share. The trustee never purchased any of the deposited stocks; all of them have been purchased by the depositor with its own funds, nor did it select the stock originally chosen comprising the stock unit, or take any part in the elimination of stocks, excepting to follow the instructions given to it by the depositor. The duties of the trustee under the Trust Agreement have been carried out under the supervision of one of its vice presidents as an incident of the general business of the trustee without the employment or designation of anyone for that sole purpose; the amount of the depositor's administration fee, originally fixed not to be in excess of 1 1/2( semiannually for each trust share outstanding, was reduced to 1( semiannually for each trust share outstanding. The trust department of the trustee keeps an asset ledger, an income account, a distribution account, and an unclaimed dividend account, and whatever other accounts or records are requisite for the proper operation of the trust. The holders of trust share certificates have no voting rights, nor is there any provision in the Trust Agreement for meetings of the holders, and none has ever been held. The trust created under the Trust Agreement has likewise no directors, officers, or employees, nor has it any office, stationery, seal or minute book.
The question of law here involved is whether an investment trust of the fixed or deposited unit type is properly classified as an association and hence taxable as a corporation for federal tax purposes.
Conclusions of Law
The declaration of trust here involved dated April 2, 1930 with Independence Shares Corporation is not an association, and therefore not within the term "corporation" as defined in Sec. 1001(a) (2) of the Revenue Act of 1936, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Code § 3797(a) (3), and the ruling of the Commissioner of Internal Revenue is reversed and the taxpayer awarded the judgment prayed for.
In determining whether a particular trust agreement shall be construed as a trust or as an association, it is fundamental that we examine what powers and duties are lodged with the trust. In this case, what powers and duties were given to the depositor, to the trustee, to the cestuis que trust, the holders of the trust share certificates? Since no two trust agreements are identical, but differ on various factual bases, the most that can be hoped for from adjudicated cases, is to determine the controlling principles of law laid down and attempt to apply them to the facts of the particular case; and so it is for this reason that all of the pertinent portions of the declaration of trust between the trustee and depositor are set forth.
The Supreme Court in Morrissey v. Commissioner, 296 U.S. 344, 56 S. Ct. 289, 80 L. Ed. 263, makes an elaborate review of the authorities and while certain statements taken out of the context of an opinion do not always reveal the true attitude of the court, nevertheless I feel that it is a fair conclusion from a careful reading of the Morrissey case to say that the court distinguished it from the traditional type of trust by a finding that the facts disclosed a purpose and intention to carry on a business enterprise and so to share in its gains, and unless such an intention to engage in a business enterprise is present mere resemblance to corporate forms is not controlling. In Crocker v. Malley, 249 U.S. 223, 39 S. Ct. 270, 63 L. Ed. 573, 2 A.L.R. 1601, the trust was engaged in the operation of a mill, and in Morrissey v. Com'r, supra, it was concerned with the operation of a golf club, while in Hecht v. Malley, 265 U.S. 144, 44 S. Ct. 462, 68 L. Ed. 949, it was concerned with the operation of a real estate trust, and here the court stated at page 157 of 265 U.S; at page 467 of 44 S. Ct., 68 L. Ed. 949: "We think the word 'association' as used in the Act clearly includes 'Massachusetts Trusts' such as those herein involved, having quasi-corporate organizations under which they are engaged in carrying on business enterprises". The approach therefore it seems to me, is to attempt to determine, whether from a consideration of all the powers lodged with the trust, the object is to hold and conserve particular property with incidental powers such as in the traditional type of trust, or whether the intention is to provide a medium for the conduct of a business and to share its gains and losses.
The government lays great stress on some of the attributes of the quasi form of organization mentioned by the court in Morrissey v. Commissioner, supra. One of these is the provision for succession. However, in the instant case, it is not like a corporation since the beneficiaries have no right to select a successor trustee and the depositor has the right to select one, only if the trustee is relieved or discharged by a competent court and the successor must then be a bank or trust company incorporated under the laws of the United States of America or the Commonwealth of Pennsylvania. Central management is another. An examination of the trust reveals, in my opinion, no such central management as was contemplated by the court in the Morrissey case, supra, or central management as is understood generally in the ordinary corporation. Continuity of organization is another. However, this is an attribute of the trust as well as of a corporation and therefore mere continuity of organization as such is not, in my opinion, sufficient to bring it within the terms of the Morrissey case, supra. The transfer of beneficial interests without effect on the continuity of the enterprise is another. But here again it is a distinguishing feature more applicable between partnerships and corporations than between trusts and corporations. The large number of participants is another. However, as was held in Swanson v. Commissioner, 296 U.S. 362, 56 S. Ct. 283, 80 L. Ed. 273, the fact that there were a large number of participants is immaterial, and does not affect the question of whether there is a trust or an association. Limitation of personal liability of participants is another. Here there is no provision in the Trust Agreement relieving the trust share holders of any of the liability of the trust and it therefore can in no wise be controlling.
Accordingly, I am persuaded to the point of view that the instant case conforms itself most nearly to the case of Commissioner v. Chase National Bank, 2 Cir., 122 F.2d 540, as well as that of Commissioner v. Buckley, 9 Cir., 128 F.2d 124, and not as contended for by the government more nearly to Commissioner v. North American Bond Trust, 2 Cir., 122 F.2d 545. In the case of Commissioner v. North American Bond Trust, supra, the court there distinguishes the case from that of Commissioner v. Chase National Bank, supra, largely on the ground that in its case the depositor was not confined to the same bonds for each unit and the depositor was permitted to make up new units composed of different bonds from the preceding units as new money was available, thus reducing the interest of certificate holders in the bonds that they had then owned, and substituted in the place of the interest so taken, an interest in new bonds. This was not the case in Commissioner v. Chase National Bank, supra, nor is it the situation in the instant case, since the depositor has no power to vary the stock in different units as an examination of the instrument reveals that the only way the property held in trust could be affected by the depositor was its authorization to weed out whatever became unsound for investment and retain the remainder, this power in the instant case not being nearly as broad as that detailed authority given depositor in Commissioner v. Chase National Bank, supra. Accordingly, the only investment discretion found here is the limited power of elimination, granted to the depositor, the agreement not even containing powers of an ordinary trust under will or deed, authorizing the trustee to invest and reinvest the corpus of the trust.
Here I feel there was no power exercised by either the trustee or depositor or their combination beyond those which are necessary incidents to the preservation of trust property, the collection of income therefrom and its distribution to the holders of trust shares, and I do not find that the instrument provided a medium which could be construed as set up for the conduct of a business and the sharing of its gains and losses.
I therefore find that the Independence Trust Shares trust is not an association either in purpose or activity, and judgment should be in favor of the taxpayer.
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