Murphy v. Commissioner

*724 In this proceeding petitioners contest the correctness of respondent's determination that Murphy Personal Property Trust should be classified as an association taxable as a corporation rather than as a trust. The years involved are 1925 and 1926 and the deficiencies are $283.86 and $1,298.67, respectively.

FINDINGS OF FACT.

Petitioners are trustees of the Murphy Personal Property Trust, declaration of trust which provided in substance as follows: The declaration of trust which provided in substance as follows: the funds shall be held for the benefit of the cestuis, who shall not constitute an association or partnership; the trustees shall receive payment for interests in the fund; the trustees shall have full power to invest and reinvest in any personal property; they shall have power to loan money to any cestui or trustee upon his secured note or obligation; each trustee shall be personally liable for any loss incurred*1489 in connection with such loan; the trustees shall have full power of sale and power to borrow money for the trust and pledge its assets as security; all of the trustees shall approve all transactions; persons dealing with the trustees need not make inquiry of their authority; the trustees may organize a corporation to hold the trust property; they shall have full power of management; may employ counsel and clerks; and may receive compensation in an amount not exceeding 5 per cent of the gross income; they may appoint from their number ministerial officers; the trustees may declare dividends and decide what constitutes capital or income and such decision shall be final; the trustees shall state an account annually; a trustee may resign and any vacancy shall be filled by appointment by the other trustees; the trustees are liable only for willful breach of trust; they shall have offices and keep records and may designate a trust company as depositary of any documents; they may designate a transfer agent; certificates of interest shall be issued *725 to each cestui que trust, which certificates shall not be transferred, except by will, until first offered in writing to the trustees. *1490 The cestuis shall not be assessed or be personally liable, but may inspect the books. They shall have a right only to net distributable proceeds on liquidation or to any income distributed meanwhile. The trustees may own interests in the trust fund not in excess of 49 per cent. The trustees may apply to the court for instructions without notice to the cestuis. The trust shall terminate 21 years after the death of the last survivor of the first trustees or at such earlier time as the trust may be terminated. The trustees may alter declaration of trust or terminate the trust with the consent of the cestuis holding 75 per cent of the units.

The cestuis have all been members of the Murphy family and lineal decendants of Simon J. Murphy and though the declaration contains no such limitations, only such persons are permitted to be holders of participating units. The initial funds of the trust were investments by the cestuis, the source of which was 10 per cent of the sums received by such persons from the Murphy Family Trusts for the years 1921, 1922 and 1923. The Murphy Family Trust is a common law trust formed at the termination of the testamentary trust of*1491 Simon J. Murphy, deceased, to hold and administer extensive property left by him, including real estate, mines, timber and oil.

The Murphy Personal Property Trust was formed to provide a means for the investment and preservation of funds received as beneficiaries under the Murphy Family Trusts and for the further purpose of creating a fund from which members of the Murphy family and corporations controlled by them could borrow money without resorting to the open market.

The funds of the petitioning organization have been invested almost exclusively in municipal bonds and the trustees have never engaged in buying and selling securities, all securities being bought and held for permanent investment.

No loans have been made to any one except members of the Murphy family or corporations controlled by them, and much the larger part of such loans has been to individuals. Interest is charged on loans made, usually at a rate of 5 per cent, but in some cases at 5 1/2 per cent. There has never been a loss of any loan nor have the trustees been obliged to sell any collateral. The trustees have never borrowed money for the trust nor have they ever organized a corporation.

All employees*1492 of the organization have been furnished and all expenses paid by the Murphy Family Trusts and the trustees have never received any compensation as trustees specifically.

*726 The trustees have made distributions semiannually at the rate of 3 per cent per annum by way of dividends, although the funds have earned larger sums.

Three vacancies have occurred and have been filled by action of the trustees as provided in the declaration. No meetings of the unit-holders have ever been held and, except for 14 units purchased and retired by the trustees from one of the cestuis, all units are in the hands of the original holders. The declaration of trust has never been amended or altered. Minutes of the meetings of the trustees are regularly kept, but such meetings are held at no fixed or stated time. The trustees have no seal.

On December 31, 1924, certificates of interest of $1,000 each were held as follows:

On the same date the books of the trustees contained*1493 the following entries:

On December 31, 1924, the records of the company showed loans as follows:

OPINION.

VAN FOSSAN: An association is an unincorporated body of persons organized in the general form of a corporation and employing usual *727 corporate methods in carrying on a business for profit. See . Testing the petitioning organization by this formula, it will be noted that, though it bore some resemblance to a corporation in form, there are certain important departures. *1494 In a corporation the ultimate power of control is vested in the stockholders, who act through their duly elected directors. In the declaration before us all power of management is vested in self-perpetuating trustees, while the unitholders had no power of control. They had no power to appoint trustees nor could they remove a trustee if objectionable.

The power to initiate proceedings to terminate the trust is vested in the trustees subject only to approval by the unitholders. The trustees in the instant case were responsible for losses incurred in loans, and all transactions of whatever nature must have the unanimous approval of all the trustees. No meeting of unitholders is provided for or was ever held and the power to dispose of unitholdings was limited. The unitholders had no power to compel dividends, the decision of the trustees being expressly made final. Thus it can scarcely be said that the declaration of trust created an organization similar in its fundamental respects to a corporation. The powers conferred on the trustees and the trust structure, as well as the rights of the beneficiaries thereof, much more closely resemble the usual trust than a corporation. *1495 .

Passing from the form of the organization to its operation, we find that the purposes of the same, as shown by its dealings, were the conservation of the income of the several estates represented and the financial accommodation of its unitholders. The making of money as evidenced by the payment of dividends and the accumulation of surplus was an incidental concomitant. Investment in the trust was actually limited to members of the Murphy family. Loans were likewise limited to members of that family or to family-controlled corporations. The operating expenses were all paid by the Murphy Family Trusts. That organization was limited to lineal decendants of Simon J. Murphy. True, the trustees invested the funds of the trust with a view to gaining an appropriate return, but such is the duty of every trustee. There is a basic distinction between such a return of interest on capital funds in the trustees' hands and the income of a business carried on for profit. The trustees in the instant case never traded on the market or bought and sold securities for profit. They bought securities solely for investment. Their investment*1496 of funds no more resembled a business for profit than does the normal investment by testamentary trustees. See .

Similarly, the making of secured loans to members of the Murphy family was a corollary of the investment policy. This policy was *728 pursued not primarily to make money for the trust, but to accommodate the cestuis. All loans were conservatively made on collateral and usually at an interest rate of 5 per cent.

Considering all of the evidence before us, both as to form and actual operation, we are of the opinion that Murphy Personal Property Trust was a trust and not an association. It should be taxed accordingly.

Reviewed by the Board.

Decision will be entered under Rule 50.