Roberts-Solomon Trust Estate v. Commissioner

ROBERTS-SOLOMON TRUST ESTATE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Roberts-Solomon Trust Estate v. Commissioner

Docket No. 80149.

United States Board of Tax Appeals

34 B.T.A. 723; 1936 BTA LEXIS 654;

June 26, 1936, Promulgated

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Where in a family settlement an inter vivos trust was created to operate business buildings and the essential elements of a corporate organization were present, the trust is taxable as an association.

Ward Loveless, Esq., George M. Wollcott, Esq., and Walter T. Johnson, Esq., for the petitioner.

W. H. Payne, Esq., and R. N. McMillan, Esq., for the respondent.

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ARUNDELL

This case involves an income tax deficiency of $983.91 for the calendar year 1932. The issue is whether the Roberts-Solomon Trust Estate is taxable as an association under section 1111(a)(2) of the Revenue Act of 1932 and articles 1312 and 1314 of Regulations 77.

FINDINGS OF FACT.

On January 29, 1930, Lillian Roberts-Solomon created the Roberts-Solomon Trust Estate by an indenture conveying to five of her sons as trustees three 3-story buildings and one 1-story building in the city of Macon, Georgia. The beneficiaries of the trust were Mrs. Solomon and her nine children and two minor grandchildren. The fractional interests of the beneficiaries were represented by participation certificates, Mrs. Solomon and her nine children receiving 100 shares each and the two grandchildren 50 shares each. The certificates were nonassessible and provided that no liability should rest upon either the beneficiaries or the trustees by reason of their ownership thereof. Any beneficiary could dispose of his shares in the trust after they were first offered for sale to the trustees and the other beneficiaries.

The term of the trust was 25 years, with a power of renewal for a subsequent term of 25 years on the assent of four-fifths of the trustees and a majority of the beneficiaries. Any vacancies among the trustees were to be promptly filled by the remaining trustees.

The trustees had broad discretionary powers to manage and control, improve, sell, lease, encumber, mortgage, or exchange the property. All their actions had to be determined upon by a majority of the trustees. The trustees were directed by the trust instrument to collect the rents and income from the trust property and, after discharging certain obligations and providing for the living expenses and needs of their mother (the grantor) as in their discretion they might think necessary or advisable, to distribute annually or aftener such portion of the income as in their discretion was determined to be the fairly distributable net income of the trust among the several cestuis que trustent according to their respective beneficial interests. The trustees had power to employ such agents as were necessary and employed a real estate firm to collect rents monthly from the various mercantile firms occupying the buildings. The trustees passed upon the desirability of prospective tenants offered for the trust property, decided what rentals should be charged, and determined the provisions and clauses contained in the various leases on the trust properties. All except the most minor expenditures were discussed and passed upon by a majority of the trustees. Maitland Solomon, one of the trustees, was appointed manager at a salary of $250 per month. He maintained an office at the expense of the trust, where he transacted the trust business for an average of two to four hours a day during 1932. Complete books and records were kept by the trust, which were audited every year by a hired accountant. Monthly and annual reports were made by the trustees to the beneficiaries, giving a complete record of every transaction of the trust. A trust seal was adopted and used on trust certificates, certain leases, and other instruments.

The trustees decided what was the fairly distributable income of the trust and made monthly distributions to the beneficiaries. They also determined how much of the trust income should be held out for repairs and expenses. There was actually distributed to the beneficiaries in 1932, $15,031.10. Distributions to beneficiaries were not always made according to their share holdings as the amounts distributed were treated as advances and 6 percent interest charged thereon, all of which is to be accounted for when the trust is terminated and final distribution made in accordance with the respective holdings of the beneficiaries. The net income of the trust for the year 1932 was $11,224.47.

OPINION.

ARUNDELL: The issue here is whether the Roberts-Solomon trust is taxable as an association. If it is taxable as a trust, the petitioner claims an overpayment of the entire tax as paid, $559.05, by virtue of the fact that all the net income of the trust for the year was distributed to the beneficiaries.

In our opinion, the trust possesses every feature enumerated in the Morrissey case, , as essential characteristics of a corporate organization. There was centralized management, continuity of existence, transferable beneficial interests, and limited liability. Thus, the trust is distinguishable from the ; affd., , involving a similar family settlement where the court held: "Except that the trustees were authorized to continue the going business, the trust had no feature in common with a corporation."

There was no question but that the Roberts-Solomon trust was "doing business", Morrissey v. Commissioner, supra; ; ; , and was not created merely for liquidation purposes, ; affd., ; Morriss Realty Co. Trust No. 1,; affd., , or merely to collect and distribute rents, ; and cf. ; ; and

The petitioner claims that a feature distinguishing this trust from those in the Morrissey and related cases is that the parties here did not of their own volition pool their separate sources to undertake this business enterprise. It relies on statements by Chief Justice Hughes in the Morrissey case, as follows:

"Association" implies associates. It implies the entering into a joint enterprise, and * * * an enterprise for the transaction of business. This is not the characteristic of an ordinary trust - whether created by will, deed, or declaration - by which particular property is conveyed to a trustee or is to be held by the settlor, on specified trusts, for the benefit of named or described persons.

Such beneficiaries do not ordinarily, and as mere cestuis que trust, plan a common effort or enter into a combination for the conduct of a business enterprise * * *

We think that this statement, taken in its context and with reference to the circumstances of the case to which it is directed, means no more than that an "ordinary trust - whether created by will, deed, or declaration" is not created "for the conduct of a business enterprise", but rather for the passive purpose of separating the legal and equitable title, or of liquidation. In this case we have a trust definitely created for the transaction of a business. We see no reason for distinguishing it from the ordinary business trust taxable as a corporation merely on the ground that the participants did not furnish the capital with which the business is carried on. The mere fact that they were given the business instead of creating it themselves seems no reason for holding that there is no association. Had they received undivided interests in the property by deed or will and then established the trust themselves, it would undoubtedly be taxable as an association. Cf. ; affd., . The same should be true where they accept interests in a trust conducting a going enterprise. Had the grantor not sought the advantages of the corporate modes of procedure, she could simply have declared a trust, naming herself as sole trustee and continued to manage the business without being subject to taxation as a corporation. . But she chose to give to the trust features analogous to the corporate form and the beneficiaries accepted the gift, "burdened" with the advantages which are characteristic of a corporation. The trust is taxable as a corporation.

Judgment will be entered under Rule 50.