Commissioner of Internal Revenue v. Combs

• Decision Date: 11 April 1935
• Docket Number: No. 7523.,7523.
• Citation: 76 F.2d 682
• Parties: COMMISSIONER OF INTERNAL REVENUE v. COMBS et al.
• Court: U.S. Court of Appeals — Ninth Circuit

76 F.2d 682 (1935)

COMMISSIONER OF INTERNAL REVENUE v. COMBS et al.

No. 7523.

Circuit Court of Appeals, Ninth Circuit.

April 11, 1935.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Louise Foster, and Lucius A. Buck, Sp. Assts. to Atty. Gen., for petitioner.

Latham, Watkins & Bouchard, Dana Latham, Miller, Chevalier, Peeler & Wilson, and Melvin D. Wilson, all of Los Angeles, Cal., for respondents.

Before WILBUR and GARRECHT, Circuit Judges, and CAVANAH, District Judge.

WILBUR, Circuit Judge.

The Commissioner of Internal Revenue determined a deficiency in the tax of the respondents for the years 1925 and 1926 amounting to $7,369.22. This deficiency it appears was assessed upon the theory that the respondents were acting as an association and therefore taxable under the Revenue Act of 1926, § 2 (a), 44 Stat. 9 (26 USCA § 1262 (a), as interpreted by Treasury Regulations 69, promulgated under that act, Arts. 1502, 1504. The Board of Tax Appeals reversed the decision of the Commissioner upon the ground that the respondents were not an association, and the Commissioner brings this petition to review the act of the Board of Tax Appeals. The question as to whether or not organizations are taxable as associations under the Revenue Act is one that has been frequently before the courts and is not free from difficulty. The various decisions have been collected and discussed in a number of recent cases. Reinecke v. Kaempfer (C. C. A.) 72 F.(2d) 469, 470; Twin Bell Oil Syndicate v. Helvering (C. C. A.) 70 F.(2d) 402; Hecht v. Malley, 265 U. S. 144, 44 S. Ct. 462, 68 L. Ed. 949; Commissioner v. Brouillard (C. C. A.) 70 F.(2d) 154; Burk-Waggoner Oil Ass'n v. Hopkins, 269 U. S. 110, 46 S. Ct. 48, 70 L. Ed. 183. We think it unnecessary to enter into an extended discussion of the various decisions of the courts of appeals dealing with the question, or to attempt to establish the proper rule for determining the question of tax liability. The tendency of the recent cases is to deal with the facts of the particular case rather than to attempt to define the term "association" more precisely than is done by the regulations of the Treasury Department. So stated, Judge Sparks, speaking for the Circuit Court of Appeals in the Seventh Circuit in Tyson v. Com'r, 68 F.(2d) 584 (in February 1934), as follows: "The trend of these decisions seems to be to look to the actual activities of the entity first, rather than to its form or possible powers."

So also is the statement of Judge Alschuler, speaking for the same court in Reinecke v. Kaempfer, supra (in June 1934), where he said: "We are satisfied that the similitude referred to is not in those essentials which distinctly stamp the entity as a corporation, but rather in the business carried on and the manner of its transaction."

Judge Wilson, speaking for the Circuit Court of Appeals for the First Circuit, dealt with this matter in a recent opinion Commissioner v. Kelley, 74 F.(2d) 71, 73, saying: "The courts have also said that, in determining whether a trust is taxable as a corporation, substance rather than form is to be regarded; but each case must be determined on its own facts."

In the latter case (Commissioner v. Kelley, supra) Judge Wilson reviewed the decisions on this subject and deduced the conclusion that: "To constitute a trust an association, and taxable as a corporation, there must be a body of persons associated together who are (1) actually carrying on business for profit, and (2) under the usual forms and procedure of corporations. Both conditions must be present."

In Twin Bell Oil Syndicate v. Helvering, 70 F.(2d) 402, 408, we considered the proper interpretation of the statute and rules of the Treasury Department concerning the taxability of associations there involved and held that the Twin Bell Oil Syndicate was such an association. Judge Sawtelle, speaking for the court, said: "* * * we are impelled to the conclusion that the taxpayer was engaged in business, that its organization was of a quasi corporate character, and that, as a consequence, it was an `association' and should be taxed as a corporation under the provisions of the Revenue Act of 1926 and the Treasury regulations promulgated thereunder."

This case was reversed by the Supreme Court on other grounds (December 3, 1934) 293 U. S. 312, 55 S. Ct. 174, 79 L. Ed. ___.

It is agreed that one of the tests for determining whether or not a trust is so organized as to constitute an association within the meaning of the taxing laws is whether or not the trustees are authorized to conduct business and do so. Inasmuch as the purpose of the act is to treat associations, corporations, joint-stock companies, and insurance companies on a basis distinct and separate from that applicable to trusts or copartnerships, it is clear that while a trust may be organized so that the trustees can do business, their powers, duties, obligations, and methods of doing business, and the relationship of the trustees to the beneficiaries, must in some degree correspond to the similar duties and obligations of directors and stockholders of a corporation in order to make the trust taxable as an association. The first test, as to whether or not the trust is one to do business, as distinguished from one for merely holding investments for the beneficiaries and for the transaction only of the incidental business essential to...