COMMISSIONER OF IR v. United States & Foreign S. Corp.
| Decision Date | 22 March 1945 |
| Docket Number | No. 8637.,8637. |
| Citation | 148 F.2d 743 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. UNITED STATES & FOREIGN SECURITIES CORPORATION. |
| Court | U.S. Court of Appeals — Third Circuit |
S. Dee Hanson, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and A. F. Prescott, Sp. Assts. to Atty. Gen., on the brief), for petitioner.
Charles C. Parlin, of New York City (Wright, Gordon, Zachry, Parlin & Cahill, and J. Reid Hambrick, of New York City, on the brief), for respondent.
Before GOODRICH and McLAUGHLIN, Circuit Judges, and GANEY, District Judge.
This is an appeal from the Board of Tax Appeals and concerns the question of the cost basis of certain Seaboard Air Line Railway Company securities sold by the petitioner during the taxable years 1935 to 1937. The petitioner was one of a number of participants who formed a syndicate to buy, sell, trade and deal in securities of the Seaboard Air Line Railway Company. The petitioner and other participants formed the syndicate believing that by simplifying the capital structure of the Seaboard Air Line Railway Company, and improving its position through a reduction of the funded debt and interest charges by getting additional capital from the sale of common stock, and also by the injection of new management blood, there would be an appreciation in the value of the Seaboard securities.
The securities in question were received by the petitioner as a distribution, in kind, in 1931 and 1935 upon the termination of the syndicate. The petitioner claims that the syndicate agreement created a principal-agent relationship (or a "partnership") and therefore the cost basis was the actual cost of the securities to the syndicate, while the government maintains that the syndicate agreement created some other type of relationship which it calls an "association", and that the cost basis was accordingly the fair market value at the date of their receipt.
The question on appeal is, therefore, whether the syndicate agreement created an "association" within the intendment of the Revenue Acts so as to make it taxable as a corporation. If it was not an association the basis of the securities for gain or loss are determinable in accordance with the provisions of Sec. 113(a) (13) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Acts, pages 700, 864.1
A business trust constitutes an association within the meaning of the Revenue Acts and is taxable the same as a corporation. Morrissey v. Commissioner of Internal Revenue, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263; Swanson et al. v. Commissioner of Internal Revenue, 296 U.S. 362, 56 S.Ct. 283, 80 L.Ed. 273; Helvering v. Combs et al., 296 U.S. 365, 56 S.Ct. 287, 80 L.Ed. 275. In the Morrissey case, supra, the court laid down five criteria for determining whether a trust is a business undertaking. Whether a trust has the attributes of a corporation, is to be determined by resemblance thereto rather than by identity therewith, and the basis of this determination is whether the trust was organized "to enable the participants to carry on a business and divide the gains which accrue from their common undertakings * * *." Morrissey Case, supra, 296 U.S. at page 360, 56 S.Ct. at page 296, 80 L.Ed. 263. In applying the tests laid down in the Morrissey, supra, to the syndicate agreement, it must be found that an "association" was not created and the findings of the Tax Court sustained.
The only assets held by the managers of the syndicate consisted of the securities of the Seaboard Air Line Railway Company and affiliated companies. It had no bank account with any commercial bank, and in making repayments of bank loans, the managers always used separate checks of the individual participants. It never had a seal or a license to deal in securities and the managers merely acted as agents for common principals. The participants lacked control over the management and there was no provisions in the agreement for the removal of the management or substitution of new managers, and the participants in nowise had the control over the managers such as stockholders do over a board of directors. Further the syndicate was organized November 30, 1928 and was to continue for six months until May 30, 1929, with the provision that it might be extended for one or more successive periods of six months each by notice from the managers to the participants, which was done for four such periods, the last extension being to May 30, 1931...
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