Morrissey v. Commissioner of Internal Revenue

• Decision Date: 16 December 1935
• Docket Number: No. 17,17
• Parties: MORRISSEY et al. v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

296 U.S. 344

56 S.Ct. 289

80 L.Ed. 263

MORRISSEY et al.

v COMMISSIONER OF INTERNAL REVENUE.

No. 17.

Argued Oct. 18, 1935.

Decided Dec. 16, 1935.

[Syllabus from pages 344-346 intentionally omitted] Mr. Theodore B. Benson, of Washington, D.C., for petitioners.

The Attorney General and James W. Morris, Asst. Atty. Gen., of Washington, D.C., for respondent.

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 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 of Internal Revenue (C.C.A.) 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 author zed to add to their number and to choose their successors; to purchase, encumber, sell, lease, and operate the 'described or other lands'; to construct 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 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 per cent.

Petitioners contend that they are trustees 'of property held in trust,' within section 219 of the Revenue Acts of 1924 and 1926,² and are taxable accordingly and not as an 'association.' They urge that, to constitute an association, the applicable test requires 'a quasi corporate organization in which the beneficiaries, whether or not certificate holders, have some voice in the management and some control over the trustees and have an opportunity to exercise such control through the right to vote at meetings'; and that, in any event, the activities in which petitioners were engaged, during the tax years under consideration, did not constitute 'a carrying on of business' within the rule applied by this court.

The government insists that the distinction between associations and the trusts taxed under section 219 is between 'business trusts on the one side' and other trusts 'which are engaged merely in collecting the income and conserving the property against the day when it is to be distributed to the beneficiaries'; that Congress intended that all 'business trusts' should be taxed as associations.

1. The Revenue Acts of 1924 and 1926 provided:

'The term 'corporation' includes associations, joint-stock companies, and insuranc companies.' Revenue Act 1924, § 2(a)(2); Revenue Act 1926, § 2(a) (2).³

A similar definition is found in the earlier Revenue Acts of 1917 (section 200), 1918 (section 1), and 1921 (section 2(2),⁴ and also in the later Revenue Acts of 1928 (section 701(a)(2), 1932 (section 1111(a)(2), and 1934 (section 801(a)(2).⁵

The Corporation Tax Act of 1909⁶ which imposed an excise tax upon the privilege of doing business in a corporate capacity, embraced associations having a capital stock represented by shares and 'organized under the laws of the United States or of any state or territory.' Flint v. Stone Tracy Co., 220 U.S. 107, 108, 144, 31 S.Ct. 342, 346, 55 L.Ed. 389, Ann.Cas. 1912B, 1312; Fliot v. Freeman, 220 U.S. 178, 186, 31 S.Ct. 360, 55 L.Ed. 424. The Income Tax Act of 1913,⁷ taxed the net income of 'every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how cre- ated or organized, not including partnership.' The case of Crocker v. Malley, 249 U.S. 223, 39 S.Ct. 270, 271, 63 L.Ed. 573, 2 A.L.R. 1601, arose under the latter act. The Court found that the declaration of trust in that case, relating to mill property, was on its face 'an ordinarily real estate trust of the kind familiar in Massachusetts,' and that the function of the trustees was 'not to manage the mills but simply to collect the rents and income of such property as may be in their hands, with a large discretion in the application of it, but with a recognition that the receipt holders are entitled to it subject to the exercise of the powers confided to the trustees.' The Court thought that, if it were assumed that the words 'no matter how created or organized' applied to 'association,' still it would be 'a wide departure from normal usage' to call the beneficiaries a joint-stock association when they were not partners and had 'no joint action or interest and no control over the fund.' Nor could the trustees 'by themselves' be treated as a joint-stock association within the meaning of the act 'unless all trustees with discretionary powers are such'. 249 U.S. 223, at pages 232—234, 39 S.Ct. 270, 272, 63 L.Ed. 573, 2 A.L.R. 1601.

The decision in Crocker v. Malley was rendered in March, 1919, and the Treasury Department thereupon assumed that the degree of control exercised by the beneficiaries over the management of the trust was determinative of the question whether the trust constituted an 'association.' See statement of the rulings of the Bureau by the Board of Tax Appeals in Woodrow Lee Trust v. Commissioner, 17 B.T.A. 109, at pages 111, 112. It was in that view that the Regulations under the Revenue Acts of 1918 and 1921, in distinguishing an 'association' from a 'trust,' provided as follows:

'If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute.' Regulations Nos. 45, 62, Art. 1504.

This ruling continued until our decision in May, 1924, in Hecht v. Malley, 265 U.S. 144, 44 S.Ct. 462, 68 L.Ed. 949, and furnished the test which the Board of Tax Appeals applied in its determinations for earlier years.⁸ Accordingly, the Board in the case now before us, holding that under the trust instrument the shareholders 'had no control over the trustees or the management of the business,' determined that the trust was taxable as such, and not as an association, for the years 1921, 1922, and 1923.

The case of Hecht v. Malley related to the excise taxes imposed upon 'associations' by the Revenue Acts of 1916 (section 407) and 1918 (section 1000(a).⁹ The provision of the act of 1916 retained the qualifying words of the Corporation Tax Act of 1909 'organized under the laws of the United States, or any State or Territory'—and the Court followed the construction placed upon those words in Eliot v. Freeman, supra. But the act of 1918 omitted this qualification and the excise tax as laid upon corporations applied to 'associations' under the general definition. The Court thus found the terms of the act of 1918 to be in significant contrast to the provisions of the acts of 1909 and 1916. The omission of the qualification showed the intention of Congress 'to extend the tax from one imposed solely upon organizations exercising statutory privileges, as theretofore, to include also organizations exercising the privilege of doing business as associations at the common law.' 265 U.S. 144, at page 155, 44 S.Ct. 462, 466, 68 L.Ed. 949. Shorn of the restriction, the word 'association' appeared to be used in its ordinary meaning, and we referred to several definitions found...