Court Opinion

ID: 9637133
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:58:30.846678+00
Date Added: 2024-06-11T18:09:53.859451
License: Public Domain

HOLMES, Circuit Judge
(dissenting).
The appellants are trustees in each of ten separate trust agreements, practically identical except as to the beneficiaries. The court below held that the parties to these agreements had associated 'themselves together for the purpose of carrying on various business enterprises for profit, that the ten trusts had likewise associated themselves in the same manner and for the same purpose, and that said trusts and the parties thereto constituted an association which was taxable as such under the regulations promulgated pursuant to the Revenue Act of 1932, c. 209, 47 Stat. 169, 26 U.S.C. A. § 1696. This appeal challenges the correctness of that ruling.
The district court found that it was the intention of the parties at the time the trusts were created that the properties of the trusts should be held and managed in concert, as a unit, and as a business operated for profit. It further found that the purpose of creating the ten trust estates was that the title to the property should be vested in trustees, as a continuing body, with centralized management, secure from interruption by death of the beneficial owners, with limited personal liability of the participants, whose beneficial interests would be subject to transfer without affecting the continuity of the enterprise. Findings more in detail were as follows:
On January 1, 1931, A. J. McKean, Sr., and his four children became joint owners of property, which they simultaneously conveyed to the father and two sons as trustees. The corpus of each of the ten trusts was the undivided interest of the named beneficiaries, each of whom, for the duration of the trusts, was prohibited from selling, conveying, or encumbering any part of the trust estate or the income therefrom. The life of each trust, except the senior McKean’s, was to extend until five years after the death of the father, A. J. Mc-Kean, Sr., and in case any of the children beneficiaries should not be living at that time, the Alamo National Bank of San Antonio, Texas, was designated to continue as trustee for the interest of the heirs of such beneficiaries. The trustee bank should then hold the property in trust for a period of twenty-one years after the death of the last survivor of the four children beneficiaries.
Only one general book of original entry was used for all of the property, both before and after the creation of the trusts. There was no segregation of cash receipts and disbursements according to individual trusts; all income was deposited in, and all disbursements made from, one common bank account. At the end of each year the net worth of each oil trust, determined by dividing the total net worth of all the oil trusts by five, was credited to that trust. This was the only bookkeeping entry segregated according to individual trusts.
The interests of the beneficiaries of the oil and general properties were identical. The purpose in creating them was not to liquidate but to hold together the several properties of the McKean family, and to manage them as one unit in the most advantageous manner for the earning of income. *767The trastees have exercised practically all of the powers granted to them in each of the trust agreements. The only question here is whether the persons involved were associated together for the purpose of doing business within the meaning of the revenue laws.
There is no statutory definition of an association. The act says that the term corporation shall include, inter alia, associations. Treasury regulation 77, article 1312, so far as applicable, provides that associations shall include common-law trusts and organizations, by whatever name known, which act or do business in an organized capacity, the net income of which is distributable among the shareholders on the basis of the proportionate share or capital which each has in the business or property of the organization. In distinguishing associations from the ordinary trust, it is pointed out that the trustees of a pure trust take title to the property for the purpose of collecting and distributing income, whereas, if the trustees’ powers are not so restricted, but provide for the carrying on of some business enterprise, the unit is deemed an association, taxable as a corporation.
It is sufficient if the trust enterprise so nearly resembles a corporate organization as to warrant the conclusion that its income was intended by Congress to be taxed in the same manner as that of a corporation. The status of the business trust has been dealt with by the Supreme Court in three decisions.1 The instant easels controlled by the latest of the three, wherein the Supreme Court designated five salient features of a trust which comes within the classification of an association: Centralized management; the title in trustees with provision for succession; security‘from termination by death of the beneficial owners; facility of transfer of the beneficial interests without affecting the continuity of the enterprise; and the limitation of their personal liability to the property embarked in the undertaking.
It is urged in this case that unity of title is lacking, the basis for this argument being that the trusts were created by ten instruments instead of one and might terminate at different times; but the effect was the same, for the duration of the shortest trust, as if only one instrument had been used to accomplish the purpose of creating an association for the carrying on of a joint enterprise for profit. The ten instruments effectively merged for a limited time the entire title of the five owners in the same trustees. The concurrent effect of these separate instruments was to give unity of title to the trustees for the taxable year in question. The association existed during' that period. Unity of a fee-simple title in the trustees is not indispensable where there is unity of use, control, possession, management, and operation for a definite time, with consequent unity of income and expenses for the taxable year. As said by the United States Court of Appeals for the District of Columbia in Bert v. Helvering, 67 App.D.C. 340, 92 F.2d 491, the real test is whether the enterprise more nearly resembles, in general form and mode of procedure, a corporation than a partnership.
In the trusts now before the court, for the duration of the one first terminating, we have a pooling of property rights through mutual conveyances by living parties, making themselves the beneficiaries. The intention here is not to arrange for the ultimate transmission of a family inheritance, but to pool resources for the purpose of using them as a unit to the best advantage for their own benefit. The donative element essential in an ancestral trust is wholly lacking. While we have ten separate trusts, the instruments creating them were executed simultaneously, placing all of the property in the hands of the same three trustees and giving them identical powers. The creation of all of them was part of one plan and the result of concerted action. In such case, the transaction should be viewed as a whole. The taxpayer should not be allowed to separate them into component parts for tax purposes, having formed an association for all other purposes.-
The findings disclose very extensive operations by the trustees of the farm and ranch properties, including the raising and marketing of corn, cotton, pecans, vegetables, and similar produce. Up to and including 1934, the general trusts speculated on the exchange in wheat and cotton in considerable amounts, a large part of which *768was on margins; they also purchased at various times stocks approximately of the value of $12,000. During 1933, they purchased, and later sold at a profit on the stock exchange, wheat and cotton totalling approximately ' $300,000. The operating costs of these trusts were approximately $4,000 per year. The trustees of the general trusts also sold stock, collected rents, and dividends on stocks, took depreciation on its properties, and made sizeable contributions to charities. Part of the property of the general trusts was sold and the proceeds used in the operation of the trusts. The combined gross income of the five oil trusts was $48,830.78, all of which was from oil royalties except $35.3.55 on lease rentals, and a profit of $194.30 on the sale of property. For 1932, all income was from royalties except $330.27, received as lease rentals. In 1933, the combined income of the five oil trusts was $23,270.73 from fifty-three properties, all of which was from oil royalties except $40.
The general trusts are not parties to these suits, the appellants seeking to isolate the oil trust and arguing that their activities alone were not sufficient to meet the business test of an association. The appellee counters with the contention that the right parties are not before the court, because the assessment was made by the Commissioner against the parties collectively as an association, and the tax thus assessed was paid from the common bank account of the ten trusts. A claim for refund was filed on behalf of the ten trusts. Upon rejection of the joint claim for refund, the trustees for the five oil. trusts filed separate suits seeking to recover the proportionate parts of the tax which had been prorated to the respective individual trusts. The court below consolidated the five' cases. The oil ■trusts obj ected first to having the suits consolidated and secondly to the introduction of any evidence pertaining to the activities of the general trusts. The district court held that all of the separate trusts were united in their activities for business purposes, and only by considering them together, giving weight to their concerted action, various activities, and interlinking transactions, could the proper view be obtained.
I agree with the findings and conclusions of the district court, and think its judgment should be affirmed.

 Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263; Hecht v. Malley, 265 U.S. 144, 44 S.Ct. 462, 68 L.Ed. 949; Crocker v. Malley, 249 U.S. 223, 39 S.Ct. 270, 63 L.Ed. 573, 2 A.L.R. 1601.