Leszczynski v. Commissioner

EDWARD LESZCZYNSKI, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Leszczynski v. Commissioner Docket No. 44586. United States Board of Tax Appeals 29 B.T.A. 551; 1933 BTA LEXIS 923; December 14, 1933, Promulgated *923 The organization herein held to be an association within the meaning of the revenue acts and is taxable as a corporation. O. W. Lyngklip, C.P.A., for the petitioner. James K. Polk, Esq., for the respondent. MARQUETTE *551 The respondent has determined the following deficiencies in income tax for the following calendar years: [1924] $396.66 [1925] 885.30 [1926] 775.38 [1927] 1,256.78 The one error asserted is that the respondent has determined that the petitioner was taxable as an association. FINDINGS OF FACT. On April 28, 1922, the following agreement was executed by the parties thereto: TRUST AGREEMENT WHEREAS, it is proposed by and between John A. Buss, Benjamin H. Proborsky, Joseph P. Wolff, Stephen Trybus, Boleslaus E. Polczynski, John H. Klang, Leonard L. Leszczynski, Edward Leszcjznski, John D. Lynch, Gerald M. Przybylski, Frank J. Wilkowski, and John J. Gamalski, to enter into the purchase of vacant or improved property, or the purchase of land contract interest, from time to time hereunder, and during the continuance of this contract of agreement, and to build dwellings for sale, either for cash or cash*924 down to any mortgage or mortgages, or on land contract, and to that end said parties to this agreement have subscribed their names: NOW, THEREFORE, it is agreed by and between the parties hereto, the wives of the respective parties joining herein for the purpose of barring any claims to dower in the property to be acquired as hereinbefore specified, each promising in the consideration of the promises of the others, as follows: 1. That each of the subscribers hereto shall, from time to time, as called on by trustee hereinafter named, or by the advisory board hereinafter named, pay into a common fund, a sum not to exceed two thousand ($2,000.00) dollars in any one year, for a period of ten (10) years, to carry out the purpose of this agreement; further, that each of the subscribers hereto shall be liable to the others to the full extent of two thousand ($2,000.00) dollars per year for said period of ten (10) years, if such amount be demanded by said trustee, acting in conjunction with and under the advice of the advisory board hereinafter mentioned and provided for, subject to all the conditions hereinafter more specifically set forth. 2. Further, that all amounts so paid in*925 by the subscribers hereto, shall be left in the common fund for the full period of ten (10) years, unless the share or shares of any one or more of the parties hereto shall be withdrawn in accordance with the provisions hereinafter set forth, and no dividends or profits *552 shall be withdrawn from the fund until the full end and term aforesaid, except in accordance with certain terms or conditions hereinafter contained. 3. That in case of the death of any one or more of the parties hereto before the end of the said term of ten (10) years, the heirs, executors or administrators of such party or parties shall be compelled to allow the amounts paid in by such party or parties together with all accrued profits to the date of such death to remain in the hands of the trustee hereinafter named until the end of the term, unless the share of such deceased party shall be purchased by the other parties hereto or one of them, but such share of such deceased party or parties shall be computed as of the date of the death of such party or parties, and shall thereafter and until the end of the term of this agreement draw interest at the rate of six (6%) percent per annum semiannually. *926 4. And in case of the inability of any of the parties hereto to pay in any year the said sum of two thousand ($2,000.00) dollars toward the principal fund to be contributed as a common fund, he shall not thereby lose his interest in the property to be owned and held in the name of the trustee, hereinafter named, but shall continue to permit all money paid in by him or them, together with all profits and accruals to remain in said fund, and shall draw interest at the rate of six (6%) percent per annum, payable semi-annually, on such amount, as determined at the date of his or her last payment, as shall be his proportionate share of the entire profit belonging to the parties hereto and held in trust for them. 5. Further, that Edward Leszczynski shall be trustee for all the parties to this agreement, and that all deeds or property acquired under this trust agreement, shall be taken in the name of such trustee, who shall hold the property so acquired in trust for all the parties hereto, in proportion as their respective shares in such property may be, and that said trustee shall make, execute, sign and deliver all deeds, contracts, mortgages, and other instruments in his own name, *927 but as trustee for the parties hereto; that such trustee shall continue in office for the full term of ten (10) years unless removed by death or other disability. 6. That an advisory board of three, to be composed of parties hereto, shall be elected annually, by a majority vote of the parties hereto such advisory board to act in conjunction with the aforesaid trustee on all matters pertaining to the policies of the trust, said advisory board to hold monthly meetings to discuss the policies of this trust. 7. That said trustee shall keep books of all transactions pertaining to the trust agreement and the properties and moneys of the trust, and shall call a meeting of the parties hereto between the first and twentieth day of January in each year, at which meeting he shall make an annual written report to the parties hereto of his doings as trustee, and that each of the parties hereto shall be entitled to a true copy, in writing, of such report at such annual meeting. 8. That buildings shall be placed upon the vacant properties to be acquired under this trust agreement, to be sold on such terms as the said trustee and the said advisory board shall see fit, all buildings to*928 be erected for said trust by Edward Leszczynski, one of the parties hereto, at a price to be determined upon by said Edward Leszczynski and the aforementioned advisory board. 9. Further, that if, at end of any one year during the term of this agreement, the annual report of said trustee shall show that there has been less than ten (10%) percent increase in the assets and properties of the trust on the basis of the assets and properties shown by the previous annual report, *553 exclusive of the capital paid in by the parties hereto during the year, then any one or more of the parties hereto may withdraw from this agreement and shall, within ninety (90) days after written notice to said trustee of his or their intention to withdraw, be entitled to his proportionate share of the assets, both cash and property, and such parties or party shall no longer be held liable under this agreement nor entitled to any further benefits hereunder. 10. Further, that any of the parties hereto shall be entitled to attend any or all of the meetings of the advisory board, as hereinbefore provided for, and upon giving ten days notice in writing, by registered mail, to the last known address*929 of the other parties to this agreement, shall be entitled to call for a vote on such question or questions as he may present at the meeting of the said advisory board next succeeding said ten days notice, A majority vote of the parties attending such meeting shall be binding upon the parties hereto. 11. Further, that this agreement may be abridged at any time by a majority vote of all the parties hereto, upon notice of such intention being given in the same manner as hereinbefore provided for notice of voting on any other question. 12. That at the end of the term of this agreement, any or all of the parties hereto shall be entitled to withdraw his or their proportionate share of the assets o? the trust, both cash and other properties without notice to that effect. 13. That, this agreement may, at any meeting of the parties hereto, upon notice as hereinbefore provided, be amended, altered, or added to, by a majority vote of those parties present at such meeting, and such amendments, alterations, or additions shall be binding upon all of the parties hereto. 14. That, this agreement shall be binding upon the heirs, executors, legal representatives and assigns of the parties*930 hereto. Since 1909 Edward Leszczynski has been engaged in the real estate and building business in Detroit. Wolff and Leonard L. Leszczynski were connected with Edward Leszczynski in his business. Polczynski was an electrical contractor. Lynch is an attorney and examined abstracts of title for the organization. The remainder were physicians and merchants. The purpose of the enterprise was that each individual should contribute $2,000 a year for ten years to be invested in land contracts, a division to be made only at the end of the period, or, if all agreed, the funds to be left with the trustee after that time for further investment. Edward Leszczynski was chosen trustee because of his successful career in his business and in other activities. No members were added to the group. None died and one who could not keep up his payments retired and received back his money. No certificates of ownership were issued. There were no bylaws. All books and records of the trust were kept at the office of Edward Leszczynski, who received no compensation for his services. No distribution of profits was made. At the organization of the petitioner, an advisory board of three was chosen. *931 Such a board continued to function until the end of the organization. Other than above, the petitioner had no officers or directors. The advisory board once a year and in the absence of Edward Leszczynski examined the petitioner's contracts and the trustee's accounts. *554 Once a year the members met with Edward Leszczynski and received a report of the petitioner's operations. He neither asked nor was given advice as to the manner of conducting the petitioner's affairs. The activities of the petitioner were as follows: Edward Leszczynski built houses, which he individually financed, and sold them. In addition to Leszczynski's profit, the contracts provided for an additional profit, usually 20 percent. These contracts he sold to the petitioner at a price which would net to it the additional profit of about 20 percent. The money he thus received was used for further building operations, resulting in contracts which in turn were sold to the petitioner. The petitioner purchased a few such contracts from others. It neither bought nor sold real estate. None of the contracts purchased by the petitioner was sold by it. The following are the number of contracts purchased, *932 their total cost and the total expected gross profit: Year Number Total cost Gross profit of con- tracts pur- chased [11] $36,510.00 $7,382.57 [20] 75,642.43 15,610.69 [14] 55,153.30 11,930.83 [13] 42,562.11 9,842.89 [10] 43,208.38 9,954.19 [12] 69,847.92 14,539.50 Of the contracts purchased in 1922, collections were made on 7 in 1924, on 8 in 1925, on 6 in 1926, and on 4 in 1927. Of the contracts purchased in 1923, collections were made on 20 in 1924, on 18 in 1925, on 18 in 1926, and on 15 in 1927. Of the contracts purchased in 1924, collections were made on 10 in that year, on 13 in 1925, on 12 in 1926, and on 7 in 1927. Of the contracts purchased in 1925, collections were made on 10 in that year, on 13 in 1926, and on 11 in 1927. Of the contracts purchased in 1926, collections were made on 4 in that year and on 8 in 1927. Of the contracts purchased in 1927, collections were made on 11 in that year. In 1927 thepetitioner foreclosed 1 contract purchased in 1923 and repossessed 1 purchased in 1924 and 2 purchased in 1925. For each of the years 1924, 1925, 1926, and 1927 the petitioner returned*933 the income of the organization as trustee and on Form 1040. The respondent has determined that it was taxable in each of these years as an association. Its return for the year 1924 was filed with the collector on March 14, 1925. *555 OPINION. MARQUETTE: The sole question presented is whether the respondent has erred in determining that the petitioner was taxable as an association. Sec. 2(a)(2), of Revenue Acts of 1924 and 1926. It returned its income as that of a trust the income of which was to be accumulated and therefore taxable to the fiduciary. Sec. 219, Revenue Acts of 1924 and 1926. It insists that its returns were proper, or, in the alternative, that its members were taxable as partners. It further asserts that, having filed its return for 1924 as a trust, under section 704 of the Revenue Act of 1928, it is taxable as such. The organization created by the agreement of April 28, 1922, was not imposed on the members by any third person, but was the result of their voluntary action. Blair v. Wilson Syndicate Trust, 39 Fed,(2d) 43. As shown by the terms of the agreement and by the petitioner's actions, it appears that the parties associated themselves*934 together for the purpose of purchasing land contracts and realizing on them by collection, or, if that was not possible, by foreclosure or repossession. The contracts were payable in installments which the petitioner collected as they fell due. These activities were not confined to isolated transactions. New investments were being made out of fresh contributions by the members and out of payments received on the contracts. Its aim was not liquidation, but acquisition. These repeated transactions, all entered into for gain, constituted doing business as that term is defined in . . The fact that organizations operating under trustees were doing business has been especially stressed by the courts and by the Board in determining whether they were associations. Ittle son v., and cases cited. At the organization of the petitioner the members were careful to retain full control over the funds and the trustee. This control was retained in paragraphs 6, 8, 10, 11, and 13 of the agreement. The fact that these powers were not exercised*935 is immaterial. Such is the case in many corporations. Petitioner's counsel attempts to differentiate this organization from those which have been held to be associations on two grounds - first, that no dividends could have been or were paid, and, second, there were no certificates of stock. With respect to the first contention, it is only necessary to point out that this was the result of a voluntary agreement which could be altered in this or any other respect whenever a majority of the members so desired. The decisions in , and in , afford a negative answer to the second contention. *556 It is clear that the members did not contemplate the formation of a partnership, nor did they consider themselves partners. Cf. . So far as we are informed, none made a partnership return. The petitioner's organization has little similarity to those "ordinary partnerships" the members of which are taxable as partners under the revenue acts. The local law does not control in these cases. *936 . Thus a Massachusetts trust, which the petitioner closely resembles, is held by the Massachusetts courts to be a partnership in those instances where, as here, the members retain control over the trustees, but such an organization is an association within the meaning of the revenue acts. . We find no merit in this contention. We conclude that the petitioner was taxable as an association. Section 704 of the Revenue Act of 1928 is not applicable: first, for the reason that the Commissioner's regulations and rulings prior to the decision in , as well as subsequent thereto, were to the effect that organizations similar to the petitioner were taxable as associations in those cases where the members could control the trustees (), and, second, because the rulings and regulations referred to in section 704 (none of which was applicable to a case like this) were altered prior to the date on which the petitioner filed its return for 1924. *937 ; . Judgment will be entered for the respondent.