Yukon Alaska Trust v. Commissioner , 26 B.T.A. 635 ( 1932 )

YUKON ALASKA TRUST, BY WILLIAM LOEB, JR., CHARLES EARL, ROGER W. STRAUS AND WILLIAM E. BENNETT, TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Yukon Alaska Trust v. Commissioner

Docket No. 34161.

United States Board of Tax Appeals

26 B.T.A. 635; 1932 BTA LEXIS 1278;

July 8, 1932, Promulgated

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">*1278 1. Under section 704(a), Revenue Act of 1928, petitioner held not taxable as an association in 1920 and 1921, having filed returns as a fiduciary and, because beneficiaries had not retained power to control and manage operation and properties of trust and actions of trustees, being considered taxable as a trust under rulings then in force.

2. Held, further, that, since the trust instrument required periodic distributions of income, under provisions of section 219(a)(4), Revenue Act of 1918, and (d) of same section, Revenue Act of 1921, the income of trust for 1920-1921, whether distributed or not, is taxable to beneficiaries.

Hugh Satterlee, Esq., Albert S. Lisenby, Esq., and I. Herman Sher, Esq., for the petitioner.

Bruce A. Low, Esq., and F. L. V.an Haaften, Esq., for the respondent.

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GOODRICH

">*635 This proceeding involves the redetermination of asserted deficiencies in income taxes in the amount of $25,656.90 for the year 1920, and $26,712.22 for the year 1921.

The petitioner alleges that in the determination of such deficiencies the respondent erred (1) in denying petitioner classification as a fiduciary and classifying">*1279 it as an association under the Revenue Acts of 1918 and 1921; (2) in denying to petitioner, if an association, affiliation with the Yukon Gold Company during the taxable years; (3) in including in income uncollectible interest amounting to $64,617.76 in 1920 and $273,774.02 in 1921, accruing on obligations of the Yukon Alaska Gold Company held by petitioner; (4) in computing petitioner's income for 1920 and 1921 upon the accrual basis, which did not clearly reflect income; (5) in denying petitioner's request to make its income-tax return for 1921 upon a cash receipts and disbursements basis.

By prior order of the Board the hearing was limited in the first instance to the issue raised by the first allegation of error in the pleadings, namely whether petitioner should be held taxable as an association during the years before us. However, at trial, respondent ">*636 was permitted to file an amended answer, averring in the alternative that, if the Board should find petitioner was a trust and not taxable as an association, then it should also find that it was taxable on its undistributed income for these years. After trial, respondent added the further averment that, in case of">*1280 the same finding by the Board, petitioner should be held taxable on its net income, whether distributed or not.

FINDINGS OF FACT.

In 1916 the Guggenheim Exploration Company, a corporation, in the course of liquidation prior to its dissolution, distributed among its stockholders the greater part of its assets, reserving, however, various personal properties and intangibles, principally capital stock and notes of the Yukon Gold Company, a corporation, which aggregated in value about $10,000,000 and which could not be advantageously liquidated or distributed at the time. It was decided that the properties should be kept intact until they could be liquidated without avoidable loss and the proceeds distributed and, accordingly, they were transferred and assigned to trustees, under the terms of a deed of trust dated February 4, 1916, entered into by the officers of the company, previously thereunto duly authorized, and four individuals who were to serve as trustees, being the four trustees named in the pleadings herein, except Bennett, who was appointed following the death of Charles K. Lipman, one of the original trustees.

Under the instrument the trustees took over, upon trust, ">*1281 $1,000,000 in cash and the various properties above mentioned; and assumed the liabilities of the corporation. They were given "the exclusive control and management" of the properties, of the income and profits therefrom, and of any properties substituted therefor, including exercise of voting power accompanying the shares of stock or other corporate securities, the power to sell, exchange or otherwise dispose of any of the properties upon such terms as they deemed proper and to invest proceeds of such sales; the right to make loans; the right to purchase additional stocks or other securities; power to engage in such legal proceedings as might be necessary to the protection of the interests of the trust or its properties; authority to engage offices and any personnel necessary to the execution of the trust and to make such disbursements, including fixed compensation to themselves, as might be required.

Relating to the distribution of the income or proceeds of the corpus of the trust, the deed of trust provided as follows:

Fifth: After payment of the expenses of this Trust or the making of proper provision therefor, the Trustees shall from time to time, and at least once in every">*1282 year, distribute and pay such portion of the net income or proceeds of the property and securities held by them as such Trustees, as they may deem proper to be so distributed and paid, among and to the holders of the certificates ">*637 of beneficial interest hereinafter described, and, in their discretion, the whole or any part of the proceeds of any of the property or securities constituting the trust fund which may be collected or received by them, irrespective of the fact that such proceeds shall constitute a part of the principal of the trust fund, it being the intention of this instrument to confer the absolute and unrestricted right upon the Trustees to make such distribution of the principal of said trust fund as they may deem advisable at any time during the existence of the Trust.

It was further provided that the beneficial interests in the trust should be divided into 208,433 equal parts, to be represented by negotiable certificates of beneficial interest to be issued by the trustees. Such certificates were issued by the trustees in accordance with the terms of the instrument and by them delivered in proper amounts to the stockholders of the Guggenheim Company.

">*1283 Relating to the interest of a certificate holder, the deed of trust provided as follows:

Seventh: The interest of each and every beneficiary under This Trust is and shall continue to be limited to his right to receive his proportionate share or dividend in such distribution of principal or interest of the trust fund as shall from time to time be determined upon in their discretion by the Trustees, and shall not amount to a legal ownership of any part of the property, property interests and securities constituting the trust fund, or confer upon any certificate holder the right to require a division or partition of the trust property or to an accounting with respect thereto; nor shall the holders of the certificates of beneficial interest be deemed co-partners or subject to any personal liability with respect to any contract or obligation entered into by the Trustees, or by reason of any liability, contractual or otherwise, incurred by the Trustees; nor shall the Trustees have the power to bind the certificate holders personally, but all persons or corporations extending credit to, contracting with or having any claim against the Trustees, shall look only to the trust fund for payment">*1284 under such contract or claim or for the payment of any debt, judgment or decree rendered against the Trustees, so that neither the Trustees nor any certificate holder, present or future, shall be personally liable therefor.

The trust was made terminable upon the deaths of Frederick A. Collins and William Magowan, but could be earlier terminated by the trustees upon published declaration and notice or upon consent of the holders of 75 per cent of the outstanding certificates of beneficial interest, at a meeting called for that purpose. Upon termination, the trustees were required to wind up the affairs of the trust and liquidate its assets.

The trustees were self-perpetuating, but, in event of their failure to fill vacancies, the holders of a majority of the certificates could select new trustees. The trustees were absolved from liability for losses resulting from errors in judgment respecting any of the trust property, being held responsible only for willful breach of trust.

The action of the officers and directors of Guggenheim Exploration Company in entering into the deed of trust was ratified by the stockholders of that company at a meeting held on March 9, 1916, preceding">*1285 which a circular letter had been sent to each stockholder ">*638 explaining the existing situation as demanding the creation of the trust, outlining the terms of the trust, listing the properties to be transferred and instructing the stockholders as to their rights. The letter contained, inter alia, the following statement:

The Trustees are to make a distribution at least annually amount the holders of certificates of beneficial interest of the net income realized from the trust fund and in their discretion, of the whole or any part of the proceeds of any of the property or securities constituting the trust fund which may be sold, collected or received by them, irrespective of the fact that such proceeds may constitute a part of the principal of the trust fund.

Thereafter the Guggenheim Exploration Company was liquidated and dissolved. The trustees immediately entered upon their duties and have since continued the operation of the trust. No meeting of the holders of certificates of beneficial interest was held until in 1928, when a meeting was called to act upon a proposal to dissolve the trust. The trust had receipts from various sources, principally collections">*1286 from the Yukon Gold Company, representing dividends upon stock, interest upon notes and distributions of capital, and until September 30, 1920, made quarterly distributions to its certificate holders at the rate of $208,433 per quarter. These distributions included all the net income of the trust for each of the years 1916 to 1919, inclusive, and for the first three-quarters of the year 1920, and also approximately $2,500,000 realized from liquidation of its capital assets.

The trust was the owner of more than 80 per cent of the stock of the Yukon Gold Company and its creditor in a large amount. The trustees were elected directors of that company and served continuously as such. They were a minority on the board, however, as the directors of the company were never less than twelve in number. In 1920 the affairs of this company were badly involved. It had ceased paying dividends on its stock and interest on its notes. Its Alaskan properties were approaching exhaustion and it was endeavoring to obtain other properties for operation and thus to prolong its life. In this situation the trustees deemed it imperative to assist the company in order to protect the trust property. ">*1287 They therefore renewed and extended the unpaid notes of the company as they became due and agreed to make a loan to the company not to exceed $1,000,000. On November 22, 1920, the trustees in meeting decided to discontinue the quarterly distributions to the certificate holders "until otherwise determined and ordered by the trustees." No further distributions were made by the trustees until 1928.

The trust kept its books upon the accrual basis during the years 1916 to 1920, inclusive. During 1920 it distributed income in the amount of $213,076.20 and capital in the amount of $412,222.80. The accrued net income for 1920 undistributed amounted to $64,617.76, ">*639 of which only $7,288.60 was received, the balance representing accrued interest on the notes of the Yukon Gold Company which was never paid. No distribution was made in 1921. The net income of the trust for that year was $269,672.22, but on the basis of receipts and disbursements there was a net loss of $15,772.29. The defaulted interest on the notes of the Yukon Gold Comapny for 1920 and 1921 has not been collected.

Returns were filed for petitioner for each of the years 1916 to 1928, inclusive, on Form 1041, ">*1288 which was the form for the return of a fiduciary, the return for 1920 being filed on March 15, 1921, and that for 1921 on May 31, 1922. The returns for 1916 to 1921, inclusive, were filed on the accrual basis. Permission was requested to file a return on the cash basis for the year 1921 but was denied because the request was not timely made. For the year 1922 permission to make the change was granted, and for that and all subsequent years the returns were filed on the cash basis. On February 26, 1926, in compliance with the Commissioner's demand, and under protest, petitioner filed returns for the years 1920 and 1921 upon Form 1120, which was the form for a return of a corporation, and claimed affiliation with the Yukon Gold Company, which claim was denied by respondent. In determining the deficiencies before us, respondent held petitioner to be taxable as an association.

The trustees of petitioner, as such, took no active part in the management or operation of any of the enterprises in which the trust owned stock or an interest, except to serve as directors in the Yukon Gold Company, as hereinbefore set out, their efforts being directed solely to the conservation and liquidation">*1289 of the assets of the trust.

OPINION.

GOODRICH: In view of the provisions of section 704(a), Revenue Act of 1928, petitioner is not taxable as an association for the years 1920 and 1921 if it filed its returns for those years as a trust and if, at the time the returns were filed, it was considered to be taxable as a trust under the regulations or under a ruling of the Commissioner or an officer of the Bureau of Internal Revenue, applicable to those years, interpretative of any provision of the revenue acts under which the returns were filed, and then in force.

This petitioner did file its returns for the years before us as a trust on the usual forms furnished for the use of fiduciaries, for we regard as controlling the original returns voluntarily filed, not the amended returns later submitted in response to respondent's demand. At the time the original returns were filed the effective rulings of the Bureau (the regulations being silent except as to a trust holding real estate, which petitioner did not) laid the rule that the taxability of a trust ">*640 as an association depends upon the extent of the powers of the holders of the beneficial interests to regulate the">*1290 management of the affairs of the trust - that, where the beneficiaries had parted with the control of the operation and properties of the trust and the conduct and actions of the trustees, the trust was taxable as such, and not as an association. ; ; ; ; ; .

Under the terms of the deed of trust the trustees here were vested with "the exclusive control and management" of the trust. The beneficiaries had parted with power to control the trust or the actions of the trustees, their rights being limited to the receipt of distributions, the replacement of trustees in event of the failure of the remaining trustees to fill vacancies, and the power, upon the vote of three-fourths of the interests, to terminate the trust. It is clear, therefore, that under the rulings in force at the time the returns for 1920 and 1921 were filed, petitioner was not taxable as an association and, having filed">*1291 its returns for those years as a trust, this case falls squarely under the provisions of section 704(a) of the 1928 Act. Respondent erred in denying petitioner classification as a fiduciary and in classifying it as an association.

But respondent urges that, even though petitioner be held to be a trust, its income, whether distributed or not, is taxable under the provisions of section 219(a)(4) of the Revenue Act of 1918, and subdivision (e) of the same section of the Revenue Act of 1921, for the reason that the trust instrument did not require a periodic distribution, this matter being left to the discretion of the trustees, who in the exercise of that discretion made no distribution for several years, including a part of the year 1920 and the entire year 1921.

Because of our desire to bring the case to a conclusion, we will consider this alternative affirmative issue advanced by respondent, passing over certain objections (which are not without merit) made by petitioner respecting the allegations in the amended answer by which respondent seeks to raise this issue.

The provision of the deed of trust relating to distributions by the trustees we have set out in full in our">*1292 findings of fact, but we repeat here that part which respondent urges serves as a basis for his contention because ambiguous:

* * * the Trustees shall from time to time, and at least once in every year, distribute and pay such portion of the net income or proceeds of the property and securities held by them as such Trustees, as they may deem proper to be so distributed and paid * * *. [Italics ours.]

The italicized phrase, respondent argues, leaves within the dis cretion of the trustees the question of whether any distribution ">*641 whatever should be made, and thus nullifies the prior requirement that a distribution shall be made at least once in each year. Petitioner, pointing out that the deed of trust contains no specific instruction concerning the accumulation of income by the trustees, explains that the italicized phrase refers not to distributions of income except so far as the amount thereof is concerned so long as some distribution is made at least once each year, but to distributions of the proceeds of the property and securities, an interpretation which is supported by a contemporaneous construction of the parties as evidenced by the following sentence">*1293 contained in the circular letter sent to the stockholders of the Guggenheim Exploration Company under date of February 4, 1916:

The Trustees are to make distributions at least annually among the holders of certificates of beneficial interest of the net income realized from the trust fund and, in their discretion, of the whole or any part of the proceeds of any of the property or securities constituting the trust fund which may be sold, collected or received by them, irrespective of the fact that such proceeds may constitute a part of the principal of the trust funds.

However, there is yet a stronger reason for rejecting respondent's construction of this instruction to the trustees, which would permit, if not direct, them to accumulate the income of the trust. This trust was created for the lives of the two persons named in the instrument and all of its property was personal property. Under the laws of the State of New York the accumulation of income of personal property upon trust for any period of time and for future distribution is unlawful, except for the benefit of a minor, and certain other particular purposes authorized by statute and not here material. Sec. 16, Personal">*1294 Property Law of the State of New York; ; . It follows that, since the income of this trust could not lawfully be permitted to be held for future distribution, either we must hold the trust to be one in which the income was to be distributed periodically or we must hold it to be invalid to the extent that it provided for the accumulation of income Cf. ; ; .

We are unwilling to declare the trust invalid, for we recognize that where the provisions of the trust agreement are capable of two constructions, that should be adopted which renders the trust legal and valid. . It is true that the trustees suspended distributions, but from the evidence before us it is apparent that they discontinued not because they were authorized to accumulate the income, but because, on a basis of actual receipts, they had no funds from which distributions could be">*1295 made. We hold, therefore, that this trust was one in which the ">*642 income was to be distributed periodically and, under the provisions of section 219(a)(4) of the Revenue Act of 1918 and subdivision (d) of the same section of the Revenue Act of 1921 its income, whether distributed or not, was taxable to its beneficiaries.

Judgment will be entered for petitioner.