Abraham v. United States

• Decision Date: 29 August 1967
• Docket Number: Civ. A. No. C-66-175.
• Citation: 272 F. Supp. 807
• Parties: George G. ABRAHAM and Herbert Abraham, Trustees of the Abraham Trust, Plaintiffs, v. UNITED STATES of America. Defendant.
• Court: U.S. District Court — Western District of Tennessee

272 F. Supp. 807

George G. ABRAHAM and Herbert Abraham, Trustees of the Abraham Trust, Plaintiffs, v. UNITED STATES of America. Defendant.

Civ. A. No. C-66-175.

United States District Court W. D. Tennessee, W. D.

August 29, 1967.

John R. Stivers and Taylor Malone, Jr., Memphis, Tenn., for plaintiffs.

Mitchell Rogovin, Asst. Atty. Gen., Stanley F. Krysa, Sherin V. Reynolds, Attys., Dept. of Justice, Washington, D. C., Thomas L. Robinson, U. S. Atty., Memphis, Tenn., for defendant.

OPINION ON MOTIONS FOR SUMMARY JUDGMENT

BAILEY BROWN, Chief Judge.

Plaintiffs, George G. Abraham and Herbert Abraham, Trustees of the Abraham Trust, have sued the defendant, United States of America, for a refund of federal income taxes in the amount of $70,054.63 for the taxable years ending October 31, 1960, through October 31, 1963, which the Abraham Trust paid under protest. These income taxes were assessed as a result of the Internal Revenue Service's determination that the Abraham Trust was an association taxable as a corporation, under the Internal Revenue Code of 1954, § 7701, and Treasury Regulations § 301.7701.

Both plaintiffs and defendant have filed motions for summary judgment in this cause. This Court has heretofore heard oral argument on these motions; in addition, the Court has studied the depositions and relevant documents which are in the record, and we have had the benefit of supporting memoranda supplied by both sides to this controversy. There is, of course, no obligation on the Court to grant either of these motions merely because cross-motions for summary judgment have been filed, 6 Moore's Federal Practice 2247 et seq., and cases cited therein.

BACKGROUND

For a period of approximately forty years prior to May 20, 1950, Abraham Bros. Packing Company (Abraham Bros.), a Tennessee corporation, was engaged in Memphis, Tennessee, in the business of slaughtering and processing livestock and in packing and selling meat, meat products, and meat by-products. In the operation of this business, Abraham Bros. owned a plant and premises, consisting of certain real estate, buildings, machinery, and other improvements, together with railroad sidings and sewage facilities. The business was a closely-held family corporation which, in 1950, had about five hundred employees.

For various reasons, the officers and stockholders of Abraham Bros. decided to cease operating as a meat packing-house and on May 20, 1950, the corporation leased its packing plant to Wilson & Co., Inc. The lease covered certain real estate, buildings, machinery, and equipment and was for an initial term of twenty years at an annual rental of $100,000 for each of the first two years and $80,000 per year thereafter. At the expiration of the initial term, Wilson & Co. had an option under the lease to purchase the leased property for $500,000, and as an alternative, the lessee had the option to renew for an additional twenty years on the same terms and conditions, except that the rental was to be reduced during this second twenty-year period to $32,150.04 per year. At the end of the second twenty-year period, Wilson & Co. had the option to purchase the leased property for $100,000. If Wilson & Co. failed to purchase, the leased property was to revert to its owners. In general, the obligations with respect to the leased property, such as paying real estate taxes, fell on the lessee, although some remained with the lessor. As an example of the latter, during the first fifteen years of the lease, if it became necessary to erect facilities as a substitute for or an adjunct to the public sewage facilities, such installation was to be the joint responsibility of the lessor and lessee. On May 23, 1950, Wilson & Co. took possession of the premises, rehired most of the five hundred former employees of Abraham Bros., retained George G. Abraham, one of the plaintiff trustees, as General Manager of the plant, and began making monthly payments to Abraham Bros. as provided for in the lease.

On October 30, 1950, the Board of Directors of Abraham Bros. voted to liquidate the corporation in not more than two years, and notice of the adoption of the plan of liquidation was given to the Commissioner of Internal Revenue as required by law.

On October 27, 1952, the stockholders of Abraham Bros., of whom there were over thirty, voted to direct the appropriate officers of the corporation to surrender its charter and this was done two days later. At this same meeting, the stockholders considered and approved a document entitled "Agreement and Declaration of Trust," which authorized the appropriate officers to convey all the assets of the corporation to Ben Abraham, George Abraham and George G. Abraham, as Trustees of the Abraham Trust, and this was done forthwith. The terms of this trust agreement are set forth hereafter.

In the early part of 1963, after negotiations among Wilson & Co., Inc., John Morrell & Co., and the trustees, the lease was terminated by agreement and the leased property was sold by the Abraham Trust to John Morrell & Co. for a cash payment of $500,000 and assumption of a mortgage on the leased property, the balance of which was $309,557.87. The proceeds of this sale were paid to the beneficiaries of the trust as final distributions.

From 1950 until its dissolution in 1952, Abraham Bros. filed corporate income tax returns and paid income taxes; from 1953 through 1959, the trustees have filed only fiduciary income tax returns and have paid no income tax. However, after an audit, the Internal Revenue Service determined that the Abraham Trust was an association taxable as a corporation and it was able to and did assess deficiencies in corporate income taxes and interest for the 1960-1963 taxable years in the total amount of $70,054.63. Plaintiffs thereupon filed corporate returns for these years and paid these taxes, all under protest. On April 21, 1965, claims for refund for the aforesaid amount were filed, these claims were disallowed, and plaintiffs thereafter instituted suit in this court.

THE TRUST AGREEMENT

After certain preliminary statements, the trust agreement provided (in II) for the trustees to issue "certificates of shares" to the trust beneficiaries in an amount equal to the then present outstanding common stock of Abraham Bros. owned by each. The trustees were also empowered to issue additional certificates in the future, but only where a certificate holder wished to exchange his certificate for two or more certificates of a smaller number of units totaling the same amount as the original certificate.

The agreement (in III) gave the trustees entire control and management of the trust property, subject to outstanding leases. They were empowered to collect rents and perform all obligations of the landlord under outstanding leases and to convey title to all real estate owned by the trust if options were exercised; to sell all property, or any part thereof, not covered by outstanding leases when and under such terms as they might choose; to borrow money for temporary exigencies or for erecting any buildings on any land conveyed to them when and under such terms as they might choose; and to execute and deliver notes and execute deeds of trust or mortgage securities for any such sums borrowed. The trustees were empowered to exchange land and purchase additional land if they so chose; to grant releases and easements over any land owned or later acquired by the trust; to maintain suitable offices for the transaction of trust business; to incur any other expenses, including those incident to the hire of employees, agents, lawyers and servants; to execute, acknowledge, and record legal instruments for trust purposes; and to make all contracts and pay all expenses incidental to the conduct and operation of the trust.

The trustees (in IV) were to receive no compensation for their services, although the beneficiaries holding a majority of the shares could vote compensation for them at any time. The trustees (in VI) were a self-perpetuating body whose number was always to be kept at three, any vacancy to be filled by the surviving trustees.

The trustees (in VIII) were directed to collect all of the rental and other income of the trust, and annually or more often to divide the net income among the beneficiaries. Before paying any dividends, however, the trustees were empowered to set aside any sums they saw fit for sinking funds or contingency funds to repay loans or make repairs or meet unusual expenses. They were permitted to invest and reinvest any money coming into their hands in any assets or securities that they saw fit, and their decision as to what constituted net income was final.

The trustees (in IX) could call meetings of certificate holders at any time on their own initiative or upon the written request of any five certificate holders. It was provided (in X) that certificate holders could vote at any meeting in person or by proxy and further it was provided that the holders of a majority of the outstanding certificates could authorize the trustees to execute mortgages or deeds of trust upon the property upon such terms and conditions as the certificate holders saw fit. It was provided (in XI) for limited liability, that is, no contract of the trustees would be binding on the certificate holders personally, and all persons or corporations extending credit to or contracting with the trustees could look only to the trust property for the payment of their claims or contracts.

It was provided (in XII) that certificates were personal property and freely transferable, and that the transferees would be entitled to all the rights of the original certificate holders. It was provided (in XIII) that the trust would continue in effect for a period of seventy-five years, unless sooner terminated by the sale of all real estate owned by the trust; and it was further provided that the certificate holders, by majority vote, could authorize the...