J. W. Wells Lumber Co. Trust A v. Commissioner

J. W. WELLS LUMBER COMPANY TRUST A, A. C. WELLS, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. W. WELLS LUMBER COMPANY TRUST B, A. C. WELLS, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. W. Wells Lumber Co. Trust A v. Commissioner Docket Nos. 97134, 97135. United States Board of Tax Appeals 44 B.T.A. 551; 1941 BTA LEXIS 1314; May 21, 1941, Promulgated *1314 Upon the expiration of its charter, a lumber company transferred its timber and timberlands by one deed, and its manufacturing plant and all other assets by another deed, to its principal stockholder, as trustee, for the benefit of all of its stockholders. Held, upon consideration of the terms of the deeds and the activities of the trustee, that the trusts were not created in order to liquidate the assets acquired from the lumber company, but for the purpose of carrying on business for profit, and that the form of their organization more nearly resembled that of a corporation than that of a partnership or a pure trust, and each trust was an association taxable as a corporation. Meredith P. Sawyer, Esq., for the petitioner. Gerald W. Brooks, Esq., for the respondent. TYSON *551 The respondent determined deficiencies in income and excess profits taxes as follows: Docket No. Year Petitioner Income tax Excess profits tax 97135 [1934] Trust B $1,066.87 $387.95 97135 [1935] Trust B 155.82 56.66 97135 [1936] Trust B 476.06 420.93 97134 [1936] Trust A 2,743.34 1,665.74 *552 These are consolidated*1315 proceedings. The issues presented by the pleadings are (1) whether each petitioner, or trust, is an association and taxable as a corporation, and (2) whether petitioner in docket No 97134 is entitled to depletion. FINDINGS OF FACT. The J. W. Wells Lumber Co. (hereinafter referred to as the corporation), was a corporation organized under the laws of Michigan for a period of thirty years, beginning January 1, 1903, and was engaged in the business of logging timber and of manufacturing lumber and hardwood flooring. Its charter expired on December 31, 1932, and on that date, by two separate trust deeds, it conveyed its assets and business to A. C. Wells, as trustee, for the benefit of its stockholders. The J. W. Wells Lumber Co. Trust A, A. C. Wells, Trustee, petitioner in Docket No. 97134 (hereinafter referred to as trust A), acquired the timberlands and logging business under one of the trust deeds; and the J. W. Wells Lumber Co. Trust B, A. C. Wells, Trustee, petitioner in Docket No. 97135 (hereinafter referred to as trust B), acquired under the other trust deed the manufacturing plant, real estate in Menominee, Michigan, and all the remaining assets of the corporation. *1316 In 1931 the corporation owned 15,000 to 20,000 acres of timberland, situated in 7 counties in the northern part of Wisconsin and Michigan, containing forty to fifty million board feet of lumber. In connection with these timberlands the corporation owned camps, a store in the woods, and a logging railroad which connected with the line of a common carrier at a point 100 miles from the plant. In 1931 the corporation employed from 200 to 700 men in the woods. In 1931 the corporation also owned a manufacturing plant and lumber yard situated in Menominee, Michigan. The manufacturing plant consisted of a sawmill, a factory for the manufacture of maple flooring, a powerhouse, and yards for the storage of finished lumber and flooring. The sawmill cost $400,000 and had a capacity of 100,000 feet of hardwood per day. The flooring factory and its equipment cost about $300,000. In 1931 the corporation employed 300 men at the manufacturing plant. It usually had on hand at the plant manufactured lumber and flooring of the value of about a million dollars. On April 13, 1931, the sawmill, the manufactured lumber and flooring, and a quantity of logs on hand were completely destroyed by fire. *1317 The flooring factory was partly destroyed, but the powerhouse and most of the machinery were not seriously damaged. The corporation recovered $1,000,000 for the loss of the lumber and flooring, which was the only part of its property covered by insurance. From 1925 to 1930 the lumber business was not very brisk and the *553 corporation in that period did not acquire any additional timberlands. After the fire it sold some timberlands, but it never resumed logging operations. In the latter part of 1931 the corporation completed a new flooring factory and resumed manufacturing operations. The factory cost $175,000 and had a capacity equal to one-third of that of the old one. Some materials and machinery salvaged from the fire were used in building the new factory. The corporation reduced the size of its lumber yard by selling part of the land and permitting part to be sold for taxes. The corporation's stock was owned by A. C. Wells, members of his family, and relatives. A. C. Wells was its president and owned a majority of the stock. He at all times controlled its policies and actively managed its business. During 1932 the corporation decreased its capital stock*1318 from $1,291,000 to $500,000 and distributed the difference to its stockholders. The deed to trust A conveyed the corporation's tracts of timberland in Wisconsin and Michigan, its growing timber, logs, ties, and forest products, logging equipment, and railways, rights of way, and all rights, credits, and effects of the corporation's business of buying and selling lands, and the logging, shipping, and selling of forest products; and the deed states that the value of the real estate so conveyed, according to the books, is $262,000. The deed to trust B conveyed the corporation's flooring factory and sales division, its machinery, tools, and equipment, its rights of action, including bills and notes receivable, claims, and demands of the business, its office furniture, equipment, motor vehicles, and all its personal property not conveyed to trust A, and all real estate owned by it in Menominee; and the deed states that the value of the real estate so conveyed, according to the books, is $84,000. The provisions of the two deeds are, in respects other than those set out above, identical, and both deeds contain, inter alia, the following lowing provisions: FIRST. (Duration. *1319 ) Said Trustee shall administer said trust during his life or pleasure and in the event of his death the same may be administered to like extent by such person or persons as may be appointed by the Circuit Judge of Menominee County, Michigan, upon ex parte application of any beneficiary * * *. Nothing herein contained shall be construed to prevent; and said trustee and his successor, * * * may terminate said trust at any time by proper conveyence, to vest in the beneficiaries the corpus of said trust and the same may be partially liquidated at any time in like manner. SECOND. (Goodwill.) [The lumber company] grants unto [the trustee] full right to the use of the name of J. W. Wells Lumber Company, and all and singular, the goodwill and going business value of the business of said corporation. *554 THIRD. (Powers.) Said Trustee, * * * may sell, assign, pledge, mortgage and/or convey any or all of the assets, * * * and/or may exchange the same; may expand or reduce the extent of said operations at will; may sue or be sued as such Trustee on any matter relating to the assets or operations of such trust, and may compromise * * * any claim or account, for or against*1320 said business, property or said Trustee; may employ such assistance as he may deem necessary * * *; may borrow money and/or loan the assets * * *, and * * * full power * * * [is] granted to loan at any time, without security, the assets, credit or income of said trust to the Trustee of that certain other trust this day created * * *. [Brackets supplied.] FOURTH. (Beneficiaries.) The cestii of this trust and their proportionate beneficial interests are as follows: NAME INTEREST Charles H. Law 421/5000ths Florence W. Law 403/5000ths Stuart C. Law 39/5000ths Nellie S. McCormick 36/5000ths Edna Wells Walsh 368/5000ths Artemus C. Wells 2874/5000ths Daniel L. Well 2/5000ths Daniel Wells 1/5000ths Hattie S. Wells 562/5000ths Ralph W. Wells 294/5000ths The interests of the beneficiaries, as set forth in paragraph four of the trust deeds, are the same as their respective interests, as stockholders, in the corporation on December 31, 1932. The trust deeds further provide that the trustee shall keep account of the receipts and desbursements and furnish information to the beneficiaries annually for reporting income; that he shall not be liable*1321 for any loss or damage except in case of bad faith; that his acts shall not be "considered a conversion of all or any part of the corpus of said trust, unless the same be evidenced by writing, signed by" him; and that he shall receive such compensation as is agreed upon by him and the beneficiaries. In creating the trusts it was considered that the property of each trust was sufficient to meet any of its liabilities and that the beneficiaries would never be called upon to pay any of them. Since December 31, 1932, Wells, as trustee, has continuously controlled, managed, and disposed of the trust properties of both trusts without consulting the beneficiaries. On behalf of trust A, the trustee sold timber, temberlands, and logging equipment. He sold the logging railroad in 1933 and disposed of all of the timber, separately, or along with the land, through numerous sales, the last of which he made in 1940. Some moneys are still owing to trust A under the contracts of sale. Trust A never conducted any logging operations and it employed only a watchman, or cruiser, and an accountant. It maintained a separate bank account in the name of the trust and kept accounts in the books*1322 of the corporation showing the property disposed of, the receipts, and the taxes and other costs of carrying the property. It loaned part of the accumulated cash funds to trust B, as hereinafter stated, *555 made some investments, and kept the remainder in bank. It made a few small distributions, but the record does not show the amount thereof. Wells, as trustee, has never received any compensation from trust A for his services. Trust B manufactured and sold lumber and flooring continuously from December 31, 1932, until the time of the hearing. It built a sawmill in 1936 at a cost of $10,000, which consisted of the old powerhouse, which was repaired, and new saws and other machinery. The mill had a capacity equal to one-fortieth of that of the old one. The sales made by the trust were substantial and the operations were profitable. About 70 men were employed at the plant. The trust had on hand a large supply of manufactured lumber and flooring at the time of the hearing. In operating the factory and sawmill, trust B did not use any logs or timber from the lands belonging to, or sold by, trust A. The necessary logs and timber were purchased from other landowners*1323 in the locality. Wells, as trustee, took over and used the bank account of the corporation and kept separate accounts for this trust in the old books of the corporation. Trust B has made no distributions whatever since its creation, nor has Wells, as trustee, received any compensation from that trust for his services. From time to time since December 31, 1932, funds of trust A have been loaned to and used by trust B in the conduct of the manufacturing operations. The books show that in January 1934 trust B owed trust A $21,140.90 on account of such advances, and that this indebtedness was thereafter increased until it amounted to $58,613.27 at the end of 1934, $69,065.23 at the end of 1935, and $162,025.13 at the end of 1936. The record does not show that trust B agreed to pay any interest on such advances, or, in fact, paid any interest thereon, or was in any other way obligated to pay such interest. A. C. Wells, as trustee, filed fiduciary returns on Form 1041 with the collector of internal revenue for the district of Michigan for 1934, 1935, and 1936. They included the combined income and claimed deductions of both trusts and disclosed losses of $12,697.48 for 1934 and*1324 $1,387.30 for 1935, and net income of $5,960.18 for 1936. The 1934 and 1936 returns included deductions for depletion on sales of timber. The respondent held that each trust was taxable as a corporation and determined their taxable net income to be as follows: Petitioner Year Net income Trust B [1934] $7,759.09 Trust B [1935] 1,133.20 Trust B [1936] 3,507.77 Trust A [1936] 13,881.16 *556 OPINION. TYSON: The petitioners assail the determination of the respondent that the trusts were associations and taxable as corporations, on the grounds (1) that the trusts were created and operated for the sole purpose of liquidating the assets conveyed to them by the corporation, and (2) that their organization in form bears no resemblance to that of a corporation. Whether a trust is taxable as a corporation depends upon whether it is an "association" within the provision of the applicable revenue act which defines the term "corporation" as including "associations." The meaning of that provision was considered by the Supreme Court in 1935 in *1325 Morrissey v. Commissioner,296 U.S. 344; and in the companion cases of Swanson v. Commissioner,296 U.S. 362; Helvering v. Combs,296 U.S. 365; and Helvering v. Coleman-Gilbert Associates,296 U.S. 369. In the leading Morrissey case the Court said that, in order to be taxable as an association, the trust must have been created as a joint enterprise for the carrying on of a business and sharing the profits; and that in form of organization it must resemble a corporation. Attributes of a trust having such resemblance to corporate form were enumerated in effect as (1) trustees, as a continuing body with provision for succession, and holding title to property; (2) centralized management; (3) continuity unaffected by the death of beneficiaries; (4) transferability of interests without affecting the continuity of the enterprise; and (5) limitation of personal liability of the participants. See Commissioner v. Rector & Davidson, 111 Fed.(2d) 332; *1326 Del Mar Addition v. Commissioner, 113 Fed.(2d) 410, affirming on this point, Del Mar Addition,40 B.T.A. 833. Creation for a business purpose is necessary to classification as an association. If the trust is created for purposes other than the conduct of a business for profit, such as for instance for the complete liquidation of its assets, and its business activity is merely incidental to the preservation of the property held, it is not taxable as an association even though in form its organization is similar to that of a corporation. United States v. Davidson, 115 Fed.(2d) 799; Cleveland Trust Co. v. Commissioner, 115 Fed.(2d) 481; Helvering v. Washburn, 99 Fed.(2d) 478; Sears v. Hassett, 111 Fed.(2d) 961. Also, while similarity or dissimilarity to corporate form is often considered in granting or denying classification of a trust as an association, such similarity or dissimilarity has been given minor consideration in some cases. *1327 Commissioner v. Vandergrift R. & Inv. Co., 82 Fed.(2d) 387; Helvering v. Washburn, supra; porter Property Trustees, Ltd.,42 B.T.A. 681. In other cases, the Morrissey opinion has been interpreted as not requiring the presence in *557 an association of all the attributes of corporate form mentioned in that opinion, but only as requiring that the form of the alleged association be compared with all of such attributes for the purpose of determining whether its form more nearly resembles that of a corporation than that of a partnership of a pure trust. Commissioner v. Brouillard, 70 Fed.(2d) 154; Bert v. Helvering, 92 Fed.(2d) 491; Commissioner v. Rector & Davidson, supra;Commissioner v. Horseshoe Lease Syndicate, 110 Fed.(2d) 748; Del Mar Addition, supra; Porter Property Trustees, Ltd., supra. The petitioners, in order to support their contention that the two trusts were created and operated for the sole purpose of liquidating their respective assets, have shown certain circumstances surrounding the creation*1328 of the trusts and their activities throughout their existence, and they rely further upon oral testimony of the trustee that the parties merely intended to liquidate the assets formerly belonging to the corporation. The purpose for which the trusts were created, as was pointed out by the Supreme Court in Helvering v. Coleman-Gilbert Associates, supra, is found in the agreement of the parties, and the parties are not at liberty to say that such purpose was other than that which is formally set forth in those written instruments. To the same effect, see Commissioner v. Vandergrift R. & Inv. Co., supra;Title Insurance & Trust Co. v. Commissioner, 100 Fed.(2d) 482; and Sears v. Hassett, supra. In Commissioner v.Gibbs-Preyer Trusts Nos. 1 & 2,117 Fed.(2d) 619, the Circuit Court of the Sixth Circuit rejected the contention that the purpose of the creation of the trust must be determined solely from the language appearing in the trust instrument, and said that the crucial test must be found in what the trustee actually does rather than in the existence of powers long unused by him. *1329 In the present cases, the actual activities of the trustee were not any narrower than the powers conferred upon him by the trust instruments. Whether we look to the terms of the written instruments alone or whether we consider the question from the standpoint alone of the actual activities of the trustee in carrying out the trusts, the same result is reached, for under either test the facts fully support the conclusion that the trusts were created for the purpose of carrying on business for profit. While each of the trust deeds conveys assets pertaining to a separate branch of the business of the corporation whose life was about to expire, neither manifests any intention to liquidate. The paragraph in the deeds fixing the life of each trust gives the trustee absolute discretion to continue or dissolve the trust at any time during his life, or to liquidate it in part, with like discretion in his successors. In other words, it authorized continuation of the business or distribution of the corpus in kind, or continuation of the business after *558 a partial distribution; and, when considered in connection with the enumerated powers of the trustee, the conclusion is inescapable*1330 that the deeds intend continuance of the business and a liquidation thereof only if and when the trustee should elect to do so. Under those enumerated powers the trustee had the right to sell, assign, mortgage, or convey the assets - powers which, standing alone, might be classed as incidental business powers - but he had the additional powers to exchange property, to expand or reduce the operations at will, to engage necessary employees, and to borrow money; and, by virtue of his specific right to lend the assets and income of one trust to the other without security, the trustee could have loaned the funds of trust B to trust A and used same to acquire additional timberland or other assets for trust A, or loaned the funds of trust A to trust B, as he did, to carry on the manufacturing activities of trust B. Moreover, the fact that the deeds conveyed the right to use the name and the goodwill and "going business value" of the transferor corporation is consistent only with an intention on the part of the trusts to remain in business. Goodwill can not be disposed of as an asset independently of the business to which it relates. *1331 Metropolitan Bank v. St. Louis Dispatch Co.,149 U.S. 436, 446. Trust A was engaged continuously over the period from 1933 to 1940 in selling its timber and timberlands. It was making loans during several of these years, without security, from the proceeds of these sales to trust B, the beneficiaries of which were the same as the beneficiaries of trust A, and of interests in identical proportions. All its other funds were retained, with the exception of small distributions to the beneficiaries and some small investments. We think these facts are not only inconsistent with an intention to liquidate, but that they establish that the activities of the trust constituted a business carried on for profit; and it is immaterial even if it was so contemplated that all the timber and timberlands would be sold and no additional lands were acquired. Morrissey v. Commissioner, supra;United States v. Rayburn, 91 Fed.(2d) 163. The petitioners suggest in the case of trust A, that two-thirds of the timber and timberland had been sold before December 31, 1932, the date of the creation of the trust, and assert that the only function*1332 of the trust was to collect the outstanding proceeds and dispose of the unsold residue. There is no support for any such assertion in the record. The trustee was unable to state how much timber or land was sold in any one year and no other witness gave such information. Forty to fifty million feet of timber were on hand in 1931 and the returns in evidence disclose that as much as sixteen million feet were sold in 1934 and 1936. In the case of trust B, the activities on its behalf unquestionably constituted the carrying on of a business for profit. The only differerence *559 between its activities and those of the precedent corporation was that they were carried on in a reduced volume, and, in lieu of securing logs from timberlands owned, it purchased them in the market. Its business was buying raw materials, manufacturing them, and selling the finished product. The assertion of petitioners that this was done not for profit but solely to secure better prices for the timber on the timberlands belonging to trust A is inconsistent with the fact that the plant acquired by the trust in 1932 was enlarged in 1936, that the operations after the acquisition of the plant by the*1333 trust were expanded rather than contracted, and that in 1940 the plant was still in operation and no effort had been made to liquidate. The petitioners concede that there was some profit. They have produced no evidence of sales or expenses of this trust, and the returns show only combined income and expenses of the two trusts which increased over the period 1934 and 1936. The net result of operations of both trusts as shown on the returns was affected by large deductions for depletion on sales of timber in two of those years. However, the annual labor costs of the two trusts increased from $26,000 in 1934 to $44,000 in 1936, and, since little labor was hired by trust A, this further indicates that there was expansion by trust B. The trustee has never made any distribution either from income or proceeds of sales of this trust. We are of the opinion that trusts A and B were created and operated for the purpose of carrying on business for profit. The petitioners' next contention is that the organizations in form bear no resemblance to that of a corporation. The title to the property of each trust was held by the trustee as a continuing body, with provision for successors, *1334 during the life of the trust, and the exclusive management was delegated to him for the duration of the trust. The fact that there were no formal directors' meetings or that the beneficiaries had no voice in the management or did not exercise control is not determinative. The trustee conducted the affairs of the trusts and the parties in interest secured centralized management when, in the trust agreement executed by the corporation in which they were stockholders, the trustee was designated as their representative. Helvering v. Coleman-Gilbert Associates, supra;Helvering v. Combs, supra.The continuity of the enterprise was not affected by the death of any beneficiary. The deeds do not so expressly provide, but, on the contrary, provide for termination only at the death or pleasure of the trustee or his successor and that the trustee may expand or reduce the operations at his will. There is no specific restriction in the deeds upon the transferability of the beneficial interests nor any express limitation of personal liability of the beneficiaries; but the silence of the agreements in these particulars is not enough to prevent classification*1335 as an association. Del Mar Addition v. Commissioner, supra;Bert v. Helvering, supra.*560 The failure to include in the trust deeds a limitation on the personal liability of the beneficiaries was apparently due to the fact that it was considered that the property held by the trusts was sufficient to meet their liabilities and that the beneficiaries would never be called on to pay any of such liabilities. Del Mar Addition v. Commissioner, supra.As to matters of form the real test is resemblance, not identity; and, when the facts are considered in this light, we think the trusts sufficiently resemble a corporation to bring them within the statute. We hold that the trusts are associations and taxable as corporations. With respect to the loans by trust A to trust B, it is contended that if the trusts are taxable as corporations, trust B should be allowed deductions for interest thereon. Interest was computed on the monthly balances by an accountant, at the legal rate of interest under the law of Michigan, and deductions are claimed in the amounts of $2,716.59 for 1934, $3,400.13 for 1935, and $5,746.43 for*1336 1936. No portion of these latter amounts was charged on the books of the trust. But this computation of the accountant was based on the assumption that trust B was obligated to pay interest on the loans. It does not however appear that trust B was so obligated, and the issue was not raised by the pleadings. The accountant, the only witness testifying as to this interest, did not know whether any agreement existed for payment of interest on such loans, and the evidence does not otherwise establish one or that the loans from trust A to trust B, for any other reason, bore interest. Since the claimed deductions of interest are not in issue and it also does not appear that any interest was paid, or agreed to be paid, or that the loans, for any other reason, bore interest, the claimed deductions for such interest are denied. Hundahl v. Commissioner, 118 Fed.(2d) 349. The petitioner in Docket No. 97134 assigns error in the disallowance of a deduction of $11,437.71 for depletion. No evidence has been produced to establish that this was error. Decision will be entered for the respondent.