Court Opinion

ID: 4620082
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:41:56.393749+00
Date Added: 2024-06-11T07:55:45.738103
License: Public Domain

ELMER E. WILLIAMS, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Williams v. CommissionerDocket No. 10476.United States Board of Tax Appeals14 B.T.A. 1149; 1929 BTA LEXIS 2982; January 10, 1929, Promulgated 1929 BTA LEXIS 2982">*2982  The Bank of Kampsville, Bank of Richwoods, and Bank of Brussels were not associations during the years 1919 and 1920 within the meaning of the Revenue Act of 1918, but were partnerships, the income of which was taxable to the persons comprising the partnerships.  John K. Laird, Esq., and B. L. Jennings, Esq., for the petitioner.  Alva C. Baird, Esq., for the respondent.  MARQUETTE 14 B.T.A. 1149">*1149  This proceeding is for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the total amount of $6,388.45, which the respondent has asserted against the petitioner as "Trustee for the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels." FINDINGS OF FACT.  The petitioner is an individual residing at Hardin, Ill.  During the year 1898 and until some time subsequent to 1922, he was cashier and a member of the board of directors of the Bank of Calhoun County at Hardin, and since the latter date has been vice president of that bank.  14 B.T.A. 1149">*1150  The Bank of Calhoun County was organized in the year 1898 under the banking laws of the State of Illinois, with a capital stock of $25,000, divided into 250 shares1929 BTA LEXIS 2982">*2983  of the par value of $100 each.  Under its charter it could not legally conduct any branch banks.  The nearby towns of Kampsville, Batchtown and Brussels, also located in Calhoun County, Illinois, were not considered sufficiently large to warrant the establishment of incorporated banks therein, but in order to keep other banks from securing a foothold in the community it was to the interests of the Bank of Calhoun County that these communities be provided with satisfactory banking facilities controlled by persons closely connected with the Bank of Calhoun County.  Prior to the year 1908 the Bank of Calhoun County was the only banking institution in that county.  The board of directors of the bank consisted of eight men.  In 1907, or in the early part of 1908, Frank A. Whiteside, David D. Pierson and Stuart E. Pierson, who were members of the board of directors of the Bank of Calhoun County and who owned 64.8 per cent of its capital stock (Whiteside owning 100 shares, David D. Pierson owning 50 shares, and Stuart E. Pierson owning 32 shares) learned that outside interests were contemplating the establishment of a bank at Brussels.  They thereupon determined and agreed among themselves1929 BTA LEXIS 2982">*2984  to establish private banks at Kampsville, Batchtown, and Brussels.  Thereupon they caused to be organized three safe-deposit companies, one in each of the towns named, and erected buildings suitable for banking quarters.  Each stockholder of the safe-deposit companies was allowed to purchase an equal amount of the capital stock of the Bank of Calhoun County, and in order to permit this to be done the capital stock of the Bank of Calhoun County was increased from 250 shares of the par value of $100 each to 500 shares of the par value of $100 each.  After this increase the holdings of Frank A. Whiteside were 150 shares, or 30 per cent; the holdings of David D. Pierson were 155 shares, or 31 per cent, and the holdings of Stuart E. Pierson were 52 shares, or 6.4 per cent.  The principal stockholders, or controlling interests, of the three safe-deposit companies were not the same, as the purpose was to have these companies controlled by residents of the towns in which they were located.  Upon the completion of the buildings by the safedeposit companies, leases were executed to individuals designated by Frank A. Whiteside.  The petitioner was not designated in any way, either as lessee or1929 BTA LEXIS 2982">*2985  assignee, in any of these leases.  The Bank of Calhoun County then advanced $5,000 each on three notes signed by the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels, and guaranteed by Frank A. Whiteside, David D. Pierson, and Stuart E. Pierson to be used in establishing banks in the towns of Kampsville, Batchtown, and Brussels, it being understood that the 14 B.T.A. 1149">*1151  makers of the notes had no legal existence.  The petitioner was thereupon employed by Frank A. Whiteside, David D. Pierson, and Stuart E. Pierson to secure cashiers and bookkeepers, receive the three $5,000 advances from the Bank of Calhoun County, occupy the buildings erected by the three safe-deposit companies, and conduct banks therein to be known respectively as the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels, and to act as manager thereof.  There was an oral understanding from the beginning of the enterprise that the operations were under the control of Frank A. Whiteside, David D. Pierson, and Stuart E. Pierson, and reports of the conduct and operations of the enterprises were regularly made to them, also instructions were given by them to the petitioner from time to time.  At the time1929 BTA LEXIS 2982">*2986  these banks were started Whiteside and the two Piersons agreed orally among themselves that the rental of the buildings, salaries, operating expenses, and the advances from the Bank of Calhoun County, were to be paid or repaid from earnings, if any, but that the earnings in excess of the amounts required for those purposes should be accumulated until such time as the three banks should be dissolved or cease doing business, and that the accumulated earnings should be distributed among the then stockholders of the Bank of Calhoun County.  This plan or understanding agreed upon by Whiteside and the two Piersons was not communicated to the other stockholders of the Bank of Calhoun County.  Under a constitutional provision of the State of Illinois, all private banks were compelled to cease business as such on the 31st day of December, 1920.  This provision required the incorporation of State Banks to succeed the banks which from the year 1908 to the close of 1920 had been operated as the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels.  Thereupon the petitioner, pursuant to orders and instructions given him by Frank A. Whiteside and Stuart E. Pierson, David D. Pierson being1929 BTA LEXIS 2982">*2987  then deceased, proceeded to liquidate the three banks named.  The net proceeds from the liquidation, after paying all liabilities, were paid to the then stockholders of the Bank of Calhoun County, pro rata according to their holdings in that bank in December, 1920, and in the early part of 1921.  These distributions comprised all of the net profits from the operations of the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels since their organization.  The three banks above named were operated at all times as separate enterprises and were known to the trade and public respectively as "Bank of Kampsville," "Bank of Richwoods," and "Bank of Brussels." They issued no stock certificates or other evidences of ownership; they had no boards of directors and no officers, but were operated by the petitioner 14 B.T.A. 1149">*1152  under and pursuant to directions given him by Whiteside and the Piersons.  For the year 1919 the Bank of Brussels filed an income-tax return on a partnership form.  It was sworn to by the assistant cashier, George Gebben.  Under "Schedule C, Members' Shares of Income," the following appears: D. D. Pierson15 @ 100Stuart E. Pierson15 @ 100F. A. Whiteside15 @ 100Elmer E. Williams5 @ 1001929 BTA LEXIS 2982">*2988  For the year 1920 the Bank of Kampsville, Blank of Richwoods, and Bank of Brussels, filed returns on a partnership form, sworn to by Elmer E. Williams, manager.  Under "Schedule C" the following appears in each return: Elmer E. Williams, Trustee for the stockholders of the Bank of Calhoun County, Hardin, Ill., See attached statement All of net profits.  The respondent, upon audit of the returns, determined that each of the banks named was an association taxable as a corporation; that they were affiliated, and that there is a deficiency in tax for the years 1919 and 1920 in the total amount of $6,388.45.  OPINION.  MARQUETTE: The question raised by this proceeding is, What were the nature and status of the three unincorporated banks known respectively as the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels?  The respondent has determined that they were associations and therefore taxable as corporations under the Revenue Act of 1918, and that they were affiliated.  The petitioner contends that they were in fact partnerships composed of Whiteside and the two Piersons, and that the net profits therefrom should have been taxed as income to the members of the partnership. 1929 BTA LEXIS 2982">*2989  The record is not clear as to the ground on which the respondent has asserted the tax against the petitioner.  We are satisfied from the evidence that the three institutions in question were partnerships.  They had no legal existence separate and apart from Whiteside and the Piersons who created them.  Whiteside and the Piersons conceived and organized the enterprises, furnished the capital therefor, and were liable for the losses, if any occurred, and they were clearly entitled to retain the profits if they had so desired.  All the essentials of a partnership were present.  The fact that they agreed among themselves to divide the accumulated earnings at the date of dissolution among the then stockholders of the Bank of Calhoun County is not, in our opinion, of material significance.  If the stockholders of the Bank of Calhoun County ever acquired any enforceable interest in the profits of the three 14 B.T.A. 1149">*1153  private banks it was not until after the profits had been earned.  The petitioner's contention that the three banks were partnerships must be sustained.  The courts have held, however, that a business organization may be a partnership under a state law and yet be taxable1929 BTA LEXIS 2982">*2990  as an association under the Revenue Acts of the United States.  . We must therefore inquire whether the banks in question were associations within the meaning of the Revenue Act of 1918.  An association, as that word is used in the several revenue acts, has been defined as "a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise".  ; ; . The organization which founded and conducted the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels, was of the simplest character and in no way resembled a corporate organization.  No officers or directors were elected, no certificates or other evidences of ownership were issued, and there were present none of the indicia of an association as defined by the Supreme Court.  We are therefore of opinion that the three banks were not associations and were, therefore, not taxable as corporations.  From what we have said it follows1929 BTA LEXIS 2982">*2991  that the Bank of Kampsville, Bank of Richwoods, and Bank of Brussels were partnerships composed of Whiteside and the two Piersons; that they were not taxable as corporations, and that the net profits therefrom should have been reported as income by Whiteside and the Piersons according to their respective interests in the partnership.  We are unable to perceive any liability on the part of the petitioner for the tax asserted herein.  Judgment will be entered for the petitioner.