Nee v. Main Street Bank

• Decision Date: 06 June 1949
• Docket Number: No. 13746.,13746.
• Citation: 174 F.2d 425
• Parties: NEE, Collector of Internal Revenue, v. MAIN STREET BANK et al.
• Court: U.S. Court of Appeals — Eighth Circuit

174 F.2d 425 (1949)

NEE, Collector of Internal Revenue, v. MAIN STREET BANK et al.

No. 13746.

United States Court of Appeals Eighth Circuit.

May 5, 1949.

Rehearing Denied June 6, 1949.

COPYRIGHT MATERIAL OMITTED

Louise Foster, Sp. Asst. to the Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., George A. Stinson and Ellis N. Slack, Sp. Assts. to the Atty. Gen., and Sam M. Wear, U. S. Atty. and Sam O. Hargus, Asst. U. S. Atty., both of Kansas City, Mo., on the brief), for appellant.

John H. McEvers, of Kansas City, Mo. (Reece A. Gardner, G. Lee Burns and Stinson, Mag, Thomson, McEvers & Fizzell, all of Kansas City, Mo., on the brief), for appellees.

Before GARDNER, Chief Judge, and JOHNSEN and COLLET, Circuit Judges.

JOHNSEN, Circuit Judge.

The questions are whether a certain trust was liable (1) for income taxes as an association, 26 U.S.C.A. § 3797(a) (3), and (2) for capital stock taxes as an association doing business, 26 U.S.C.A. § 1200(a).

The income taxes were for the calendar years 1939 to 1941 and the capital stock taxes for the fiscal years 1939 to 1943. The trustees had made fiduciary returns during these years, under 26 U.S.C.A. § 142, as for an ordinary trust. The Commissioner of Internal Revenue made assessments against the trust, of the association income taxes and capital stock taxes involved, in 1944. The trust had by that time been terminated and its assets conveyed to the beneficiaries. The beneficiaries paid the assessments made against the trust and duly instituted suit in the District Court for their recovery from the Collector. On a trial without a jury, the court gave judgment for the beneficiaries, 75 F.Supp. 597, and the Collector has appealed.

The trust agreement involved had been made in 1936 and grew out of the previous taking of title in trust to a ranch in Lea County, New Mexico, through mortgage foreclosure. The mortgage had been given in 1921 by some parties named Nymeyer, to secure a number of promissory notes, aggregating $33,341. The payee of the notes sold them severally, through an investment broker, to five banks. Upon a default in 1922, the banks had joined in executing a declaration of trust, constituting H. T. Mattern, an officer of one of the banks, as trustee, with title to all of the indebtedness and security rights, and with direction to collect or foreclose — "said Trustee to take title to any of said real estate or other property and sell the same upon credit or for cash, and apply all the proceeds of said sales or other cash received by him pro rata upon said notes."

Mattern, as trustee, took the title to the property through foreclosure in 1924. The ranch was primarily grazing land and there was no market for it at the time. All that Mattern was able to sell was one small piece of land out of the tract. The remainder he continued to hold until his death in 1935. Between 1928 and 1933, however, he and the beneficiaries had jointly executed oil and gas leases upon most of the property in favor of the Gypsy Oil Company, which thereafter assigned its rights to the Gulf Oil Corporation. These leases ran, subject to drilling operations being commenced by a certain date, or delay rentals being paid, to September, 1938, "and as long thereafter as oil, gas, or casinghead gas, or any of them is produced."

Up to the time of Mattern's death, there had appeared to be no prospect of salvaging the amounts of the beneficiaries' investments. Two of the banks had lifted the trust interests out of their assets and transferred them to their affiliated securities companies. A third bank had gone into receivership and its interest had come into the hands of an individual. In 1936, the holder of the oil and gas leases began to conduct drilling operations on the property, and there came to be talk and hopes of finding oil. In June of that year, approximately six months after Mattern's death, the two banks, the two securities companies, and the individual, then having the interests in the property, executed a new declaration of trust (which is the one here involved), with themselves as beneficiaries, and with three persons as trustees, "in the place and stead of said H. T. Mattern, with respect to said real estate and leases formerly held by the said H. T. Mattern as trustee."

The terms of the agreement varied materially from those of the Mattern trust. The trustees were given no power to sell and liquidate the property. It was provided that the three trustees were to "hold title" to the property (whose legal description was set out and the proportionate interests of the beneficiaries in which were specified) as trustees for the settlors; that the trustees were to have "full power and authority to hold, manage, lease and handle said property or any part thereof, including the right to execute leases for oil, gas and mineral rights or for grazing purposes on said property or any part thereof, and to transact any and all business incident thereto, including the right to collect all income therefrom and disburse the same;" that the trustees should receive no compensation for their services but were entitled to make payment of necessary expenses in handling the property; that the trustees were not to be "personally liable in any manner whatsoever in the execution of this trust, except for misconduct that amounts to bad faith or gross negligence;" that, in case of any disagreement among them, the acts of any two trustees "shall be as valid and binding as if all of said Trustees had joined therein;" that in the event of the death, refusal, inability or failure of a trustee to serve at any time, a majority of the beneficiaries, "in the amounts of their respective interests," as set out in the agreement, should have the right to appoint a successor trustee or a trustee to succeed any successor trustee; and that any owner or owners of an interest in the property equal to 25 per cent of the whole might terminate the trust agreement at any time by filing in the office of the Recorder of Lea County, New Mexico, an instrument "declaring their intention to cancel the same" and mailing a copy thereof to each of the other beneficiaries.

The stipulation of facts contained in the record shows that the lessee's drilling operations resulted in a discovery of oil on the property almost immediately after the trust agreement was executed and that payment of royalties began to be made to the trustees in September, 1936. Such royalty payments continued to be made down to the revocation and termination of the trust in August, 1943. The trustees received during this period in royalties over $200,000. The trial court found that as a matter of fact, however, the trustees had done practically nothing during their trusteeship, except to receive and endorse the oil checks and make distribution of the proceeds to the beneficiaries. The evidence showed that, outside of making payment of taxes, etc., their other acts had consisted in the executing of a grazing lease on the land, a water lease to the oil company, a water-lease release, a pipe-line easement, and an easement to the State for a right of way. All of this was done in an informal manner, by one trustee simply calling the others on the telephone, explaining the matter to each of them orally, and circulating such instrument as was to be executed, among them by mail, for signature.

Did the trial court err in its view that the trust was not a taxable association — either as a matter of law from the face of the instrument, or in its finding and conclusion from the evidence, under the test in United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746, that, in actions tried without a jury, "A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed?"

To permit a trust to be classified as an association for income tax purposes, it must (1) be initially created, or have been thereafter utilized during the tax period involved, as a vehicle for carrying on a business enterprise, and it must (2) have characteristics, under its written structure or in its adopted mode of operation, resemblant of a corporate organization. Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263. Both of these features are requisites in making the income of a trust taxable as that of an association. The first, however, is the substantive element, and the second is simply one of supportive but not invariable form. Helvering v. Washburn, 8 Cir., 99 F.2d 478, 481.

On the first feature, a trust cannot ordinarily be regarded as having been created for an enterprise purpose, or as having thereafter become converted into an enterprise, if its sole or dominant object and activity are a liquidation of the trust estate or a holding to preserve the trust property. Fidelity-Bankers Trust Co. v. Helvering, 72 App.D.C. 1, 113 F.2d 14, 19, and cases cited. "That transactions of a business character are necessary incidentally to (a liquidation or preservation of particular property placed in trust for that purpose) does not, without more, convert a trust having such primary objectives into a `business enterprise'." "The ultimate question is whether the trust performs some nonbusiness function of this sort or operates a business enterprise as a going concern." Id., 113 F.2d at page 18.

The specification in a trust instrument of powers which normally involve the doing only of such business acts as traditionally and generally have been recognized as being incidents in the administration of an ordinary trust of the property may not therefore be given an artificial significance by attempting to read such powers as legal abstractions. But powers enumerated in the trust instrument, of a type or scope beyond the usual incidents in administering an ordinary trust, may properly be read abstractly and accorded...