Cyclops Iron Works v. Commissioner

*603 The respondent asserted deficiencies in the petitioner's income taxes of $1,754.87, $4,337.76, $4,555.62 and $4,848.90, for the respective years 1923 to 1926, inclusive, which these consolidated appeals seek to review. Docket No. 34784 relates to the years 1923, 1924 and 1925, and Docket No. 40646 to the year 1926. The issue for each year relates to the question of whether or not the respondent was an association taxable as a corporation upon its income.

FINDINGS OF FACT.

Prior to December 31, 1921, the Cyclops Iron Works was a family corporation exclusively owned and controlled by J. M. Etienne, Victor Etienne, Jr., brothers, and their cousins Emile J. Etienne and Emile Maden. These individuals, in the order named, *1501 were president, vice president, secretary-treasurer, and general manager of the corporation; the first two owning each a three-eighths and the last two each a one-eighth interest in the capital stock.

On or about the above date these four stockholders decided that the continuity of their family interests in and to the business they were engaged in would best be served and made certain by abandoining the corporation as a business vehicle and substituting in its place a *604 trust composed of themselves, which should thereafter own, control, manage and operate it without change, for their interests, which were to remain the same as in the corporation. Accordingly, with this motive in mind, on the above date an agreement was entered into by these four stockholders purporting to convey unto the three parties first above named the entire business of the Cyclops Iron Works, including all of its assets, both tangible and intangible, in trust for the benefit of all of them who were named as beneficiaries, with individual interests fixed in ratio as above set out. Transferable benefit certificates evidencing these interests were issued to the four beneficiaries. The trust instrument, *1502 among other things, provided (1) that the contracting parties were not to be partners in the business or to be held liable for any debts contracted or obligations otherwise incurred by the trust in carrying on the business; (2) that the title to all of the property constituting the trust estate should vest solely in the trustees to the absolute exclusion of the beneficiaries, who neither Jointly or severally should have any legal or equitable title, right or interest in it; (3) that the right of the beneficiaries should, during the administration of the trust, be limited solely to the distributable income and, upon its termination, to the distributable proceeds; (4) that the trustees were empowered to take and hold the trust property and to continue to operate the business theretofore carried on by the Cyclops Iron Works, to all intents and purposes, in the same manner and form as it had done, with full control to the exclusion of the beneficiaries; (5) that the trustees were to be exempted from any personal liability for the trust debts, whether arising out of contract or in tort; and that only funds of the trust and its property should be held for payment of any debt, damage, *1503 judgment, or decree against the trustees or the trust estate; (6) that the trustees, individually, were given the right to hold beneficial interests in the trust and to contract "either as vendor, purchaser, or otherwise" with it the same as though he were not trustee, and, in the absence of fraud, to retain any profit he might dervice out of the transaction; (7) that all obligations in writing to be binding upon the trust must be executed by the president or vice president and attested by its secretary under a seal of the trust estate; (8) that record similar to stock records of a corporation should be kept showing the names and addresses of all of the owners of beneficial interests and no assignment of any beneficial interest was to be recognized by the trustees until recorded in such books; (9) the trustees were to receive such compensation for services rendered as a majority of their number might fix from time to time, without regard to any statutory limitations provided for in the State laws in regulating the compensation of trustees or other fiduciaries; (10) the trustees *605 were to periodically designate from among their number a president, vice president, secretary*1504 and treasurer, and other officers as deemed advisable, and to fix their duties and compensation; also, to adopt suitable by-laws to govern the conduct of the trust; (11) the trustees were given absolute power to interpret the terms and conditions of the trust instrument in all matters between the beneficiaries and themselves, which, in the absence of bad faith, was made final and binding upon the beneficiaries; and (12) the trust was not to be terminated by the death of any beneficiary or to be made accountable to his legal representative for any interest, distributable or otherwise, which the deceased might have in the trust estate; in such event, however, the trustees were given an option to purchase, either for themselves or for the trust, any such beneficial interest.

The petitioner took over the manufacturing business of the Cyclops Iron Works on December 31, 1921, and, from that date and throughout the taxable years, it conducted that business without material change from the plan and manner as it had been conducted by that corporation. Since the change from corporation ownership and management, the same individuals who held the executive offices of the corporation, viz. *1505 , president, vice president, secretary-treasurer, and superintendent, have occupied similar offices under the same titles with the petitioner.

The petitioner filed fiduciary income-tax returns for each of the four years under review showing net income earned in each year. The respondent held that the petitioner is taxable as a corporation upon such income for each of the taxable years and asserted the deficiencies here in review.

OPINION.

LANSDON: In respect to the first two years in review the petitioner contends that its taxable status as a trust is fixed, in virtue of its having filed fiduciary returns for such years, and for 1922, which were accepted and approved by the collector of internal revenue; and that such acceptance constituted a ruling within section 704(a) of the Revenue Act of 1928, which, remaining unrevoked, commits the respondent to an acceptance of its claims now made in such respect. There is no merit to this contention under the facts shown. The act of the local collector of internal revenue in receiving petitioner's returns when presented for filing, was a mere routine act which in no way committed the respondent in his audit which followed. We, therefore*1506 must hold against the petitioner on this contention.

The remaining question relates to the character of the petitioner's business which produced the income in question and to its organization structure. It is obvious that the disputed income was derived *606 from a business which a corporation might properly conduct, inasmuch as it had been so operated for many years. The petitioner contends, however, that its form of organization excludes it from classification as an association within the taxing laws and makes it a simple trust. In support of this interpretation the petitioner contends that the trust instrument denies any control to the beneficiaries over the trustees in their management of the trust business, and argues that this lack-of-control feature distinguishes its organization from an association as defined by the courts and this Board. It is true that in certain cases the question of control has been one upon which our decisions have turned; but, if that were controlling in this case, we could not find petitioner's position sustained by the proof. On the contrary, the record shows that all of the beneficiaries had a hand in the management and control of the*1507 business carried on by their organization; three of their number serving in the double capacity of executive officers and trustees, and the other as its business manager. In such circumstances the entire and exclusive control of this organization and its business which produced the income was in the beneficiaries.

In , the Supreme Court, after reviewing at great length the distinguishing features between associations and trusts, and quoting approved definitions of associations, held that "a body of persons united without charter, but upon methods and forms used by incorporated bodies, for the prosecution of some common enterprise" constituted an "association" taxable as a corporation.

It would be difficult to conceive of a business being carried on more nearly in conformity to corporate forms and methods than the one here considered, or of an organization which partook so little of the essential features of a trust as that of the petitioner. Respecting corporate formalities, excepting for the election of the trustees, by the beneficiaries, the new organization which succeeded to the corporation functioned in perfect parallel*1508 to the system used by the corporation, and there was not an advantage which the laws give to corporations, or a privilege or right of its stockholders which was not preserved to the petitioner and its beneficiaries under the trust agreement. On the other hand, there is little, except name, which would indicate that these parties intended to create a trust by this agreement, and some provisions in it violate the fundamental essentials of trust relationship. Typical of this are the provisions which allow the trustees to retain profits derived through business transactions between themselves and the trust estate, and permit any trustee to deal in his individual capacity with the trust in all respects "as if he were not a trustee," including (1) the right to *607 purchase at any public auction sale which the trustees might see fit to hold, assets of the trust; and (2) to contract with the trust without being required, in the absence of fraud, to make a fiduciary's account of any profits realized. The further provisions which allow the trustees to fix their own salaries, irrespective of any statutory provisions for compensation of trustees or other fiduciaries, and, in the absence*1509 of fraud, to decide all questions of dispute between themselves and the beneficiaries under the terms of the trust instrument, are so foreign to all concepts of fiduciary relationship as to put the parties claiming such powers beyond all claims of protection afforded trustees.

The corporation known as the Cyclops Iron Works was a close family corporation owned and controlled by the same individuals who now own and control this petitioner. There being no change in such ownership operation or control, except in name, we ignore the fiction and give force and effect to essential facts. The petitioner meets all of the essential requirements which constitute an association, taxable as a corporation, as heretofore construed by the courts and this Board, and the respondent committed no error in so classifying it in computing the taxes in dispute. ; ; ; *1510 ; ; ; ; .

Decision will be entered for the respondent.