Porter Property Trustees, Ltd. v. Commissioner of Internal Revenue, Docket No. 95762.
| Decision Date | 05 September 1940 |
| Docket Number | Docket No. 95762. |
| Parties | J. HOWARD PORTER, JOHN C. PORTER AND PAUL D. PORTER, TRUSTEES, IDENTIFIED UNDER THE TRADE NAME PORTER PROPERTY TRUSTEES, LTD., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Benjamin W. Henderson, Esq., and Wilford G. Edling, C. P. A., for the petitioners.
John H. Pigg, Esq., for the respondent.
This case involves a deficiency in taxes of the Porter Property Trustees, Ltd. (hereinafter referred to as the petitioner), resulting from respondent's determination for the year 1935, as follows:
Income tax _______________________________________________ $1,458.59
Excess profits tax _______________________________________ 653.06
Surtax on personal holding company _______________________ 3,134.66
Penalty of 25 percent for failure to file a personal holding
company return _________________________________________ 783.67
The petitioner raised four assignments of error in its petition, but as no evidence was presented on the claim for a deduction of legal fees, the claim having been denied by the respondent in his answer, we must assume that this claim has been abandoned. The principal question is whether petitioner is taxable as an association under section 801 (a) (2) of the Revenue Act of 1934, as respondent contends, or as a trust; and secondary questions, are whether petitioner derived income from sale contracts during the year 1935 in the amount of $1,627.10, as respondent determined, and whether it is entitled to a deduction, denied by respondent, for its payment of $2,202.50 in that year because of an assessment levied against the stockholders of a certain defunct bank.
The facts were stipulated in part and in part developed from testimony at the hearing.
FINDINGS OF FACT.
J. Howard Porter, John C. Porter, and Paul D. Porter, are the trustees of the petitioner, Porter Property Trustees, Ltd., an express trust, created by a written instrument dated February 28, 1935. Before February 28, 1935, the entire outstanding capital stock of the James Porter Investment Co., a Delaware corporation, consisting of 2,808 shares, was owned and held by James Porter and Katie E. Porter, husband and wife, and members of their family. The following table shows the interest and relationship of each stockholder:
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Name | Relationship | Shares held
-------------------------------|-----------------------------------|------------
James Porter _________________ | Father __________________________ | 685
Katie E. Porter ______________ | Mother __________________________ | 1,858
Paul D. Porter _______________ | Son _____________________________ | 50
B. F. Shumway ________________ | Nominee for father ______________ | 65
W. N. Dennison _______________ | Husband of daughter (Elizabeth) _ | 50
Rebecca P. Wells _____________ | Daughter ________________________ | 50
James Howard Porter __________ | Son _____________________________ | 50
John C. Porter _______________ | Son _____________________________ | 0
Elizabeth P. Dennison ________ | Daughter ________________________ | 0
| |____________
Total ___________________|__________________________________ | 2,808
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On February 28, 1935, and for some time before then, the James Porter Investment Co. was the owner of certain personal property, and also held in fee simple certain land, mainly agricultural and unimproved, and situate in Kern County and San Luis Obispo County, California, Nobles County, Minnesota, and Grundy County, Iowa. This land was acquired by the James Porter Investment Co. at the time of its incorporation in 1930, from James Porter and Katie E. Porter in exchange for its capital stock. Such of its personal property as was not acquired by that company in a like manner, and at the same time, was acquired by the company in the course of its ordinary business activities afterwards but before February 28, 1935. Certain of these lands had been improved before and during the period held by the company, and farming operations were carried on by leaseholders for profit on part of these lands while they were owned and held by the company.
On February 28, 1935, James Porter, Katie E. Porter, Paul D. Porter, F. B. Shumway, W. M. Dennison, and James Howard Porter, as grantors, and James Howard Porter, Paul D. Porter, and John C. Porter, as trustees (hereinafter sometimes referred to as the trustees), executed and entered into a written "Conveyance and Contract" agreement, incorporated herein by reference, the relevant parts of which are later set out, by which the trust involved herein, known as the Porter Property Trustees, Ltd., was created. By the terms of the trust instrument, the trustees were selected and appointed by the grantors, and were therein designated and described as the board of trustees and were authorized to act under and use the trade name of Porter Property Trustees, Ltd. There were transferred and conveyed to the trustees at the time of creation of the trust 1,723 shares of the capital stock of the James Porter Investment Co., which constituted all the shares shown in the table above, except the 685 shares in the name of James Porter and 400 of the 1,858 shares in the name of Katie E. Porter. On the day of their constitution as such, February 28, 1935, the trustees, acting in their collective capacity, acquired from James Porter the 685 shares noted above in consideration for their assumption of his debt in the amount of $52,000.
The interests of the respective trust beneficiaries are described in the trust instrument as "expectancy fractions." Article 15 of the trust instrument provides as follows:
ART. 15. REGISTRATION & DORMANT FRACTIONS:
Expectancy Fractions under this administration shall at first be allotted in the records of the Board under instructions delivered to the Board by James Howard Porter. Should fractions appear dormant thereby, while held dormant they shall not be reckoned with when apportioning in distributions, such being computed solely by or upon the fractions registered as to beneficiaries at time of making each distribution. Dormant fractions, their usefulness being contingent upon possible future conveniences, remain subject to the discretion of the Trustees.
Pursuant to the provisions of "ART. 15" of the trust instrument, under instructions from James Howard Porter, expectancy fractions were allotted in the records of the board of trustees as follows:
Name Expectancy fractions
Paul D. Porter _______________________________________________ 290/1000
John C. Porter _______________________________________________ 290/1000
Rebecca P. Wells _____________________________________________ 65/1000
Elizabeth P. Dennison ________________________________________ 65/1000
James Howard Porter __________________________________________ 290/1000
_________
Total ____________________________________________________ 1000/1000
Immediately after the trustees had acquired the 2,408 shares of the James Porter Investment Co. on February 28, 1935, as set forth above, they exchanged them with that company for all its assets (except one parcel of real estate situate in Grundy County, Iowa, known as the Porter Homestead), subject to its then outstanding liabilities. Shortly thereafter the company was liquidated and dissolved.
Included among the assets of the company thus acquired were certain land sale contracts which provided for future payments by the purchasers, some of them not becoming due and payable until after their acquisition by the trustees. At this time the company was treating with the Standard Oil Co. for the lease by the latter of a part of these lands situate in Kern County, California. The negotiators had by then reached an agreement for the execution of a lease which was to be executed by the James Porter Investment Co. for the use and benefit of the Porter Property Trustees, Ltd., and then to be assigned to the trustees. This was accordingly done. Under its terms the lessee was obligated to explore, develop, and drill certain wells on the leased land for oil or gas of commercial quality and in commercial quantity. This was done but no oil or gas was found, and the lessee quitclaimed its interest to the trust in the year 1938. Under the terms of this lease agreement certain oil and gas royalty interests were retained by the lessor, in addition to the bonus paid by the lessee for the execution of the lease.
The trust instrument provided for the following additional matters: (1) The trustees were given the power to sell and to convey and deliver any, all, or such of the trust properties as they might see fit, in their discretion; (2) the trustees were authorized to add to their number and to choose their successors, provided that the number of trustees should at no time exceed five; (3) the trustees and/or their successors were to hold the trust properties throughout the existence of the trust; (4) the trust was to continue indefinitely for any lawful term; (5) the trustees were authorized to act together, informally over their individual signatures, or collectively, under the name of Porter Property Trustees, Ltd., through duly authorized officers of their board; (6) the trustees, acting as the board of trustees, were authorized to delegate to, by proper resolution, any member or members of the board the necessary authority to transact any and all business of the trust, including the execution of deeds, conveyances, and...
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