Crocker v. Malley

• Decision Date: 03 May 1918
• Docket Number: 1323,1324.
• Citation: 250 F. 817
• Parties: CROCKER et al. v. MALLEY, Internal Revenue Collector. MALLEY, Internal Revenue Collector, v. CROCKER et al.
• Court: U.S. Court of Appeals — First Circuit

250 F. 817

CROCKER et al. v. MALLEY, Internal Revenue Collector.

MALLEY, Internal Revenue Collector, v. CROCKER et al.

Nos. 1323, 1324.

United States Court of Appeals, First Circuit.

May 3, 1918

On Petition for Rehearing, June 10, 1918.

In Error to the District Court of the United States for the District of Massachusetts; George H. Bingham, Judge.

Felix Rackemann, of Boston, Mass. (Harrison M. Davis, of Boston Mass., on the brief), for trustees.

Francis G. Goodale, Sp. Asst. U.S. Atty., of Boston, Mass. (Thomas J Boynton, U.S. Atty., of Boston, Mass., on the brief), for collector.

Before DODGE and JOHNSON, Circuit Judges, and ALDRICH, District Judge.

DODGE Circuit Judge.

These cases arise under the federal Income Tax Act approved October 3, 1913 (38 Stat. 166, 172).

The five persons who were then the trustees under a declaration of trust dated March 29, 1912, and recorded in the Worcester county, Mass., Northern district, registry of deeds, brought suit, on January 15, 1917, against the collector of internal revenue to recover back certain amounts paid by them to him under protest, as income taxes claimed by him to be due from them under said act, for the years 1913, 1914 and 1915. The case was heard in the District Court without a jury on an agreed statement of facts. The trustees recovered judgment for $9,554.07, with interest, which judgment the collector seeks to reverse in No. 1324, asserting that the allowance of any recovery was error. By their writ of error in No. 1323 the trustees assert the judgment to have been erroneous in not allowing also the further recovery of $1,321.33, included in their total claim as stated in their declaration. Neither party disputes the finding below that all the formalities required by the statute to enable the plaintiffs to bring this suit have been complied with.

The declaration of trust provided that 'the title of this trust (fixed for convenience) shall be the Wachuset Realty Trust. ' The important features of the trust thereby created are set forth as follows, in the 'opinion and findings' of the District Court:

'The trust was created under the common law. In its inception there were five trustees and eight beneficiaries, five of whom were trustees. The property of the trust consisted of real estate and shares of stock in a Massachusetts corporation, the legal title to which was vested in the trustees. The real estate was leased to the Massachusetts corporation, and the income of the trust came from the dividends on the stock and the rentals of the real estate. Certificates were issued by the trust to the beneficiaries in proportion to their respective interests in the property held by the trust. The certificates contained a provision signifying the assent of the beneficiaries to the terms of the trust agreement. * * *

'According to the trust agreement, the trust was to continue for 20 years from and after the death of the survivor of certain persons named, when the property was to be converted into money and the net proceeds distributed among the persons then holding and owning the beneficial interests therein. Pending final conversion and distribution of the property, full management and control of the same was vested in the trustees, with as full powers as though they were themselves sole and absolute beneficial owners thereof in fee simple. They were authorized to collect and receive all rents and incomes from the property, and semiannually or oftener to distribute such portion thereof as they, in their discretion, should determine to be fairly distributable as income to the several cestui que trusts, according to their interests. The compensation of the trustees was not to exceed a total of 1 per cent., reckoned upon the gross income received, 'unless, at any time, a majority in interest of the cestuis que trust consent in writing to some larger compensation for any past service.' Any vacancies in the office of trustee were to be filed by the remaining trustees by an instrument in writing, signed by them and assented to in writing by the holder or holders of a majority in amount of the beneficial interests in the trust; and the terms and provisions of the trust could be modified at any time by an instrument in writing, signed, sealed, and acknowledged 'by the then trustees, assented to in writing by a majority in interest of the cestuis que trust.' It was also stipulated that the cestuis que trust should 'be trust beneficiaries only, without partnership, associate, or any other relation whatever inter sese.'' The District Court has stated the question upon which the trustees' right of recovery depends, as follows:

'The principal question in the case is whether the plaintiffs are trustees and subject to the tax provisions of section II, subdivision D, of the act of October 3, 1913, or whether they are an association within section II, subdivision G (a), of said act. The contention of the defendant is that the plaintiffs are an association and taxable under the provisions of subdivision G, while that of the plaintiffs is that they are a strict trust, not an association or partnership, and are subject to the tax provisions of subdivision D.'

This question was resolved by the District Court in favor of the plaintiffs, and the case decided upon the ground that they are a trust and not an association.

Under the corporation excise tax statute of 1909 (36 Stat. 11, 112), every corporation, joint-stock company, or association, organized for profit and having a capital stock represented by shares, now or hereafter organized under the laws of the United States, or of any state or territory, etc., was made subject, if engaged in business in any state, etc., to pay annually a special excise tax with respect to the carrying on or doing of business by it, of 1 per cent. upon its entire net income over and above $5,000 received by it from all sources during the year.

In Eliot v. Freeman, 220 U.S. 178, 31 Sup.Ct. 360, 55 L.Ed. 424, it was held with regard to two Massachusetts real estate trusts, more or less similar in character to the trusts here under consideration, that they were not within the provisions of the act, nor liable to the excise tax thereby imposed, because formed in a state where statutory joint-stock companies are unknown, and not therefore deriving, either from the laws of the United States or of any state or territory, etc., any quality or benefit not existing at the common law. The intention of Congress was held to have been to embrace within the statute only such corporations and joint-stock associations as were organized under some statute, or did derive from that source some quality or benefit not existing at the common law.

This decision was in 1911. The language of the subsequently enacted income tax statute of 1913 imposes the normal tax therein provided for upon the entire net income of every corporation, joint-stock company, or association organized in the United States, no matter how created or organized.

If, therefore, the Wachuset Realty Trust is a joint-stock company or association, within the meaning of those terms as used in section II, G (a), of the statute of 1913, it makes no difference whether it is created or organized under any statute or not. Being organized in the United States, its income is liable to the tax imposed, although it derives no benefit not existing at common law from any statutory source. The question remains, however, whether or not the facts before the District Court required the finding that it was a 'joint-stock association' or 'association,' such as the above section intends. We find no indication in Eliot v. Freeman, or in any other Supreme Court decision, that a Massachusetts trust like those before the court in that case must necessarily be regarded as such an 'association' in the statutory sense. On the collector's behalf it is said that in the legislation of 1913 Congress 'intentionally omitted the one requirement which exempted such an organization' under the legislation of 1909. But we think it by no means clear, from anything said in the opinion, that either trust before the court in Eliot v. Freeman must have been held an 'association' in the statutory sense, had it only been organized under some statute expressly permitting such organization. In the opinion it is expressly said, as to the trusts then under consideration, that they could 'hardly be said to be organized, within the ordinary meaning of that term' (220 U.S. 186, at page 187, 31 Sup.Ct. 361, 55 L.Ed. 424), and it was pointed out that they did not have perpetual succession, but ended 20 years after lives in being-- suggestions which would hardly have been made if the decision was meant to be understood as contended.

With regard to the statute of 1909 it is to be noticed that, while corporations, joint-stock companies, or associations, and insurance companies, were therein classed together as they are in the statute of 1913, the former statute, unlike the latter, imposed upon them, not a tax upon their incomes as such, but a 'special excise tax with respect to the carrying on or doing business by them,' equivalent to 1 per cent. upon their net incomes in excess of $5,000. Upon partnerships, not capable of being included in said classification, the statute of 1909 did not undertake to impose any such tax, any more than upon individuals. The incomes of the partners from the business of an ordinary partnership Congress could not have taxed in 1909; the Sixteenth Amendment not having become a part of the Constitution until February 25, 1913.

The statute of 1913, however, imposes a tax directly upon net incomes, not a special excise tax equivalent to the same percentage. It imposes such tax directly upon the incomes of...