Coleman-Gilbert Associates v. Commissioner of Int. Rev.

• Citation: 76 F.2d 191
• Decision Date: 27 February 1935
• Docket Number: No. 2975,2976.,2975
• Parties: COLEMAN-GILBERT ASSOCIATES v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

76 F.2d 191 (1935)

COLEMAN-GILBERT ASSOCIATES v. COMMISSIONER OF INTERNAL REVENUE (two cases).

Nos. 2975, 2976.

Circuit Court of Appeals, First Circuit.

February 27, 1935.

Ralph E. Tibbetts, of Boston, Mass., for petitioners.

Arnold Raum, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

WILSON, Circuit Judge.

These are petitions for review of decisions of the Board of Tax Appeals under sections 1002, 1003 of the 1926 Revenue Act, 26 USCA §§ 1225, 1226, and section 1001, as amended by section 603 of the 1928 Act, 26 USCA § 1224, and section 1101 (a) of the Revenue Act of 1932 (26 USCA § 1224 (a). The petition in No. 2975 involves income taxes for the years 1927 and 1928, and the petition in No. 2976 involves income taxes for the year 1929. The same question is involved in both cases and may be disposed of in one opinion.

The question to be determined is whether the trust known as Coleman-Gilbert Associates for the years in question is taxable as a corporation.

By a declaration of trust executed on November 8, 1926, Harry Coleman, Pauline Coleman, Bernard Gilbert, Harris Levine, and Lena Levine provided that certain real estate situated in the city of Boston and its suburbs should, for a period of fifteen years, be held by them in trust, under the name Coleman-Gilbert Associates.

It is agreed by the parties hereto that the property in question, consisting of some twenty apartment houses in the city of Boston and its suburbs, had originally been owned by Messrs. Gilbert, Coleman, and Levine in common, each owning a one-third interest; that prior to November 6, 1926, Coleman and Levine had each transferred one-half of his interest in this property to his wife, so that, at the time of the declaration of trust, Harry Coleman owned one-sixth interest in the property; his wife, Pauline Coleman, one-sixth; Harris Levine, one-sixth; his wife, Lena Levine, one-sixth; and Bernard Gilbert, one-third. That for the years 1927, 1928, and 1929 the petitioner filed returns with the federal government as a fiduciary on Form 1041 reflecting the following incomes: For the year 1927, $81,302.11; for the year 1928, $77,730.53; and for the year 1929, $23,376.23 — each beneficiary in each year filing a return for his or her share of the income distributed under the trust agreement.

It is further agreed that altogether there are about 1,500 tenants in the apartment houses, and the gross annual rentals amount to approximately $420,000; that the operating expenses are over $300,000 a year; that two of the male trustees devote their entire time to the management and operation of the trust properties, and a third trustee, Mr. Levine, is also actively engaged in taking care of a part of the management duties, but so far the female trustees have been entirely inactive in the management of the trust property; that the trustees draw no salary; that the male trustees have superintended the maintenance of the trust properties, including the collection of the rents, the making of repairs, the purchasing of supplies, the borrowing of money when necessary, the paying of all bills, and supervising the office details involved in the operation of these properties; that no part of the management work, collection of income, has been performed by "agents" as that term is generally understood, except in so far as strictly supervised employees on a weekly salary might be considered agents. The only other property in the trust estate are 300 shares of the Shawmut Associates, a subsidiary of the National Shawmut Bank, which were bought at the instance of the National Shawmut Bank, which has a mortgage on the property of the trust.

Bernard Gilbert testified before the Board without contradiction that, for more than twenty years, he, together with Mr. Coleman and Mr. Levine, had been interested in this real estate, which is now included in the Coleman-Gilbert Associates trust; that prior to 1926 the property had been operated under the name of Coleman & Gilbert, and that he had been the most active of the co-owners in the handling of the property prior to the formation of the Coleman-Gilbert Associates; that there was no change in the method of handling the properties after Coleman-Gilbert Associates was formed, except as hereafter appears, and no change in the books; that there were never any meetings of the trustees, and no records of their proceedings kept; that there were no shares or certificates of the trust issued at any time; and of course no meetings of shareholders as such were ever held; that the purpose of forming Coleman-Gilbert Associates was to avoid a partition of the property by some of the heirs in case of the death of any of the owners of the property, and, in any event, was to terminate in fifteen years; that the power to purchase other property was inserted in the trust instrument simply to protect the holdings that the trust had; but this power and certain other broad powers vested in the trustees had never been exercised.

Congress has not undertaken to lay down any tests for determining whether an organization is an association within the meaning of section 2 (a) (2) of the Revenue Act of 1926, 26 USCA § 1262 (a) (2), and section 701 (a) (2) of the Revenue Act of 1928, 26 USCA § 2701 (a) (2), and taxable as a corporation. It has merely said by way of definition that corporations "include associations, joint-stock companies and insurance companies."

It was left for the courts or the Treasury Department by Regulations to determine what organizations are included within the term "associations." As yet the Supreme Court has not laid down any absolute test. Two cases only have come before it in which the taxing of trusts as associations was involved: Crocker et al., Trustees v. Malley, 249 U. S. 223, 39 S. Ct. 270, 63 L. Ed. 573, 2 A. L. R. 1601; Hecht et al., Trustees v. Malley, 265 U. S. 144, 44 S. Ct. 462, 68 L. Ed. 949.

In the former case, decided in 1919, the court, in deciding that the trust was not an association, laid stress on two points: (1) That the purpose of the trust was to liquidate a business, and (2) that the beneficiaries had no control over the trustees.

In the case of Hecht et al., Trustees v. Malley, the court said (page 157 of 265 U. S., 44 S. Ct. 462, 467):

"The word `association' appears to be used in the Act in its ordinary meaning. It has been defined as a term `used throughout the United States to signify a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise.' 1 Abb. Law Dict. 101 (1879); 1 Bouv. Law Dict. (Rawle's 3d Rev.) 269; 3 Am. & Eng. Enc. Law (2d Ed.) 162; and Allen v. Stevens, 33 App. Div. 485, 54 N. Y. S. 8, 23, in which this definition was cited with approval as being in accord with the common understanding. Other definitions are: `In the United States, as distinguished from a corporation, a body of persons organized, for the prosecution of some purpose, without a charter, but having the general form and mode of procedure of a corporation.'"

In the same case the court said (page 161 of 265 U. S., 44 S. Ct. 462, 468):

"It results that Crocker v. Malley is not an authority for the broad proposition that under an Act imposing an excise tax upon the privilege of carrying on a business, a Massachusetts Trust engaged in the carrying on of business in a quasi-corporate form, in which the trustees have similar or greater powers than the directors in a corporation, is not an `association' within the meaning of its provisions.

"We conclude, therefore, that when the nature of the three trusts here involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, but are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to be deemed associations within the meaning of the Act of 1918."

This appears to be the last word of the Supreme Court that is helpful in determining what is included in the term "association."

The Treasury Department has endeavored from time to time to clarify the situation by Regulations defining associations and trusts. Under Article 1504 of Regulation 62, it followed what it understood was the holding of the court in Crocker v. Malley, supra, and provided that: "Where trustees hold real estate subject to a lease and collect the rents, doing no business other than distributing the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among trustees and of consenting to a modification of the terms of the trust, no association exists. * * * If, however, the cestuis qui 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. * * *"

In 1926, following the decision in the Hecht v. Malley Case, by Regulation 69, Arts. 1502 and 1504, and again in 1928 by Regulations 74, Arts. 1312 and 1314, it was provided that, in addition to the above tests in Regulation 62, "if, however, the beneficiaries have positive control over the trust, whether through the right periodically to elect trustees or otherwise, an association exists. * * * Even in the absence of control by the beneficiaries where the trustees are not restricted to the mere collection of funds and their payment to the beneficiaries, but are associated together with similar or greater powers than the directors of a corporation for the purpose of carrying some business enterprise, the trust is an association within the meaning of the statute."

There are numerous decisions of the Board of Tax Appeals and Circuit Courts of Appeals in review,...