Tyson v. Commissioner of Internal Revenue

• Decision Date: 06 February 1934
• Docket Number: No. 4944-4947.,4944-4947.
• Citation: 68 F.2d 584
• Parties: TYSON et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

68 F.2d 584 (1933)

TYSON et al. v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 4944-4947.

Circuit Court of Appeals, Seventh Circuit.

December 15, 1933.

Rehearing Denied February 6, 1934.

KixMiller, Baar & Hoffman, of Chicago, Ill. (Arnold R. Baar and Arthur R. Foss, both of Chicago, Ill., of counsel), for petitioners.

Pat Malloy, Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to Atty. Gen. (E. Barrett Prettyman, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., C. R. Marshall, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., of counsel), for respondent.

Before ALSCHULER, SPARKS, and FITZHENRY, Circuit Judges.

SPARKS, Circuit Judge.

Petitioners who are the trustees of the Chicago Real Estate Trust filed their income tax returns, as fiduciaries, for the five fiscal years ending June 30, 1925, to 1929. The Commissioner found that they were taxable as an association under the provisions of section 2 (a) (2) of the Revenue Acts of 1924 and 1926, 26 USCA § 1262 (a) (2), and section 701 (a) (2), Revenue Act of 1928, 26 USCA § 2701 (a) (2), and Treasury Regulations 65, arts. 1502 and 1504, relating to the Revenue Act of 1924, and similar provisions relating to the Revenue Acts of 1926 and 1928, promulgated in accordance with section 1001 of the Revenue Act of 1924 (26 USCA § 1245 and note) and an identical provision of the Revenue Act of 1926, § 1101 (26 USCA § 1245 and note) and Revenue Act 1928 § 62 (26 USCA § 2062). These provisions will be set forth hereinafter. The Board of Tax Appeals sustained the deficiencies asserted by the Commissioner, and from its decisions these appeals are had. The principal question involved is, therefore, whether petitioners constitute a trust or an association according to the definitions above referred to.

There have been a number of cases involving this same question of whether a particular entity is taxable as a trust or as an association.¹ The trend of these decisions seems to be to look to the actual activities of the entity first, rather than to its form or possible powers. The first question then is, were the petitioners associated together for the purpose of carrying on a business enterprise, or were they merely holding property for the collection of the income and its distribution among the beneficiaries of the trust?

In 1925, the petitioners owned three buildings, all under long term net rental leases. Construction of one of them had been completed during the first of the taxable years. The trustees had purchased the land on which this was erected already subject to a contract for a lease which had specified the type of building and the main provisions of the rental. The architect's plans for the building had already been drawn and petitioners had adopted those plans practically without change. The entire cost of land and building was about $2,500,000, or approximately equal to the total amount of the trust receipts outstanding which had been $2,500,000 at least as far back as 1902. At the close of the last taxable year, June 30, 1929, the total value of the real estate holdings was $3,815,630.57, and those holdings were entirely free from encumbrance.

During the taxable years petitioners had owned securities valued at $520,292, but these had been sold to pay off the mortgage on their last building. These securities had been purchased for the purpose of investing the depreciation and contingency funds which the trustees were authorized to set aside. The evidence showed that during the thirty-nine years of their organization the trustees had owned five other pieces of real estate in addition to the three owned during the taxable years. These five pieces had been disposed of prior to the taxable years.

The case of Tyson et al. v. Commissioner, 54 F.(2d) 29, 31, was decided by this court shortly before the decisions were handed down by the Board in these cases, and the Board discussed it at length in its opinion. In that case the trustees owned a single piece of property which was already subject to a long term net rental lease at the time they purchased it. No other property was ever acquired by them although the declaration of trust under which they were organized permitted other activities. Upon the sale of their single piece of property their trust was dissolved. This court in holding that the trustees should be taxed as fiduciaries rather than as an association stated, "In short, the investment was one which provided with reasonable certainty for a sure and fixed income without either care or supervision." (Italics ours.) Using this as a test, we think it can not be said that petitioners in the case at bar are simple fiduciaries. It seems obvious that the duties connected with their investments involved considerable care and supervision. When they found no building suitable for their purposes they put one up. They determined what part of the gross income up to ten per cent. of it should be withheld from distribution for depreciation and contingency funds and then invested those funds. They exercised the authority granted by the trust agreement to dispose of properties, selling five during the period of their existence. They placed a mortgage on their last acquired piece of property, paying it off within the five taxable years here involved. Although all the buildings were leased under net rental arrangements whereby the tenants paid all the expenses of maintenance, insurance, taxes and special assessments, nevertheless there were expenses incurred amounting to an average of about $20,000 a year in addition to legal and miscellaneous expenses of over $2,000 a year in each of the taxable years for which balance sheets and income statements were put in evidence. These are rather substantial expenses for an entity which, in order to bring itself within the definition of a trust for taxing purposes, must be practically self-operating, "without care or supervision." They employed as their agent an experienced real estate management firm of which one of their number was a member. That firm collected the rents, depositing them in the trustees' bank account and accounting to them. It also saw to it that taxes were paid by the lessees. With all these facts present, surely it cannot be said that the trustees were a mere conduit through which the income from the properties passed for distribution to the receipt holders practically without activity on their part. We therefore conclude that the trustees were engaged in sufficient activities to warrant our holding that they were carrying on a business enterprise, hence taxable as an association.

Petitioners, however, argue that even if it were held that they were carrying on a business, they would be properly subject to tax as a corporation only if in addition they were substantially similar to a corporation in other essential characteristics of form and procedure.

Petitioners operated under an Agreement and Declaration of Trust drawn up in 1890, the significant provisions of which are set forth marginally as amended in 1904.²

This appears to provide for the organization of a typical Massachusetts trust, probably chosen as to form for the reason that at that time corporations were not able to engage in the real estate business in Illinois because of a statute which greatly restricted their right to hold title to real estate. Hence the fact that the entity called itself a trust from the time of its organization is of little or no importance in the present discussion. While the taxing statute does not in terms refer to this type of trust, it does define corporations to include associations. Section 2 (a) (2) of Revenue Acts of 1924 and 1926, 26 USCA § 1262 (a) (2); section 701 (a) (2), Revenue Act of 1928, 26 USCA § 2701 (a) (2). A similar statute relating to the excise tax has been held to be applicable to business trusts provided they are organized in quasi-corporate form for the conduct of a business enterprise. Hecht v. Malley, 265 U. S. 144, 44 S. Ct. 462, 68 L. Ed. 949. The statute also gives the Commissioner authority with the approval of the Secretary of the Treasury to prescribe all needful rules and regulations for the enforcement of the Act. Section 1001 of the Revenue Act of 1924, and section 1101 of the Revenue Act of 1926 (26 USCA § 1245 and note), and section 62 of the Revenue Act of 1928 (26 USCA § 2062). Under this authority, the Commissioner promulgated articles 1502 and 1504 of Regulations 65³ and 69 (with amendments), articles 1312 and 1314, Regulations 74, including common law trusts in the associations to be taxed as corporations, provided they were doing business in an organized capacity. Such regulation, being reasonable and appropriate for the enforcement of the provisions of the taxing act is binding and has the effect of law. United States v. Morehead, 243 U. S. 607, 37 S. Ct. 458, 61 L. Ed. 926. Moreover, since this regulation was promulgated, Congress has re-enacted the statute without material change, thereby approving in effect the administrative construction placed upon it. Brewster v. Gage, 280 U. S. 327, 50 S. Ct. 115, 70 L. Ed. 457; National Lead Company v. United States, 252 U. S. 140, 40 S. Ct. 237, 64 L. Ed. 496; Burnet v. Brooks, 288 U. S. 378, 53 S. Ct. 457, 77 L. Ed. 844, 86 A. L. R. 747.

That the organization of the trustees was of a very loose and informal character we think is not sufficient to take them out of the classification contemplated by the administrative regulations cited. Even though no formal meetings of the trustees were held, they had adopted a regular practice for the administration of their trust. At regular intervals the trustees living in Chicago would go over the accounts which were kept in the offices of their agent, and determine what dividends should be paid to the receipt holders. They would then prepare a dividend resolution and send it to the trustees who lived in Boston for their approval. The various...