Tyrrell v. Commissioner

*707 The respondent determined deficiencies in income taxes of the following individuals for the calendar year 1927, as follows:

*658 Vinnie T. Rorick died since filing her petition and, upon suggestion of her death, the executrices of her estate, Helen R. McGill and Ruth R. Steves, were substituted as petitioners and the title of the *708 proceeding was changed accordingly. The three cases were consolidated for hearing and submitted on the evidence adduced and stipulation filed.

FINDINGS OF FACT.

What is herein referred to as the W. C. Tyrrell Trust is a declaration of trust which was created by a written instrument, executed in Texas, bearing date of December 31, 1919. It was executed by W. C. Tyrrell and the four children of his wife, Ellen F. Tyrrell, and himself, to wit; W. C. Tyrrell, Jr. (a petitioner herein), H. C. Tyrrell, Esther L. Garth, Vinnie T. Rorick, and their respective husbands, J. W. Garth and David Rorick, Jr. W. C. Tyrrell and Ellen F. Tyrrell, his wife, were quite wealthy and owned much real estate and other property situated in several counties in the State of Texas.

Ellen F. Tyrrell died intestate, August 2, 1919. Her husband, who prior to her death had managed the properties here involved, was made the trustee of the trust above mentioned.

The trust instrument recited*659 that its paid-in capital was $2,000,000 and that it was "A Joint Stock Association without individual liability of its shareholders." The trustee was to forthwith issue certificates for two thousand shares, each share of the nominal par value of $1,000. The original corpus of the trust was property which said children inherited from their mother, together with other property given them by their father after their mother's death, all of which property became the property of the W. C. Tyrrell Trust and subject to its terms.

In the articles of the W. C. Tyrrell Trust it was, in part, provided:

Said shareholders are not to have any legal title to the trust property itself, real, personal or mixed, held from time to time by the Trustee, and, in especial, they shall have no right to call for any partition; they shall have no equitable estate in the property, real, personal or mixed, the subject-matter of this Trust, but their interest shall consist only of an interest in all of said property subject to the terms and conditions of this Trust, and the shares shall be personal property carrying the rights as herein set forth, of division of proceeds and profits and the other rights and*660 matters concerning the Trust Property and shall be transmissible and transferrable as personal estate.

* * *

Shares may be transferred on the books of said Trustee by the person named in the certificate thereof, his attorney or personal representative upon the surrender of the certificate, and a new certificate shall be issued to the transferee, who shall thereupon become subject to the terms of this Declaration or Trust.

All transfers of shares shall be recorded in the books of the Trustee. * * *

The trust further provided that the death of a shareholder should not operate to "determine the trust", the executors, administrators. *709 or assigns of the deceased succeeding to the rights of the deceased under the terms of trust. The trustee had no power to bind the shareholders personally and all persons or corporations extending credit to or having claims against the trustee were to look only to the funds and property of the trust for payment, neither the trustee nor the shareholders present or future being personally liable therefor.

The trustee was to have absolute control over, and disposal of, all the property and similar control and disposition of the proceeds*661 of all sales, but subject only to an accounting to the cestuis que trustent under the terms and conditions of the trust.

The trustee was given the power to borrow money to carry out the purposes of the trust and to determine what constitutes such purposes; to acquire by purchase or otherwise real or personal property when deemed by him advantageous to the trust and also to dispose of the same, which power was exercised. The trustee might fix his own compensation, which was not to exceed $12,000 per annum without the approval in writing of the holders of 75 percent of the shares of participation.

Any trustee might resign his trust by written instrument duly signed, acknowledged in the manner required for deeds, and recorded in the deed records of Jefferson County, Texas. Any trustee vacancy occurring was to be filled by an instrument in writing signed and acknowledged by shareholders owning not less than 51 percent of the shares of participation, which instrument was to be likewise recorded. It was made the duty of any trustee, in anticipation of his death or disability, to execute a designation in writing of a shareholder who in the event of the trustee's death or disability*662 would serve as trustee pending an election by the shareholders of his successor. No trustee was to be responsible except for his own default.

At or upon the expiration of 20 years after the death of the last survivor of W. C. Tyrrell and his aforesaid children, or at such earlier time as three-fourths in value of the shareholders might appoint, the trustee or his successor in office should terminate the trust by selling the property then held by the trustee and dividing the proceeds amont the shareholders. Any trustee of the trust might terminate it at any time, either by dividing the property among the beneficiaries or after sales of the property, in whole or in part, upon appraisement and partition by three disinterested individuals nominated by the trustee and approved in writing by the holders of 51 percent of the shares of participation.

At all meetings of the shareholders each share was entitled to one vote and absent shareholders might vote by proxy, duly executed. *710 The trustee was required to call meetings of shareholders upon written request of the holders of 25 percent of the shares of participation.

Income tax returns of the W. C. Tyrrell Trust were*663 filed on the corporation form during the entire life of the trust. Therein the kind of business it did was stated as "investments, farming and real estate." The returns show it did business as represented. Different documents or papers were executed by the trustee during the existence of the trust in which it was described as a joint stock company or association. Its letterheads in use during its existence so indicated.

W. C. Tyrrell (the father) served as trustee from the date of the creation of the trust until his death, September 7, 1924. During that period or afterwards, there were no formal or called meetings of the members of the trust and no orders or directions are shown to have been given the trustee, though some informal or family gatherings of the members occurred. The affairs of the trust during the time the father was trustee were handled by him in substantially the same manner as he had handled his and his wife's affairs before her death. After his death, H. C. Tyrrell, pursuant to terms of the trust, was designated trustee and so served until January 6, 1927, when he was succeeded as trustee by his brother, W. C. Tyrrell, Jr.

An agreement bearing date of December 31, 1926, was*664 executed on January 6, 1927, by all four heretofore named children (and also signed by the husbands of the daughters) and by H. C. Tyrrell trustee for the W. C. Tyrrell Trust. Pursuant to that agreement, H. C. Tyrrell, Vinnie T. Rorick, and Esther L. Garth (who filed petition herein as Mrs. James W. Garth) were to transfer and deliver to W. C. Tyrrell, Jr., their "certificates of participation in the said Trust, to the end that W. C. Tyrrell, Jr. May own all of the shares of participation (or certificates of interest) in said Trust." The said W. C. Tyrrell, Jr. Trustee, pursuant to terms of the agreement, was to convey to each of the other three children, his two sisters and brother, certain of the trust property "in general warranty form and bear date as of December 31, 1926, and it is contemplated that the value of the said shares of participation in said Trust in the hands of W. C. Tyrrell, Jr., will be affected and reduced to the extent of said transfers." It was further therein agreed that said shares were to be sold to "W. C. Tyrrell, Jr., at a price which will enable the latter to pay off the outstanding indebtedness of the Trust", which he obligated himself to assume and pay, *665 and hold the other parties harmless by reason thereof. Numerous other provisions of the agreement are not deemed material to be here set out.

It was stipulated in the agreement executed January 6, 1927, that there should be no personal liability upon the trustee or upon the holders or owners of the certificates of beneficial interest in the trust *711 "by reason of the obligations and warranties herein undertaken, but that the parties hereto shall look exclusively to the assets of the W. C. Tyrrell Trust for the enforcement of the obligations herein undertaken by W. C. Tyrrell, Jr., Trustee."

Contemporaneously with the execution on January 6, 1927, of the agreement dated December 31, 1926, H. C. Tyrrell resigned as trustee and W. C. Tyrrell, Jr., became trustee and made distribution of the assets of the trust to the members thereof, one-fourth of its assets in value being distributed and conveyed by W. C. Tyrrell, Jr., trustee, to each of his two sisters and his brother, the fourth interest remaining in the trust being retained as his own.

At the time of distribution of the assets of the trust as described, W. C. Tyrrell, Jr., Vinnie T. Rorick, Esther L. Garth, and*666 H.C. Tyrrell were the sole stockholders, and W. C. Tyrrell, Jr., was the sole trustee.

The trust provided that any trustee thereof might terminate the trust at any time by dividing the trust property among the beneficiaries pursuant to the terms of the trust, and the evidence herein indicates the trust was terminated or dissolved in accordance therewith.

It is stipulated that in the event each of the petitioners derived taxable income as a result of the transactions occurring at the date of the execution (January 6, 1927) of the aforesaid agreement dated December 31, 1926, and pursuant thereto, the amount of the taxable income to W. C. Tyrrell, Jr., is $232,799.95; to Vinnie T. Rorick, $157,260; and to Esther L. Garth, $116,495.66.

It was further stipulated that in the case of petitioner, W. C. Tyrrell, Jr., in addition to any other adjustments that the Board might find, his net taxable income for 1927 as shown in the deficiency notice should be increased in the sum of $45,000, by decreasing in that amount the ordinary loss for 1927 allowed as a deduction from petitioner's capital net gain for that year in determining the net taxable income upon which the deficiency shown*667 in the deficiency notice was computed.

OPINION.

SEAWELL: ¹ The first issue we shall consider and determine is whether the W. C. Tyrrell Trust was, within the meaning of the Revenue Act of 1926, a joint stock company or an association taxable as a corporation. Section 2(a)(2) of the Revenue Act of 1926 states: "The term 'corporation' includes associations, joint-stock companies and insurance companies."

It is frequently very difficult to determine whether a trust or other organization is taxable as a corporation. There are certain trusts *712 which, in the sense of the revenue act, are clearly simply trusts, and others which are as clearly associations. Each case necessitates a construction of the particular trust and agreement involved therein. The line of demarcation between the different types of organizations is often so fine that it is almost indistinguishable.

In the instant proceedings, when all the facts and their proper relation to one another are carefully considered and given their true meaning and full weight, we think the W. C. Tyrrell Trust falls within that category determined*668 by the Supreme Court of the United States to be an association taxable as a corporation. What is so well and ably said in some recent decisions of the Supreme Court as to when a trust is an association taxable as a corporation within the meaning of the Revenue Acts of 1926 and 1928 makes an extended discussion of the subject here unnecessary. See Marrissey v. Commissioner,296 U.S. 344, affirming 74 Fed.(2d) 803; Helvering v. coleman-Gilbert Associates,296 U.S. 369, reversing 76 Fed.(2d) 191, and affirming memorandum decision of this Board; Helvering v. Combs,296 U.S. 365, reversing 76 Fed.(2d) 682, which affirmed memorandum decision of this Board; Swanson v. Commissioner,296 U.S. 362, affirming 76 Fed.(2d) 651, which affirmed memorandum decision of this Board; Commissioner v. Vandergrift Realty & Investment Co., 82 Fed.(2d) 387; Central Republic Bank & Trust Co., Trustee,34 B.T.A. 391. Notwithstanding the authorities cited as determinative of the issue now being considered, some discussion is deemed*669 advisable and may make clearer and more convincing our determination.

In the instant proceedings the record shows that the trustee of the trust was empowered to buy and sell real and personal property and to operate farms, which he did for the interests of the trust. Income tax returns of the trust indicated, as our findings of fact show, that its business was investments, farming, and real estate. The evidence, in our opinion, does not indicate that the trust was a mere passive trust simply preserving and conserving valuable property, with no more than the necessary minimum business activity to do so. The fact that the certificate holders or beneficiaries did not exercise control is not determinative. Hecht v. Malley,265 U.S. 144. What was said by the Supreme Court in Helvering v. Combs, supra, seems applicable and appropriate to be here repeated with respect to the parties forming the trust: "Entering into a joint undertaking they avoided the characteristic responsibilities of partners and secured advantages analogous to those which pertain to corporate organization. The fact that meetings were not held or that particular forms of*670 corporate procedure were absent is not controlling. Morrissey v. Commissioner, supra."

*713 Prior to any tax controversy the trust and the petitioners as members thereof considered it and represented it to the public and to the respondent (Commissioner) to be a joint stock company, its letterheads used throughout its existence so indicating. In view of our findings of fact, there is no occasion or necessity for repeating here the many acts and circumstances indicating the W. C. Tyrrell Trust was, as it and its members or organizers represented it to be, a joint stock company or association. In our opinion, and we so hold - as heretofore indicated - the W. C. Tyrrell Trust was in the sense of the Revenue Act of 1926 a joint stock company or association taxable as a corporation.

The next issue for our determination is whether the petitioners realized taxable gain upon liquidation of the W. C. Tyrrell Trust. Section 201(c) of the Revenue Act of 1926 provides in part as follows:

Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock. * * * The gain or loss to the distributee resulting from such*671 exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203.

We have seen that under section 2(a)(2), supra, the term "corporation" includes associations and joint stock companies, and, in view of our determination that the W. C. Tyrrell Trust is an association or joint stock company taxable as a corporation, we think it logically follows that the certificate owners or shareholders would be taxable upon any gain realized by virtue of the distribution in complete liquidation of said trust, association, or joint stock company. We have heretofore determined a similar issue, in the case of Pierce Oil Corporation,32 B.T.A. 403. We there decided that gain was realized by the stockholders of a joint stock company organized under the laws of Texas upon liquidation thereof.

This issue is controlled by the principles enunciated and applied in Pierce Oil Corporation, supra, wherein we said, in part:

It is of no moment that Pierce Fordyce was not a corporation but an unincorporated association, for the statute has expressly included it within the definition of corporation, and the statute is*672 valid. Burk-Waggoner Oil Association v. Hopkins,269 U.S. 110. It is thus to be treated as a corporation for all purposes of the revenue act, including that prescribing consolidated returns. California Brewing Association,5 B.T.A. 347. This the petitioner recognized when it filed the original consolidated return. Its certificates of proportionate interest are treated as corporate shares. Petitioner would limit the influence of the Burk-Waggoner decision to considerations affecting the tax of the association, and urges that the association may not be treated as a corporation in determining the tax of the shareholder. But Congress intended no such exception. Section 201(a) treats of distributions for the purpose of determining the tax not alone of the distributing corporation, but also of the receiving shareholder, and provides that the term dividend "means *714 (1) any distribution made by a corporation * * * to its shareholders or members", thus bringing within its intendment not only those who may be strictly called shareholders of a corporation, but also those who by reason of the form of their organization are designated*673 "members." It is also said that Pierce Oil by acquiring the association certificates immediately became pro tanto the owner of the direct interest in the assets, the liquidation of which can not be called a realization of income. But this depends on whether for purposes of the revenue act the association is to be treated pluralistically The Burk-Waggoner decision holds that it is not. And it matters not how Texas law treats it. Burnet v. Harmel,287 U.S. 103; Palmer v. Bender,287 U.S. 551. But even though Texas should for some purposes and in some circumstances apply partnership law to such an association, no one could say that the association is an "ordinary partnership" and it is only to such that the partnership provisions of the statute are applicable. Burk-Waggoner Oil Association v. Hopkins, supra.

Cf. Holmby Corporation v. Commissioner, 83 Fed.(2d) 548, affirming 28 B.T.A. 1092.

After the distribution of assets or liquidation of the W. C. Tyrrell Trust its certificate holders or shareholders had something substantially different from what they had before. Before*674 liquidation or distribution, they had no legal or equitable title to any particular assets. After liquidation or distribution of the trust assets they had legal and equitable title in particular assets. The distribution made of the assets of the trust among the certificate holders resulted in gain to them, so the respondent determined.

We have held that the W. C. Tyrrell Trust should be classed as an association or joint stock company taxable as a corporation and find no evidence sufficient to overthrow the presumption of the correctness of respondent's determination that the distribution or liquidation resulted in gain to each of the petitioners, and we therefore so hold. In our opinion, the position of W. C. Tyrrell, Jr., after the distribution in liquidation was practically the same as that of the other certificate holders with respect to the income tax law and these proceedings. In any event, W. C. Tyrrell, Jr., was in receipt of a distribution in liquidation just as much as the other shareholders. There was a merger of the legal and equitable estates in him of the remaining one-fourth of the trust property. He became the sole owner, sole trustee, and beneficiary of one-fourth*675 of the trust assets and realized gain therefrom as did the other beneficiaries.

We are of the opinion and hold that each of the petitioners realized gain, taxable income, as the result of the transactions resulting in the distribution in liquidation of the assets of the W. C. Tyrrell Trust as heretofore described.

It was stipulated that in the event we should determine, as we now do, that the transactions heretofore described resulted in taxable income to each of the petitioners, the amount thereof is in each instance as particularly set forth in the stipulation. Computations *715 in recognition of the stipulation applicable to each case will accordingly be made.

Reviewed by the Board.

Decision in each case will be entered under Rule 50.