76 T.C. 803 (1981), 1977-79, Elm Street Realty Trust v. C.I.R.

Docket Nº:1977-79.
Citation:76 T.C. 803
Opinion Judge:NIMS, Judge:
Attorney:William C. Hays and Robert F. Corliss, for the petitioner. Barry J. Laterman, for the respondent.
Case Date:May 18, 1981
Court:United States Tax Court

Page 803

76 T.C. 803 (1981)




No. 1977-79.

United States Tax Court

May 18, 1981

E and H transferred rental property to a trust which was to serve as a vehicle for their estate planning. The trust's organizing instrument vested the trustee with broad authority over the res and provided for transfer of the beneficiaries' interests. The beneficiaries had limited powers respecting amendment of the trust's organizing instrument, its termination and appointment of a successor trustee. E and H, the two original beneficiaries, transferred their beneficial interests to members of their families. Held, although the trust possessed a business objective, the beneficiaries were not associates within the meaning of sec. 301.7701-2, Proced. & Admin. Regs., and the trust is thus not classifiable as an association.

Page 804

William C. Hays and Robert F. Corliss, for the petitioner.

Barry J. Laterman, for the respondent.

NIMS, Judge:

Respondent determined deficiencies in petitioner's income tax for the taxable years ending February 28, 1975, February 29, 1976, and February 28, 1977, in the respective amounts of $4,538.82, $4,320.88, and $3,912. The issue for decision is whether the Elm Street Realty Trust is an association within the meaning of section 7701(a)(3)[1] and thus taxable as a corporation.


Some of the facts have been stipulated. The stipulation and the exhibits attached thereto are incorporated herein by reference.

At the time the petition in this case was filed, petitioner's principal office was located in Boston, Mass.

The Elm Street Realty Trust (petitioner or the trust) was formed at the behest of Zenas O. Egan and Earle B. Harvey by a declaration of trust dated March 1, 1971. At that time, Egan and Harvey were in the wholesale automobile parts business in Massachusetts; they had a business relationship with a Connecticut company named Risley-Leete Co., Inc. (Risley), which sold automobile parts. Also, at that time, Egan and Harvey were guarantors of certain obligations of Risley.

Risley was engaged in business on the premises located at 43-47 Elm Street, West Haven, Conn. A corporation controlled by an individual who was a former stockholder of Risley owned the

Page 805

aforesaid Elm Street realty. Around the time the trust was created, the former stockholder was engaged in litigation with Risley.

Sometime prior to the formation of petitioner, an opportunity to purchase the Elm Street property was presented to Egan and Harvey. They believed that a purchase of the property would not only represent a good investment, but would also contribute to Risley's future stability because of the removal of an adverse lessor.

On March 1, 1971, the date of the petitioner's creation, Egan and Harvey effected a conveyance of the Elm Street property (which they previously had acquired) to the petitioner. Also on that date, the trustee, Whitfield W. Johnson, executed a lease with Risley on behalf of the trust.

The declaration of trust stated that petitioner was formed " to acquire, hold, improve, manage and deal in real estate." The maximum term of the trust was 11 years, the same duration as the lease term; the trust and the lease were intended to be coterminous. However, the trust could also be terminated if either of the following conditions, contained in article Third of the declaration of trust, occurred prior to the end of the 11-year term:

(b) Upon notice in writing to the Trustee then serving by the beneficiaries hereunder or the heirs or legal representatives of any beneficiaries who may then be deceased, as the case may be, stating that the within trust is thereby terminated and instructing the Trustee as to the disposition of the property then held by him in trust hereunder.

(c) Upon request in writing to the Trustee then serving by any beneficiary hereunder whose beneficial interest at such time as set forth under the provisions of Article First hereof as amended shall be 25% or more and that the within trust should be terminated provided that the Trustee then serving hereunder within seven days of receipt of such writing determines in his complete and absolute discretion that termination would be in the best interests of the beneficiaries hereunder.

Article Second of the declaration of trust provides:

The Trustee shall hold and manage certain real estate conveyed to him this day being property generally known as 43-47 Elm Street, situated in West Haven, Connecticut, together with such other property as may now or hereafter be added to this trust and he shall collect the income therefrom and after paying all expenses in connection with the administration of his trust including all mortgage payments due from time to time, he shall distribute the net income therefrom at least as often as annually to the beneficiaries hereunder from time to time.

Page 806

Pursuant to article Sixth of the declaration of trust, the trustee was authorized to engage in the following activities:

The Trustee shall have complete control, management and power to invest and reinvest the Trust property in any manner he may deem advisable and in any kind of property, real, personal mixed, tangible or intangible, without regard to whether such investments be such as are considered proper or legally authorized to be made by Trustees generally, and without in any way limiting the generality of the foregoing, the Trustee shall have the following powers:

To purchase or sell any property of any character, at public or private sale, for cash or credit, or upon such terms or conditions as he shall see fit; to let, hire or lease any property for any terms even beyond the termination of this Trust; to exchange, release (with or without consideration) or partition any property or interest of the Trust; to place restrictions, reservations or conditions upon property acquired or disposed of by the Trust; to lay out, grant or dedicate any part of any land owned by the Trust for roads, streets, sidewalks, squares, open places, and easements; to survey and plot any land of the Trust; to take and give options for land, property, or interests to be bought or sold by the Trust; to provide drains, sewers, water supplies, cables and other conveniences; to subdivide land of the Trust and to grant or purchase easements in, under or over the soil of land for any purpose; to build roads, paths, bridges and other structures necessary to develop land of the Trust or any other land; to landscape and develop any land of the Trust in any way, and to remove soil, rock and other minerals and to sell or dispose of such materials in any way; to erect buildings of any sort, and to improve, remodel, demolish, move or otherwise alter or dispose of any buildings of the Trust or any other buildings; to pay commissions of any amount and by any means, to brokers and others for services rendered the Trust; to advertise in any manner and to use any other means to attract business to the Trust; to insure the Trust or any property of the Trust against fire or any possible other hazard, liability or contingency, in forms and amounts, and with companies at his discretion, but the Trustee shall not be liable for any failure to insure; to loan funds or property of the Trust upon any sort of security or without security to any person, association or corporation; to assign, release in part, discharge, hypothecate or foreclose mortgages of the Trust; and the Trustee may borrow, upon construction loan-so-called, or upon conditional sale or lease and purchase agreement, or otherwise for the purposes of the Trust and may issue notes, bills of exchange, bonds, debentures and other evidences of obligation of this Trust; secured or unsecured, and to secure the same to execute mortgages, debentures, deeds of Trust, and collateral agreements and to secure the repayment by a pledge, mortgage or hypothecation of the Trust property or any part thereof. The Trustee shall also have every possible power and right of dealing with the Trust property and estate which an individual can have over his own property as full and completely as if such individual powers were herein expressed.

And for the foregoing purposes and in execution of any other powers of the Trustee (save the power to alter or amend this instrument or to resign this Trust) the Trustee may make such contracts with such persons, associations and corporations as he may deem desirable.

Page 807

Petitioner's original beneficiaries were Egan and Harvey, each of them having a 50-percent beneficial interest. Article Fifth of the declaration specifically dealt with the matter of the transfer of beneficiaries' interests:

No beneficiaries' interest hereunder shall be the subject of any alienation, gift, sale...

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