Girard Trust Co. v. Commissioner , 34 B.T.A. 1066 ( 1936 )

GIRARD TRUST COMPANY, TRUSTEE UNDER AGREEMENT FOR MORRIS L. CLOTHIER ET AL., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Girard Trust Co. v. Commissioner

Docket Nos. 75740, 76841.

United States Board of Tax Appeals

34 B.T.A. 1066; 1936 BTA LEXIS 603;

October 7, 1936, Promulgated

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A trust engaged in disposing of a tract of land in liquidation of an estate, by subdividing the tract and selling the lots because the tract could not be satisfactorily sold as a whole, is taxable as a trust and not an association.

George B. Clothier, Esq., for the petitioner.

R. N. McMillan, Esq., and E. M. Woolf, Esq., for the respondent.

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STERNHAGEN

The Commissioner determined deficiencies of $3,004.79 for 1930 and $443.70 for 1931 in the income taxes of the petitioner, in part by holding the trust taxable as an association. Petitioner contends that it is taxable as a trust.

FINDINGS OF FACT.

The petitioner, a corporation with principal office at Philadelphia, Pennsylvania, entered into an agreement on February 21, 1930, whereby it received in trust from the residuary devisees under the wills of Isaac H. Clothier, deceased, and Mary C. Clothier, deceased, a tract of land known as "Ballytore" at Wynnewood, Pennsylvania, to improve and sell, and to turn over the proceeds thereof, less expenses, to the devisees.

Ballytore was the homestead of Isaac H. Clothier, who died testate on January 15, 1921. By the third paragraph of his will he devised it to his widow, Mary C. Clothier, for her life with power to direct his executors to sell it or a part of it at her request whenever she desired. The widow and an unmarried daughter lived at Ballytore after Clothier's death, but considering the house large for them, the widow decided to sell and a son, who was an executor of her husband's will, consulted the Girard Trust Co., Wallace & Warner, Inc., a real estate firm, and others about a method of sale. The property was valued at $255,000, and constituted a considerable part of the Clothier estate. Those consulted were of opinion that the place could not be advantageously sold as a whole since there was no market for large tracts in that vicinity, and advised that it be subdivided and offered in lots. Wallace & Warner, Inc., were asked to buy the property as a whole, but declined.

On March 12, 1929, the widow made a written request to the executors to sell the property in whole or in part on such terms as they deemed best, and on May 17, 1929, she joined with them in the execution of a power of attorney to the Girard Trust Co. and an agreement with it whereby it was empowered and undertook to act for them in the management, development, improvement, sale, and conveyance of the premises, and agreed to collect all moneys, bonds, mortgages, or other securities in the course thereof for the account of the executors or for investment at their direction. On the same date the Girard Trust Co. entered into a contract with Wallace & Warner, Inc., whereby the latter undertook to supervise road construction on the tract, consisting of 54 acres, to secure the installation of public utilities, to prepare and submit plans for further improvement, and to use their best efforts to sell the lots. The agreement was made for a period of five years, subject, however, to termination one year after the widow's death at the option of the Girard Trust Co.

During 1929 surveys for roads were made, contractors' estimates procured, and the construction of the Ballytore and Clothier roads was begun and payments made on account thereof. The Girard Trust Co., with the consent of the widow and executors, conveyed one acre of the land to Caroline Clothier on September 20, 1929, and .801 of an acre to Florence B. Scott on December 6. In its corporate capacity it advanced to the executors a total of $27,250 in 1929 to be used in payment for the improvements being made.

On January 6, 1930, Mary C. Clothier, the widow, died testate; she made specific bequests of personalty and willed the residue of her estate to her nine children in equal shares. The surviving executors under her husband's will decided to distribute the unsold portions of Ballytore pursuant to the seventh paragraph of his will, but on February 21, 1930, the nine children and their spouses, as parties in interest, executed an instrument releasing the executors of all further liability in respect of the real estate, and agreeing to take the unsold portion of Ballytore as tenants in common without division or partition among them. On the same date, the executors revoked the power of attorney given to the Girard Trust Co. on May 17, 1929, and the nine children and their spouses entered into the aforesaid trust agreement with the Girard Trust Co. whereby it undertook to hold the tract of land:

* * * to manage, develop, improve, grant, bargain, sell and convey the same or any part or parts thereof and to receive, collect and receipt for any and all sums of money whether in cash, or, partly in cash and partly in mortgages derived from such sale or sales thereof; and shall hold any and all such sums * * * [for the nine children and transfer it to them in equal parts].

* * * less its charges and less any and all proper charges for development and improvement * * *.

The Girard Trust Co. was empowered to sell in such parts and on such terms as it deemed best, without interference, and the devisee-children relinquished title to the tract, reserving an interest only in the proceeds of the sale. They bound themselves to contribute equally amounts necessary to pay taxes, debts, development, and other expenses on the tract; empowered the Girard Trust Co. to incur debts in execution of the agreement and to employ persons to assist in development and sale, and ratified the company's contract of May 17, 1929, with Wallace & Warner, Inc. The agreement was made terminable at the option of the devisee-children at any time after April 1, 1933, after written notice of 60 days to the company.

The Girard Trust Co. adopted without further agreement its contract with Wallace & Warner, Inc., for the subdivision and sale of the tract, and between February 21, 1930, and December 31, 1931, the Ballytore and Clothier roads were completed, including paving and curbs, sewer, water pipe and temporary electric wiring, in accordance with surveys and estimates made during 1929. During 1930 four parcels of land, aggregating 5.3101 acres, were sold at a total profit of $31,897.71, and the trustee repaid to itself the funds advanced to the executors in 1929. It also paid income taxes and real estate taxes, assessments and insurance on the unsold land, frontage and improvements, and made certain distributions to the devisee-children from the net proceeds of the sales.

One of the principal reasons for turning the tract over to the Girard Trust Co. for sale was the difficulty of dealing with nine children, of whom eight were married and some of whom traveled. In its preliminary negotiations, the trustee discussed the erection of houses on the tract, but was informed that the devisees merely wished to have the property liquidated. After installation of the roads, curbs, and utilities, there were no further expenditures. One lease was made in 1930 with a tenant on the land who had previously been in free occupancy. Three of the lots were bought by members of the family. The trust agreement is still in force without change, and lots have been sold since 1931.

In determining its income taxes for 1930 and 1931, the Commissioner treated the trust as an association.

The trust was created for the purpose of liquidating the estate and not for the purpose of carrying on business for profit.

OPINION.

STERNHAGEN: The Commissioner's determination that petitioner is an association taxable as a corporation is defended entirely by reliance upon ; ; ; and ; "and the fact that from the testimony this trust was created for the purpose of engaging in a business for profit and was engaged in subdividing real estate, the purpose of which was to acquire larger profits." But the evidence does not support such a finding and requires the opposite finding which has been made. The stipulation and the testimony all show that the trust was created only because it was the most convenient and practical method of disposing of the property. If the estate could have been liquidated promptly this would have been done; but it was too large for the market. Subdivision was the only effective way of disposition, and to have the deed to each lot executed by all the interested individuals would have been too cumbersome. The fact that in the process of liquidation they sought the best price - if possible a profit - and were financially able to resist immediate sale at less than fair value does not stamp the liquidation as a business enterprise. The question whether the evidence shows liquidation or shows a business enterprise is always one of degree. ;;;;; ; ; ; Morriss Realty Co. Trust No. 1,; ; ; ; ; (on appeal, C.C.A., 7th Cir.); (on appeal, C.C.A., 7th Cir.); . Here the businesslike method was an incident of the paramount process of liquidation. The determination is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50.