaged in carrying on a business enterprise, lack of control by the beneficiaries is not a determinative factor. The organization is, therefore, held to be an association and not a trust, and is, accordingly, subject*1305 to tax as a corporation. The former ruling dated December 2, 1920 is, accordingly, hereby revoked. The taxpayer should be advised of the action taken herein, revoking the former ruling made in the case, and an extra copy of this letter is attached for that purpose. The Commissioner of Internal Revenue made certain adjustments to petitioners' income, which are not here in dispute. He determined that petitioners' net income for the calendar year 1924 was $206,434.49 and on November 26, 1928, advised the petitioners that in his opinion the Commissioner had ruled prior to January 1, 1925, that the petitioners were an association taxable as a corporation. On July 9, 1929, he mailed to petitioners, by registered mail, a deficiency notice (together with a statement comprising three pages, which was a part of said notice) determining a deficiency of $24,593.19 in respect of the calendar year 1924. OPINION. VAN FOSSAN: In this case we are confronted with the question whether or not a specific ruling, made by the Commissioner in 1920 and applicable only to the petitioners, of which ruling personal notice was sent to and received by petitioners, was reversed or revoked *557 *1306 by court opinions, general rulings and promulgations, no specific notice of revocation being sent to petitioners until 1927. Petitioners base their case on the provisions of section 704(a) of the Revenue Act of 1928, which provides: 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. For the purpose of clarity of understanding we recapitulate the salient facts. The First Peoples Trust was formed in*1307 1919 by a declaration of trust and began business January 1, 1920. On December 2, 1920, the Commissioner, over his personal signature, wrote a letter to petitioners specifically holding the organization to be a trust, taxable as such. Thereafter, until 1928, when an adverse decision by the United States Circuit Court of Appeals was rendered, petitioners filed income-tax returns in accordance with the Commissioner's ruling, i.e., as a trust. On February 9, 1923, the collector advised petitioners that his superiors had ruled that petitioners need not file capital-stock-tax returns. On May 12, 1924, the United States Supreme Court decided Hecht v. Malley,265 U.S. 144, and certain other cases and on June 7, 1924, the Secretary of the Treasury approved a revision of the regulations relating to capital-stock tax, giving effect to the recent decisions and dividing trusts into two classes, i.e., holding trusts and operating trusts, the former being nontaxable and the latter taxable. On August 11, 1924, the Commissioner declared the above interpretation applicable to income-tax situations under the Revenue Acts of 1918 and 1921, and on August 18, 1924, a similar*1308 ruling as to the 1924 Act was published. On October 6, 1924, the Commissioner and the Secretary promulgated Regulations 65, including article 1504, which purported to indicate the distinction between an association and a trust, and on December 5, 1924, the Deputy Commissioner wrote petitioners in reference to their controversy over the classification of petitioners for capital-stock-tax purposes, offering to grant further hearing on *558 the matter, if desired. Petitioners requested such a hearing and the same was held December 17, 1924. On January 15, 1925, the Acting Deputy Commissioner sent petitioners a letter containing a tabular statement of computation of capital-stock-tax liability and on March 25, 1925, petitioners received notices of assessment of such taxes. The taxes were paid under protest, claim for refund was filed and rejected, and suit was brought for recovery. The District Judge ruled favorably to petitioners' claim, but the Circuit Court of Appelals on October 30, 1928, reversed the District Court and held petitioners to be an association taxable as such for capital-stock-tax purposes. On August 27, 1927, the collector advised petitioners by letter*1309 that the Commissioner "has ruled that the (petitioner) is an association" for income-tax purposes. Attached to the letter was a copy of a letter from the Commissioner to the collector dated August 23, 1927, stating that the "status of the organization in question for the purpose of income tax has been reconsidered * * *" and holding that "the organization is, therefore, held to be an association and not a trust, and is, accordingly subject to tax as a corporation. The former ruling dated December 2, 1920, is, accordingly, hereby revoked." In considering the question presented we start with the premise that section 704(a) is a statute of repose, calculated to give taxpayers freedom from reversals of opinion, retroactive in character, as to the proper classification of an organization under the law as interpreted by the administrative rulings. Such a statute, being remedial in character, should be liberally construed in favor of the taxpayer. E. A. Landreth Co.,15 B.T.A. 665. Looking to the facts of the case, we find that the Commissioner had specifically ruled on petitioners' status in 1920 and had committed himself to a holding that taxpayers were a trust*1310 and not an association for income-tax purposes. This ruling remained unrevoked, unless revoked by analogy or indirection, until August 27, 1927, when, after reconsideration, it was specifically revoked. The language of the statute affords relief in any situation where a return was filed as a trust "under any ruling of the Commissioner * * * which had not been reversed or revoked prior to the time the return was made * * *." Admittedly, the return for 1924 was filed under the ruling of 1920, which ruling had not been specifically or directly reversed or revoked prior to such filing. The question thus arises, can a specific ruling be reversed or revoked by indirection? That the Commissioner was of the opinion that a specific revocation was necessary is evident from his action in revoking the same in *559 1927. The language used was that of the present tense. "The former ruling * * * is * * * hereby revoked." It would seem to be fundamental that the revocation of a ruling, like the revocation of an offer in the law of contracts, must be equal in scope and manner with the ruling. See *1311 Shuey v. United States,92 U.S. 73. If the ruling was made and published generally, an effective revocation may be accomplished by employing the same means. If the ruling was specific and directed to one individual, then a revocation must be effectively brought to the attention of the same individual and generally by the same means. In the instant situation petitioners did not rely on a general published ruling or interpretation; they had a specific ruling personal to their trust. Had the reliance been on such a generalization it would seem to be unquestionable that a reversal or revocation of such generalization might be accomplished by a subsequent generalization. Such was the case in various cases previously before the Board. Commercial Trust Co.,18 B.T.A. 1248. See also E. A. Landreth Co., supra;Van Cleve Trust Co.,18 B.T.A. 486; Mary L. Dutton et al.,18 B.T.A. 1151. Here the question is narrower. Nor need we concern ourselves with the question whether the Commissioner was correct in his ruling in 1920 that petitioners were taxable as a trust. That was his ruling and it stood*1312 unreversed or unrevoked until 1927. The above conclusion makes unnecessary a consideration of the effect on the general situation of Hecht v. Malley and the Commissioner's rulings in other cases. Petitioners are relying on the personal ruling of 1920. Similarly, the capital-stock-tax controversy is immaterial. It may be observed in this connection, however, that the Commissioner in his revocation letter of 1927 makes no mention of such a controversy and does not suggest that the rulings of his office subsequent to Hecht v. Malley on the capital stock-tax issue had any bearing on the income-tax question or had worked a reversal or revocation of the ruling of 1920. The whole tenor of the letter suggests that the outstanding ruling of 1920 was alive and in full effect. Moreover, the capital-stock-tax issue was not definitely settled as to petitioners until the notice of assessment of March 25, 1925, which was after the date of filing of petitioners' 1924 income-tax return. We are of the opinion that petitioners should prevail. Their tax return for 1924 was duly filed as a trust under a specific personal ruling by the Commissioner made in 1920, which stood*1313 unreversed and unrevoked at the date of filing. They are entitled to the shelter afforded by section 704(a) of the Revenue Act of 1928. Decision will be entered for the petitioners.