Berry Bros. Trust v. Comm'r of Internal Revenue
| Decision Date | 17 July 1947 |
| Docket Number | Docket No. 11013. |
| Citation | 9 T.C. 71 |
| Parties | BERRY BROTHERS TRUST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A trust created for the purpose of operating a screw products manufacturing business, of which the grantor's five sons were the trustees and the beneficiaries, held an association taxable as a corporation. Edgar J. Goodrich, Esq., and Lipman Redman, Esq., for the petitioner.
Cecil H. Haas, Esq., for the respondent.
The respondent deficiencies in petitioner's income tax, declared value excess profits tax, and excess profits tax for the years 1942, 1943, and 1944, as follows:
+----------------------------------------------+
¦ ¦ ¦Declared ¦ ¦
+-----+----------+--------------+--------------¦
¦ ¦ ¦value ¦Excess profits¦
+-----+----------+--------------+--------------¦
¦Year ¦Income tax¦excess profits¦tax ¦
+-----+----------+--------------+--------------¦
¦ ¦ ¦tax ¦ ¦
+-----+----------+--------------+--------------¦
¦1942 ¦$1,329.28 ¦ ¦$890.55 ¦
+-----+----------+--------------+--------------¦
¦1943 ¦ ¦$2,285.77 ¦107,938.24 ¦
+-----+----------+--------------+--------------¦
¦1944 ¦ ¦230.17 ¦110,049.43 ¦
+-----+----------+--------------+--------------¦
¦Total¦1,329.28 ¦2,515.94 ¦218,878.22 ¦
+----------------------------------------------+
The sole question for our determination is whether the petitioner is an association taxable as a corporation. Should that question be decided affirmatively, the parties have stipulated the amounts deductible as compensation for officers and the excess profits tax credit to be used in recomputing the petitioner's tax liability.
The petitioner was created under a deed of trust dated September 17, 1924, executed by Richard G. Berry, Sr., hereinafter referred to as the grantor. Fiduciary returns for the years involved were filed with the collector of internal revenue for the eleventh district of Ohio. The respondent rejected the fiduciary returns, holding that the petitioner is taxable as a corporation and should have filed corporate returns on Form 1120.
The petitioner operates a bolt and nut factory at Columbus, Ohio. The business was founded by the grantor about 1881. Soon thereafter he was joined by his brother and together they operated the business for a number of years as a partnership under the name of Berry Brothers. In 1913 the brother withdrew and thereafter the business was operated by the grantor as a sole proprietorship until 1924. In that year the grantor retired and transferred the business to his 5 sons under the trust deed referred to above. The eldest of the sons was then about 36 years of age and the youngest about 26. They had all grown up in the business and were familiar with all phases of the work. All of them were then working full time. They drew no salaries or fixed compensation for their services. From time to time the grantor made them gifts of considerable value.
The three older sons had been in control of the business since about 1915. In that year the grantor retired from active management. He retained ownership of the business and made occasional visits to the plant.
It was the grantor's lifelong intention to have his sons succeed him in the business and continue to operate it jointly. However, there was considerable dissension among them over policies and management. The eldest son, Paul, left the business in 1920 or 1921, but the grantor persuaded him to return, promising him a part ownership interest.
By the trust deed of September 17, 1924, the grantor transferred to his five sons, as trustees, the real estate and other assets pertaining to the Berry Brothers business upon the following terms and conditions:
FIRST: The grantees, as Trustees hereunder, in their collective capacity, shall be designated, so far as practicable, as the Berry Brothers Trust. They shall own, control, operate and manage said property, works, plant and business until the expiration of the period provided for in this INSTRUMENT.
The Trust hereby created shall not terminate or be held to have terminated upon any theory of merger, based upon the fact that the same persons are by the terms of this instrument made sole beneficiaries and sole trustees of said Trust; and said grantees are each expressly given the right and privilege to participate in said property and business, and the profits, dividends, earnings and increase thereof, without regard to the relation as Trustee which each grantee may bear to said Trust.
No beneficial interest could be sold or otherwise disposed of without the consent of a majority of the trustees or without first having been offered to the trustees. The instrument contained a form of certificate of interest and also a form of transfer. The certificate reads, in part, as follows:
THIS certifies that . . . is the owner of one of the five shares of the Berry Brothers Trust, of Columbus, Ohio, and is held subject to the provisions of the Deed of Trust, executed on the . . . day of September, 1924, by Richard G. Berry, and recorded in Deed Book . . . , pp. . . . , in the office of the Recorder of Franklin County, Ohio.
This certificate is alienable and transferable, and represents a full one-fifth interest in the property and business of said Trust, and entitles the owner and holder, at all times, to one-fifth of all net profits and dividends that may be declared and paid thereby.
The trustees were not to be liable for losses except that they were required to restore impairments of capital due either to mistakes of management or certain casualties. The death of a shareholder was not to terminate the trust or entitle the deceased's representatives to an accounting, but such representatives or heirs would succeed to the rights of the deceased without any interruption of business. No successor in interest, whether by transfer or inheritance, was to be entitled to participate in the management of the business. The survivors of the original trustees were to continue as the trustees until the termination of the trust. The trust was to continue until only one of the original trustees survived. At that time the business was to be liquidated and the assets distributed among the parties entitled to receive them. In the meantime, however, the trustees by unanimous vote could liquidate and dispose of the business or convert it to corporate form.
The sons were all twenty-one years of age at the time the trust deed was executed. They are all still living and there has never been any change in the trustees or beneficiaries. There has been some dissension among the brothers. In 1941 the youngest brother, Urban, brought suit in the Court of Common Pleas of Franklin County, Ohio, against the other brothers for an accounting and for recovery of his full one-fifth share of the profits of the business. Some of those profits had been withheld from him by the other trustees. The court entered a decision in which it found ‘that the trust here under consideration is a continuing and subsisting trust.‘ The court ruled that the four other brothers during the years in which they had operated the business without any assistance from Urban were entitled to remuneration for their services as trustees before distribution of the distributable profits in which Urban was entitled to share equally with them under the trust agreement. The sons later agreed upon the amounts of such compensation and the suit was settled out of court. Urban withdrew from active participation in the business before the close of 1931, and since that time it has been operated by the four other brothers without any substantial change in policy or management.
No certificates of interest such as were provided for in the trust deed were ever issued. The business has always been carried on in an informal manner with all of the active trustees participating and performing various services. The eldest son, Paul, keeps the ledger, the only permanent record kept, and is the only person authorized to draw checks on the firm's bank account. Another of the sons looks after production and sees that orders are properly filled. All of them make sales from time to time and perform various other duties jointly. There are about sixty regular employees.
The trustees have never held regular meetings,...
To continue reading
Request your trial
-
Mutual Loan & Savings Co. v. Commissioner of Int. Rev.
...taxing acts," relying upon the cited case of Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110, 46 S.Ct. 48, 70 L.Ed. 183, and Berry Bros. Trust, 9 T.C. 71. The Court stated: "The test uniformly applied in determining whether a transaction does constitute an exchange within the purview of se......
-
MUTUAL LOAN AND SAVINGS COMPANY v. Commissioner
...property as this term is used in the federal taxing acts. Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110 1 USTC ¶ 143, Berry Brothers Trust, 9 T. C. 71 Dec. 15,901. If the refunding bonds carried conditions materially different from those of the original bonds, the property rights ......