Petition for review of decision of the United States Board of Tax Appeals.
Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
Petitioners reported taxable income for the years 1925, 1926, and 1927. The correctness of the taxes assessed thereon is the only question presented to us. Respondent contends that the Zenith Real Estate Trust was taxable as a corporation. Petitioners, on the other hand, argue that it should have been taxed at the rate revenue acts provided for the taxation of a trust. Two small items, penalties for the years 1925 and 1926, amounting to $176.68 and $185.87, were also involved, but the correctness of petitioners' position in reference thereto is now conceded by respondent.
Was the Zenith Real Estate Trust for the purposes of income taxation a corporation or a trust?
The revenue acts provided for different rates of taxation on the income of corporations and trusts. They defined the term "corporation" as follows: "The term 'corporation' includes associations, joint-stock companies, and insurance companies." Section 2(a), Revenue Acts of 1924 and 1926 (26 USCA § 1262(a).
The trust indenture which created the Zenith Real Estate Trust contained provisions below set forth.*fn1
Briefly stated, the testimony showed:
The trustees, who organized the trust, purchased Duluth real estate in July, 1920; the three trustees and a fourth person each contributing $5,000 toward the down payment. Each later contributed $2,500. Subsequently other persons subscribed, to whom trust certificates were issued. The single piece of property purchased was occupied by a Kresge store under a lease which obligated it to pay all taxes, assessments, insurance of all kinds, to keep the building in good repair, and to restore any part destroyed. The trustees held title to the property, but appointed an agent to collect the monthly rentals and see that the tenant complied with its obligations.
The trustees met occasionally to consider the value of the property and its possible disposition, as well as for the declaration of dividends from income. They had no other activities. They had no officers. No meeting of the beneficiaries was ever held, although the principal certificate holders were consulted orally at or about the time the property was sold in 1926. Dividends for each six months were paid out of the income, and the trustees at one time set aside a depreciation fund of $5,000 and invested it in bonds, which bonds were held for about a year. Interest from these bonds and from the bank deposits was the only interest collected. The property, the only real estate ever held, was sold in December, 1926, and the proceeds were distributed among the beneficiaries. The trust was thereupon dissolved. A substantial profit was realized from the sale of the property.
Both counsel cite Hecht v. Malley, 265 U.S. 144, 44 S. Ct. 462, 464, 68 L. Ed. 949, to support their positions. Aside from the fact that it is a Supreme Court decision, we see little reason for the emphasis placed upon this holding. The question there decided is not the one here presented. It is true, the court was there considering a tax (excise), and the taxpayer, as here, was a Massachusetts trust. But here the similarity stops. "Doing business" was the test for the imposition of the excise tax, not the character of the instrumentality that transacted the business. Moreover, to be taxable, the entity was required to be a "corporation, joint-stock company or association, now or hereafter organized in the United States for profit." There was not, as here, two sections of the revenue act to be construed; strued; one covering corporations (including associations), and another covering trusts. Obviously, as the Congress in the revenue acts under consideration dealt with both entities and provided different tax rates for each, it could not have intended the term "association" to have been synonymous with the word "trust," as that term was used by it. Revenue Acts 1924, 1926, § 219(a), 26 USCA § 960 note.
Our question then is, When is a Massachusetts trust an association under these acts, and when is it a trust?
Probably the best test is to be found in the activities of the entity. On could readily conceive of a Massachusetts trust being possessed of powers and so exercising them that for taxation purposes it should be called a corporation. An illustration of this is to be found in Trust No. 5833, Security-First Nat. Bank v. Welch (D.C.) 50 F.2d 613. Likewise, it is easy to conceive of a Massachusetts trust so designed and so purposed as to be considered a trust as that term is used in the revenue acts. For an illustration of this, see Lansdowne Realty Trust v. Commissioner of Internal Revenue (C.C.A.) 50 F.2d 56. It necessarily follows then, and numerous decisions sustain this view, that in determining when a trust is an association courts must look to the substance rather than the form of the entity used to carry on the business. Likewise it must be more influenced by the instrument's activities than the ascertainment of the possible field of its activity. Gardiner v. United States (C.C.A.) 49 F.2d 992; Little Four Oil & Gas Co. v. Lewellyn (C.C.A.) 35 F.2d 149; Lansdowne Realty Trust v. Commissioner (C.C.A.) 50 F.2d 56. This does not mean that we should not look to the articles of agreement which brought the entity into being. An examination of this document will aid a court in construing the activities and in weighing the taxpayer's asserted intention respecting its activities.
In the instant case, the articles of agreement which brought the Zenith Real Estate Trust into existence suggest that the counsel drawing the articles entertained for it somewhat pretentious hopes for its future enlargement. Its witnesses, however, upon the hearing before the Board, said that it was conceived and brought into existence for the single purpose of acquiring a single piece of real estate; that such real estate had been leased for a long period to a responsible lessee; and that the said lessee kept the property in repair, and paid the taxes, in addition to the rental. In short, the investment was one which provided with reasonable certainty for a sure and fixed income without either care or supervision. They also say this plan was never departed from, save once when $5,000 of the income was invested in bonds. This departure, however, was also for the purpose of making more certain said income. The insertion in the articles of agreement that the trustees might purchase other property may be ascribed to the caution of counsel ...