Darol Trading Account v. Commissioner

DAROL TRADING ACCOUNT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Darol Trading Account v. Commissioner Docket No. 81519. United States Board of Tax Appeals 34 B.T.A. 837; 1936 BTA LEXIS 638; July 28, 1936, Promulgated *638 The petitioner is not an association within the meaning of section 1111 of the Revenue Act of 1932, but is a partnership within the meaning of paragraph (a)(3) of said section. John E. McClure, Esq., and Millard L. Thompkins, Jr., Esq., for the petitioner. R. N. McMillan, Esq., for the respondent. MORRIS *837 The respondent having determined a deficiency in income tax of $1,639.16 for the period August 23 to September 16, 1932, the petitioner brings this proceeding, alleging error by reason of the respondent's holding that it is taxable as an association within the meaning of section 1111 of the Revenue Act of 1932 and, therefore, subject to taxation as a corporation in accordance with the provisions of section 13 of that act, and his failure to hold that the asserted deficiency is barred by the statute of limitations. FINDINGS OF FACT. The petitioner, Darol Trading Account, composed of Walter D. Ebbitt, Marie Girard, and First Chrold Corporation, was formed as the result of an option agreement, dated August 22, 1932, addressed to E. F. Hutton & Co., 61 Broadway, New York City, by which said Marie Girard gave to said Hutton & Co.*639 , or its assigns, an option to purchase from her 25,000 shares of the common capital stock of McKesson & Robbins, Inc., at $4 a share, it being agreed, as part of the consideration therefor, that she should receive 25 percent of the profits "of the syndicate formed to operate against" that portion, after the deduction of expenses, it being specifically provided "that the other members of the syndicate are to assume 100% of the losses" and that she should be held "free from any liability." In pursuance of the foregoing option, Loeb, a member of the firm of said Hutton & Co., directed a communication, dated August 22, 1932, to said Ebbitt and First Chrold Corporation, whose power of attorney he held - they already having been invited and having agreed to participate in a trading account to be opened in the name of "Darol Trading Account" - stating that Hutton & Co. was manager of said account, for which it was to receive 10 percent of the profits, after deducting expenses; that the maker of the option was to receive 25 percent of the profits - Ebbitt, and First Chrold corporation to assume all losses, if any - and it therein allotted to them, respectively, 10 percent and 65 percent*640 of the profit and 13.33 and *838 86.67 percent of the losses. Each of said communications bore the acceptance of the participants. The foregoing venture was limited in its operation to trading in McKesson & Robbins, Inc., securities, its duration being limited to September 22, 1932. Actually, it terminated on September 16, 1932. During existence of the account 35,700 shares were purchased, at a cost of $169,190, and 11 days were consumed in such purchases; 35,700 shares were sold for $182,966.50 and 13 days were consumed in accomplishing such sales. No reports, except final, were rendered to the participants. There was no agreement, as such, between the participants, other than the option communication of August 22, 1932. There were no meetings of participants, no beneficial ownership certificates were issued, there were no officers or directors, no bylaws, no minutes and no seal. The purpose of the account was for division of the risk involved. The respondent, in determining his said deficiency, held that the venture was an association within the meaning of section 1111(a)(2) of the Revenue Act of 1932, hence, taxable as a corporation under the provisions of*641 section 13(a) of that act. The trading account filed on October 4, 1932, with the collector of internal revenue, a "Form 1065A, Treasury Department Internal Revenue Service Information Return of Trading Account Income", for the period under consideration, showing the income and the "partners' shares of income and credits." No agreement extending the period of limitations, as provided in section 275 of the Revenue Act of 1932, has ever been executed by the petitioner. OPINION. MORRIS: Guided by the principles laid down in , we find not the slightest "resemblance" of an incorporated body in this case. It lacks resemblance in both substance and form - in substance, in that it was never intended by the parties in interest that they should enjoy the rights, privileges, or immunities of stockholders in an incorporated enterprise - nor did they enjoy such rights, privileges, or immunities, under the incorporation laws of the state of their activities - in form, in that they operated under no guise indicating incorporation; there were no bylaws, nor anything resembling them; there was no corporate seal; there were no officers*642 or directors, nor any body even slightly resembling them; there were no certificates of ownership issued or intended to be issued for the ready transfer of interests; no meetings, similar to those customarily held by directors of a corporate body, were held; there were no employees, the venture occupied no office space and had no mailing address other than the office of Hutton & Co., which, as agent for the optionor, Girard, brought the parties *839 in the venture together. These factors, in and of themselves, while not decisive, are, nevertheless, persuasive. In that case, after reviewing the applicable statute, the earlier cases, and the regulations of the Department, and after rereviewing the legislative background, the Court proceeded to define what it termed the "salient features" of a trust, "when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains - which may be regarded as making it analogous to a corporate organization." By no stretch of the imagination could it be said that this petitioner was "carrying on" a business enterprise, within the reasonable interpretation*643 of those words as used by the Supreme Court. Obviously, any transaction, be it ever so trivial, entered into for personal gain, may be said to be a "business" enterprise, and so restricting the matter, this petitioner would fall squarely within the definition. But, the addition of the words, "carrying on", connotes not only general activity, but continuity, far beyond the confines of the facts of this case. This venture was limited to the consummation of a sale of a specific block of stock. Its duration was limited by the expressed language of the option to one month from the date thereof. Actually, however, the venture was completed and closed within 13 days. True, 35,700 shares were dealt in, but these additional shares were merely incidental to the expeditious and profitable fulfillment of the purpose of the venture. The Court there refers to the fact that a corporate organization "as an entity, holds the title to the property embarked in the corporate undertaking." Here, the "entity", if there could be said to be such, within the meaning of the word, as used, owned no property. The property, the subject matter of the venture, i. e., 25,000 shares of McKesson & Robbins*644 stock, was owned by the optionor, who was a participant only in the sense that she had those shares to sell at a stated figure, plus 25 percent of any profit to be derived from their sale. She, in effect said, to Hutton & Co., "I have 25,000 shares of stock, which I would like to sell, and in order that I may be insured against loss in their sale, I am willing to forego 75 percent of the profit, in order that that may be accomplished." To this end the two participants joined the venture with the understanding that they would share in 75 percent of the profit merely for the assurance by them that no loss would be suffered by the optionor. The Court refers to the fact that a trust may be perpetuated, notwithstanding the death of the owners of beneficial interest, thus rendering themselves akin to owners of corporate shares, and also to the fact that the "trust type of organization facilitates, as does a *840 corporate organization, the transfer of beneficial interests without affecting the continuity of the enterprise, and also the introduction of large numbers of participants." It is safe to say that, in the absence of provision for the transfer of the interests of the real*645 participants in this venture, they, even if they had marketable interests, could not transfer them prior to the completion of the venture and the determination of what those interests were. Furthermore, the transferees of such interests would necessarily have to be approved by the optionor since their financial ability to indemnify against loss was of the essence of their interests in the venture. Undoubtedly the type of transfer, to which the Court refers, should be reasonably free of restriction. Finally, the Court refers to the fact that the trust method permits of limited liability, as in the case of a corporation. It seems only necessary to point out here that the only person enjoying limited liability was the optionor - the real participants agreed to indemnify the optionor against loss in consideration of their hoped for profit in the venture. Subdivision (a)(3) of section 1111 of the Revenue Act of 1932 provides as follows: The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this*646 Act, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization. In our opinion the petitioner falls squarely within the term "partnership" as defined in the foregoing provision, which was inserted for the first time in the Revenue Act of 1932. In so deciding, we are relieved of the necessity for considering the second issue pertaining to the statute of limitations. Reviewed by the Board. Judgment will be entered for the petitioner.