Source: https://supreme.justia.com/cases/federal/us/296/344/case.html
Timestamp: 2016-07-28 12:33:52
Document Index: 563353056

Matched Legal Cases: ['§ 219', 'Art. 1314', 'Art. 801', '§ 704', 'Art. 1504', 'Art. 1504']

Morrissey v. Commissioner :: 296 U.S. 344 (1935) :: Justia U.S. Supreme Court Center Log In
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Morrissey v. Commissioner 296 U.S. 344 (1935)
U.S. Supreme CourtMorrissey v. Commissioner, 296 U.S. 344 (1935)Morrissey v. Commissioner of Internal RevenueNo. 17Argued October 18, 1935Decided December 16, 1935296 U.S. 344CERTIORARI TO THE CIRCUIT COURT OF APPEALS
7. Whether a trust may be classed and taxed as an "association," under the Revenue Acts of 1924 and 1926, which define the term corporations as including "associations," joint stock companies and insurance companies, is not dependent on its having a statutory organization or statutory privileges, or upon its use of corporate forms of procedure. Its trustees may perform the Page 296 U. S. 345 functions performed in corporations by officers and directors, and provisions of the trust instrument may take the place of bylaws. P. 296 U. S. 357.
(3) The character of the trust is revealed by the terms of the trust instrument. P. 296 U. S. 361. Page 296 U. S. 346
Petitioners, the trustees of an express trust, contest income taxes for the years 1924 to 1926, inclusive, upon the ground that the trust has been illegally treated as an "association." The Circuit Court of Appeals affirmed the decision of the Board of Tax Appeals which sustained the ruling of the Commissioner of Internal Revenue. 74 Page 296 U. S. 347 F.2d 803. We granted certiorari because of a conflict of decisions as to the distinction between an "association" and a "pure trust," the decisions being described in one of the cases as "seemingly in a hopeless state of confusion." Coleman-Gilbert Associates v. Commissioner, 76 F.2d 191, 193. [Footnote 1]
The trustees might convene the shareholders in meeting for the purpose of making reports or considering recommendations, but the votes of the shareholders were to be advisory only. The death of a trustee or of a beneficiary was not to end the trust, which was to continue Page 296 U. S. 348 for twenty-five years unless sooner terminated by the trustees.
Petitioners contend that they are trustees "of property held in trust," within § 219 of the Revenue Acts of 1924 and 1926, [Footnote 2] and are taxable accordingly, and not as an "association." They urge that, to constitute an association, the applicable test requires "a quasi-corporate organization in which the beneficiaries, whether or not certificate holders, have some voice in the management and some control over the trustees, and have an opportunity Page 296 U. S. 349 to exercise such control through the right to vote at meetings;" and that, in any event, the activities in which petitioners were engaged, during the tax years under consideration, did not constitute "a carrying on of business" within the rule applied by this Court.
"every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how created Page 296 U. S. 350 or organized, not including partnership."
"If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust Page 296 U. S. 351 is an association within the meaning of the statute."
265 U.S. p. 265 U. S. 155. Shorn of the restriction, the word "association" appeared to be used in its Page 296 U. S. 352 ordinary meaning, and we referred to several definitions found in standard dictionaries, as, e.g., "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;" "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;" "an organized but unchartered body analogous to but distinguished from a corporation." Id., p. 265 U. S. 157. We expressed the view that the word "association," as used in the excise tax provision of the Revenue Act of 1918, clearly included "Massachusetts trusts," of the sort there involved, "having quasi-corporate organizations under which they are engaged in carrying on business enterprises." We were careful to say that it was then unnecessary to determine "what other form of "associations," if any," the Act embraced. Id.
"should be exempt from Page 296 U. S. 353 the excise tax on the privilege of carrying on their business merely because such a slight measure of control may be vested in the beneficiaries that they might be deemed strict trusts within the rule established by the Massachusetts courts."
The text of the regulations relating to associations, so far as pertinent here, promulgated under the Revenue Act of 1924, is set forth in the margin. Regulations No. 65, Arts. 1502, Page 296 U. S. 354 1504, as amended. [Footnote 10] These regulations were continued substantially unchanged under the Revenue Acts of 1926 and 1928. No. 69, Arts. 1502, 1504; No. 74, Arts. 1312, 1314. The corresponding regulations under the Act of 1932 were somewhat modified, No. 77, Art. 1314, and these were considerably expanded by the regulations issued under the Revenue Act of 1934, No. 86, Art. 801-2, 801-3.
2. As the statute merely provided that the term "corporation" should include "associations," without further definition, the Treasury Department was authorized to supply rules for the enforcement of the Act within the Page 296 U. S. 355 permissible bounds of administrative construction. Nor can this authority be deemed to be so restricted that the regulations, once issued, could not later be clarified or enlarged so as to meet administrative exigencies or conform to judicial decision. Compare Murphy Oil Co. v. Burnet, 287 U. S. 299, 287 U. S. 303-307. We find no ground for the contention that, by the enactment of the Revenue Act of 1924, the Department was limited to its previous regulations as to associations. And, while the case of Hecht v. Malley was concerned with the special excise tax provision of the Revenue Act of 1918, the ruling of the Court that the degree of the control by beneficiaries was not a decisive test in that relation could, by similar reasoning, be applied to the general income taxes laid by the revenue acts upon corporations, and thus upon associations. These general income taxes covered both those taxes which in their nature were excise taxes on business, and as such could have been laid prior to the Sixteenth Amendment, and those taxes on other income which were permitted by that amendment. Stanton v. Baltic Mining Co., 240 U. S. 103, 240 U. S. 107, 240 U. S. 114. We think that the Department did not exceed its powers in rewriting its regulation, in the light of the decision in Hecht v. Malley, so as to provide with respect to the income taxes, in general, to be paid by associations that the extent or lack of control by the beneficiaries of a trust should not, in itself, determine whether there was an association within the meaning of the statute. That the revised regulation had congressional approval is persuasively evidenced by the fact that the regulation, as amended in 1925, was continued without substantial alteration until 1933, and meanwhile Congress reenacted without change the general provision as to associations in the Revenue Acts of 1926, 1928, and 1932. See Brewster v. Gage, 280 U. S. 327, 280 U. S. 337; McCaughn v. Hershey Chocolate Co., 283 U. S. 488, 283 U. S. 492; Page 296 U. S. 356 Murphy Oil Co. v. Burnet, supra; Helvering v. Bliss, 293 U. S. 144, 293 U. S. 151.
3. "Association" implies associates. It implies the entering into a joint enterprise, and, as the applicable regulation imports, an enterprise for the transaction of business. This is not the characteristic of an ordinary trust -- whether created by will, deed, or declaration -- by which particular property is conveyed to a trustee or is to be held by the settlor, on specified trusts, for the benefit of Page 296 U. S. 357 named or described persons. Such beneficiaries do not ordinarily, and as mere cestuis que trust, plan a common effort or enter into a combination for the conduct of a business enterprise. Undoubtedly the terms of an association may make the taking or acquiring of shares or interests sufficient to constitute participation, and may leave the management, or even control, of the enterprise to designated persons. But the nature and purpose of the cooperative undertaking will differentiate it from an ordinary trust. In what are called "business trusts," the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains. Thus, a trust may be created as a convenient method by which persons become associated for dealings in real estate, the development of tracts of land, the construction of improvements, and the purchase, management, and sale of properties, or for dealings in securities or other personal property, or for the production, or manufacture, and sale of commodities, or for commerce, or other sorts of business, where those who become beneficially interested, either by joining in the plan at the outset, or by later participation according to the terms of the arrangement, seek to share the advantages of a union of their interests in the common enterprise.
4. The inclusion of associations with corporations implies resemblance; but it is resemblance, and not identity. The resemblance points to features distinguishing associations from partnerships as well as from ordinary trusts. As we have seen, the classification cannot be said to require organization under a statute, or with statutory privileges. Page 296 U. S. 358 The term embraces associations as they may exist at common law. Hecht v. Malley, supra. We have already referred to the definitions, quoted in that case, showing the ordinary meaning of the term as applicable to 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." These definitions, while helpful, are not to be pressed so far as to make mere formal procedure a controlling test. The provision itself negatives such a construction. Thus, unincorporated joint-stock companies have generally been regarded as bearing the closest resemblance to corporations. But, in the Revenue Acts, associations are mentioned separately, and are not to be treated as limited to "joint-stock companies," although belonging to the same group. While the use of corporate forms may furnish persuasive evidence of the existence of an association, the absence of particular forms, or of the usual terminology of corporations, cannot be regarded as decisive. Thus, an association may not have "directors" or "officers," but the "trustees" may function "in much the same manner as the directors in a corporation" for the purpose of carrying on the enterprise. The regulatory provisions of the trust instrument may take the place of "bylaws." And, as there may be, under the reasoning in the Hecht case, an absence of control by beneficiaries such as is commonly exercised by stockholders in a business corporation, it cannot be considered to be essential to the existence of an association that those beneficially interested should hold meetings or elect their representatives. Again, while the faculty of transferring the interests of members without affecting the continuity of the enterprise may be deemed to be characteristic, the test of an association is not to be found in the mere formal evidence of interests or in a particular method of transfer. Page 296 U. S. 359
It is no answer to say that these advantages flow from the very nature of trusts. For the question has arisen because of the use and adaptation of the trust mechanism. Page 296 U. S. 360 The suggestion ignores the postulate that we are considering those trusts which have the distinctive feature of being created to enable the participants to carry on a business and divide the gains which accrue from their common undertaking, trusts that thus satisfy the primary conception of association and have the attributes to which we have referred, distinguishing them from partnerships. In such a case, we think that these attributes make the trust sufficiently analogous to corporate organization to justify the conclusion that Congress intended that the income of the enterprise should be taxed in the same manner as that of corporations.
Under the trust, a considerable portion of the property was surveyed and subdivided into lots which were sold Page 296 U. S. 361 and, to facilitate the sales, the subdivided property was improved by the construction of streets, sidewalks, and curbs. The fact that these sales were made before the beginning of the tax years here in question, and that the remaining property was conveyed to a corporation in exchange for its stock, did not alter the character of the organization. Its character was determined by the terms of the trust instrument. It was not a liquidating trust; it was still an organization for profit, and the profits were still coming in. The powers conferred on the trustees continued and could be exercised for such activities as the instrument authorize .
6. Petitioners contend that the trust was not taxable as an association, by reason of the retroactive provisions of § 704(a) of the Revenue Act of 1928. [Footnote 12] The contention is plainly unavailing, and does not require an extended discussion. Section 704(a) of the Act of 1928 provides, in substance, that where a taxpayer filed a return as a trust for a taxable year prior to 1925, the taxpayer shall be taxable as a trust, and not as a corporation, if the taxpayer was considered to be so taxable either (1) under the regulations in force at the time the return was made, or (2) under a departmental ruling then applicable and in force. Prior to the time for filing petitioners' return for the year 1924, the regulations had been amended, following the decision in Hecht v. Malley, supra, so as to provide that operating trusts in which the trustees were not restricted to the mere collection of funds and their payment to beneficiaries, but were associated together in much the same manner as directors in a corporation for the purpose of carrying on a business enterprise, should be deemed to be associations, regardless of the control exercised by the beneficiaries. Treasury Regulations No. 65, Art. 1504, October, 1924. It does not appear that there Page 296 U. S. 362 were regulations or rulings in force at the time of the return for the taxable year 1924, under which the trust in this instance would be taxable as a trust, and not as an association.
"* * * *" "Art. 1504. Association distinguished from trust. -- Where trustees merely hold property for the collection of the income and its distribution among the beneficiaries of the trust, and are not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business, and the beneficiaries have no control over the trust although their consent may be required for the filling of a vacancy among the trustees or for a modification of the terms of the trust, no association exists, and the trust and the beneficiaries thereof will be subject to tax as provided by section 219 and by articles 341-347. If, however, the beneficiaries have positive control over the trust, whether through the right periodically to elect trustees or otherwise, an association exists within the meaning of section 2. Even in the absence of any control by the beneficiaries, where the trustees are not restricted to the mere collection of funds and their payment to the beneficiaries, but are associated together with similar or greater powers than the directors in a corporation for the purpose of carrying on some business enterprise, the trust is an association within the meaning of the statute."