Court Opinion

ID: 4591441
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:05:49.04281+00
Date Added: 2024-06-11T07:50:40.151132
License: Public Domain

REALTY ASSOCIATES, AS SYNDICATE MANAGER, BRIGHTON SYNDICATE No. 1, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Realty Assoc. v. CommissionerDocket No. 27921.United States Board of Tax Appeals17 B.T.A. 1173; 1929 BTA LEXIS 2176; October 31, 1929, Promulgated 1929 BTA LEXIS 2176">*2176  There being no organization empowered to advise, direct or control the activities of a manager in charge of a fund placed in his hands by contributors for investment purposes, no "association" taxable as a corporation under section 2 of the Revenue Act of 1921 is formed.  Lawrence A. Baker, Esq., John A. Selby, Esq., and Henry Ravenel, Esq., for the petitioner.  John D. Foley, Esq., for the respondent.  LANSDON 17 B.T.A. 1173">*1173  The respondent asserted deficiencies in income tax for the year 1922 against the Realty Associates, a corporation, as syndicate manager of Brighton Syndicate No. 1, in the amount of $7,835.25.  The issues are (1) whether during the taxable year Brighton Syndicate No. 1 was an "association" within the provisions of the Revenue Act of 1921, and, therefore, taxable as a corporation upon its income; (2) whether, if taxable as a corporation, this syndicate was entitled to a deduction theretofore allowed by the Commissioner from its gross income for the taxable year of $20,984.01 as a business expense incurred within said year.  FINDINGS OF FACT.  During the taxable year the corporation known as the "Realty Associates" was engaged1929 BTA LEXIS 2176">*2177  in the exploitation of real estate properties located on Long Island and in and around New York and Brooklyn, N.Y.  Beginning about 1905 and continuing up to and including the taxable year, the operations of this corporation were carried on through a scheme whereby it acquired the major portion of its capital, needed for the exploitation of various projects, from outside investors by means of individual subscription to a fund placed in its hands, and to which it likewise contributed, for the purposes 17 B.T.A. 1173">*1174  of investment; but over which it exercised complete control in every respect.  A number of these projects were carried on by this corporation at the same time, one of which was the so-called Brighton Syndicate No. 1, now under consideration.  The relationship of the parties forming this so-called syndicate is established by seventeen separate contracts identical in form and recitals, which allege that each "is one of seventeen counterparts," and that when all are signed and executed, each by "Realty Associates" and a member of the syndicate, upon notice from the syndicate manager it shall be in full force and effect.  Each is dated November 1, 1919, and signed by "Realty1929 BTA LEXIS 2176">*2178  Associates" and a different member of the so-called syndicate, with figures showing the amount of the subscription of the latter, in dollars, following his name, of which the following is typical: SIXTH: This Agreement is one of seventeen counterparts, each signed and executed by REALTY ASSOCIATES and a member of the Syndicate and the amount subscribed by said member is set opposite his name at the bottom of this Agreement and is hereby made a part thereof.  By his signature the member does hereby agree to abide by the terms of this syndicate and this Agreement as hereinabove set forth.  If when and as all seventeen counterparts are duly signed, sealed and delivered by the respective parties this Agreement shall be in full force and effect.  Such fact shall be certified in writing by the Syndicate Manager to each of said members of the Syndicate.  This Agreement shall bind and benefit ratably according to the amount of their several subscriptions not only the parties hereto, but their respective legal representatives, assigns, successors and survivors.  The members of the Syndicate will at any time execute any instruments necessary in the judgment of the Syndicate Manager to carry1929 BTA LEXIS 2176">*2179  out the provisions of this Agreement.  IN WITNESS WHEREOF, the members of the Syndicate have hereunto attached their hands and seals and the REALTY ASSOCIATES has hereunto attached its corporate seal and caused this Agreement to be signed by two of its officers on the day of the year above written.  (Signed) REALTY ASSOCIATES By FRANK FOX 3rd Vice-President.F. JOERISSEN Asst. TreasurerREMSEN JOHNSON [SEAL.] Presumably one of these contracts is made between "Realty Associates" and itself, as both parties, since it is one of the seventeen named in the syndicate as well as the so-called "syndicate manager" with whom the contract is made.  The first paragraph of these contracts names the "Realty Syndicate" and sixteen other persons which it says are "hereinafter called the 'Syndicate,'" as parties of the first part, and Realty Associates, a corporation, called the "Syndicate manager," party of the second part.  The second paragraph recites that the parties "whose names are hereunto subscribed" are 17 B.T.A. 1173">*1175  desirous of forming a syndicate to be known as "Brighton Syndicate" for the "purchase and holding" of certain securities thereinafter described.  It1929 BTA LEXIS 2176">*2180  is then recited that in consideration of their mutual promises, and the expected benefits from the performance thereof, the parties severally agree with each other and with the syndicate manager to do certain things, viz, (1) each member of the syndicate agrees to "contribute to a syndicate fund" the sum set opposite his name, payable within ten days after call from the syndicate manager, with certain penalty provisions in case of default; but providing that each individual member "shall be responsible to the full extent of his subscription regardless of the payment or non-payment of the subscription of any other member of the syndicate"; (2) the syndicate fund is to be used by the syndicate manager for the purpose of purchasing and managing "from an investment standpoint," the securities so described, "and for such other purposes as in the judgment of the syndicate manager any be advisable," giving authority to the syndicate manager to exercise full powers of ownership over such securities, including the right to hypothecate, pledge and borrow money on them for the benefit of the syndicate, the syndicate members agreeing at any time to execute any instruments at the request of the1929 BTA LEXIS 2176">*2181  syndicate manager, which in its judgment might be necessary to carry into effect the provisions of the contract; (3) the agreement is to remain in force until terminated "at the option of the syndicate manager," when notice shall be given to the subscribers; (4) the syndicate manager is required to keep a record of the names and addresses of such members of the syndicate as shall furnish such to it, but shall be under no obligation to so notify any member who fails to furnish such.  A notice mailed to such address shall be due notice to the member; (5) when terminated the assets and profits are to be distributed though a partial distribution might be made beforehand at the discretion of the syndicate manager, as follows: 1st.  The syndicate manager shall retain its disbursements for expenses and then return to each subscriber the amount actually paid into the fund by him, with interest thereon at the rate of 6 per cent per annum.  2d.  The syndicate manager shall then retain 25 per cent of the total net profits resulting from the operation of the agreement in payment for its services as syndicate manager; and (6) the remaining balance be distributed "to the parties entitled thereto" 1929 BTA LEXIS 2176">*2182  in amounts or values proportionate to which the amount paid into the fund by each bears to the total of the fund so raised.  The heirs, successors and assigns of all members of the so-called syndicate are made parties to the contracts with full benefits under the syndicate.  Following the execution of these contracts the parties paid over to the Realty Associates, Inc., as syndicate manager, the amounts 17 B.T.A. 1173">*1176  severally subscribed by them, which funds in accordance with the provisions of said contracts were invested by the syndicate manager in the securities so to be purchased.  In July, 1922, profits of a total of $62,952.04 were distributed by the syndicate manager among the subscribing members to the funds so invested, in accordance with the provisions of the several contracts, of which amount the Realty Associates retained the sum total of $30,411.60.  In auditing the income-tax return of the Realty Associates, Inc., for the year 1922, the Commissioner determined that the so-called Brighton Syndicate was an association, taxable as a corporation within the provisions of section 230 of the Revenue Act of 1921, and as such determined a tax liability which was asserted1929 BTA LEXIS 2176">*2183  as a deficiency against the Realty Associates as syndicate manager for Brighton Syndicate No. 1.  OPINION.  LANSDON: In view of the conclusion we have reached in this case, it is only necessary to consider the question as to the correctness of the determination of the Commissioner in classifying the Brighton Syndicate as a corporation within the purview of the Revenue Act of 1921, the pertinent provisions of which are as follows: SEC. 2.  That when used in this Act - * * * (2) The term "corporation" includes associations, joint-stock companies, and insurance companies.  It being conceded that the so-called Brighton Syndicate is neither a joint-stock company nor an insurance company, it remains only to determine whether it can be properly classed as an association within the meaning of this Act.  The term "association," like that of syndicate, or company, is often carelessly employed to characterize activities of two or more individuals jointly, or disjointly, working together to accomplish a given object, regardless of the nature or form of their organized efforts; and, even in the absence of any organization whatever; but in its true legal concept the entity thus recognized1929 BTA LEXIS 2176">*2184  is restricted to certain well defined limits.  These definitions have received judicial approval: In the United States, as distinguished from a corporation, a body of persons united without a charter but upon the methods and forms used by incorporated bodies for the prosecution of some enterprise.  (1 Bouvier's Law Dictionary.) In the United States, as distinguished from a corporation, a body of persons organized for the prosecution of some purpose, without a charter, but having the general form and mode of procedure as a corporation.  (Webster's International Dictionary.) 17 B.T.A. 1173">*1177  The term "association" usually means an unincorporated organization composed of a body of men, partaking in its general form and mode of procedure of the characteristics of a corporation.  (Words & Phrases, 584.) Cited in ; ; . Article 1312, Regulations 74, defines associations which are to be classed as corporations for income-tax purposes as associations and joint-stock companies, * * * common law trusts and organizations, by1929 BTA LEXIS 2176">*2185  whatever name known, which act or do business in an "organized capacity." Testing the relationship created between the individuals, who signed these several contracts and paid into the so-called Brighton Syndicate investment fund, by the plain provisions of the instruments themselves it can hardly be contended, when measured by these definitions, that it amounted to an association taxable under the statute.  As between themselves there is no acting or doing business "in an organized capacity," as called for in article 1312, supra, since they are in no manner or form organized; neither is there any management or control of the affairs of the so-called syndicate reserved to them so as to give its operations the slightest resemblance to corporate actions.  Construed together, these seventeen instruments amounted to nothing more or less than so many subscriptions to an investment fund in the hands of Realty Associates to be binding upon each subscriber when all seventeen were signed; and then, payable only at the election of the so-called syndicate manager.  As to whether they could have been enforced by the so-called syndicate manager we need not consider in view of the fact that1929 BTA LEXIS 2176">*2186  all subscriptions were in fact paid, the investment made and liquidated in accordance with their terms.  However, in so doing the syndicate manager acted alone and without direction or restraint from any of these subscribers individually or collectively.  No organization was formed, from which it follows that there was no association to tax.  Reviewed by the Board.  Decision of no deficiency will be entered.SMITH and MURDOCK concur in the result.