Court Opinion

ID: 9650406
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:35:51.23783+00
Date Added: 2024-06-11T18:12:21.226129
License: Public Domain

AUGUSTUS N. HAND, Circuit Judge
(dissenting).
The question before us is whether four separate investment trusts should be classified for income tax purposes as strict trusts or as associations taxable on income as corporations. Each “Unit” was to consist of sixteen shares in each of thirty specified companies. The money was furnished by the certificate-holders to the American Depositor Corporation, known as Depositor, which purchased the stock of the thirty specified constituent corporations from funds supplied by the certificate-holders. The trustee was to hold the property, issue the certificates and receive the income, dividends and other distributions thereon. The income was to be distributed by the trustee to the holders of the certificates. Reinvestments were forbidden. The trustee was to collect the cash and to convert the other distributions, such as stock dividends and rights, into cash and to distribute the moneys proportionately to the certificate-holders. It could sell none of the shares constituting the corpus except at the discretionary direction of the Depositor which could exercise such discretion only upon the occurrence of specified events tending to indicate that the shares of one of the thirty corporations were not desirable investments. One of the reasons for directing a sale would be because the particular shares had reached too high a figure as compared with the dividend paid. Under modified agreements the Depositor might direct the sale of any constituent shares which it regarded as an unsound investment and its power was not conditioned upon the occurrence of the specified events. The market value of the investments in the four trusts amounted to upwards of $13,-000,000 and the gains realized in the year 1934 from sales were $23,053.31.
The original agreements provided that they continue in force until June 30, 1951, but the trustee might terminate them at any time the number of constituent companies should become less than sixteen either because of the elimination of stocks on account of ineligibility, or otherwise. At any time prior to termination, any certificate-holder might surrender his certificates and, within three days, receive in exchange his proportionate share of the deposited property then held by the trustee, payments for fractional parts of shares to be made in cash. If the holder requested the trustee to sell securities to which he was entitled on demand, the trustee was obliged to endeavor to make the sale as expeditiously as possible.through the usual market facilities and the holder was entitled to receive the cash proceeds of such sales when consummated. The certificates were transferable in the same manner as bearer negotiable instruments, unless registered in the name of the holder and would pass on his death to his legal representatives. The holders of certificates representing 241,885 Units surrendered them for cancellation during the year 1934.
The trustee did a very large business in 1934. It received $662,110.45 in dividends and realized through sales $137,065.07. While it was limited in its possible activities, yet a business was set up whereby a large amount of earnings was distributed to the certificate-holders in’ the way of income, sales attributable to capital realized $137,065.07, and capital gains amounted to $23,053.31. Moreover, any certificate-holder who wished to realize his gain because of the increased value of an investment could surrender his certificate and obtain a profit by means of a sale through his own broker, or through the trustee. In spite of limitations which were drastic not only in respect to the portfolio of stocks which could be held by the trustee, but in respect to the inability of the trustee to select other varieties of stocks, I am inclined to think that such an enterprise, in which thousands of certificate-holders were the proprietors and there was an opportunity to make large profits through the sales of stock dividends and rights and of the stocks themselves if a great increase in market value had occurred, was an association, and not an ordinary trust.
Treasury Regulations 86 Art. 801.2 expressly says that an association “includes * * * an ‘investment’ trust (whether of the fixed or management type) * *
In view of the decision in Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263, it may well be that an association would include a fixed investment trust if the association had nothing to do except collect income from particular property and distribute it to the beneficiaries, but here the arrangement went much farther. Under the Accumulative Series Agreement the trustee might retain any *545common stock of a constituent company that was distributed as a dividend. It also might sell such stock. Under the Series AA Agreement it must sell the excess over the original number of the constituent shares issued in connection with a reclassification merger or other exchange. The Supplemental Agreements provided that any holder of a certificate held under the original agreements could become subject to the provisions of the Modified Agreements.
It seems to me that there was enough in the arrangements and activities of the trustee and Depositor to “provide a medium for the conduct of a business and sharing its gains”, and I find nothing in Morrissey v. Commissioner, supra, to show that these trusts should not properly be classified as “associations” and subject to income tax as such.
For the above reasons, the contention of the Commissioner should prevail and the orders of the Board of Tax Appeals should be reversed.