Commissioner of Int. Rev. v. GIBBS-PREYER TRUSTS NOS. 1 & 2
| Decision Date | 11 February 1941 |
| Docket Number | 8430.,No. 8429,8429 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. GIBBS-PREYER TRUSTS NOS. 1 AND 2 et al. |
| Court | U.S. Court of Appeals — Sixth Circuit |
COPYRIGHT MATERIAL OMITTED
Louise Foster, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Louise Foster, Sp. Assts. to Atty. Gen., on the brief), for petitioner.
Albert B. Arbaugh, of Canton, Ohio (Albert B. Arbaugh and Wendell Herbruck, both of Canton, Ohio, on the brief), for respondents.
Before HICKS, SIMONS, and HAMILTON, Circuit Judges.
The questions presented for our decision are whether the two trusts, of which respondent, The George D. Harter Bank of Canton, Ohio, is trustee, were associations taxable as corporations during the years 1934 and 1935, pursuant to the provisions of Section 801(a) (1) (2) of the Revenue Act of 1934, c. 277, 48 Stat. 680, 26 U.S.C. A.Int.Rev.Acts, page 790, and Section 501 (a) (1) (2) of the Revenue Act of 1935, c. 829, 49 Stat. 1014, 26 U.S.C.A.Int.Rev.Acts, page 811.
Lewis Gibbs died in 1914, the owner of four parcels of commercial real estate in the business district of Canton, Ohio. He also jointly owned, in equal shares with his two sons, four other pieces of real estate in the same community. By his will he devised all the properties to his two sons and daughter in equal shares.
On June 1, 1930, Gibbs' three children created two identical trusts and transferred these properties to the respondent, The George D. Harter Bank, as trustee. Two trusts were created because of the different proportions in which the properties were owned by the cestuis que trustent. One of the trusts was identified as Gibbs-Preyer Trust No. 1 and covered the four properties the decedent jointly owned with his two sons. The other, Gibbs-Preyer Trust No. 2, covered the property individually owned by the decedent.
Under the terms of the trust instruments, each cestui que trust received a trustee's certificate for his proportionate share in each trust which was measured by his undivided joint interest in the real estate conveyed to the trustee. The certificates were first made transferable, but subsequently the trust agreement was modified, requiring the transfer of the interest of a cestui que trust by a separate instrument of conveyance executed and delivered with the formality of a deed accompanied by surrender to the trustee of the certificates representing the interest conveyed. Whereupon, the trustee was required to issue to the transferee a new certificate and cancel the old.
Under the terms of the instrument creating the respective trusts, the trustee was empowered to hold, control and manage the estates; to receive rents and profits; to pay taxes; to provide for insurance, repairs, maintenance and improvements, except where the lessees were required to maintain the properties. It was also authorized to compromise claims against the trusts; to bring suits to protect the trust estates; to borrow money for the trusts' temporary needs and to employ counsel. It was required to keep books of registry showing the respective ownership of the cestuis que trustent and their transfers, if any, and to make monthly distribution to the cestuis que trustent of net rents.
The trustee had legal title to the properties and no single beneficiary had the power to compel a partition of the trust estates. Two-thirds in amount could control the trustee in all matters, including the power to compel it to lease or sell the properties or transfer them to the beneficiaries as tenants in common. The trusts terminated January 1, 1980, according to the terms of the instruments creating them, if not earlier terminated by a vote of the cestuis que trustent owning two-thirds of the estates.
It was the business practice of the decedent, Lewis Gibbs, to own real estate in common with his sons, and after his death his children continued this practice among themselves. When his estate was settled, the properties owned by him and devised to his children were not partitioned. The family policy of holding the properties in common was threatened and the present trusts were created to prevent the breaking up of the estate and for the further reason that the sons of decedent desired to be relieved of active management of the estate and to turn the management of the properties over to their sons.
Article X of the trust instruments which is material to the questions here, is found in the margin.1
At the time of creation of the respective trusts, two parcels of the real estate were managed by a real estate agency and the remaining properties were directly managed by the sons of decedent, who acted as agents for the other beneficiaries in the making of leases, supervising repairs, erecting new buildings, etc. There was a contemporaneous oral agreement between the parties to the written trusts that where the properties involved were managed by members of the family or beneficiaries, such persons would be considered agents of the beneficiaries of the trusts, and the properties have been so managed since the creation of the trusts. Leases have been negotiated, tenants secured, rentals fixed and repairs and improvements made by the members of the family in the management of the properties of the trusts. In some instances, buildings have been erected or the existing ones remodeled, the necessity for which was determined by members of the Gibbs family, contracts for the work executed by them and the necessary funds contributed by the beneficiaries.
The trustee paid for insurance and taxes from the trust income whenever the lease did not require the lessee to do so, but the members of the family selected the company in which the insurance was placed and the amount to be carried.
On the execution of the trust instruments, certificates of beneficial interest were issued to the several beneficiaries in proportion to their respective interests, some of which have been since transferred in trust for other members of the family. The trustee has at no time exercised control or management of any of the trust property, but has limited its activities to the holding of legal title to them, the payment of taxes and maintenance and insurance items upon order of a member of the Gibbs family. It has signed leases at the direction of members of the family, collected the rents, paid the bills and kept the necessary records. There have been no sales of any of the real estate in the trusts nor any additional purchased and no accumulations of funds by the trustee except for the payment of taxes.
The Board of Tax Appeals held the trusts here involved were pure trusts and not associations taxable as corporations. The deficiencies involved total $15,356.51.
It is contended by the petitioner that it was not competent to controvert by parol testimony the plain terms of the written instruments creating the trusts and that the purpose of their creation and taxability as associations must be determined from the language appearing in the instruments. This concept must be rejected. The crucial test in determining whether a trust is an association, taxable as a corporation, must be found in what the trustees actually do and not in the existence of long unused powers. In determining the applicability of the statute, we must look to the actual activities of the entity...
To continue reading
Request your trial
-
Abraham v. United States
...204 (2nd Cir. 1956); Rohman v. United States, 275 F.2d 120, 124-125 (9th Cir. 1960). It is true that in C. I. R. v. Gibbs-Preyer Trusts Nos. 1 & 2, 117 F.2d 619, 622-623 (6th Cir. 1941), our Court of Appeals, without discussing or even citing the Morrissey or Coleman-Gilbert cases, supra, h......
-
United States v. Stierwalt, 6503.
...that simple association of a number of persons for an avowed business purpose results in a taxable association, C. I. R. v. Gibbs-Preyer Trusts, 6 Cir., 117 F.2d 619, it is apparent that the doctrine of Morrissey is applicable to business arrangements other than trusts and that the test rem......
-
Equitable Trust Co. v. Magruder
...American Bond Trust, 41 B.T.A. 1343. It is said these two cases are now on appeal to the Second Circuit. See also Commissioner v. Gibbs-Preyer Trusts, 6 Cir., 117 F.2d 619, Feb. 11, On the whole case I reach the conclusion of law that the plaintiff is entitled to recover the sum of $52.38 w......
-
Nashville Trust Co. v. Cotros, 8641.
...may be regarded as making it analogous to a corporate organization. We recently recited these features in Commissioner of Internal Revenue v. Gibbs-Preyer Trusts, 6 Cir., 117 F.2d 619, and need not repeat. In our judgment, and notwithstanding the effort of the taxpayers to differentiate the......