Schochet v. Commissioner

• Decision Date: 26 July 1982
• Docket Number: Docket No. 5493-79.
• Citation: 44 TCM (CCH) 556,1982 TC Memo 416
• Parties: Frank and Freda Schochet, Trustees of Insty-Prints, Inc. National Advertising Fund Trust v. Commissioner.
• Court: U.S. Tax Court

44 TCM (CCH) 556

1982 TC Memo 416

T.C. Memo. 1982-416.

Frank and Freda Schochet, Trustees of Insty-Prints, Inc. National Advertising Fund Trust v. Commissioner.

Docket No. 5493-79.

United States Tax Court.

Filed July 26, 1982.

Robert L. Lowe, 1610 IDS Center, Minneapolis, Minn., for the petitioners. Dale L. Newland, for the respondent.

Memorandum Findings of Fact and Opinion

IRWIN, Judge:

Respondent has determined deficiencies in petitioners' Federal income tax as follows:

                  Taxable Year                  Deficiency
                      1969 ...................  $1,551.661
                      1970 ...................   3,593.121
                      1971 ...................   3,316.43
                      1972 ...................   8,529.79
                      1973 ...................   2,291.98
                      1974 ...................   4,223.45
                      1975 ...................   1,235.38
                

The issues for decision are whether amounts received by petitioner from the franchisees of Insty-Prints, Inc. to be expended for advertising and promotion are income and whether interest earned on such amounts is income.

Findings of Fact

Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Insty-Prints National Advertising Fund Trust (for convenience referred to hereafter as petitioner) is a trust² formed under the laws of Minnesota. Petitioner's trustees are Frank and Freda Schochet. Petitioner's principal office was in Minneapolis, Minnesota, at the time the petition was filed herein.

Insty-Prints, Inc. (thereafter referred to as Insty-Prints) is a Minnesota corporation engaged in the business of franchising instant printing or photocopying stores. Frank Schochet is the president of Insty-Prints. Frank and Freda Schochet own 65 percent of the common stock of Insty-Prints.

Insty-Prints sold its first franchise sometime around October 1966. Under the typical Insty-Prints franchise agreement a franchise is granted covering a limited geographic area for 10 years (with an automatic 10-year renewal period unless notification of nonrenewal is made by either party) which allows the franchise the right to use the tradename "Insty-Prints" and conduct an Insty-Prints business at a single location within the franchise area. The franchisor, Insty-Prints, is obligated to provide specified initial advice and training in the conduct of an Insty-Prints shop and specific continuing services to each franchisee. The franchisee is required to adopt and maintain certain business procedures and conduct a high-quality shop in accordance with Insty-Prints' standards. Insty-Prints receives three cents for each dollar of gross sales of the franchisee as a royalty.

Article VII of the franchise agreement provides that any advertising done by a franchisee must be approved by Insty-Prints. Each franchisee is required to maintain and expand a specified "local advertising budget." In addition, subparagraph (2)(c) of Article VII provides:³

(c) No payment to the Insty-Prints national advertising fund need be made by the Franchisee during the first year the Franchisee opens, owns, and operates only one Insty-Prints licensed shop. Thereafter, Franchisee agrees to remit each month to the Franchisor or advertising agency designated by the Franchisor two percent (2%) of the previous months' sic gross sales on said Insty-Prints franchised shop, to the fund. If Franchisee opens, owns, and operates additional Insty-Prints franchised shops during the period this Franchise Agreement is in effect, Franchisee shall thereupon remit to Franchisor, or advertising agency designated by Franchisor, two percent (2%) of the previous months' sic gross sales on each of the additional Insty-Prints franchised shop units during the period that the Franchise Agreement is in effect. Thereafter, Franchisee need not make any advertising fund payments on the first unit during the balance of the period the Franchise Agreement is in effect. This fund shall be used solely for group advertising and promotion for the benefit of all Franchisees. Expenditures from this fund shall be made with the approval of an advertising committee to be appointed by the Franchisor, which committee shall include three (3) Franchisees. This remittance shall be paid to the "Insty-Prints Advertising Account", and not to Insty-Prints, Inc., and shall be remitted on the 10th day of the month following said gross sales.

The required payments to the Insty-Prints national advertising fund began in 1969 and were received by Insty-Prints, which created a separate ledger account for such payments on its corporate books. Insty-Prints segregated the advertising funds in a separate bank account. The advertising funds continued to be paid to Insty-Prints until 1973.

On November 23, 1973, a trust agreement establishing the Insty-Prints National Advertising Fund (petitioner) was entered into by Insty-Prints, as grantor, and Frank and Freda Schochet, as trustees. The trust agreement provided in pertinent part as follows:

TRUST AGREEMENT ESTABLISHING THE INSTY-PRINTS NATIONAL ADVERTISING TRUST FUND

This Trust Agreement is made by and between INSTY-PRINTS, INC., a Minnesota corporation, as grantor, and FRANK SCHOCHET and FREDA SCHOCHET, as trustee sic.

WHEREAS, the grantor is engaged in the business of granting franchises for the conduct of INSTY-PRINTS businesses to numerous franchisees throughout the United States; and

WHEREAS, pursuant to the terms of the franchise agreements the franchisees are required to pay a percentage of their monthly gross sales to the grantor for the purpose of funding group advertising and promotion of the INSTY-PRINTS business for the benefit of all INSTY-PRINTS franchisees; and

WHEREAS, the grantor desires to establish a trust for the purpose of receiving, investing, administering, disbursing and accounting for said funds and other sums that may from time to time be allocated for such purposes by the grantor from its own funds or other sources.

NOW, THEREFORE, the parties hereto hereby establish the INSTY-PRINTS NATIONAL ADVERTISING TRUST FUND, herein referred to as the "trust", upon the following terms and conditions:

1. Sources of Trust Funds

The grantor has transferred to the trust the sum of $83,641.40 the receipt of which is hereby acknowledged by the trustee, which sum constitutes the balance in the INSTY-PRINTS, INC. advertising account as of November 23, 1973. The grantor shall transfer to the trust all funds received from its franchisees for group advertising and promotion of the INSTY-PRINTS business. The grantor may from time to time in its sole discretion allocate sums from its own funds or obtain sums from other sources for group advertising and promotion of the INSTY-PRINTS business and shall transfer all such sums to the trust. The trustee shall accept and add to the trust all such sums.

2. Disbursement of Trust Funds

The trustee shall disburse sums for group advertising and promotion of the INSTY-PRINTS business in accordance with instructions received by trustee from time to time from the INSTY-PRINTS Advertising Committee (the "committee").⁴ The trustee shall have no duty to inquire as to the purposes of any disbursement nor any responsibility for disbursements made in accordance with instructions of the committee and may, without liability to the grantor or any beneficiary of the trust, rely on the instructions of the committee.

3. Trustee

* * *

(n) Accounts, Reimbursement and Compensation of Trustee

The trustee shall submit an account of its receipts and disbursements at least annually to the grantor. If the grantor does not object in writing to the account of the trustee within 30 days after receipt thereof, such account shall be deemed accepted as prepared by the trustee and thereafter binding upon the grantor and each beneficiary of the trust and the trustee shall to the same extent as if such account were approved by a court of competent jurisdiction be deemed discharged and released of all liability to the grantor, the trust and the beneficiaries thereof with respect to the period of such account. If the trustee shall be compelled for any reason and at any time to pay any tax or penalty with respect to the trust, the trustee shall be reimbursed therefor from the trust, and if the trust is insufficient or terminated, the trustee shall be reimbursed therefor by the grantor. Before making any distribution of either income or principal the trustee may require a refunding agreement or may withhold distribution pending determination of any tax liability. The trustee shall be reimbursed for all reasonable expenses incurred in the administration of a trust. The trustees named herein shall serve without compensation. Additional and successor trustees that are not employees of the grantor or beneficiaries of the trust (or owners or employees of beneficiaries) shall receive fair compensation for their services.

4. Investment Powers

The trustee shall have the following powers relative to the investment and reinvestment of the trust property:

(a) Power to Invest in Various Types of Assets

To invest and reinvest part or all of the trust property in any one or more of the following types of investments deemed by the trustee to be appropriate for the investment of the trust property: (1) common stocks, (2) investment company shares, (3) bonds, (4) mortgages, (5) notes, and (6) other similar property;

(b) Powers Relative to Corporate Securities

To vote in person or by general or limited proxy, or refrain from voting, any corporate securities for any purpose; to purchase, exercise, waive or sell any subscription or conversion rights and any stock options, warrants or similar rights; to initiate, consent to, participate in, oppose or take any other action with respect to any voting trusts, reorganizations, consolidations, mergers, recapitalizations, foreclosures, liquidations and dissolutions and in connection therewith to deposit securities and

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