Opinion
Docket Nos. 48118 50768.
1956-01-30
CURT TEICH TRUST NO. ONE BY CURT G. TEICH, JR., WALTER E. TEICH, JOHN N. THORNBURN, GEORGE W. BLOMGREN, AND JOSEPH W. NORTH, CO-TRUSTEES OF SAID TRUST, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
John N. Thornburn, Esq., and Joseph W. North, C.P.A., for the petitioners. Paul Levin, Esq., for the respondent.
1. DEFINITIONS— TRUST OR ASSOCIATION.— Beneficiaries of an ancestral trust, to run for 20 years, the corpus of which consisted of rental property, a limited amount of the income being payable to one of the donors for life, the balance to the donors' children, with remainder of the corpus to the children, held not to be associates in a joint enterprise and the trust is not an association taxable as a corporation.
2. CAPITAL GAINS.— The trust not being an association is entitled to the benefits of section 117(b) of the 1939 Internal Revenue Code in determining income realized from sales of capital assets. John N. Thornburn, Esq., and Joseph W. North, C.P.A., for the petitioners. Paul Levin, Esq., for the respondent.
The Commissioner determined deficiencies in income tax for the calendar years 1949 and 1950 in the respective amounts of $26,306.04 and $39,436.19.
The issue for decision for both years is whether or not Curt Teich Trust No. One was an association taxable as a corporation by reason of the definition of the term corporation contained in section 3797(a)(3) of the Internal Revenue Code of 1939. A subsidiary issue for the year 1950 as to the treatment of gains from the sale of capital assets will automatically be decided by our decision on the main issue.
Minor issues raised by the pleadings as to adjustments on account of repairs and maintenance costs, leasehold improvements, and a depreciation deduction have been settled by concessions of the parties at the hearing. The concessions will be given effect in the recomputation under Rule 50.
FINDINGS OF FACT.
The stipulated facts are incorporated herein by this reference.
The petitioner was created by an agreement dated October 10, 1948, between Curt Teich, Sr., and Anna L. Teich, his wife, as ‘Donors' and five named individuals, as ‘Trustees.’ The agreement bears the caption ‘Curt Teich Trust— Trust Agreement— Trust No. One.’
The petitioner filed fiduciary income tax returns for the calendar years 1949 and 1950 with the collector of internal revenue at Chicago, Illinois. The donors and trustees are all residents of Cook County, Illinois.
Curt Teich, Sr., about 1898, shortly after his arrival in this country organized Curt Teich & Company as an individual proprietorship. That organization was incorporated about 1904, as an Illinois corporation under the name of Curt Teich & Company, Inc. The corporation is engaged in the business of printing postal cards.
Its operations are entirely separate and distinct from the petitioner.
So stipulated. It may be that the parties meant ‘post cards.’
Curt Teich, Sr., and Anna L. Teich were married in 1909. About 1911 they commenced to make investments in real estate in Chicago. Some of the properties were acquired by them as joint tenants and some individually. Some were sold and the proceeds were reinvested. They acquired and held the properties for the purposes of realizing income therefrom. Detailed records were kept covering the operation of the properties, and the income was reported in individual or joint income tax returns. None of such investment real estate was owned by Curt Teich & Company, Inc. The only real estate owned by that corporation is a portion of the building which it occupies.
Five children were born to Curt and Anna Teich. One son lost his life in the Armed Forces of the United States in World War II. The other 4 children, 3 sons and 1 daughter, are living and are beneficiaries under the trust agreement hereinafter described. Three of the children were married when the trust instrument was executed, and the other has married since then.
In establishing the trust it was the purpose and desire of the donors to create an estate for the benefit of their children which could not be dissipated by spendthrift operations, so that the children might be spared some of the difficulties that Curt Teich, Sr., had had in his earlier years.
By the trust instrument of October 10, 1948, the donors conveyed to the trustees parcels of real estate described in an annexed schedule as parcels I to IX, inclusive. Each of the parcels embraced a number of lots. Parcels I to VIII are all in Chicago and parcel IX is in Springfield, Illinois.
Pertinent facts as to the several parcels follow:
Parcel I contains 2 stores and 19 offices. Parcel II is a 3-story brick building containing 1 store and 4 apartments with a garage-type building located in the rear. This parcel was sold by the trustees. Parcel III is rented to a manufacturing company. Parcels IV and V were improved at the time that the trust agreement was executed, but subsequently the buildings were destroyed by fire and the vacant property was then sold by the trustees. Parcel VI was improved by a residence and private 1-car garage, and was sold by the trustees. Parcel VII is divided into two parcels. One is rented to a metal products company. The other was improved with a manufacturing building and a boatyard, both of which were sold to a manufacturing company. Parcel VIII is located at 1733-55 West Irving Park Road and is occupied by Curt Teich & Company, Inc. Parcel IX is the Springfield property. It is a 12-story building located in the main business area and contains stores and offices.
The several parcels herein sometimes called the trust estate, were transferred to the trustees to hold, manage, invest and reinvest, collect the gross income and pay expenses, and to distribute the balance of the income to the designated beneficiaries. Anna L. Teich, one of the donors, and also a beneficiary, is to receive $2,500 per month during her life or until the termination of the trust. The remainder of the income is to be divided, and paid in quarter-annual installments, equally among the four children named therein, beginning in January 1949, and until October 10, 1968.
The death of any beneficiary does not terminate the trust. In the event of the death of a child, provision is made to distribute to that child's children and surviving spouse his share of the income during the existence of the trust.
On termination of the trust on October 10, 1968, the trust property is to be sold and the trust estate distributed in equal shares to the donors' four children or to the estate of any deceased child, to be paid in such manner as such deceased child may appoint in his will, or in case of intestacy to his heirs.
The trustees are given a number of enumerated powers. They may establish reserves, borrow money and execute trust deeds or mortgages of the trust property as security, execute notes, and pay off loans either from principal or income. They may engage such professional and other help as they deem necessary, and employ brokers and salesmen, and pay the costs thereof out of trust funds. They may procure liability insurance or other forms of indemnity for their protection or the protection of the donees on account of any interest in the trust or the trust property. The trustees are to keep the trust estate invested in income-producing property, and may invest in improved or unimproved real estate, or in personal property including notes, debentures, bonds, preferred or common stocks, as in their sole judgment and discretion they deem proper for the best interests of the trust estate. They are not to be limited in their investment of trust funds to so-called legal trust fund investments. The trustees are not required to retain the properties originally placed in trust, but the donors set forth in the agreement advice to the trustees that they have great confidence in the desirability of retaining such property in the trust estate.
The trustees are given full power to sell, assign, and transfer any part of the trust property on such terms and at such price as they deem proper. They may sell at private sale and pay commissions, fees, and expenses. They may vote stock or give proxies for voting, and take any action deemed proper with respect to reorganization, mergers, or consolidations with respect to any securities in the trust estate.
The trustees may apportion between income and principal the costs of administration, operating costs, and losses. In making distributions or allocations to beneficiaries, the trustees may distribute or allocate in cash or in kind, and sell any part of the trust estate for the purpose of making distribution or allocation.
The trustees are empowered to sell any of the original trust property, or any other property that comes into their hands, or convert it into cash or other personal property; to manage and operate it, fix rentals, and lease it; mortgage or pledge it; grant easements; erect, repair, and reconstruct improvements; acquire and dispose of furniture, equipment, and chattels incident to the trust property; procure insurance; and ‘in general * * * to deal with the said premises * * * as would be lawful for any person owning the same to deal with the same * * *.’
The beneficiaries have no title or interest in the trust property as such, but only in any installment of principal or income actually paid by the trustees. Their interests are declared to be personal property. It is also provided that no beneficiary may assign, pledge, or otherwise anticipate any payment of principal or income.
Provision is made for the resignation of any trustee, but upon such resignation, or the death or removal of any trustee, the trust is not to fail or determine; in such event the continuing trustee or trustees are to exercise all of the powers and duties of the trustees.
The trustees may amend the trust agreement by an instrument in writing to be filed in their records. If, in the judgment of the trustees, any amendment made by them does not materially alter the rights of beneficiaries, it is to become binding on all persons at the time of filing. If it does materially alter the rights of beneficiaries, notice is to be given to them and the amendment will not be effective if any beneficiary lodges written objections within a specified time. No amendment has ever been made.
On termination of the trust the trust property is to be sold, and the net proceeds divided among the beneficiaries as their interests may appear in the records in the hands of the trustees.
Each of the trustees is to be paid the sum of $50 for each meeting attended by him, and reasonable compensation for any other or special services rendered.
Action by a majority of the trustees is binding on all. All documents executed by any three are valid and as effectual as if executed by all.
The donors, with the consent of the trustees, may deliver other and additional property to the trustees to become a part of the trust estate and subject to the provisions of the trust agreement. No property other than that originally conveyed has been conveyed or transferred into the trust.
No action taken by the trustees is to result in any personal liability on them other than for their own willful and wanton abuse of their powers and duties as trustees.
The beneficiaries as such have and exercise no voice in the management of the trust estate. There are no certificates or shares to evidence any beneficial interest, the trust agreement being the only evidence of interest in the trust estate. No beneficiary has attempted to assign, pledge, or otherwise transfer any interest in either the income or principal of the trust. The trust has never been incorporated. The trustees have their own bank account and stationery. The telephone number appearing on the stationery of the trustees is listed under the name of Curt Teich & Company, Inc. There is no listing in the name of the trust or trustees. The trustees do not have a seal.
The trustees held their first meeting on December 29, 1948. At that meeting they elected a chairman and a secretary, and adopted resolutions to open bank accounts and rent a safe-deposit box, to have the chairman and the secretary proceed with the general management of the trust properties, and to employ as managers the persons who had been managing the properties. In 1949 the trustees held four meetings, to wit: On March 16, June 1, June 23, and October 27. In 1950 meetings were held on January 9, April 14, July 10, October 3, and December 7. At the several meetings, the trustees formally considered and acted upon such varied matters as the rental to be charged for trust properties, including rental increases in some instances, the possible means of removal of one tenant, the insurable values of the trust properties, the terms that leases were to run, fire losses on two properties, the cost of repairs and remodeling, offers of prospective purchasers of some of the properties, and reduction of mortgages. They regularly considered balance sheets and monthly reports of operations of the trust properties. Distributions to beneficiaries were voted at the meetings of March 16, June 23, and October 27, 1949, and January 9, April 14, July 10, October 3, and December 7, 1950.
Of the five trustees originally designated, two are beneficiaries of the trust, namely, Curt G. Teich, Jr., and Walter E. Teich. Four of the five original trustees are still serving in that capacity. One resigned in 1950 and a successor was appointed. All of the trustees have been engaged in full-time occupations outside of their capacity as trustees.
Both prior to and after the creation of the trust in 1948 the actual management of the properties in Chicago was in the hands of Charles F. Horne, and those in Springfield were managed by Elmer Suckow. Horne had been employed by both Curt Teich, Sr., and Curt Teich & Company, Inc., and had received compensation from both. After creation of the trust, Horns continued to look after the details of managing the Chicago properties and was compensated by the trustees. He devotes about 45 per cent of his time to work for the trustees and about 55 per cent of his time to his duties with Curt Teich & Company, Inc., where he is supervisor of the credit department and assistant to the president. Horne has desk space in the office of Curt Teich & Company, Inc., where he maintains a complete double-entry set of books containing a cash receipt and disbursements journal and a ledger in which are recorded the financial transactions concerning the trust property. From these records are abstracted monthly statements of income and disbursements which are submitted to the trustees. These practices are a continuation of the same methods as used by the donors prior to the creation of the trust. Suckow, the agent of the trustees in Springfield, collects the rents from the trust property in that city, sees that the property is maintained, and makes a monthly report and payment of net rent to the trustees.
Rents constitute practically all of the proceeds from the properties in trust with the exception of the proceeds from the sale of properties as above set forth and a small amount of interest. Gross income from rentals reported by the trust for 1949 was $87,960.78 and for 1950 it was $82,556.57.
Curt Teich, Sr., and Anna L. Teich filed Federal gift tax returns for the year 1948 in which they reported the conveyances of the properties to the trust.
Prior to the creation of the trust, the donors held the properties which were conveyed to the trust for the purpose of deriving income therefrom.
The beneficiaries of the trust and their distributable shares of trust income for the years 1949 and 1950 were as follows:
+-------------------------------------------------+ ¦ ¦1949 ¦1950 ¦ +-----------------+---------------+---------------¦ ¦ ¦distributable ¦distributable ¦ +-----------------+---------------+---------------¦ ¦Beneficiary ¦share ¦share ¦ +-----------------+---------------+---------------¦ ¦Anna L. Teich ¦$30,000.00 ¦$30,000.00 ¦ +-----------------+---------------+---------------¦ ¦Curt Teich, Jr ¦9,806.60 ¦10,176.30 ¦ +-----------------+---------------+---------------¦ ¦Walter Teich ¦9,806.60 ¦10,176.29 ¦ +-----------------+---------------+---------------¦ ¦Louise T. Chmelik¦9,806.60 ¦10,176.29 ¦ +-----------------+---------------+---------------¦ ¦Ralph Teich ¦9,806.60 ¦10,176.29 ¦ +-------------------------------------------------+
In 1950 the trust sold 3 pieces of real estate which had been held for more than 6 months, and realized a gain thereon in the amount of $28,168.08. In its fiduciary return for 1950 the trust included in income only the amount of $14,084.04 as gain from the sale of capital assets. The respondent in the notice of deficiency included the entire amount of $28,168.08 as taxable income on the ground that the petitioner is an association taxable as a corporation and is therefore not entitled to the benefit of section 117(b) of the Internal Revenue Code of 1939, under which only 50 per cent of long-term capital gain is to be taken into account in computing net capital gain, net capital loss, and net income.
OPINION.
ATKINS, Judge:
Under the provisions of section 3797(a) of the 1939 Internal Revenue Code, an ‘association’ is included within the term ‘corporation.’ Applying this provision of the Code to the Teich Trust, the respondent has determined that it is an association, subject to tax as a corporation. His action has resulted in the determination of deficiencies for the years 1949 and 1950.
The leading case on the issue presented here is Morrissey v. Commissioner, 296 U.S. 344, wherein, with elaborate care, the Supreme Court examined the matter of taxation of trusts in its historical setting and set forth at length its views as to a number of problems that had arisen in the many trust-association cases that had been litigated.
As we read the opinion in the Morrissey case, the first question to be resolved is whether the organization under scrutiny is, on the one hand, an association in the light of the history of the statute and regulations, or, on the other, a traditional trust. On this point the Court said:
‘Association’ implies associates. It implies the entering into a joint enterprise, and, as the applicable regulation imports, an enterprise for the transaction of business. This is not the characteristic of an ordinary trust—whether created by will, deed, or declaration— by which particular property is conveyed to a trustee or is to be held by the settlor, or specified trusts, for the benefit of named or described persons. Such beneficiaries do not ordinarily, and as mere cestuis que trustent, plan a common effort or enter into a combination for the conduct of a business enterprise. Undoubtedly the terms of an association may make the taking or acquiring of shares or interests sufficient to constitute participation, and may leave the management, or even control of the enterprise, to designated persons. But the nature and purpose of the cooperative undertaking will differentiate it from an ordinary trust. In what are called ‘business trusts' the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains.
The Court also stated that it is impossible in the nature of things to translate the statutory concept of ‘association’ into a particularity of detail that would fix the status of every sort of enterprise or organization. It has been recognized, therefore, that each case must be considered as a special, individual and separate problem. James E. Davidson v. United States, 24 A.F.T.R. 1118, affd. 115 F.2d 799.
Under the facts before it in the Morrissey case, and in each of the other cases decided at the same time,
the Court found that there was an association within the intent of the statute and language of the regulations. In each of those cases owners of interests in property voluntarily associated themselves, through the form of a trust, in a joint enterprise for the transaction of business.
Swanson v. Commissioner, 296 U.S. 362; Helvering v. Coleman-Gilbert Associates, 296 U.S. 369; and Helvering v. Combs, 296 U.S. 365.
In this case, in contrast with the facts in the Morrissey case, the beneficiaries did not associate themselves in any enterprise. Here Curt Teich, Sr., and his wife, Anna L. Teich, conveyed particular property to trustees, on specified trusts, for the benefit of their children. The testimony in the case is that it was the purpose and desire of the grantors to create an estate for the benefit of their children which could not be dissipated by spendthrift operations. To effectuate this purpose the trust instrument provides against anticipation by the beneficiaries of any interest in either principal or income. It is provided that the beneficiaries cannot assign their right to principal or income and any attempted anticipatory assignment shall be absolutely null and void. The beneficiaries had not had any previous interest in the trust property, except Anna L. Teich, who thereafter had only a life interest.
Under the circumstances of this case it is our opinion that it cannot be said that the beneficiaries planned a common effort or entered into a combination for the conduct of a business enterprise. It is our view that these beneficiaries are not associates and that the trust should not be considered an association within the meaning of the statute and regulations and the rule of the Morrissey case. Rather, we believe the trust is properly classified as a traditional trust, or as the Court calls it in the Morrissey case, an ‘ordinary trust.’
The distinction that we see in the Morrissey case between organizations which consist of property owners who associate themselves for the operation of their properties for profit, and those in which an ancestor places his property in trust for others, has been drawn in other cases. In Blair v. Wilson Syndicate Trust, 39 F.2d 43, it was stated:
A distinction is to be made between an agreement between individuals in the form of a trust and an express trust created by an ancestor, although they may have some features in common. The controlling distinction is that one is a voluntary association of individuals for convenience and profit, the other a method of equitably distributing a legacy or donation. Congress has recognized this distinction, classing the former as associations, to be taxed as corporations, and at the same time providing for a separate and distinct method of taxing the income of estates and trusts created by will or deed, classing them together for that purpose.
Similarly in Living Funded Trust of Harry E. Lyman, 36 B.T.A. 161, where the grantor set up a trust for the benefit of his wife, children, and grandchildren, in holding that the trust was not an association, it was said:
In the case under consideration the beneficiaries did not establish a trust for the management of properties owned by them as tenants in common. They did not associate themselves together for the prosecution of a common enterprise; they did not create an ‘association’ upon the methods and forms used by corporations; they had no part in establishing the trust, and were without power to modify the trust agreement or to terminate the trust.
The respondent contends that the powers vested in the trustees, described at some length in our Findings of Fact, permit them to conduct a business, as distinguished from the mere holding and conservation of property. It is our view that whether or not the trustees are empowered to conduct a business, the trust is not taxable as an association in a case such as this, where ancestors set up a traditional or ordinary trust for the benefit of the natural objects of their bounty and there has been no voluntary association of those beneficiaries for the purpose of carrying on a business. In any event, it is our opinion that the powers given to the trustees here, while broad, do not transcend proper powers customarily reposed in trustees for the protection and conservation of trust corpus.
In support of his position the respondent cites, among other cases, Roberts-Solomon Trust Estate, 34 B.T.A. 723, affd. 89 F.2d 569, in which it was held that the trust was an association taxable as a corporation. In that case the grantor transferred rental property in trust for the benefit of persons holding certificates of beneficial interests to be issued by the trustees. The certificates of beneficial interest, which were transferable, were issued in the first instance by the trustees to the grantor in exchange and full payment for the property conveyed in trust. The grantor in turn transferred some of the certificates back to the trustees in trust for each of her children and grandchildren for the purpose of paying them income for a term of years. The certificates were transferable by the beneficiaries after first being offered for sale to the trustees and the other beneficiaries. On termination of the trust the trust property was to pass to the then holders of beneficial certificates. That case is distinguishable from the instant case because the trust instrument there did not purport to place property in trust for the purpose of conservation for the benefit of any persons who might be the natural objects of the donor's bounty. It did not name personal beneficiaries at all, but only referred to impersonal certificate holders. Such certificate holders became not merely the owners of an equity in real estate, but also the owners of transferable certificates. There was no certainty in that case that the trust corpus would ultimately go the settlor's children and grandchildren. The Court of Appeals emphasized that the business was ‘not necessarily for the benefit of stated persons, for the certificates are transferable and all may pass into other hands.’
The respondent relies on the Roberts-Solomon case principally on the point of what constitutes associates in an enterprise. We said in the opinion in that case that the mere fact that the participants ‘were given the business instead of creating it themselves seems no reason for holding that there is no association.’ That holding must be read in the light of its factual setting. The settlor was an active participant in the enterprise, through being a certificate holder, and, as the Court of Appeals stated:
Each person on accepting shares in a business enterprise thus organized becomes an associate.
The holding in that case that the beneficiaries were associates is consistent with the thought expressed in the Morrissey case in the quotation above, that ‘the terms of an association may make the taking or acquiring of shares or interests sufficient to constitute participation * * *.’
The case of Porter Property Trustees, Ltd., 42 B.T.A. 681, affd. 130 F.2d 276, also relied on by the respondent on this point, is likewise distinguishable. In that case 3 of the 5 beneficiaries of the trust, and also the president of the board of trustees of the trust, had been stockholders of the corporation whose stock was placed in trust and whose assets were acquired by the trust. They were, therefore, associated in interest in the trust property both before and after the creation of the trust. In the opinion in that case, in discussing the point of associates, it was said:
we need look only beyond the creation of the trust of the prior corporation to find parents and children happily associated together under the form of a corporation in carrying on their farming operations. In the transmutations which followed it would seem of little moment that certain members of the family passed from the active role of shareholders to the passive one of beneficiaries.
Here, in contrast with the above cases, the grantors entirely disassociated themselves from the trust property (save for the life interest of Anna L. Teich), the beneficiaries had had no previous interest in the property, and they had no certificates or evidences of interest or participation which would make them associates in the operations of the trust. The only interests they received were nonassignable rights to income, and eventually corpus, according to the provisions of the trust instrument. Thus, the cases principally relied on by the respondent are not in point on the facts, and we are not aware of any others which would support or require a holding that the Teich Trust constitutes an association within the purview of the taxing statute.
As the petitioner was not an association taxable as a corporation in the years 1949 and 1950, it follows that the respondent erred in determining the deficiency for 1950 in taking into account the entire amount of long-term capital gain realized on sales of assets in that year. Sec. 117(b), I.R.C. 1939.
Decision will be entered under Rule 50.