Trust No. 5833, Security-First Nat. Bank v. Welch

• Decision Date: 07 December 1931
• Docket Number: No. 6582.,6582.
• Parties: TRUST NO. 5833, SECURITY-FIRST NAT. BANK OF LOS ANGELES v. WELCH, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Ninth Circuit

54 F.2d 323 (1931)

TRUST NO. 5833, SECURITY-FIRST NAT. BANK OF LOS ANGELES v. WELCH, Collector of Internal Revenue.

No. 6582.

Circuit Court of Appeals, Ninth Circuit.

December 7, 1931.

Miller, Chevalier, Peeler & Wilson, Melvin D. Wilson, Dana Latham, Gibson, Dunn & Crutcher, and Henry F. Prince, all of Los Angeles, Cal., for appellant.

Samuel W. McNabb, U.S. Atty., Ignatius F. Parker, Asst. U.S. Atty., and Alva C. Baird, Asst. U.S. Atty., all of Los Angeles, Cal. (C.M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D.C., of counsel), for appellee.

Before WILBUR and SAWTELLE, Circuit Judges, and JAMES, District Judge.

WILBUR, Circuit Judge.

This is an appeal from a judgment in favor of the defendant. The facts are stated clearly and briefly by the District Judge in his memorandum opinion, and for that reason we quote therefrom as follows:

"This is an action to compel refund of $4,147.93, representing federal income taxes computed at the prevailing corporate rate for the calendar year 1928. The amount sued for was paid under protest by plaintiff, Security First National Bank of Los Angeles, as trustee, to the defendant collector. The sole question for decision is whether the project or enterprise denominated Trust No. 5833, as it is disclosed by the evidence, is an association within the purview of section 701 (a) (2) of the Revenue Act of 1928, 26 USCA § 2701 (a) (2). The pertinent part of that section reads: `the term "corporation" includes associations, joint-stock companies, and insurance companies.' The defendant collector demanded and collected the tax from plaintiffs upon the ground that it was an association as described in the Revenue Act aforesaid. The plaintiffs contend that such ruling was erroneous and illegal, and that the enterprise under consideration is shown by the evidence herein not to be an association within the aforesaid section, but that it is to be considered solely as a fiduciary for income tax purposes. It is admitted that, if the enterprise is properly classified as an `association,' the amount sued for cannot be recovered by plaintiff herein.

"The following facts have been established: In October, 1924, one Cotton, a real estate operator in Los Angeles, Cal., in association with other persons, undertook to acquire by purchase a tract of approximately 90 acres of land, to improve the same by laying out streets and other ways, to install sidewalks, water, electricity, and other utilities therein, and to subdivide the tract into city lots and to sell them to the public at a substantial profit. The scheme involved an outlay of capital both for the purchase price of the acreage and also to pay for the improvements and subdivision expenses. The land was owned by the Southern California Edison Company, which agreed to sell it to Cotton and his associates for $810,000. The contemplated improvements amounted to approximately $250,000. A written contract of sale of the tract was accordingly entered into by one Farran acting as the agent of the buyers and promoters, Cotton and his associates, and the Southern California Edison Company, the seller. The agreement provided for the payment of $100,000 in cash and the balance of the purchase price within 90 days of the date of the contract. In order to finance the project, a syndicate of some 40 persons was organized. These persons were invited by Cotton and his associates to subscribe and invest various amounts of money in the undertaking ranging from $1,000 to $15,000 each. The purpose of the syndicate as well as the invitation to join therein was to enable the participants to realize a profit upon their investments in the project. The aggregate amount realized from such subscriptions was $250,000. The contract with the Edison Company was assigned to the Security Trust & Savings Bank, predecessor of one of the plaintiffs herein as trustee. Concurrently, the subscribers of the $250,000 paid their money to said trustee. The Security Trust & Savings Bank, as such, advanced the further sum of $400,000 to the project, and took a first lien upon the assets of the enterprise as its security for payment of such loan with interest. An additional sum of $212,500 was advanced by Cotton and an associate, Bryan, and these two took a second mortgage on the assets of the enterprise as security for the payment of their loan, with interest. The moneys thus obtained in accordance with a written instrument denominated as a declaration of trust, Trust No. 5833, were applied on the purchase price of the 90-acre tract of land.

"The declaration of trust under which the project was so launched and carried out is a lengthy document that has been introduced in evidence herein, and that has been carefully considered by the court. I consider it unnecessary to set it forth in extenso. Suffice it to say that it conforms generally to similar instruments common in the realty subdivision activities of Los Angeles, Cal., and is what is popularly known therein as a `real estate subdivision trust.' It was executed by the Security Trust & Savings Bank as trustee, Dean Farran, acting on behalf of Cotton and associates as trustor, and the subscribers or investors of the $250,000 as beneficiaries. It provided a complete, and to some extent a self-executing, scheme for the payment of the purchase price of the property; the payment of the two mortgage loans; the reimbursement of those who had subscribed and invested money therein; the payment of all expenses attendant upon the improvement and subdivision of the tract of land and for the sale of the entire subdivided parcel of real property. It declared that all beneficial interest in the trust is owned by the investors of the $250,000, and that such interest be divided into units of $1,000 each, and that each beneficiary shall be deemed to hold one of such units for each $1,000 that he had paid into the trust or should thereafter pay into it. It provided that, in all dealing with the trustee and the beneficiaries, the trustee shall be bound by the written direction of any three of the board of five beneficiaries termed the `board of syndicate managers,' which board was chosen by the subscribers of the $250,000, and had power to establish the price at which the real property was to be sold by the trustee; to fix the terms of sale; the manner, method, and time of disposition of the proceeds of such sale; the person to whom all money coming into the hands of the trustee under the declaration was to be paid after certain payments rigidly fixed by the declaration of trust had been made; the amount of such payments; to fix the restrictions, covenants, conditions, and reservations under and upon which the property or any part of it shall be sold; the form of deeds and contracts to be executed by the trustee in case of any sales; to fix and determine the manner, method, cost, and improvement of the property; and in all other respects to have the power to bind each and every beneficiary in all dealings with the trustee and with other parties in connection with the subdivision and sale of the property. It provided that no lot is to be sold by the trustee for less than the minimum price thereof fixed by a schedule of minimum prices that was annexed to said declaration and made a part thereof, but, as before stated, it gave to the syndicate managers the power of fixing the prices at which the property of the subdivision might be sold. A real estate firm of Los Angeles was irrevocably constituted the agent of the beneficiaries for the sale of the property for a period of two years from the date of the declaration of trust, but, as just adverted to, the sales agency could sell the real property only upon such price, terms, restrictions, and covenants as were fixed by the board of managers by written direction to the trustee and subject to such conditions. The sales agency could direct the trustee to convey the property with the same force and effect as if such direction had been given by the board of managers' direction. At the expiration of two years, the board of managers were authorized to designate some other agency, if it so desired, for the sale of the trust property.

"The trustee is directed to apply the proceeds of sales to the payment of taxes, costs, charges, and expenses, etc.; to the payment of its own services; to the payment of money loaned the project by the bank, by Cotton, and by others, and to the payment to the subscribers to the amount that they had subscribed to the project and certain additional amounts specifically mentioned and designated in the trust instrument, and, in addition, to pay as directed by the board of managers any further amount of money that would be received by them on account of sales of real property of the trust as directed by the board of syndicate managers.

"The declaration provided that the beneficiaries agreed that they would subdivide and improve the real property as provided in the trust instrument, and that such work of improvement would be installed and completely and fully paid for within two years of the date of such instrument.

"It also provided that the trustee may resign and discharge itself of the trust by a written notice to the board of managers thirty days before such resignation shall take effect, and successor may thereupon be appointed by an instrument in writing executed by the beneficiaries and accepted by the successor trustee. Should the beneficiary fail to make such appointment before the expiration of such thirty-day period, then the trustee may thereupon appoint a temporary successor trustee to fill such vacancy until such successor be appointed by the beneficiaries, and it further provided that any such successor should be vested with all the estates, rights, powers, and duties of its predecessor trustee. It was also stated in the declaration of trust that no sale or transfer of beneficial interests under the trust shall be valid or binding...