296 U.S. 344 (1935), 17, Morrissey v. Commissioner of Internal Revenue

Docket Nº:No. 17
Citation:296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263
Party Name:Morrissey v. Commissioner of Internal Revenue
Case Date:December 16, 1935
Court:United States Supreme Court

Page 344

296 U.S. 344 (1935)

56 S.Ct. 289, 80 L.Ed. 263



Commissioner of Internal Revenue

No. 17

United States Supreme Court

Dec. 16, 1935

Argued October 18, 1935




1. Under Revenue Acts declaring that the term "corporation" shall include "associations," the Treasury Department was authorized to define the latter term by regulation, and thereafter to clarify or enlarge the definition in order to meet administrative exigencies and conform with judicial decision. Pp. 349, 354.

2. Enactment of the Revenue Act of 1924, providing, as in previous Acts, that the term corporation shall include associations, did not fix the definition of the term "association" then in the regulations so that the Department could not further adapt it to the administration of the Act. P. 355.

3. The view expressed by this Court in Hecht v. Malley, 265 U.S. 144, that the degree of control by the beneficiaries was not a decisive test of whether a trust is an "association" and therefore subject to the special excise imposed on corporations (defined as including "associations") by the Revenue Act of 1918, is applicable also to general income taxes laid by the Revenue Acts upon corporations, and thus upon associations. P. 355.

4. Regulations of the Treasury Department adopting this view, under the Revenue Act of 1924, held not in excess of its authority. P. 355.

5. Revision of the Treasury Regulations defining the term "associations" in the Revenue Act of 1924, was in effect approved by Congress in subsequent Revenue Acts through the reenactment, without substantial change, of the provision so construed by the Department. P. 355.

6. Congress has power to tax as a corporation an unincorporated association in the form of a trust which transacts its business as if it were incorporated. P. 356.

7. Whether a trust may be classed and taxed as an "association," under the Revenue Acts of 1924 and 1926, which define the term corporations as including "associations," joint stock companies and insurance companies, is not dependent on its having a statutory organization or statutory privileges, or upon its use of corporate forms of procedure. Its trustees may perform the

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functions performed in corporations by officers and directors, and provisions of the trust instrument may take the place of bylaws. P. 357.

8. To constitute a trust an "association" within the meaning of these Acts, it is not essential that the beneficiaries should have such control as is commonly exercised by stockholders or that they should hold meetings to elect representatives. P. 358.

9. While the faculty of transferring the interests of members without affecting the continuity of the enterprise may be deemed to be characteristic, the test of such an "association" is not to be found in the formal evidence of interests or in a particular method of transfer. P. 358.

10. A trust designed not for the purpose of holding and conserving particular property with incidental powers in the trustees, as in the traditional type of trusts, but as a medium for the conduct of a joint business enterprise and a sharing of the gains is to be classed as an "association" within the meaning of the Revenue Acts, supra, when the following attributes, analogous to those of corporate organizations, are present: (1) title to property embarked in the enterprise held by trustees, as a continuing body, during the existence of trust; (2) centralized management by trustees, as representatives of beneficial owners, whether selected by or with the advice of beneficiaries or designated in the trust instrument with power to select successors; (3) continuity uninterrupted by deaths among beneficial owners; (4) means for transfer of beneficial interests and introducing new participants without affecting continuity; (5) limitation of personal liability of participants to property embarked in the undertaking. P. 359.

11. A trust was created to develop a tract of land through construction and operation of golf courses, club houses, etc., and for the conduct of incidental businesses, with broad powers for the purchase, operation and sale of properties; the management and control were vested in the trustees, and the interests of the beneficiaries were represented by transferable common and preferred shares.


(1) That the trust constituted an "association." P. 360.

(2) That sale of part of the property before the beginning of the tax years in question and conveyance of the remainder to a corporation in exchange for its shares did not alter its character, since it remained an organization for profit with profits still coming in, and the powers of the trustees continued. P. 360.

(3) The character of the trust is revealed by the terms of the trust instrument. P. 361.

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12. Section 704(a), Revenue Act, 1928, providing that a taxpayer filing a return as a trust for a taxable year prior to 1925 shall be taxable as a trust, and not as a corporation if, under regulations or departmental rulings in force at time of filing, the return it was considered to be so taxable, held inapplicable to a return for the year 1924 filed after the adoption of Treasury Regulations No. 65, Art. 1504, amending prior regulations so as to provide that operating trusts in which the trustees were not restricted to the mere collection of funds and their payment to beneficiaries, but were associated together in much he same manner as directors in a corporation, for the purpose of carrying on a business enterprise, should be deemed to be associations, regardless of the control exercised by the beneficiaries. P. 361.

74 F.2d 803 affirmed.

Certiorari, 295 U.S. 725, to review the affirmance of a decision of the Board of Tax Appeals which sustained income taxes laid upon a trust as an association.

HUGHES, J., lead opinion

MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.

Petitioners, the trustees of an express trust, contest income taxes for the years 1924 to 1926, inclusive, upon the ground that the trust has been illegally treated as an "association." The Circuit Court of Appeals affirmed the decision of the Board of Tax Appeals which sustained the ruling of the Commissioner of Internal Revenue. 74

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F.2d 803. We granted certiorari because of a conflict of decisions as to the distinction between an "association" and a "pure trust," the decisions being described in one of the cases as "seemingly in a hopeless state of confusion." Coleman-Gilbert Associates v. Commissioner, 76 F.2d 191, 193.1

The facts were stipulated. In the year 1921, petitioners made a declaration of trust of real estate in Los Angeles. They were to be designated in "their collective capacity" as "Western Avenue Golf Club." The trustees were authorized to add to their number and to choose their successors; to purchase, encumber, sell, lease, and operate the "described or other lands;" to construct [56 S.Ct. 291] and operate golf courses, club houses, etc.; to receive the rents, profits, and income; to make loans and investments; to make regulations, and generally to manage the trust estate as if the trustees were its absolute owners. The trustees were declared to be without power to bind the beneficiaries personally by "any act, neglect or default," and the beneficiaries and all persons dealing with the trustees were required to look for payment or indemnity to the trust property. The beneficial interests were to be evidenced solely by transferable certificates for shares which were divided into 2,000 preferred shares of the par value of $100 each, and 2,000 common shares of no par value, and the rights of the respective shareholders in the surplus, profits, and capital assets were defined. "Share ledgers" showing the names and addresses of shareholders were to be kept.

The trustees might convene the shareholders in meeting for the purpose of making reports or considering recommendations, but the votes of the shareholders were to be advisory only. The death of a trustee or of a beneficiary was not to end the trust, which was to continue

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for twenty-five years unless sooner terminated by the trustees.

During the years 1921 and 1922, the trustees sold beneficial interests and paid commissions on the sales. About 42 acres (of the 155 acres described by the declaration of trust) were plotted into lots which were sold during the years 1921 to 1923, most of the sales being on the installment basis. On the remaining property, a golf course and club house were constructed, and, in 1923, this property with the improvements was conveyed to Western Avenue Golf Club, Inc., a California corporation, in exchange for its stock. Under a lease from the corporation, petitioners continued the operation of the golf course until January 12, 1924. After that date, petitioners' activities were confined to collections of installments of principal and interest on contracts of purchase, the receipt of interest on bank balances and of fees on assignments by holders of purchase contracts, the execution of conveyances to purchasers, the receipt of dividends from the incorporated club, and the distribution of moneys to the holders of beneficial interests. On December 31, 1923, the total number of outstanding beneficial interests was 3,016 held by 920 persons; by December 31, 1926, the number of interests had been gradually decreased to 2,172, held by 275 persons. The holdings by the trustees ranged approximately from 16 to 29 percent

Petitioners contend that they are trustees "of property held in trust," within § 219 of the Revenue Acts of 1924 and 1926,2 and are taxable accordingly, and not as an...

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