Court Opinion

ID: 4592974
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:09:05.627293+00
Date Added: 2024-06-11T07:50:57.898477
License: Public Domain

ROLLIN S. STURGEON AND LUCIEN HUBBARD, AS TRUSTEES UNDER THE DECLARATION OF TRUST DATED OCTOBER 18, 1922, KNOWN AS THE STURGEON-HUBBARD TRUST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sturgeon v. CommissionerDocket No. 37095.United States Board of Tax Appeals25 B.T.A. 368; 1932 BTA LEXIS 1533; January 26, 1932, Promulgated *1533 Held that petitioner should be taxed as a trust during all the years in question.  Hermann F. Selvin, Esq., for the petitioners.  Alva C. Baird, Esq., for the respondent.  VAN FOSSAN *368  This proceeding was brought to redetermine the deficiencies in the income taxes of the petitioners for the years 1923, 1924, and 1925 in the amounts of $2,345.88, $21.69, and $439.65, respectively.  The primary issue is whether or not the petitioner is a trust and taxable as such or is an association, taxable as a corporation.  The *369  petitioner further asserts that the provisions of section 704(a) of the Revenue Act of 1928 require the taxation of it as a trust for the year 1923.  FINDINGS OF FACT.  Prior to October 1, 1922, Rollin S. Sturgeon was a motion picture director and Lucien Hubbard was an author of scenarios.  Both were of recognized ability and reputation in the motion-picture industry, but were unemployed at the time.  They decided to produce one motion picture based on a story written by Hubbard and entitled, "What's Your Daughter Doing?" They possessed a substantial part of the capital required therefor and to secure the remainder*1534  enlisted the aid of friends, whose money was contributed to be used by Sturgeon and Hubbard without interference from others.  The motive for supplying the needed funds was primarily to realize profits from the venture, but secondarily to give Sturgeon and Hubbard employment and assistance.  The agreement relating to such capital contributions was embodied in the following declaration of trust, date October 18, 1922: AGREEMENT AND DECLARATION OF TRUST OF STURGEON & HUBBARD TRUST Agreement executed at Los Angeles, California, October 18th, 1922, by and between ROLLIN S. STURGEON and LUCIEN HUBBARD, hereinafter designated as "Trustees", and EDWIN J. LOEB, GEO. W. COHEN and IRVING M. WALKER, hereinafter designated as "beneficiaries", and other persons who may become beneficiaries hereto, in accordance with the following provisions hereof, WITNESSETH THAT: WHEREAS, the beneficiaries desire to create a trust fund for the purpose of producing a motion picture or photoplay hereinafter referred to, and propose to pay to the trustees certain sums of money to be used for that purpose as hereinafter provided, NOW, THEREFORE, the trustees hereby declare that they will hold said funds*1535  to be paid to them, as well as all other property which they may acquire as such trustees, together with the proceeds thereof, in trust, to produce said photoplay and to manage and dispose of the same for the benefit of the beneficiaries in the manner and subject to the stipulations herein contained, to-wit: 1.  The trustees shall always be two in number.  Any vacancy in the office of trustee occasioned by the death or inability to act of either trustee, shall be filled by the remaining trustee by an instrument in writing.  Any person so appointed trustee shall forthwith execute a written acceptance of this trust which shall be filed with the Commissioner of Corporations of the State of California.  A trustee so appointed shall have all the powers and duties of his predecessor.  The acting trustee, for the time being, whether surviving or remaining, shall have all the powers and discretions of the original trustees.  The title of the outgoing trustee shall vest in the remaining trustee, and upon the filling of any vacancy the title to the whole trust property shall vest jointly in those who shall then be trustees hereunder.  *370  2.  The trustees are authorized to purchase*1536  materials, employ artists, directors and other persons, and otherwise use the trust funds or other trust estate, to produce one photoplay of such length as in their judgment shall be proper, the story of said photoplay to be a story whose working title is "What's Your Daughter Doing?", written by Lucien Hubbard.  The trustees are authorized to do all things necessary and desirable or incidental that may be required in their judgment to carry out the purposes for which this trust is formed, including among other things net expressly stipulated herein, the leasing of studios and studio equipment.  Any instruments leasing any property or otherwise relating to the execution of this trust shall be executed by the trustees.  3.  The trustees shall have power to enter into such agreements as they may deem proper for the sale, leasing or other distribution or disposition of said photoplay, and/or of rights therein, and may demand, collect, sue for, receive and receipt for all sums of money at any time coming due to said trust, employ counsel to begin, prosecute, defend and compromise suits at law or in equity, and otherwise deal with respect to the same.  4.  No person dealing with the*1537  trustees shall be bound to see to the application of the purchase money, or other consideration paid or delivered by or for said person to or for said trustees.  5.  The trustees shall have full power and authority to fix the compensation of any and all persons whom they may employ in connection with the execution of this trust, but they themselves shall receive no compensation other than such part of the four hundred (400) trustees' units as may be issued to them as hereinafter in paragraph 7 provided for.  6.  The trustees shall not be personally liable for errors of judgment, either in the production of said photoplay or in contracting in any way with reference to the disposition thereof, nor for any loss arising out of the operation of said trust estate, in the execution of this trust in good faith; nor shall they be personally responsible for any misconduct, errors, or omissions of any officer, agent, or servant employed and retained with reasonable care.  7.  The entire interest of the beneficiaries under this agreement shall consist of and be divided into not more than eight hundred (800) units consisting of not more than four hundred (400) subscribers' units and not more*1538  than four hundred (400) trustees' units, and the trustees are authorized to issue not more than four hundred (400) units of each class upon the terms and conditions hereinafter specified, and not otherwise.  No more than four hundred (400) subscribers' units shall be issued to the beneficiaries above named and to any other persons who may become beneficiaries hereunder by writing their names at the close of this declaration of trust, or otherwise executing a written acceptance hereof, upon payment of the sum of One hundred dollars ($100.00) in cash for each and every unit so subscribed for.  For each subscriber's unit so issued, one trustee's unit shall be issued to the trustees, share and share alike, in consideration of the assignment by them individually, to themselves as trustees, of the story above referred to, and as full compensation for all services performed and to be performed by them in the organization of this trust, and in the production and disposition of said photoplay.  As evidence of the ownership of said units, a certificate or certificates of beneficial interest, the form of which shall be prescribed by the trustees, shall be issued to each beneficiary.  Among other*1539  things, each certificate of beneficial interest shall contain a plainly typewritten or printed statement reading as follows: *371  NOTICE Inasmuch as the value of this certificate will decrease as each pro-rata payment of the trust proceeds is made thereon, the purchaser or prospective purchaser of any certificate, or units represented thereby, should definitely ascertain from the trustees what payments, if any, have been made prior to purchasing any certificates or units represented thereby, or before otherwise acquiring any interest therein.  In no event shall a total of more than four hundred (400) subscribers' units and four hundred (400) trustees' units, be issued.  Under no circumstances shall any origianl issue of certificates be made after March 30th, 1923, and the trustees shall in no event proceed with the production of said photoplay nor shall they incur any liabilities in connection therewith, until and unless at least 180 subscribers' units are actually subscribed and paid for in accordance with the terms hereof.  8.  It is not intended to create hereby any relation of partnership, or of agency among the trustees, or by the trustees and the beneficiaries, *1540  or among the beneficiaries, or between any or all of the beneficiaries; but the title to every several item of property constituting the trust estate shall be vested solely in the trustees; and the beneficiaries jointly and severally shall have no legal or equitable title, right or interest in or to any several item thereof.  The right of the beneficiaries shall relate only to the net distributable proceeds of the liquidation of the trust, and meanwhile, to the income from the administration thereof, as hereinafter in paragraph 9 provided.  9.  The trustees shall at all times keep full, true and complete books of account and records of their proceedings and doings, which books and records shall be held at the office of the trustees at Universal City, California, and shall be open at all times to the inspection of the beneficiaries.  All net proceeds resulting from the trust after the payment of debts and expenses, shall be applied as follows: First: There shall be paid to each beneficiary who has paid cash for the units issued to him, the amount paid by him for each unit so issued to him, all payments in this subdivision to be properly prorated.  Second: There shall be paid to*1541  each beneficiary who has paid cash for the units so issued to him, interest at the rate of six percent (6%) on the amount paid by such beneficiary for the units issued to him, until repaid, all payments in this subdivision to be properly prorated.  Third: The remainder shall be paid out as dividends on account of all units actually issued under the provisions of paragraph 7, including both subscribers' and trustees' units, all payments in this subdivision to be properly prorated.  10.  Certificates of beneficial interest issued in accordance with the provisions of paragraph 7 hereof, shall conclusively evidence the ownership of the respective interests in this trust; and no transfer of beneficial interests in this trust shall be binding upon the trustees, or effect them or the trust in any way, unless and until the certificate of such beneficial interest shall be surrendered to the trustees at their office at Universal City, California, the transfer thereof noted on their records, and a new certificate of such beneficial interest issued by them.  11.  In case of the loss or destruction of any certificate or certificates of beneficial interest issued by the trustees, the trustee*1542  under such conditions as they may deem expedient, may issue a new certificate or certificates in the place of the one lost or destroyed.  *372  12.  The trustees shall have no power to bind the beneficiaries personally by any act, neglect or default, and no beneficiary shall be personally liable as a partner or principal, or otherwise, upon account of any express or implied contract made by the trustees or made in any way on behalf of the trust estate, or upon account of any tort committed by the trustees, or by any offficer, agent or servant acting under them or in their behalf or in any way connected with this trust or its administration; but all beneficiaries and all persons, firms, corporations and associations extending credit to, contracting with or having any claims against the trustees of any character whatsoever, whether legal or equitable, or whether arising out of contract or tort, shall look only to the funds and property of the trust for payment or for indemnity, or for the payment of any debt, damage, judgment or decree, or any money that may otherwise become due or payable from the trustees, so that neither the trustees, nor any of their officers or agents appointed*1543  by them hereunder, nor the beneficiaries, shall be personally liable therefor.  The trustees shall look only to the funds and property of the trust for exoneration, indemnification or reimbursement, and shall, under no circumstances, have any right of exoneration, indemnification or reimbursement against the beneficiaries.  Every note, bond, obligation or contract in writing, made or given by the trustees, shall, by explicit reference to this declaration of trust, give notice of the limitations upon the power of the trustees, their officers and agents, and of the exemption from personal liability both of the trustees and the beneficiaries, and shall contain an express declaration to the effect that no recourse shall be had in any event upon any trustee, their officers and agents or beneficiaries and that the other contracting party shall look only to the funds and property of the trust for payment of any liability and obligation.  Even though in any case the trustees shall not give such notice to the other party, nevertheless, such other contracting party shall have no recourse against the trustees, their officers or agents, or the beneficiaries, but shall look only to the funds and*1544  property of the trust for payment of any liability and obligation.  13.  The death of any beneficiary shall not terminate the trust, nor entitle his legal representative to claim an accounting, or to take any action in the courts, or otherwise, against the trustees, but the executors, administrators or assigns of the decedent shall succeed to all the rights of decedent under this instrument, upon surrender of his certificate or certificates of beneficial interest, and the issuance of a new certificate or certificates, to the person or persons lawfully entitled to receive the same.  14.  Each trustee in his individual capacity, or in any other fiduciary capacity, may purchase, hold and own beneficial interests in this trust in all respects as if he were not a trustee.  15.  Units hereunder shall carry only the rights specifically set forth in this instrument and in the certificates of beneficial interests issued hereunder.  Beneficiaries shall have no voice or control whatever in the production of said picture, or in the business connected therewith or with its disposition.  16.  The terms and provisions of this trust may be amended, modified or added to, except as regards the*1545  liability of the trustees and the beneficiaries, at any time or times, by instruments in writing signed by both of the then trustees, and filed with the Commissioner of Corporations of the State of California.  17.  The title of this trust, fixed for convenience, shall be "STURGEON & HUBBARD TRUST" and it may deal and be dealt with by said title and also in the names of its trustees.  Said title may be changed and a new title selected from time to time by the trustees by instrument in writing signed by both of *373  the trustees and filed with the Commissioner of Corporations of the State of California.  18.  The term "trustees" in this "Agreement and Declaration of Trust" shall be deemed to include the original and all successor trustees.  19.  This trust shall continue for the term of fifteen (15) years unless it is possible, in the discretion of the trustees, to terminate the same sooner by final distribution and sale of said production and all rights thereunder, and by the complete collection by the trustees of all solvent credits properly due them hereunder, and upon the termination thereof the trustees shall proceed to wind up its affairs, liquidate its assets and*1546  distribute the proceeds thereof among the beneficiaries in the manner hereinabove provided.  20.  This agreement shall be valid only upon condition that the consent of the Commissioner of Corporations of the State of California, to the organization of this trust on the terms above specified, or as the same may be modified by the Commissioner, be had and obtained.  IN WITNESS WHEREOF the parties hereto have executed this instrument the day and year first above written.  [Signed] ROLLIN S. STURGEON LUCIEN HUBBARD GEO. W. COHEN IRVING M. WALKER EDWIN J. LOEB The certificate of beneficial interest is in the following form: CERTIFICATE OF BENEFICIAL INTEREST This is to certify that is the owner of 5 subscribers' units in the trust established under the provisions of a declaration of trust dated October 18th, 1922, whereby Rollin S. Sturgeon and Lucien Hubbard are named as trustees, the purpose of said trust being the production and distribution of a motion picture photoplay written by Lucien Hubbard.  Said declaration of trust is on file and may be inspected by beneficiaries thereunder, at the office of said trustees, Universal City, California, or at the office of*1547  Loeb, Walker & Loeb, 610 Pacific Mutual Building, Los Angeles, California.  All the provisions of said trust agreement are hereby made a part hereof, in all respects and with like effect as though the same were herein set forth at length; and except only as the said trust agreement provides, this certificate confers no rights, powers, privileges or interest; The holder hereof has no interest, legal or equitable, in any specific property and the interest of the holder of this certificate is transferable only upon the books of the trustee, upon the surrender of this certificate, together with written evidence of such transfer by the holder thereof, in person or by his duly constituted attorney in fact.  WITNESS my hand at Los Angeles, This day of  , 1922.  [Signed] LUCIEN HUBBARD ROLLIN S. STURGEON As trustees under the declaration of trust referred to in this certificate.  NOTICE Inasmuch as the value of this certificate will decrease as each pro-rata payment of the trust proceeds is made thereon, the purchaser or prospective purchaser of any certificate or units represented thereby, should definitely *374  ascertain from the trustees what payments, if any, *1548  have been made prior to purchasing any certificate or units represented thereby, or before otherwise acquiring any interest therein.  The beneficiaries under the trust subscribed and paid $36,000 and certificates of beneficial interest were issued to them in the following respective amounts: Rollin S. Sturgeon, $12,300; Lucien Hubbard, $11,500; Irving Thalbery, $7,400; G. W. Cohen, $500; Loeb, Walker and Loeb, $1,000; G. Brenner, $3,300.  The photoplay was produced and on April 12, 1923, it was sold to William M. Vogel for $75,000, payable in installments.  The sum of $10,000 was reserved to protect possible censorship requirements.  No other picture was contemplated or produced.  Subsequent to the sale the trustees did nothing but collect and distribute the reserved payments made by Vogel.  The petitioner's returns for 1923, 1924 and 1925 were timely filed as a trust on Form 1041, entitled "Fiduciary Return of Income." OPINION.  VAN FOSSAN: Section 704(a) of the Revenue Act of 1928 provides: If a taxpayer filed a return as a trust for any taxable year prior to the taxable year 1925 such taxpayer shall be taxable as a trust for such year and not as a corporation, if such taxpayer*1549  was considered to be taxable as a trust and not as a corporation either (1) under the regulations in force at the time the return was made or at the time of the termination of its existence, or (2) under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue applicable to any of such years, and interpretative of any provision of the Revenue Act of 1918, 1921, or 1924, which had not been reversed or revoked prior to the time the return was made, or under any such ruling made after the return was filed which had not been reversed or revoked prior to the time of the termination of the taxpayer's existence.  In , we pointed out that in all cases in which the shareholders did not control the actions of the trustees, irrespective of whether or not the taxpayer was engaged in business under corporate form, the rulings of the Bureau of Internal Revenue, in effect up to July 1, 1924, consistently held that the taxpayer was taxable as a trust.  See also *1550 ; . The case at bar is such a case.  Therefore, the petitioner comes within the provisions of section 704(a), supra, and must be taxed as a trust for the year 1923.  This Board has held that the significant tests to be applied in determining whether an alleged trust is a trust, or an association taxable as a corporation, are whether (1) the beneficiaries of the alleged trust have voluntarily associated themselves together in the general form and mode of procedure of a corporation, and (2) are *375  organized to, and in fact are, engaged in the active conduct of a business for profit, or (3) whether the trustees are merely holding the property and collecting the income therefrom and distributing to those beneficially interested.  ; affd., ; ; . During the years 1924 and 1925 the trustees did nothing more than collect installments of reserved purchase money and distribute them to the beneficiaries. *1551  The retention of $10,000 from the purchase price was necessitated by the possible prohibitions of censorship authorities.  The trust was continued in 1924 and 1925 solely to meet that contingency.  The nominal actions of the trustees during those years do not signify that the petitioner was engaged in the active conduct of a business for profit, but rather that the funds of the trust were merely received and held for distribution.  ; ; . Under these facts, therefore, the petitioner is taxable as a trust during all the years under consideration.  Judgment will be entered for the petitioner.