Hecht v. Malley
| Decision Date | 03 December 1921 |
| Docket Number | 1226. |
| Citation | 276 F. 830 |
| Parties | HECHT v. MALLEY. |
| Court | U.S. District Court — District of Massachusetts |
Dunbar Nutter & McClennen, of Boston, Mass., for plaintiff.
The United States Attorney and Alonzo H. Garcelon, Sp. Asst. U.S Atty., of Boston, Mass., for defendant.
This case raises the question whether Massachusetts trusts are subject to the tax on capital stock imposed by the acts of 1916 and 1918. There is no controversy as to the facts; they are as shown by the plaintiff's testimony.
A Massachusetts trust is a peculiar form of business organization common in this state, which has frequently been considered in different aspects in the United States Supreme Court and in the Massachusetts Supreme Judicial Court. [1] In outline, it is an arrangement whereby property is conveyed to trustees, who execute a declaration of trust to hold and manage it for the benefit of such persons as from time to time shall own certificates, which are issued by the trustees and are transferable, much like stock in a corporation. The legal title to the property is in the trustees and they are the active managers of the business. The details of the organization are prescribed in the declaration of trust and differ greatly in different trusts especially with reference to the rights of the certificate holders. Sometimes these are little, if any, greater than those of cestuis que trust under a will, the entire management and control of the enterprise being vested in the trustees. At the other extreme are organizations in which the certificate holders meet annually, elect the trustees annually, and have power to direct the trustees, as well as to remove them. The Massachusetts decisions classify these trusts as being either 'strict trusts,' or partnerships; the former class comprising those in which the certificate holders have substantially the same rights as cestuis under the usual testamentary trust, while in the latter the parties interested are regarded as partners who have intrusted the management of the enterprise to the trustees. In neither class does the organization derive any powers from statute, and in neither do the Massachusetts courts recognize any entity apart from the persons of the trustees, or of the certificate holders
The taxes here in question were levied under the Revenue Acts of 1916 (section 407, title 4, Act Sept. 8, 1916, c. 463, 39 Stat. 789) and 1918 (section 1000 et seq. (Comp. St. Ann. Supp. 1919, Sec. 5980n et seq.)). The act of 1916 (section 407, subd. 1) provides that--
'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 of the United States, shall pay annually,' etc.
The act of 1918 provides (title 10, Sec. 1000) that--
On the face of this section the Hecht Trust was not within it. The tax was imposed because of the defining section of the act of 1918 (Comp. St. Ann. Supp. 1919, Sec. 6371 1/4a), which provides:
'The term 'corporation' includes associations, joint-stock companies, and insurance companies; the term 'domestic' when applied to a corporation or partnership means created or organized in the United States.'
The Treasury Department held that the Hecht Real Estate Trust was an 'association,' and therefore taxable as a corporation. It is not contended by the government that the trust was a 'joint-stock company or an insurance company,' within the defining section quoted. Under the Treasury Regulations (article 7), some trusts are taxed under this statute, while others are not; trusts, the members of which have all the liability of partners (see Horgan v. Morgan, 233 Mass.
381, 124 N.E. 32), are taxed as corporations, and the members may perhaps also be liable to taxation as partners. The underlying principle on which the distinction is made is whether in each particular case the effect of the arrangement between the trustees and the shareholders was to create an organization distinct from the members who compose it. This was the point of view taken by Jessel, M.R., in Smith v. Anderson, 15 Ch.Div. 247, and ably expressed in his opinion. He was, however, reversed by the Court of Appeals (s.c., 15 Ch.Div. 273).
The tax in question began with the act of 1909 (Act Aug. 5, 1909, c. 6, Sec. 38, 36 Stat. 112), which imposed on 'every corporation, jointstock company, or association, organized for profit and having a capital stock represented by shares, and every insurance company' a tax based on its net income. It was challenged as being an income tax, and as such at that time unconstitutional; but it was sustained, on the ground that it was not an income tax, but an excise tax. Flint v. Stone Tracy Co., 220 U.S. 107, 31 Sup.Ct. 342, 55 L.Ed. 389, Ann. Cas. 1912B, 1312. And it was also held in Eliot v. Freeman, 220 U.S. 178, 31 Sup.Ct. 360, 55 L.Ed. 424, that Massachusetts trusts were not subject to it; i.e., that they were neither joint-stock companies nor associations within its meaning. The tax of 1909 was in substance continued in the act of 1916. But as that statute imposed a general income tax on corporations it was recast and was based on capital stock. The tax imposed by the act of 1916 is by express language continued by the act of 1918, and the provisions of the former act are, with some modifications, retained in the later one.
Decisions under the earlier acts are obviously of much importance in determining the meaning and scope of this one. Eliot v Freeman, 220 U.S. 178, 31 Sup.Ct. 360, 55 L.Ed. 424, establishes that the act of 1909 imposed an excise tax on the privilege of doing business in corporate or 'quasi corporate' (220 U.S. 151, 31 Sup.Ct. 342, 55 L.Ed. 389, Ann. Cas. 1912B, 1312) form-- i.e., in forms not recognized by common law which possess special advantages conferred by statute-- and that Massachusetts trusts are not such organizations. In Crocker v. Malley, 249 U.S. 223, 39 Sup.Ct. 270, 63 L.Ed. 573, 2 A.L.R. 1601, such a trust was held not to be an 'association,' the income of which was taxable under Income Tax Act Oct. 3, 1913, c. 16, 38 Stat. 114. The radical...
To continue reading
Request your trial
-
Continental Supply Co. v. Adams
...L. Ed. 949, affirming in part and reversing in part (C. C. A. Mass.) Malley v. Howard, 281 F. 363, which reversed a decree (D. C.) Hecht v. Malley, 276 F. 830. The Supreme Court in that case was considering the question of whether or not three so-called "Massachusetts trusts" were "associat......