Case Name: McKEAN et al. v. SCOFIELD, Collector of Internal Revenue
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1940-01-11
Citations: 108 F.2d 764
Docket Number: No. 9237
Parties: McKEAN et al. v. SCOFIELD, Collector of Internal Revenue.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 108
Pages: 764–768

Head Matter:
McKEAN et al. v. SCOFIELD, Collector of Internal Revenue.
No. 9237.
Circuit Court of Appeals, Fifth Circuit.
Jan. 11, 1940.
HOLMES, Circuit Judge, dissenting.
R. N. Gresham, of San Antonio, Tex., for appellants.
Lee A. Jackson, Sp. Asst, to the. Atty. Gen., and W. R. Smith, Jr., U. S. Atty., of San Antonio, Tex., for appellee.
Before SIBLEY, HUTCHESON, and HOLMES, Circuit Judges.

Opinion:
SIBLEY, Circuit Judge.
There were five suits filed in the district court against the Collector of Internal Revenue to recover additional taxes exacted for the year 1933. Each suit was brought by A. J. McKean, Sr., A. J. McKean, Jr., and E. B. McKean as trustees, but as trustees for different beneficiaries and under a different deed of trust in each case. The additional tax was assessed on the separate returns of each trust by considering the five trusts, along with five other similar trusts relating to other property, as constituting an association taxable as a corporation. The court consolidated the cases, and a jury being waived, the judge found the facts, held that they showed an association, and denied recovery. This appeal results.
The principal facts are that' A. J. McKean, Sr., and his wife had numerous and valuable separate and community properties in Texas. The wife died in October, 1930, devising her interests to their children A. J. McKean, Jr., E. B. McKean, Lucille M. Ponder and Myrtle M. Smith. These children were all married. Some already had children. To avoid questions about the ownership in settling Mrs. McKean's estate, to obviate a division, to provide for the family welfare, and to facilitate the management of the property, the trusts in controversy were created. The oil properties were put together, giving rise to the "oil trusts", and the remaining property went into the "general trusts". By conveyances joined in by the father and four children each became the owner of a one-fifth undivided interest in common in each group of properties. Standing thus as equal owners in common, each of them, on the same day by a separate deed conveyed his undivided fifth interest in the oil properties to the father and two sons as trustees, and by five other deeds each dealt similarly with the remaining general properties. There thus arose five oil trusts and five general trusts, each grantor having created an oil and a general trust for the benefit of himself or herself and descendants according to the limitations of the trust deeds. Each trust had the same trustees, and their powers were in practically identical terms, including full management and control, sale, lease, investment and reinvestment and partition. A compensation of $720 per year was fixed in each trust. The net income of each was to be distributed annually to the beneficiaries of that trust, but with power to set up a reserve or surplus. On the death of a trustee the survivors were to continue, but on the death or disability of all three a named bank was to be trustee. The trusts created by the four children are to terminate five years after the death of the father, but the oil trusts and those created by the father are to terminate at a different time. Each trust requires its trustees to keep proper books with right of inspection by its beneficiaries, and the trustees are absolved from personal liability except for dishonesty or wilful breach of trust. Each beneficiary is prohibited from selling or incumbering any part of the trust estate or its income. There are intricate limitations over on the death of the grantor during the trust period, with monthly payments of income to beneficiaries; and if the monthly payment does not equal $100, that much is to be paid by encroaching on the corpus, but not so as to impair its solvency. In case of sickness or other urgent necessity of a beneficiary the trustees have authority to pay over as much as in their opinion is adequate to relieve the misfortune.
There is no provision in any trust deed for cooperation with or recognition of any other trust. In point of practice, however, the trustees being identical and having charge of interests in the same property, have dealt with and for each trust in the same way, have kept but one bank account and one set of books, until distributions were made, or new investments or sales, when entries were made on the separate accounts of each trust. The testimony is that the trustees did not consider themselves bound to invest for all the trusts in the same property but had done so to avoid criticism if one investment should turn out better or worse than another. There have been no partitions. The trustees have done considerable business in the oil trusts, and ranching and farming in the general trusts, and have bought and sold properties, and speculated profitably in wheat and cotton on the exchange. In the tax year 1933, the oil trusts made and returned separately net income. There was no net income on the returns of the general trusts.
The income tax laws recognize a trust as a taxpayer and make provisions for taxation of the trust income. These laws also provide another scale of taxation for corporations and say: "The term 'corporation' includes associations, joint-stock companies and insurance companies." Revenue Act 1932, § 1111(a), (2), 26 U.S.C.A. § 1696 (3). The questions when a trust is an association, and who are the associates, were dealt with in Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263; Swanson v. Commissioner, 296 U.S. 362, 56 S.Ct. 283, 80 L.Ed. 273; and Helvering v. Combs, 296 U.S. 365, 56 S.Ct. 287, 80 L. Ed. 275. Each case dealt with a single trust by means of which several owners of property had combined the title and management of their property in the one trust, with substantially the results that would have been attained by conveying it to a corporation for stock therein, and for purely business purposes. There was a unity of ownership achieved by the trust, which in turn created a unified management and control, which could not be affected by a contributor's death, but gave him a beneficial interest which he could sell as in case of a stockholder. Such is not the case here. Each property owner has kept his property separate in ownership, though he has converted it into a trust for the benefit of himself and family. Solicitude for the future of his family is a main purpose of the trust, as is shown by the character of the limitations, the provisions for encroachment on corpus in case of need, and forbidding any beneficiary to transfer or incumber his interest or anticipate the income. That the trusts cover undivided interests in the same properties, that they have the same trustees and identical powers and similar limitations, and that in practice the trustees have dealt with all alike, keeping but one set of books, does not amalgamate or consolidate the trusts or make them one for tax purposes. It was so held even when several such trusts were all created by one grantor and in a single instrument in United States Trust Co. v. Commissioner, 296 U.S. 481, 56 S.Ct. 329, 80 L.Ed 340, and Helvering v. McIlvaine, 296 U.S. 488, 56 S.Ct. 332, 80 L.Ed. 345, affirming 7 Cir., 78 F.2d 787, 102 A.L.R. 252. Each trust is a separate thing. In each the trustees owe a separate duty to its beneficiaries. Though in the tax year and previously these trusts had been carried along together, the harmony might at any time be broken. A widow and children requiring monthly support, sickness or misfortune calling for encroachment on corpus, or even the exercise of the power of partition given in the deed, might call for special management in any trust and cause a complete change of investment. Speculation on margins could probably be stopped by the beneficiaries of one trust, though suffered to continue by others. Nothing in the law, nothing in the trust deeds binds the trusts together, and the fact that the trustees are the same persons and the property undivided estates in the same realty is not enough. In law the trustees are as separate as though they were different individuals. There has been cooperation between the trusts, but no incorporation. There has been confusion of transactions, but the trustees have not formed themselves or their trusts into a new body which could be called an association, if indeed they could. If five individuals owning each an undivided interest in property cooperate voluntarily in its manager ment, no taxable association results. If they each employ the same agent to manage it the same thing is true. If each conveys his interest in trust for himself and his children only, and not for the other owners, the case is not altered. Nothing which resembles ownership for all, as when conveyance is made to a corporation, has occurred. It was so held of a stock-purchasing syndicate where the syndicate manager was to act for each participant rather than for all. Commissioner v. N. B. Whitcomb Coca Cola Syndicate, 5 Cir., 95 F.2d 596; Everts v. Comm., 38 B.T.A. 1039. See also Burnet, Commissioner v. Burns, 8 Cir., 63 F.2d 313.
It may be conceded that these trustees are engaged in business, so that if the owners in common had conveyed their interests into one trust, or otherwise formed a company to own and manage them, a business association might have resulted. They may have thought and purposed that a harmonious cooperation would be achieved by selecting the same trustees and giving them the same powers. But we think that so long as each owner kept his interest separate, and for the use of his own chosen beneficiaries, with no compulsory cooperation with the others, there arose among the several trusts nothing so like a corporation that it could be held an association taxable as a corporation.
The judgment is reversed and the cause remanded for further proceedings consistent with this opinion.