107 F.2d 22 (9th Cir. 1939), 9129, United States v. Trust No. B.I. 35, Bank of America Nat. Trust & Sav. Ass'n

Docket Nº:9129.
Citation:107 F.2d 22
Case Date:October 25, 1939
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 22

107 F.2d 22 (9th Cir. 1939)





No. 9129.

United States Court of Appeals, Ninth Circuit.

October 25, 1939

Page 23

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Norman D. Keller, James P. Garland, and Arthur A. Armstrong, Sp. Assts. to Atty. Gen., and Ben Harrison, U.S. Atty., E. H. Mitchell, Francis C. Whelan, and Armond Monroe Jewell, Asst. U.S. Attys., and Eugene Harpole, Sp. Atty., Bureau of Internal Revenue, all of Los Angeles, Cal., for appellant.

M. F. Mitchell and George G. Witter, both of Los Angeles, Cal., for appellee.


DENMAN, Circuit Judge.

This is an appeal from a judgment of the district court for refund of taxes paid by the appellee, the court holding invalid the assessment against and collection from appellee of taxes on income for the tax years 1931 to 1933, inclusive, as earned by an association, and also the assessment of and collection as from an association an excise tax on dividends paid in 1933 to the holders of certificates of beneficial interest in the trust. The district court held the trust income was that of the traditional type of trusts and not of a business trust as defined by the Supreme Court in Morrissey v. Commissioner, 296 U.S. 344, 357, 56 S.Ct. 289, 295, 80 L.Ed. 263, in the following language:

'* * * In what are called 'business trusts' the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains. Thus a trust may be created as a convenient method by which persons become associated for dealings in real estate, the development of tracts of land, the construction of improvements, and the purchase, management, and sale of properties; or for dealings in securities or other personal property; or for the production, or manufacture, and sale of commodities; or for commerce, or other sorts of business; where those who become beneficially interested, either by joining in the plan at the outset, or by later participation according to the terms of the arrangement, seek to share the advantages of a union of their interests in the common enterprise.'

On the argument it was not questioned that the trust was organized in corporate form. Cf. Morrissey v. Commissioner, Supra, 296 U.S. 359, 56 S.Ct. 289, 80 L.Ed. 263; Helvering v. Combs, 296 U.S. 365, 368, 56 S.Ct. 287, 80 L.Ed. 275. The trustee is to act under the direction of a so-called advisory board which has the power not only to advise but to direct the trustee in the conduct of the enterprise created by the trust. Here was centralized management.

The beneficiaries of the trust have participation certificates transferable by endorsement. Vacancies in the directing committee are filled by election by the holders of the certificates.

The single question for our disposition is whether the trust was 'created and maintained as a medium for the carrying on of a business enterprise and sharing its gains * * * '. Morrissey v. Commissioner, supra, 296 U.S. 359, 56 S.Ct. 296, 80 L.Ed. 263.

The Fox Oil Company, a California corporation, had been engaged in the business of ownership and leasing of certain proven oil lands and in the storage, settling and sale of the oil received from its lease royalties in Kern County, California. In 1920 it owned 120 acres of such land and was engaged in the business of selling the oil. This business of selling the oil was conducted by the Fox Company through its agent who attended to the storage and settling of the oil, its classification as to its various grades, procured purchasers therefor, and provided transportation to the buyers.

On October 20, 1920, the Fox Company transferred to the trustee under the trust indenture here described the title to the 120

Page 24

acres of oil land, [*] three leases thereon covering its entire area, and the agreement under which the then agent performed for its principal the business of storage, settling, classifying, grading, transporting and selling the oil. With regard to the enterprise for handling and disposing of the oil in 1929, some 13 months prior to the first tax year in question, a new agent was employed by the trustee who performed these various functions for the trustee, its principal, leading to collection of the proceeds of the sales constituting the income upon which the challenged assessments were computed and made.

The size and complexity of the trust enterprise of caring for and disposing of the oil is not shown in exact description and figures. Since the burden is on the taxpayer to adduce facts showing the Commissioner's assessment is wrongful, Germantown Trust Co. v. Lederer, 3 Cir., 263 F. 672, 676, we must assume that if size and complexity are pertinent in this case to constitute a business for profit those factors are present. In amount the oil sales must at times require extended business activity by the trustee acting through its agent, for the tax on income from oil sales by the trustee at one time required the borrowing of $20,000.00 for its payment. Moreover, the Supreme Court has held in Helvering v. Combs, 296 U.S. 365, 368, 56 S.Ct. 287, 80 L.Ed. 275, that lack of size and complexity of business do not necessarily prevent a trust from being taxable as an association.

The trust instrument contemplated this continuous and diversified function of the trustee. The transferred agreement with the agent so to serve the trustee principal, though called a 'sales agreement', in fact was an agreement for this collection, custody, treatment and procuring of sales of the oil. Concerning such contracts of...

To continue reading