Hecht v. Malley Howard v. Same Howard v. Casey Crocker v. Malley

Decision Date12 May 1924
Docket Number119,Nos. 99-101,s. 99-101
Citation68 L.Ed. 949,265 U.S. 144,44 S.Ct. 462
PartiesHECHT et al. v. MALLEY, Former Collector of Internal Revenue. HOWARD et al. v. SAME. HOWARD et al. v. CASEY, Former Acting Collector of Internal Revenue. CROCKER et al. v. MALLEY, Former Collector of Internal Revenue
CourtU.S. Supreme Court

Mr. Edward F. McClennen, of Boston, Mass., for petitioners Hecht, Howard, and others.

Messrs. Harrison M. Davis and Felix Rackemann, both of Boston, Mass., for petitioners Crocker and others.

The Attorney General and Mr. Alfred A. Wheat, of New York City, for respondents.

Mr. Justice SANFORD delivered the opinion of the Court.

These four cases, which were heard together, involve the question whether the trustees of three 'Massachusetts Trusts' are subject to the special excise taxes imposed upon certain 'associations' by the Revenue Act of 1916 (39 Stat. 756, c. 463), and the Revenue Act of 19181 (40 Stat. 1057, c. 18), based upon the value of their capital stock.

The petitioners in Case No. 99 are the trustees of the 'Hecht Real Estate Trust'; in Nos. 100 and 101, the trustees of the 'Hay-market Trust'; and in No. 119, the trustees of the 'Crocker, Burbank & Co. Ass'n.' Excise taxes were assessed against them under these Acts and paid under protest.2 They then brought suits for refund in the Federal District Court in Massachusetts, an had recoveries. 276 Fed. 830. The judgments in their favor were reversed by the Circuit Court of Appeals. 281 Fed. 363. And these writs of certiorari were granted. 260 U. S. 715, 717, 43 Sup. Ct. 93, 67 L. Ed. 478.

The 'Massachusetts Trust' is a form of business organization, common in that State,3 consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be the holders of transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided. These certificates, which resemble certificates for shares of stock in a corporation and are issued and transferred in like manner, entitle the holders to share ratably in the income of the property, and, upon termination of the trust, in the proceeds.

Under the Massachusetts decisions these trust instruments are held to create either pure trusts or partnerships, according to the way in which the trustees are to conduct the affairs committed to their charge. If they are the principals and are free from the control of the certificate holders in the management of the property, a trust is created; but if the certificate holders are associated together in the control of the property as principals and the trustees are merely their managing agents, a partnership relation between the certificate holders is created. Williams v. Milton, 215 Mass. 1, 5, 102 N. E. 355; Frost v. Thompson, 219 Mass. 360, 365, 106 N. E. 1009; Dana v. Treasurer, 227 Mass. 562, 565, 116 N. E. 941; Priestly v. Treasurer, 230 Mass. 452, 455, 120 N. E. 100.

These trusts—whether pure trusts or partnerships—are unincorporated. They are not organized under any statute; and they derive no power, benefit or privilege from any statute. The Massachusetts statutes, however, recognize their existence and impose upon them, as 'associations,' certain obligations and liabilities.4

The Hecht Real Estate Trust was established by the members of the Hecht family upon real estate in Boston used for offices and business purposes, which they owned as tenants in common. It is primarily a family affair. The certificates have no par value; the shares being for one-thousandths of the beneficial interest. They are transferable; but must be offered to the trustees before being transferred to any person outside of the family. The trustees have full and complete powers of management; but no power to create any liability against the certificate holders. There are no meetings of certificate holders; but they may, by written instrument, increase the number of trustees, remove a trustee, appoint a new trustee if there be none remaining, modify the declaration of trust in any particular, terminate the trust, or give the trustees any instructions thereunder.

The Haymarket Trust is strictly a business enterprise. It was established by the original subscribers who furnished the money for the purchase of a building in Boston used for store and office purposes. The shares are of the par value of $100 each. Except as otherwise restricted, the trustees have general and exclusive powers of management, but no power to bind the certificate holders personally. At any annual or special meeting of the certificate holders, they may fill any vacancies in the number of trustees, depose any or all the trustees and elect others in their place, authorize the sale of the property or any part thereof, and alter or amend the agreement of trust.

The Crocker, Burbank & Co. Ass'n is also a business enterprise. It was formerly entitled the Wachusett Realty Trust. The certificates have no par value; the shares being for ninety-six thousandths of the beneficial interest in the property. The trustees originally held the fee of certain lands subject to a long lease and the stock of a Massachusetts corporation engaged in manufacturing paper and owning and operating several mills. In Crocker v. Malley, 249 U. S. 223, 39 Sup. Ct. 270, 63 L. Ed. 573, 2 A. L. R. 1061 (1919), in which the original trust instrument was before the court, it was held that the trustees were not subject as to the dividends received from the corporation to the tax imposed by the Income Tax Act of 1913 (38 Stat. 172) upon the net income of 'every corporation joint-stock company or association, * * * organized in the United States,' but were subject only to the duties imposed by the Act upon trustees. The original trust agreement involved in that case has now, however, been modified, with the assent of the certificate holders. By this modification 'the form of [the] organization' was specifically 'changed to that of an association,' under its present name. The trustees were authorized to surrender the stock of the manufacturing corporation, to acquire instead its entire property, and to carry on the business theretofore conducted by it, or any substantially similar business. The title to all the trust property 'and the right to conduct all the business' were vested exclusively in the trustees, who were authorized to designate from their number a president and other officers and to prescribe their duties. The certificate holders were authorized, at any meeting, to remove any trustee and elect trustees to fill any vacancies. Since the modification of the trust agreement the trustees have carried on the manufacturing business in substantially the same manner as it was formerly conducted by the corporation.

To determine rightly the scope and effect of the Revenue Acts now in question it is necessary to bear in mind the previous legislation on the same subject, and the interpretation given it by the decisions of this Court.

Section 38 of the Act of August 5, 1909, c. 6, 36 Stat. 11, 12—commonly called the Corporation Tax Law—provided:

'That every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States or of any State or Territory, * * * or now or hereafter organized under the laws of any foreign country and engaged in business in any State or Territory of the United States * * * shall be subject to pay annually a special excise tax with respect to the carrying on or doing business * * * equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources; * * * or if organized under the laws of any foreign country, * * * from business transacted and capital invested within the United States and its Territories. * * *'5

In Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312 (1911), the court, in sustaining the constitutionality of this section of the Act, said that the domestic corporations, joint stock companies or associations, as well as the insurance companies, 'must be such as are now or hereafter organized under the laws of the United States or of any State or Territory,' and that the tax was imposed 'upon the doing of business with the advantages which inhere in the peculiarities of corporate or joint stock organizations of the character described,' that is, 'upon the exercise of the privilege of doing business in a corporate capacity, as such business is done under authority of state franchises.'

In Eliot v. Freeman, 220 U. S. 178, 185, 31 Sup. Ct. 360, 361, 55 L. Ed. 424(1911), it was held that this excise tax did not apply to two typical Massachusetts trusts. The court said:

'Under the terms of the Corporation Tax Law, corporations and joint stock associations must be such as are 'now or hereafter organized under the laws of the United States or of any State or Territory. * * *' The language * * * 'now or hereafter organized under the laws of the United States,' etc., imports an organization deriving power from statutory enactment. * * * The description of the corporation or joint stock association as one organized under the laws of a State at once suggests that they are such as are the creation of statutory law, from which they derive their powers and are qualified to carry on their operations. * * * Entertaining the view that it was the intention of Congress to embrace within the corporation tax statute only such corporations and joint stock associations as are organized under some statute, or derive from that source some quality or benefit not existing at the common law, we are of opinion that the real estate trusts involved in these two cases are not...

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