Court Opinion

ID: 4624634
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:55:33.823247+00
Date Added: 2024-06-11T07:56:34.265730
License: Public Domain

CENTRAL NATIONAL BANK, TRUSTEE FOR JACOB PERKINS, ET AL., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Central Nat'l Bank v. CommissionerDocket No. 28701.United States Board of Tax Appeals25 B.T.A. 1123; 1932 BTA LEXIS 1422; April 13, 1932, Promulgated *1422  Income of a trust distributed to beneficiaries is taxable under the Revenue Acts of 1921 and 1924 to the beneficiaries.  Income of the trust not so distributed is taxable to the trust.  D. J. Needham, Esq., for the petitioner.  J. R. Johnston, Esq., for the respondent.  VAN FOSSAN *1123  This proceeding is for the redetermination of deficiencies in income taxes for the fiscal years ending May 31, 1923, and May 31, 1924, amounting, respectively, to $108.30 and $2,006.14.  The sole issue is whether the income involved is taxable to the trustee or to the beneficiaries of the trust.  FINDINGS OF FACT.  The facts were stipulated.  The following material facts appear from the stipulation.  The petitioner, which has its office in the city of Cleveland, State of Ohio, is the duly appointed, qualified and acting trustee under trust agreements dated June 3, 1921, and executed by Jacob Perkins and others comprising all the stockholders of the Edgewater Land Company, as parties of the first part and the petitioner as party of the second part.  The Edgewater Land Company ceased operations on or about June 9, 1921, for the reason that its charter expired*1423  on that date.  At the time of the expiration of its charter there were available assets of the company subject to distribution to its stockholders.  The great bulk of the assets could be transferred in kind only by endorsement or by deeds of conveyance requiring the signature of all the owners.  As the owners, namely the stockholders of the Edgewater Land Company, were not only individuals, but also representatives of estates domiciled in various States, it was deemed advisable, expedient and necessary for the stockholders of the company to concentrate and centralize the power of transfer in some convenient agency for the purpose of avoiding delays and inconvenience in the sale, liquidation and transfer of the assets.  Multiple copies of the agreement of June 3, 1921, were executed by each of the stockholders of the Edgewater Land Company.  These multiple copies were in all respects identical except that in each cash the stated interest of the respective stockholder varied to conform to the facts.  The agreement contained the following recitals, among others: WHEREAS The Edgewater Land Company has declared a liquidating dividend to its Stockholders of all the remaining assets of*1424  the Company, said dividend *1124  being to each of said Stockholders in proportion to their respective stockholdings in said Company, and * * * WHEREAS it is deemed desirable by all of the Stockholders of the Company that all of their said dividends and the assets of which said dividend is comprised, shall be assigned and transferred to Central National Bank Savings and Trust Company for convenience in the collection, care, management and distribution of said assets and property to the respective parties entitled thereto and in the proportions of their respective holdings or interest therein and WHEREAS each of the Parties of the First Part has duly assigned, transferred and set over to said Central National Bank Savings and Trust Company, his or her interest in said liquidating dividend and the assets covered thereby and has requested The Edgewater Land Company to pay and transfer each of said dividends and the assets which are represented thereby to said Central National Bank Savings and Trust Company.  By the agreement each of the stockholdes, for a valuable consideration, assigned, transferred and set over to the petitioner, his "interest in the liquidating dividend*1425  declared from the remaining assets of the Edgewater Land Company" and also his "interest in such assets by reason of said dividend." It is recited that the Edgewater Land Company had, in accordance with the respective assignments, transferred to the petitioner, the second party to the agreement, "all assets and property of every kind covered by said liquidating dividend." The agreement of June 3, 1921, further contained the following Second Party is requested to consult with Frank B. Carpenter and Second NOW, THEREFORE, the Second Party hereby agrees to hold said property above described in Trust for the Parties of the First Part and each of them in the proportions of their respective interest therein, in the manner and subject to the conditions hereinafter named, to wit: The Second Party agrees to hold and properly care for said property and securities, to use its best efforts to make prompt collections upon the notes, mortgages and land contracts above described, to sell the real estate conveyed to it, which was a part of said liquidating dividend, at such price and upon such terms as it shall deem fair and proper, but in connection with such sale Second Party is requested*1426  to consult with Frank B. Carpente and Second Party shall use due diligence to liquidate all the assets and property described in said schedule "B".  WHEREAS certain taxes are due to the State of Ohio, the City of Cleveland and the County of Cuyahoga and also to the United States, for Federal Corporation, Income and Excess Profits Taxes, and certain other taxes not yet determined which may be due to the United States and said State, City and County, it is agreed that Second Party shall pomptly pay, when determined and as the same fall due, all such taxes of every name or nature due or to become due from said The Edgewate Land Company.  Said Taxes shall be paid out of the cash in said Trust Fund and the other assets thereof as may be necessary.  The Trustee shall at all times retain sufficient property of said Trust Fund to cover the amount of such taxes due or to become due.  The judgment of the Second Party as to the amount of such taxes due shall be final and binding upon each of said First Parties, but before paying said taxes it shall, if practicable so *1125  to do, secure the approval of Frank B. Carpenter.  All of said taxes above referred to shall be a first lien upon*1427  the Trust Fund covered by this agreement.  The Second Party may employ Counsel or Accountants and pay the same out of said Trust Fund, but it is agreed that Frank B. Carpenter and R. B. Whitney will until January First, 1922, render without charge all services that may be necessary in connection with said Trust insofar as they are able so to do and as called upon.  The Second Party is authorized to sell said real estate notes, mortgages, land contracts, bonds and Treasury Certificates at such time or times, at such prices and upon such terms at It shall deem fair and proper and for the best interests of the Parties of the First Part, but in so doing it is requested to consult with Frank B. Carpenter.  The Second Party shall have full authority to cancel and surrender any of said notes and mortgages upon the payment thereof and to do all things necessary or requisite to the proper management and care of said property including the payment of any taxes that may accrue upon said Trust Fund.  It is authorized to allow to H. D. Koblitz or his assigns Twenty-five Hundred Dollars ($2500.00) upon the last of his series of notes aggregating Seventy Thousand Dollars ($70,000.00), in the*1428  event that said Koblitz or his assigns shall furnish a proper receipt showing the payment for certain improvements upon the property covered by the mortgage given to secure said notes, all in accordance with the Agreement between said Koblitz and The Edgewater Land Company.  The Second Party is authorized to pay to Ernst & Ernst out of said Trust Fund their proper bill for services rendered or to be rendered in connection with the Federal Tax matters.  WHEREAS The Edgewater Land Company sold under land contracts certain properties more particularly described upon schedule "C" hereto attached, and WHEREAS the entire purchase price of said properties has been paid, but deeds for various reasons were not made to the purchasers at the time, and WHEREAS it is desired that at the proper time such deeds be duly made and executed, and WHEREAS The Edgewater Land Company has conveyed the properties so covered by said land contracts to the Second Party with the understanding and agreement that the same shall be conveyed to the purchasers or their assigns or the parties entitled to receive the deeds of said premises, Now, THEREFORE, the First Parties authorize and direct the Second Party*1429  to execute and deliver deeds of said properties to the persons entitled to receive the same.  The Second Party agrees from time to time to make distributions pro rata to each of the Parties of the First Part according to their respective stockholdings in the stock of The Edgewater Land Company as of the date of the dissolution thereof as above stated, of the amount collected upon said Trust Fund whether principal or interest after the payment of taxes and other charges as hereinbefore provided and after deducting its own proper charges and expenses.  Such distribution shall be made at such time as in the judgment of the Second Party it is right and proper so to do.  The Second Party shall not be liable under this Agreement except for its negligence or dishonest acts.  It does not guarantee the collection or sale of the assets but does agree to use Its best endeavor to bring about a prompt liquidation and distribution of said Trust Fund subject to the conditions herein provided.  The assets transferred to the petitioner pursuant to the agreement dated June 3, 1921, included contracts for the sale of land on installments, real estate, notes, mortgages and Government obligations. *1430 *1126  During the fiscal years ending May 31, 1923, and May 31, 1924, the petitioner, acting under the provisions of the agreement of June 23, 1921, held the assets transferred to it for the purposes stated in the agreement.  The petitioner kept books of account and excerpts from the accounts were attached to the stipulation of facts.  The accounts disclose that in 1923 and 1924 the petitioner was engaged in liquidating the property transferred to it.  It had charged itself with capital funds received and during the years in question received interest on mortgages, notes, etc., collected installments on outstanding installment contracts, sold real estate and performed other acts in accordance with its obligations under the trust agreement.  From June 21, 1923, to March 6, 1924, inclusive, it distributed among the parties of the first part to the agreement capital sums held by it amounting to $61,422.50.  The petitioner filed fiduciary returns of income for the fiscal years ending May 31, 1923, and May 31, 1924.  The net taxable income for the fiscal year ended May 31, 1923, was $4,022.16, which amount was not increased by the respondent.  The return for the fiscal year ended*1431  May 31, 1924, stated taxable income in the sum of $24,050.46 and disclosed that this amount had been distributed among the beneficiaries of the trust at the end of the taxable year in the respective sums stated in the return.  The respondent, by an adjustment of profits on an installment sale of real estate, increased the amount of taxable income for the fiscal year ended May 31, 1924, to $26,040.49 and held that the income for the taxable years in question is taxable to the petitioner.  It is stipulated that there is a mistake of $10 in the respondent's computation of income for the year ended May 31, 1924, and that the correct amount of taxable income for such year, s determined by the respondent, is $26,050.49 The notice of deficiency was mailed to the petitioner on March 30, 1927.  OPINION.  VAN FOSSAN: The question for determination is whether or not the income for the taxable years ended May 31, 1923, and May 31, 1924, is taxable to the petitioner.  The respondent determined that the trust herein involved "is a discretionary trust" and that the income is, therefore, taxable to the trustee in accordance with article 342 of Regulations 62 and 65.  The respondent concedes*1432  in his brief, however, that the theory that "the trust as a taxable entity under section 219 of the Revenue Acts of 1921 and 1924 could be taxed for income distributed to the so-called beneficiaries is questionable under the most recent rulings and decisions applicable." *1127  The respondent thereupon departed from the theory originally advanced and now contends that the petitioner is a trustee of the Edgewater Land Company, a dissolved corporation, pursuant to section 8742 of the Ohio General Code; that, therefore, under the provisions of section 239(a) of the Revenue Acts of 1921 and 1924 and article 622 of Regulations 62 and 65, it should have filed returns for that corporation covering the taxable years in question in the same manner and form as corporations are required to make return; and that, consequently, income determined on the basis of such return is taxable to the petitioner.  While respondent was within his rights in advancing a new theory on which to predicate liability, we are unable to concur in his contentions.  Article 8742 of the General Code of Ohio is as follows: Trustees to Settle Affairs of Corporations. - Upon the dissolution of a corporation*1433  by the expiration of the term of its charter, or otherwise, and unless other persons be appointed by the legislature, or by the stockholders, directors, or trustees of the corporation, or by a court of competent authority, the directors, trustees, or managers of the affairs of such corporation, acting last before the time of its dissolution, by whatever name known in law, and their survivors, shall be the trustees of the creditors and stockholders of the dissolved corporation, and have full power to settle its affairs, collect and pay outstanding debts, and divide among the stockholders the money and other property remaining, in proportion to the stock of each stockholder paid up, after payment of debts and necessary expenses.  Section 239(a) of the Revenue Act of 1921 and section 239(a) of the Revenue Act of 1924 are identical, and provide: That every corporation subject to taxation under this title and every personal service corporation shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title.  The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant*1434  treasurer.  If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return shall be made by the agent.  In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns.  Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.  Article 622 of Regulations 62 and 65 reads: Returns by receivers. - Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income for such corporations on Form 1120, covering each year or part of a year during which they are in control.  Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject*1435  to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the *1128  duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control.  A receiver in charge of only part of the property of a corporation, however, as a receiver in mortgage foreclosure proceedings involving merely a small portion of its property, need not make a return of income.  See Articles 424 and 548.  It is to be observed that section 239(a) makes no reference whatever to trustees in dissolution.  Even though it should be assumed that the phraseology of section 239(a) is broad enough to include trustees in dissolution within the requirements of the section, we are of the opinion, nevertheless, that the provisions of that section and of article 622 of Regulations 62 and 65 are not applicable to this proceeding.  The stipulated facts do not show that the petitioner is a trustee operating the business of the Edgewater Land Company but, on the contrary, discloses that it is a trustee by virtue of a contract entered into by it with persons who were already, in effect, the owners*1436  of certain property as a result of the declaration of a liquidating dividend in kind distributable among the stockholders of the Edgewater Land Company.  By reason of the assignment to it of the whole of the liquidating dividend and the conveyance and transfer to it of the assets comprised in that dividend the petitioner, as a trustee, became charged, under the provisions of the contract, with the duty of liquidating the assets transferred and conveyed to it and of distributing the proceeds thereof in accordance with the terms of the agreement.  That the petiioner in so acting as a trustee was not acting on behalf of the dissolved corporation, is in our opinion established by the facts.  It appears that on June 3, 1921, the date of the agreement, the charter of the Edgewater Land Company was about to expire by limitation of time.  It is stipulated in substance, among other things, that all the facts set forth and contained in the agreement of June 3, 1921, may be fully considered for the purposes of this proceeding "the same as though original proof thereof had been produced at the time of the hearing." It may, therefore, be taken as a fact proved at the hearing that at the date*1437  of the execution of the agreement "the Edgewater Land Company had declared a liquidating dividend of all its remaining assets" which dividend was distributable among its stockholders.  It was also stipulated that "the great bulk of the assets" comprising the liquidating dividend could be transferred only in kind and that it was deemed advisable to concentrate them in some agency for convenience in their collection, care, management and distribution.  Thereupon the persons entitled to possession of the assets of the Edgewater Land Company assigned all their interest in the liquidating dividend to the petitioner as such an agency, and the Edgewater Land Company, at the request of such persons, transferred and conveyed to the petitioner in kind the *1129  assets constituting the liquidating dividend.  By so doing the corporation paid and distributed among its stockholders the liquidating dividend in kind declared by it as completely and as effectively as though the distribution had been made directly to and among the stockholders themselves.  Legal title to the liquidating dividend and to the assets comprising it thus became vested in the petitioner.  It does not appear that at*1438  the time of the transaction referred to the Edgewater Land Company had any ordinary commercial debts.  It does appear, however, that certain local and Federal taxes had become payable or might become payable.  Whatever disposition of the assets was made, such taxes would be either liens upon the real estate forming a part of the property conveyed in payment of the liquidating dividend, or could be collected from the transferee or transferees of that property.  Provision for their payment was therefore made in the agreement of June 3, 1921.  It is our opinion that the terms of section 8742 of the Ohio General Code, hereinbefore quoted, do not alter or modify the trust relationship existing between the petitioner and the other parties to the agreement of June 3, 1921.  Moreover it does not appear nor does it follow from the facts that the petitioner was a trustee of a dissolved corporation such as is referred to in article 622 of Regulations 62 and 65.  Section 8742 of the Ohio General Code provides a means for settling the affairs of a dissolved corporation.  There is nothing in the facts or in the agreement of June 3, 1921, which shows that it was the intention of the parties to*1439  the agreement that the petitioner should settle the affairs of the Edgewater Land Company after the expiration of that company's charter.  There is no provision that the petitioner, as trustee, might sue or be sued in the name or on behalf of the Edgewater Land Company, nor is there any provision authorizing the petitioner to do or perform anything whatsoever for, in behalf of, or in the name of the Edgewater Land Company or to do or to perform any act or acts which should be done or performed by the officers of that company were they in control.  It is in this connection that this proceeding is distinguishable from ; , which is cited by he respondent.  In that proceeding we said: * * * Here the question is whether a sale of the property of the corporation (the proposal and specific offer for such sale having been definitely made to the board of directors of the corporation before its dissolution, but the sale having been consummated after the filing of the necessary certificates of dissolution with the Secretary of State of the State of Texas within the three-year period after dissolution allowed*1440  by law "for the purpose of enabling those charged with the duty to settle up its affairs") was in fact and in law a sale by such corporation or by its creditors and stockholders through their trustees, and we hold that it was a sale by the corporation.  *1130  In Taylor Oil & Gas Co. we pointed out that the corporation was dissolved as a result of a resolution adopted by its stockholders and that by such resolution the directors were appointed as liquidating trustees for the corporation "with full power to settle its affairs" and that they were authorized as such trustees to sell, transfer and convey the corporation's properties "in the name of said Taylor Oil & Gas Co." The facts in the present proceeding are essentially different from those of the Taylor Oil & Gas Co. case and the conclusions reached in that proceeding are not here applicable.  The petitioner was a trustee by virtue of the agreement of June 3, 1921, for the purpose of liquidating property for the benefit of the parties named in said agreement.  The income of the trust is therefore taxable under the provisions of section 219 of the Revenue Acts of 1921 and 1924.  *1441  It is clear from the provisions of the agreement of June 3, 1921, that the income of the trust was distributable at the discretion of the trustee and might be accumulated.  It has been held in a long line of decisions that in such case the income actually distributed is taxable to the beneficiaries of the trust and that income undistributed is taxable to the trustee.  ; ; affd., ; ; ; ; . There is no dispute between the parties herein as to the taxable income for the respective years.  It does not appear from the facts whether or not the taxable income for the fiscal year ended May 31, 1923, was distributed.  It does appear, however, that taxable income in the sum of $24,050.46 was distributed in the fiscal year ended May 31, 1924.  It also appears that in the latter year there was additional taxable income amounting*1442  to $2,000.03.  In accordance with the foregoing the income actually distributed is taxable to the beneficiaries of the trust and the amount of the income undistributed is taxable to the petitioner.  Decision will be entered under Rule 50.