Main-Hammond Land Trust v. Commissioner of Int. Rev.

• Decision Date: 11 December 1952
• Docket Number: No. 11529.,11529.
• Parties: MAIN-HAMMOND LAND TRUST et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

200 F.2d 308 (1952)

MAIN-HAMMOND LAND TRUST et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11529.

United States Court of Appeals Sixth Circuit.

December 11, 1952.

Leo Weinberger, Cincinnati, Ohio, Leo Weinberger and Jerome Frank, Cincinnati, Ohio, on the brief, for petitioner.

Walter Akerman, Jr., Washington, D. C., Ellis N. Slack and Walter Akerman, Jr., Washington, D. C., on the brief, for respondent.

Before HICKS, ALLEN and McALLISTER, Circuit Judges.

ALLEN, Circuit Judge.

The sole question presented in this petition to review is whether the Main-Hammond Land Trust, petitioner, is a business trust created and operated for profit on behalf of its beneficiaries. The Commissioner determined that Main-Hammond was an association taxable as a corporation within the purview of § 3797, Internal Revenue Code, 26 U.S.C.A. § 3797, which provides that "The term `corporation' includes associations * * *" and determined an income tax deficiency of $1,940.77 for the taxable year ended June 30, 1949. The petition to review attacks the decision of the Tax Court of the United States sustaining the Commissioner's determination. The facts are stipulated; no oral testimony was introduced. The pertinent findings of fact of the Tax Court are stated in the margin.¹

Petitioner contends that within the holding of this court in Cleveland Trust Company v. Commissioner, 6 Cir., 115 F.2d 481, the Main-Hammond Land Trust was created for the purpose of financing loans and hence was the ordinary trust, not taxable as an association. The Government urges that the case is similar to, and controlled by, the holding of this court in Sherman v. Commissioner, 6 Cir., 146 F.2d 219, which determined that a land trust displaying many features of the trust in the instant case was an association taxable as a corporation. The Tax Court grounded its opinion squarely upon the holding in the Sherman case.

The essential distinctions between the ordinary trust and a trust which is an association and thus, under § 3797, Internal Revenue Code, taxable as a corporation, have been described by the Supreme Court in Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 295, 80 L.Ed. 263. In that case the trust involved was held to be an association. The Supreme Court pointed out that an ordinary trust does not constitute an enterprise for the transaction of business. In what are called "business trusts" the Supreme Court stated: "the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains." To constitute an association taxable as a corporation the trust must be an enterprise for the doing of business. It must also have substantial quasi corporate powers and attributes. Here it is undisputed that the trust exhibits these characteristics. It provides for the continuity of the trust undisturbed by the death of a certificate holder, for trust certificates transferable after the manner of stock transfer, for centralization of control and management, and for the limitation of liability to the trust assets.

The crucial question is whether the trust was organized for a business purpose. In solving this question the underlying purpose for the creation of the trust must be considered. Helvering v. Coleman-Gilbert, 296 U.S. 369, 56 S.Ct. 285, 80 L. Ed. 278. In that case the Supreme Court declared, 296 U.S. at page 374, 56 S.Ct. at page 287: "The parties are not at liberty to say that their purpose was other or narrower than that which they formally set forth in the instrument under which their activities were conducted." The circumstance that only one piece of property was involved is immaterial. Swanson v. Commissioner, 296 U.S. 362, 365, 56 S.Ct. 283, 80 L.Ed. 273; Title Insurance & Trust Company v. Commissioner, 9 Cir., 100 F. 2d 482, 485. The fact that in the taxable year the trust activities were confined to the collection and distribution of rents, the payment of taxes, bookkeeping and other incidental duties is also immaterial. Title Insurance & Trust Company v. Commissioner, supra, 100 F.2d 485; Porter v. Commissioner, 9 Cir., 130 F.2d 276, 280; Sherman v. Commissioner, supra. The fact that the land was deeded to the trustee subject to a perpetual lease does not affect the question. A long-term lease existed upon the trust property involved in Marshall's Heirs v. Commissioner, 3 Cir., 111 F.2d 935. The trust was held to be taxable as an association.

Here the Tax Court found that the central motive for the establishing of the trust was the hope of realizing profit. If this finding of fact is firmly grounded in the evidence it binds this court. Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 607, 68 S.Ct. 715, 92 L.Ed. 898.

The settlor was president of a company which was a licensed securities broker. It is stipulated that the settlor had previously bought and resold tracts of real estate through the medium of the sale of fractional interests similar to those used in this case. He acquired the trust property here involved for resale. When the trust was created the settlor paid off certain loans and offered the balance of the certificates for sale through his brokerage house. The certificate holders or beneficiaries had no interest in the preservation of the particular property, but only in the profit on their investment. In this connection the trustee was authorized by the trust agreement to purchase outstanding certificates at private sale or in the open market, out of income. Such purchases would enhance the income rights of certificate holders for they would increase the right of each certificate holder to future trust income. If the trustee purchased the certificates at less than their par value, the income rights of certificate holders would be correspondingly increased. In event of default on the lease the trustee was authorized to operate the property, which consisted of various parking lots. This in turn involved the possibility of definite operation of a business requiring contracts for and the receipt of rental, thus constituting "an unambiguous business venture". Moline Properties, Inc., v. Commissioner, 319 U.S. 436, 440, 63 S.Ct. 1132, 1134, 87 L.Ed. 1499.

As soon as the Commissioner determined the deficiency based upon his ruling that petitioner was an association rather than an ordinary trust, the beneficiaries terminated the trust, thus demonstrating their understanding that it was neither a real estate financing project nor a project for preservation of the property, but was in fact a business venture.

Treasury Regulations 111, Sections 29.3797-1, 29.3797-2, and 29.3797-3, support the conclusion that the arrangement here constituted the creation of an association in which the trustee held and managed the property with a view to securing income or profit for the beneficiaries.

No purpose would be served by a prolonged discussion of the various cases dealing with this question. They have been extensively reviewed in Sherman v. Commissioner, supra. In that case the trust was created by members of a family and a stronger case than this was presented for holding that the trust was established for the purpose of preserving the particular trust property. In the Sherman case during the taxable year the trustee in fact transacted no business pertaining to the property. As the court there pointed out, citing Cleveland Trust Company v. Commissioner, supra: "The line of separation between trusts and associations is often so vague as to make them almost indistinguishable." 146 F.2d 226. Each case must be adjudged upon its own facts. We think that the instant case is controlled by Title Ins. & Trust Co. v. Commissioner, supra, and by Sherman v. Commissioner, supra, rather than by the rule of Cleveland Trust Co. v. Commissioner, supra. The decision of the Tax Court is affirmed.

Judge HICKS participated in the hearing of this cause but died before the opinion was prepared.

1 On April 5, 1946 Stanley M. Cooper offered to purchase certain property in Cincinnati, Ohio, for a price of $90,000. Cooper made a down payment of $30,000 within thirty days and executed a note for $60,000 and a mortgage for the balance due. To reimburse himself for the $30,000 and the commission which be agreed to pay, Cooper borrowed $35,000 from Mildred J. Bode. A month later Cooper purchased two parcels of real estate adjoining the first parcel for a price of $50,000. He paid the purchase price and borrowed $30,000 from Edith A. Baker and $20,000 from Florence B. Harrell. At the same time he entered into an agreement to...