265 U.S. 144 (1923), Hecht v. Malley

Citation:265 U.S. 144, 44 S.Ct. 462, 68 L.Ed. 949
Party Name:Hecht v. Malley
Case Date:May 12, 1924
Court:United States Supreme Court

Page 144

265 U.S. 144 (1923)

44 S.Ct. 462, 68 L.Ed. 949




United States Supreme Court

May 12, 1924




1. The special excise tax laid by the Revenue Act of 1916 on "every corporation, joint-stock company or association, now or hereafter organized in the United States for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States, or any state or Territory," did not apply to associations, such as "Massachusetts Trusts," not organized under, or deriving any quality or benefit from, a statute. Eliot v. Freeman, 220 U.S. 178. P. 151.

2. In adopting language used in an earlier act, Congress must be regarded as adopting also the construction given that language by this Court. P. 153.

3. The special excise laid by § 1000(a) of the Revenue Act of 1918 (40 Stat. 1057) on every " domestic corporation," -- the act (§ 1) defining the term "corporation" as including "associations, joint-stock companies, and insurance companies," and the term "domestic," when applied to a corporation or partnership, as meaning "created or organized in the United States" -- extends to organizations exercising the privilege of doing business as associations under the common law. P. 154.

4. Organizations known as "Massachusetts Trusts," created by trust agreements, whereby property was conveyed to and managed in business operations by trustees, the shares of the cestuis que trustent being represented by transferable certificates entitling holder to

Page 145

share ratably in the income and, upon termination of the trust, in the proceeds of the property, held "associations" created or organized in the United States and engaged in business within the meaning of the Revenue Act of 1918, supra, loc. cit. Crocker v. Malley, 249 U.S. 223, distinguished. P. 156.

5. The Revenue Act of 1918 bases the special excise tax of a domestic association upon the average value of its "capital stock," including surplus and undivided profits. Held that, in the absence of a fixed share capital, the "capital stock" is the net value of the property owned by the association and used in its business. P. 162.

6. Where taxes were unlawfully assessed under the Revenue Act of 1916, and paid under protest, the government was entitled to retain the money in part satisfaction of a lawful retroactive assessment for the same period under the Revenue Act of 1918. P. 163.

281 F. 363 affirmed in part and reversed in part.

Certiorari to judgments of the circuit court of appeals which reversed judgments of the district court in favor of the present petitioners, in their actions to recover moneys paid, under protest, as special excise taxes.

SANFORD, J., lead opinion

MR. JUSTICE SANFORD delivered the opinion of the Court.

These four cases, which were heard together, involve the question whether the trustees of three "Massachusetts Trusts" are subject to the special excise taxes imposed upon [44 S.Ct. 463] certain "associations" by the Revenue Act of 1916

Page 146

(39 Stat. 756, c. 463), and the Revenue Act of 19181 (40 Stat. 1057, c. 18), based upon the value of their capital stock.

The petitioners in case No. 99 are the trustees of the "Hecht Real Estate Trust;" in Nos. 100 and 101, the trustees of the "Hay-market Trust;" and in No. 119, the trustees of the "Crocker, Burbank & Co. Assn." Excise taxes were assessed against them under these Acts and paid under protest.2 They then brought suits for refund in the Federal District Court in Massachusetts, an had recoveries. 276 F. 830. The judgments in their favor were reversed by the circuit court of appeals. 281 F. 363. And these writs of certiorari were granted. 260 U.S. 715.

The "Massachusetts Trust" is a form of business organization, common in that state,3 consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be the holders of transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property

Page 147

is divided. These certificates, which resemble certificates for shares of stock in a corporation and are issued and transferred in like manner, entitle the holders to share ratably in the income of the property, and, upon termination of the trust, in the proceeds.

Under the Massachusetts decisions, these trust instruments are held to create either pure trusts or partnerships, according to the way in which the trustees are to conduct the affairs committed to their charge. If they are the principals and are free from the control of the certificate holders in the management of the property, a trust is created; but if the certificate holders are associated together in the control of the property as principals and the trustees are merely their managing agents, a partnership relation between the certificate holders is created. Williams v. Milton, 215 Mass. 1, 5; Frost v. Thompson, 219 Mass. 360, 365; Dana v. Treasurer, 227 Mass. 562, 565; Priestly v. Treasurer, 230 Mass. 452, 455.

These trusts -- whether pure trusts or partnerships -- are unincorporated. They are not organized under any statute, and they derive no power, benefit, or privilege from any statute. The Massachusetts statutes, however, recognize their existence and impose upon them, as "associations," certain obligations and liabilities.4

The Hecht Real Estate Trust was established by the members of the Hecht family upon real estate in Boston used for offices and business purposes, which they owned as tenants in common. It is primarily a family affair. The certificates have no par value, the shares being for

Page 148

one-thousandths of the beneficial interest. They are transferable, but must be offered to the trustees before being transferred to any person outside of the family. The trustees have full and complete powers of management, but no power to create any liability against the certificate holders. There are no meetings of certificate holders, but they may, by written instrument, increase the number of trustees, remove a trustee, appoint a new trustee if there be none remaining, modify the declaration of trust in any particular, terminate the trust, or give the trustees any instructions thereunder.

The Haymarket Trust is strictly a business enterprise. It was established by the original subscribers who furnished the money for the purchase of a building in Boston used for store and office purposes. The shares are of the par value of $100 each. Except as otherwise restricted, the trustees have general and exclusive powers of management, but no power to bind the certificate holders personally. At any annual or special meeting of the certificate holders, they may fill any vacancies in the number of trustees, depose any or all the trustees and elect others in their place, authorize the sale of the property or any part thereof, and alter or amend the agreement of trust.

The Crocker, Burbank & Co. Assn. is also a business enterprise. It was formerly entitled the Wachusett Realty Trust. The certificates have no par value, the shares being for ninety-six thousandths of the beneficial interest in the property. The trustees originally held the fee of certain lands subject to a long lease and the stock of a Massachusetts [44 S.Ct. 464] corporation engaged in manufacturing paper and owning and operating several mills. In Crocker v. Malley, 249 U.S. 223, in which the original trust instrument was before the Court, it was held that the trustees were not subject as to the dividends received from the corporation to the tax imposed by the Income Tax Act of 1913 upon the net income of "every corporation,

Page 149

joint-stock company or association, . . . organized in the United States," but were subject only to the duties imposed by the Act upon trustees. The original trust agreement involved in that case has now, however, been modified, with the assent of the certificate holders. By this modification, "the form of [the] organization" was specifically "changed to that of an association," under its present name. The trustees were authorized to surrender the stock of the manufacturing corporation, to acquire instead its entire property, and to carry on the business theretofore conducted by it, or any substantially similar business. The title to all the trust property "and the right to conduct all the business" were vested exclusively in the trustees, who were authorized to designate from their number a president and other officers and to prescribe their duties. The certificate holders were authorized at any meeting to remove any trustee and elect trustees to fill any vacancies. Since the modification of the trust agreement, the trustees have carried on the manufacturing business in substantially the same manner as it was formerly conducted by the corporation.

To determine rightly the scope and effect of the Revenue Acts now in question, it is necessary to bear in mind the previous legislation on the same subject, and the interpretation given it by the decisions of this Court.

Section 38 of the Act of August 5, 1909, c. 6, 36 Stat. 11, 112 -- commonly called the Corporation Tax Law -- provided:

That every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States or of any state or Territory, . . . or now or hereafter organized under the laws of any foreign country and engaged in business in any state or Territory of the United...

To continue reading