Wolf v. Commissioner

*835 This proceeding is for the redetermination of deficiencies in income taxes asserted by the respondent in the amounts of $3,521.90 for the year 1920, $5,374.23 for the year 1921, and $3,240.31 for the year 1922. The only issue is whether the petitioners should be taxed as an association or as the trustees of a trust, the income of which is taxable to the beneficiaries.

FINDINGS OF FACT.

On December 16, 1919, ten persons, including the petitioners, purchased a tract of land consisting of 992 acres in Butte County, California. The purchase price was $250,000, of which one-half was *836 paid in cash and the remainder secured*4030 by a deed of trust signed by Max Wolf and his wife. Title to the property was for convenience taken in the name of Max Wolf and one J. C. McKinstry. On December 24, 1919, the land was conveyed to Max Wolf, E. Clemens Horst and Ralph Davis, the petitioners herein, as joint tenants. On December 31, 1919, the ten purchasers executed the following written agreement:

WHEREAS said parties through the agency of Max Wolf on November 16, 1919, purchased from Harry Fraser the Fraser Ranch, consisting of about nine hundred and ninety-two and one-half (992 1/2) acres of land in Butte County, California, together with certain personal property; and

WHEREAS said property was transferred and conveyed to Max Wolf on said last named date, but the "purchasers" are the beneficial owners of the same in equal shares; and

WHEREAS a part of the purchase price was paid in cash and in equal shares by the "purchasers" to Harry Fraser, the grantor of said property, and the balance of the purchase price is represented by three promissory notes aggregating the principal sum of One Hundred and Twenty-five Thousand Dollars ($125,000) made and executed by Max Wolf to Harry Fraser on the day of said sale, *4031 to-wit a promissory note in the principal sum of Twenty-five Thousand Dollars ($25,000) payable November 1, 1920, and a promissory note in the principal sum of Twenty-five Thousand Dollars ($25,000) payable November 1, 1921, and a promissory note in the principal sum of Seventy-five Thousand Dollars ($75,000) payable on November 1, 1924, all of said promissory notes bearing interest at the rate of six per cent (6%) per annum; and

WHEREAS to secure the payment of said notes said Max Wolf did execute to certain Trustees for the benefit of Harry Fraser a Deed of Trust upon said property;

NOW, THEREFORE, the "Purchasers" other than Max Wolf, do hereby each severally agree to pay one-tenth (1/10) of said indebtedness evidenced by said promissory notes, and to indemnify said Max Wolf against the liability of said promissory notes to the extent of the several obligations of said "Purchasers."

Further, it is mutually agreed that for the convenience and advantage of the "Purchasers," the legal title to said property shall be held by Max Wolf, E. Clemens Horst and Ralph Davis (hereinafter called the "joint tenants"), in joint tenancy with the right of survivorship, and the necessary conveyances*4032 will be made and executed accordingly.

Further, it is mutually agreed that said joint tenants and the survivor or survivors of them shall have the full trust powers coupled with an interest to lease, manage and control and operate said property as if they were the owners thereof, and to borrow from time to time whatever money they may deem advisable for this purpose, not to exceed the outstanding principal sum of One Hundred Thousand Dollars ($100,000) at any one time, and for the payment of any and all moneys so borrowed by said joint tenants, and for the payment of any promissory notes or other choses in action which may be executed by said joint tenants to evidence any money so borrowed, said "Purchasers" do hereby bind themselves and do hereby make themselves responsible jointly and severally to the same extent as if they had jointly and severally borrowed said moneys with said joint tenants and their successors in title, or as if they had jointly and severally executed said promissory notes or other choses in action in conjunction with said joint tenants.

*837 It is further agreed that the "Purchasers" shall be equally entitled to the net income from said property, *4033 but that said joint tenants shall have the right and powers to decide when and how said income shall be distributed. Said property shall be sold by said joint tenants whenever a majority of the "Purchasers" shall so direct, and upon such terms as they shall direct, and the proceeds of sale and all other moneys on hand shall be equally divided among the "Purchasers" after payment of debts and expenses properly chargeable against said property. Further, said joint tenants shall at the expiration of the trust hereby created, or at any time prior thereto, when a majority of the "Purchasers" so directs, transfer and convey to the "Purchasers" and their successors in interest, the respective undivided one-tenth (1/10) interests in said property, provided it has not meanwhile been sold, but said interests shall each be respectively chargeable with the payment of one-tenth (1/10) of all debts and expenses properly chargeable against said property.

At any time during the life of this agreement, the joint tenants and the survivor or survivors of them may in their discretion organize a corporation under the laws of the State of California, and transfer the trust property to such corporation*4034 in full payment of its capital stock and cause said capital stock to be delivered to the purchasers and their successors in title in the proportion of their respective interests. This transfer to a corporation may be made without consent of said purchasers or a majority of them.

The said joint tenants hereby agree to serve and act without compensation as agents and trustees as aforesaid and it is mutually agreed by the "Purchasers" that for all loss, liability or damage sustained or incurred by any person or persons on account of any act or omission of said joint tenants hereunder, the said "Purchasers" including the joint tenants, shall be jointly and severally responsible and the said joint tenants shall be indemnified accordingly to the full extent permitted by law.

It is further agreed that the trust created by this instrument shall in any event end three years from the date thereof or upon the death of the last surviving joint tenants or upon the death of a majority of the "Purchasers," and it is the spirit of this agreement that the said "Purchasers" shall have the rights and obligations of partners in said property with the proviso that said joint tenants shall be the*4035 general managers and agents thereof coupled with an interest therein, but without the right to sell the property except on direction of a majority of the "Purchasers" as aforesaid.

This instrument shall bind and inure to the benefit of the heirs and assigns of the "Purchasers," but said joint tenants and the survivor or survivors of them shall be agents and trustees for all persons who may have any claim or interest in said property. If the "Purchasers" or either of them make any assignment or assignments of their interest or any portion thereof, they shall still remain agents of their assignees, coupled with an interest in said property, and the joint tenants and the survivor or survivors of them shall deal with the said "Purchasers" as if no assignment or assignments had been made, but the assignees shall look to the assignors and to their joint tenants for the recovery of any money or property due them and any and all assignments shall be made and deemed made subject to this covenant and condition.

The agreement of December 31, 1919, was made in order to enable the owners of the land mentioned more conveniently to fulfill a contract made on their behalf with T. A. Livesley*4036 & Co. on December 16, 1919.

*838 On December 16, 1919, the petitioners executed a contract by which they sold to T. A. Livesley & Co. the entire crop of hops up to 500,000 pounds net to be grown on the Nord Hop Ranch during each of the years 1920, 1921, and 1922. This contract contained a clause mortgaging said crops to the buyer. It also provided that if less than 500,000 pounds of hops were produced each year the buyer would accept the amount so raised at the stipulated price per pound and the petitioners would not be required to supply the deficiency. Negotiations for the execution of this contract were commenced prior to the purchase of the Nord Hop Ranch by the petitioners and others.

Between 300 and 350 acres of the Nord Hop Ranch were devoted to the raising of hops during each of the years 1920, 1921, and 1922. The proceeds from the sales of hops were used to defray the cost of growing and any balance was applied to the unpaid remainder of the purchase price of the land. No proceeds were ever distributed among the purchasers. The petitioners never issued any certificates or other evidence of interest in the property; they did nothing except to grow the hops, *4037 deliver them under the contract, receive the proceeds and apply them as above noted. The purchasers held no meetings, nor did they attempt to direct, control or interfere with the petitioners in the management of the property. The arrangement remained as created until the last day of its three-year term. On that day, December 31, 1922, the petitioners conveyed the Nord Hop Ranch property to a California corporation, organized for the purpose, in exchange for its stock; this stock was issued to the ten purchasers and their assignees in proportion as their interests appeared. The respondent determined that the Nord Hop Ranch was an association during the years 1920, 1921 and 1922, and that it is taxable as a corporation.

OPINION.

MARQUETTE: The respondent contends that the Nord Hop Ranch was an association during the years 1920, 1921, and 1922, and that it is taxable as a corporation under section 2 of the Revenue Act of 1918 and section 2 of the Revenue Act of 1921, which provide:

SEC. 2. That when used in this Act -

* * *

(2) The term "corporation" includes associations, joint-stock companies, and insurance companies.

The petitioners claim that the Nord Hop Ranch*4038 was a trust, the income of which is taxable to the beneficiaries under section 219 of the Revenue Act of 1918, and section 219 of the Revenue Act of 1921.

*839 The term "association" as used in the Revenue Acts of 1918 and 1921 was discussed by the Supreme Court of the United States in case of . The court said:

The word "association" appears to be used in the Act in its ordinary meaning. It has been defined as a term "used throughout the United States to signify a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise." 1 Abb. Law Dict. 101 (1879); 1 Bouv. Law Dict. (Rawle's 3d. Rev.) 269; 3 Am. & Eng. Enc. Law (2d Ed.) 162; and , in which this definition was cited with approval as being in accord with the common understanding. Other definitions are: "In the United States, as distinguished from a corporation, a body of persons organized, for the prosecution of some purpose, without a charter, but having the general form and mode of procedure of a corporation". *4039 Webst. New Internat. Dict. "[U.S.] An organized but unchartered body analogous to but distinguished from a corporation." Pract. Stand. Dict.

Article 1504 of Regulations 69, which is retroactive as to the years 1920, 1921, and 1922, also provides in effect that a trust is an association if the beneficiaries have positive control. A similar implication is found in .

In the instant case the evidence discloses that there were no certificates or other evidences of ownership issued; there were no officers elected, or meetings of the owners of the beneficial interests held. The petitioners held and managed the trust property and used it in accordance with the terms of the trust instrument. The business was not conducted upon the methods and form used by incorporated bodies for the conduct of a common enterprise, and there was present none of the indicia of an association as defined by the Supreme Court. The evidence also shows that the entire management and control of the trust property were, during the life of the trust instrument, vested wholly in the trustees and that no control over the trustees or the trust property was retained*4040 or exercised by the beneficiaries. It is clear that the Nord Hop Ranch was a trust, and we are of the opinion for the reasons stated that it was not an association within the meaning of the Revenue Act of 1921 and is therefore not taxable as a corporation.

Having held that the Nord Hop Ranch is a trust not taxable as a corporation, we must now decide whether the trust income is taxable to the trustees or to the beneficiaries. Under the laws of California a provision in a trust instrument providing for the accumulation of income for the benefit of one or more persons is void unless and while the beneficiaries are minors. The courts of California have held, however, that although a trust is void in so far as it provides for the accumulation of income beyond the age of minority of the beneficiaries, yet this fact does not invalidate the *840 trust altogether but merely avoids the provisions as to such accumulations. .

It therefore appears that the trust agreement under which the petitioners held the Nord Hop Ranch could not have been upheld as to the provision giving the trustees power to accumulate the income, but that it*4041 is valid in its provision giving them the power to receive the rents and profits from the property and to distribute them to the beneficiaries or their assigns. It is our opinion that the Nord Hop Ranch is a trust, the income of which is taxable to the beneficiaries under the provisions of section 219 of the Revenue Acts of 1918 and 1921.

Judgment will be entered on 15 days' notice, under Rule 50.