Chase Nat'l Bank v. Commissioner , 41 B.T.A. 430 ( 1940 )

THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE UNDER TRUST AGREEMENT DATED JULY 1, 1931, BETWEEN AMERICAN DEPOSITOR CORPORATION, DEPOSITOR, AND THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE, CREATING %"corporate trust shares, accumulative series," petitioner/, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE UNDER TRUST AGREEMENT DATED JULY 1, 1931, BETWEEN AMERICAN DEPOSITOR CORPORATION, DEPOSITOR, AND THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE, AS MODIFIED BY SUPPLEMENTAL AGREEMENT DATED SEPTEMBER 23, 1932, CREATING "CORPORATE TRUST SHARES, ACCUMULATIVE SERIES %(modified)," petitioner, v. commissioner of internal revenue/, RESPONDENT.

THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE UNDER TRUST AGREEMENT DATED JULY 1, 1931, BETWEEN AMERICAN DEPOSITOR CORPORATION, DEPOSITOR, AND THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE, CREATING %"corporate trust shares, series aa," petitioner v. commissioner/ OF INTERNAL REVENUE, RESPONDENT.

THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE UNDER TRUST AGREEMENT DATED JULY 1, 1931, BETWEEN AMERICAN DEPOSITOR CORPORATION, DEPOSITOR, AND THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS TRUSTEE, AS MODIFIED BY SUPPLEMENTAL AGREEMENT DATED SEPTEMBER 23, 1932, CREATING "CORPORATE TRUST SHARES, SERIES AA (MODIFIED)," PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Chase Nat'l Bank v. Commissioner

Docket Nos. 93857, 93855, 93856, 93854.

United States Board of Tax Appeals

41 B.T.A. 430; 1940 BTA LEXIS 1185;

February 20, 1940, Promulgated

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Fixed investment trusts under which, for the purpose of conserving the trust property, the trustee has ministerial functions of holding corpus and collecting and distributing income and sales proceeds and a "Depositor" has limited power to direct sales so as to eliminate unsafe investments but has no power to direct reinvestment, held not taxable as associations.

Weston Vernon, Jr., Esq., for the petitioners.

Walt Mandry, Esq., for the respondent.

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STERNHAGEN

The Commissioner determined the following deficiencies in petitioners' respective income and excess profits taxes for 1934:

	Income tax deficiency	Excess profits tax deficiency
American Depositor Corporation trust agreement dated as of July 1, 1931, Corporate Trust Shares, Accumulative Series	$1,306.64	$475.14
American Depositor Corporation trust agreement dated as of July 1, 1931, and supplemental agreement dated September 23, 1932, Corporate Trust Shares, Accumulative Series (Modified)	451.09	164.03
American Depositor Corporation trust agreement dated as of July 1, 1931, Corporate Trust Shares, Series AA	1,046.24	380.45
American Depositor Corporation trust agreement dated as of July 1, 1931, and supplemental agreement dated September 23, 1932, Corporate Trust Shares, Series AA (Modified)	365.86	133.04

Petitioners assail the determinations that each was an association taxable as a corporation. Other issues were settled by agreement. The facts have all been stipulated.

FINDINGS OF FACT.

The Chase National Bank of the City of New York, a national banking association with principal office in New York, is trustee under each of four trust agreements with the American Depositor Corporation (herein called depositor), a New York corporation with principal office in New York. Two of these agreements, dated July 1, 1931, were executed on September 28, 1931, and relate to "Corporate Trust Shares, Accumulative Series" (Docket No. 93857) and to "Corporate Shares, Series AA" (Docket No. 93856), respectively. The other two, termed "Supplemental Agreements" and bearing the same styles plus "(Modified)", were executed September 23, 1932, and incorporate or modify provisions of the former (Docket Nos. 93855, 93854). In all of these agreements the depositor is party of the first part; the trustee is party of the second part, and "the holders from time to time of the Certificates for Corporate Trust Shares" are parties of the third part. All four agreements are in the record and are hereby incorporated in these findings.

The agreement of 1931, "Corporate Trust Shares, Accumulative Series", recites that the depositor has deposited with the trustee 16 shares in each of 30 designated corporations, termed a "Stock Unit"; that the trustee has issued to the depositor certificates representing the ownership of 10,000 undivided 1/10,000 interests in a stock unit, and that the depositor proposed to deposit with the trustee from time to time additional stock units against each of which the trustee was to issue certificates representing a total of 10,000 trust shares. It was then provided that the additional units deposited should consist of the same number and kind of shares as those constituting the first, augmented or altered, however, by common stock received on the former as a stock dividend or in the course of a merger, consolidation, sale of corporate assets, or exchange of stock, and that the trustee should deliver a certificate or certificates for an aggregate of 10,000 trust shares upon deposit by the depositor of a stock unit, together with cash equal to the amount of cash then held undistributed by the trustee for each unit in accordance with labor specified provisions. Certificates for shares constituting the stock units were to be registered in the name of the trustee or its nominee; "to the extent that may be necessary or proper to carry out the powers hereby granted", the trustee was directed to exercise generally the privileges of owner, subject, however, to directions of the depositor in respect of voting; to receive all income and distributions upon the shares, and on June 30 and December 31 of each year to pay proportionately to the trust share holders, upon presentation of coupons attached to the trust share certificates, all "currently distributable funds." "Currently distributable funds" were defined to comprise dividends, interest, cash distributions; the proceeds of required sales of deposited shares, subscription rights and other property; cash received upon deposits for the issuance of trust share certificates; cash received as distributions on mergers, consolidations, and dissolutions of the corporations issuing the shares; and interest allowable upon deposited funds until their required disbursement - the total so distributable to be reduced by specified expenditures made in connection with stock assessments, with changes in the capital structure of a corporation, the issuer of deposited shares (sometimes called a constituent corporation), and in adjusting claims relating thereto.

The trust administration was prescribed minutely by provisions requiring that the trustee hold as part of the stock units all shares of common stock of a constituent corporation which might be distributed to it as a stock dividend or as a distribution in the course of a "reclassification or change" in capital structure, or in the course of a merger or consolidation or action by a protective committee for shareholders' interests. Sales of fractional shares and shares in excess of a number divisible by the number of stock units were permitted for even division. All subscription rights, securities, property and other types of shares distributed on constituent shares, and also property distributed on dissolution of a constituent corporation were to be sold within a determinable time, normally 45 days after receipt, through a stock exchange if possible, and if not, in such manner and at such price as the trustee might determine. The trustee was directed to surrender the deposited evidences of share ownership in the case of such requirement under any plan for a change in structure of a constituent corporation, its merger or reorganization, and to follow the example of a majority of common shareholders in respect of action proposed by any protective committee for shareholders' interests. It was authorized to use discretion in the exercise of any option given in connection with a reclassification or change in capital structure, and also in assenting to proposals of a protective committee provided that the consensus of a majority of the holders of common shares should not be ascertainable. Any amounts required to be paid in the course of exchanges pursuant to mergers, consolidations, or protective committee plans were to be drawn first from amounts received thereunder, if any, then from currently distributable funds, and then, if necessary, were to be met by repayable advances of the trustee or proceeds from the sale of shares received. Stock assessments were to be paid out of currently distributable funds, or, if necessary, from repayable advances of the trustee.

While the additional stock units which might be deposited with the trustee from time to time were normally to be equivalent in composition to that first deposited, the depositor was granted the right upon certain events to notify the trustee within 90 days after their occurrence that it found the purchase of a certain stock in the stock unit portfolio impracticable or inadvisable, whereupon it became the trustee's duty to sell all shares of that stock held by it. The events entitling the depositor to this right were (a) that less than 2,500 shares of the stock had been sold during a 5-day period on the New York Stock or Curb Exchange; (b) that the stock had been removed for 3 days from the trading privileges of an exchange; (c) that the market value of the stock exceeded 30 times its annual cash dividend; (d) that a stock, paying dividends solely in its own common shares, had paid an annual dividend of less than 3 1/3 percent; (e) that cash dividends on a cash-dividend-paying stock had been reduced or had ceased; (f) that the market value of a stock in the stock unit portfolio exceeded 10 percent of the market value of all. Upon occurrence of (f), the depositor, after 90-day notice to the trustee, might, in the alternative, merely reduce the number of shares of that stock in a stock unit so that its market value would not exceed 10 percent of the market value of all shares in the unit, whereupon the trustee was required to sell such number of shares of that stock as would equally reduce the number held for all units. In its choice of these alternative actions the depositor was directed to "consider the preservation of the sound investment character of the Stock Units and not the making of a profit by the holders of Trust Shares as a result of the sale." Detailed directions were added for steps to eliminate fractional shares. Upon the failure of a distribution by any constituent corporation upon its shares for 1 year and 30 days, the trustee was to sell the deposited shares of that corporation. In case the number of constituent corporations should fall below 16 as a result of such elimination or through merger, consolidation or dissolution, the trustee was to terminate the agreement forthwith.

ARTICLE II. Administration of Deposited Property.

Section 17. In case any event not specified in this Agreement shall occur, requiring the exercise of discretion in the administration of the Deposited Property, the Trustee shall take such action with respect thereto as the Trustee in its absolute discretion shall determined. Neither the Trustee nor the Depositor shall be liable for any action taken or omitted by either * * *; but each shall be liable only for its own wilful default or malfeasance. * * *

The agreement was to continue in effect until June 30, 1951, unless sooner terminated by reduction of the stock unit portfolio below 16 constituent corporations; by the trustee's election not to advance funds in case taxes, assessments, and expenses should exceed cash available or in prospect; and by the depositor's failure to appoint a successor trustee.After termination, the trustee was required to sell all stock units and other property held by it and to distribute the proceeds proportionately to trust share holders. At any time before termination, a trust share holder was entitled to a proportionate distribution in kind upon surrender of his certificate. The agreement contained detailed instructions for the trustee's computation of the fair market value of securities and other property, adjustments necessary in the case of its receipt of fractional shares, and procedure in the case of undetermined taxes and other liabilities. The trustee was required to keep proper books and records of account, open to inspection by the depositor and holders of trust share certificates. Its compensation was payable by the depositor and not out of deposited property.

The certificates were to be issued by the trustee and countersigned by the depositor, to contain a list of the shares held in each constituent corporation, corrected to reflect changes in the portfolio, and to bear detachable coupons of the bearer's right to participation in the semiannual distribution of currently distributable funds, and were assignable if unregistered by delivery merely and, if registered, by transfer upon the trustee's books. Coupons were transferable by delivery in either case, and were payable upon presentation. Certificate holders would in no event be liable, and persons dealing with the trustee were to look only to deposited property for the satisfaction of claims of any sort.

ARTICLE VI. General Provisions Regarding the Certificates and Coupons and Miscellaneous Provisions.

Section 7. No holder of any Certificate shall have any right to vote or consent in respect of shares of stock held by the Trustee hereunder, except as, if and to the extent such rights are given to the Depositor hereunder and may be extended voluntarily by the Depositor to holders of Certificates or any of them.

Section 12. Nothing herein contained or contained in the Certificates shall be construed so as to constitute the holders of Certificates partners or members of an association. * * *

The agreement of 1931, "Corporate Trust Shares, Series AA", was substantially identical in recitations and provisions with the agreement of 1931, "Corporate Trust Shares, Accumulative Series", except that it provided for the sale of common stock as well as other stock, rights, securities and property, received as a dividend or distribution on deposited shares or in the course of a change in structure, merger, or consolidation of a constituent corporation, subject generally to rules for retention of common shares which merely replaced those surrendered, and for convenience in division. Furthermore, in case the market value of the shares of any stock in a unit should exceed 10 percent of all shares in the unit, the depositor could require a sale of all, as in the other agreement, but no provision enabled the depositor in the alternative to require the sale of only so many shares as would reduce such market value to 10 percent.

On September 27, 1932, the depositor called to the attention of trust share holders under both agreements the requirement for sale, within a 45-day period, of the shares of constituent corporations which had made no distribution for a period of 1 year and 30 days, and outlined a proposed modification of each agreement which would render such sales subject to the depositor's judgment from the standpoint of sound investment and would extend the time within which the sale could be made. For those desiring to receive new certificates for old, a printed letter of transmittal of the old certificates was enclosed. Many did so elect, and received certificates issued under the "Supplemental Agreements", each of which recited the purpose to modify the respective original agreements and to issue "Modified Shares." Each then provided that trustee "deal with all property from time to time held by it in respect of Modified Shares under the Original Agreement, as hereby modified." By the modifying provisions, those sections of the original agreements which required the trustee to sell all, or part, of the shares which the depositor found it impracticable or inadvisable to purchase because of specified events, were stricken, and in their stead it was provided that the depositor might require the trustee to sell all or a specified portion of any common stock in the stock unit portfolio whenever it was the depositor's opinion that such action would contribute to "the sound investment character of the stock units", without regard to the making of a profit. For the treatment of fractional shares detailed instructions were included to insure even divisibility among the stock units. The original requirement for termination of the agreement in case the number of constituent corporations should fall below 16 was stricken, and the time within which the trustee was normally to make any sales required, during the continuance of the agreement or after termination, was extended to 180 days. Other sections made changes in the period for which interest was allowable on deposited property, and provided for the exchange of old certificates for new, and indemnity of the trustee for assessments, claims, tax liability, and charges upon property held in the trust.

An outline of the plan of operation of the several trusts and a list of the constituent corporations appeared on the certificates issued under the respective agreements, and on prospectuses issued by the depositor, offering the several types of trust shares for sale at determinable prices computed to reflect the changing market value of the stock unit portfolio plus 9 1/2 percent and the cost of Federal stamp taxes. The prospectus stressed that the constituent corporations had been chosen as representative of a cross section of American industry after a study of factors having a bearing on the investment character of their shares; that no discretionary substitutions or reinvestments of the proceeds of shares sold were permitted; that provision was made for the elimination of shares which for given reasons it became inadvisable to hold; that the certificate holder could surrender his certificate for underlying shares at any time, and that no trust provisions could be changed. The prospectus relating to series AA, original and modified, stated further that the trust shares:

are designed to return to the investor, from time to time, a part of the increase in market value of the underlying stocks (through the sale of additional shares of such stocks received through stock split-ups, as well as cash dividends and the proceeds of the sale of stock dividends and rights).

By deposit of the stock unit the depositor became the holder by purchase of the certificates issued, and it then sold them to the public through some 1,500 distributors located throughout the United States. To fill orders, the depositor had to purchase, for deposit, shares of the constituent corporations, at times with borrowed funds secured by sight drafts accompanying the orders. The trustee took no part in such transactions. The certificates, if registered, were transferable only upon the trustee's registration records by the owner or his authorized attorney; those unregistered could be assigned by delivery in the same manner as a negotiable instrument. During the years 1931-1934 many were so transferred and were dealt in over the counter by brokers and individuals.

The depositor deposited with the trustee the following number of stock units, together with cash equal to that then held by the trustee in respect of each unit already on deposit and to the value of other property so held, against which the trustee executed and delivered certificates representing an aggregate of 10,000 undivided 1/10,000 interests in each deposited unit:

	1931	1932	1933	1934
Accumulative Series	517	323.0875	none	none
Series AA	460	230.061	none	none
Accumulative Series, Modified		65,4125	none	none
Series AA, Modified		76.03	none	none

Under the right to exchange their original trust shares for new shares issued under the supplemental agreements, holders of 6,324,625 undivided 1/10,000 interests of the accumulative series and of $5,189,700 such interests of series AA surrendered their old certificates, which were canceled, and received certificates for the equal number of interests under the respective supplemental agreements. Simultaneously there were transferred to the trustee's accounts under the supplemental agreements the appropriate number of stock units. From time to time thereafter the depositor deposited additional stock units, against each of which the trustee issued certificates for 10,000 undivided 1/10,000 interests.

Holders of the following number of interests surrendered their certificates and received in kind the proprotionate part of a stock unit:

	1932	1933	1934
Accumulative Series	146,250	933,125	241,885
Accumulative Series (Modified	48,750	2,717,500	1,451,800
Series AA	180,910	872,500	188,575
Series AA (Modified)	20,000	2,660,625	1,238,670

At the beginning of 1934 the total number of outstanding interests and the number of these which were registered; and at the end of 1934 the total number of outstanding interests, the number thereof which were registered, and the estimated number of holders of both registered and unregistered interests, were as follows:

	January 1		December 31
	Total	Registered	Total	Registered	Holders
Accumulative Series	996,875	2,130	754,990	2,140	8,389
Accumulative Series (Modified)	4,212,500	20,030	2,760,700	17,140	30,674
Series AA	657,500	2,815	468,925	2,100	5,210
Series AA (Modified)	3,269,375	10,880	2,030,705	7,530	22,563

The following schedules show the total cash received by the trustee from cash dividends (inclusive of equivalent cash received with the deposit of constituent shares); from sales, through stock exchanges, of stock dividends and constituent shares; and as interest on deposited funds:

	1931	1932	1933
Accumulative Series:
Cash dividends	$458,475.60	$970,958.09	$124,515.03
(Including deposited cash)	($416,854.54)	($197,482.08)
Sale of stock dividends	20,866.12	57,165.86	12,715.63
Sale of shares	none	none	363,269.22
Interest	1,468.28	3,139.53	521.23
	480,810.00	1,031,263.48	501,021.23
Accumulative Series (modified):
Cash dividends			$507,670.03
Sale of stock dividends			48,804.96
Sale of shares			none
Interest			679.88
			557,154.87
Series AA:
Cash dividends	$407,928.00	$812,332.30	$91,945.06
(Including deposited cash)	($374,506.14)	($156,150.32)
Sale of stock dividends	18,565.60	47,881.95	9,810.08
Sale of shares	none	none	266,366.86
Interest	1,306.40	2,619.20	391.19
	427,800.00	862,833.45	368,513.19
Series AA (Modified):
Cash dividends			$408,394.22
Sale of stock dividends			40,378.91
Sale of shares			none
Interest			543.20
			449,316.33

NOTE. - Figures for 1932 represent the aggregate amounts received for the entire year on units transferred to the accounts of the supplemental agreements.

All of the above amounts were made available to and paid to certificate holders upon presentation of the appropriate coupons on or after June 30 and December 31 of the respective years. During those years the trustee purchased no property of any kind.

During 1934 petitioner received the following dividends on constituent shares and made sales of securities, as required by the trust provisions, receiving the following proceeds and realizing the following net capital gains:

	Dividends	Sale proceeds	Gains
Accumulative Series	$76,390.99	$63,776.47	$9,502.84
Accumulative Series (Modified)	307,441.50	18,095.98	3,280.64
Series AA	49,454.17	41,612.42	7,609.03
Series AA (Modified)	228,823.79	13,580.20	2,660.80

The entire amount of the dividends and sale proceeds was made available during 1934 to holders of the certificate coupons. The subject of the sales - all made through stock exchanges - were (1) stocks, and (2) subscription rights, both received in distribution on constituent shares, and (3) shares of 2 constituent corporations which had made no distributions on them for 13 months. During 1934 the trustee purchased no property of any kind. At the end of that year the stock porfolios held subject to the original agreements contained shares of 23 corporations; those subject to the supplemental agreements, shares of 30 corporations. The number of stock units and the market value of the constituent shares at that time were as follows:

	Stock units	Market value
Accumulative Series	75.499	$1,447,937.94
Accumulative Series (Modified)	276.07	6,299.050.54
Series AA	46,8925	899,459.46
Series AA (Modified)	203.0705	4,633,431.17

During the years 1931, 1932, 1933, and 1934 petitioner was never required to exercise any option in respect of a reclassification or change of constituent shares, or to exercise any election to advance funds in connection with any change, merger, consolidation or sale of assets by a constituent corporation, or to deposit constituent shares with a shareholders' protective committee, or to advance funds for the payment of stock assessments. At meetings of shareholders of the constitutent corporations the depositor, through proxies executed by the trustee, cast all votes on the constituent shares. No meetings of holders of trust share certificates were provided for in the agreements, and none has ever been held.

At the time of execution of the original agreements, the depositor selected the constituent shares of a stock unit, and for each trust selected shares which it then owned in the same 30 corporations. Since execution, the trustee has acted in accordance with the agreements, and it and the depositor have discharged all their duties and obligations thereunder. The trustee's duties were carried out under the supervision of one of its vice presidents by its corporate trust department, a department regularly maintained to handle its general work as trustee under trust indentures. The affairs, correspondence, and records of the four trusts were handled and kept as incidents of its general business without the employment or designation of anyone for that sole purpose. No portion of the salaries of its officers and employees has ever been charged to property of those trusts or paid by the depositor or certificate holders otherwise than through a fee paid by the depositor for petitioner's services, and only its regular business stationery has been used in correspondence connected with the trusts.

The trustee's trust department kept ledger sheets bearing titles of the trusts on which were entered the respective receipts and disbursements for each. There were no disbursements or charge of trust cash or property on account of petitioner's service fee or trust expenses advanced by it. These latter were reimbursed by the depositor and were in the following amounts:

	1931	1932	1933	1934
Accumulative Series (Original and Modified)	$2,254.42	$4,995.89	$630.02	$313.86
Series AA (Original and Modified)	2,369.71	4,764.47	511.97	236.76

In its ledgers the trust department also recorded under the heading of the proper trust the number of certificates delivered to the depositor, canceled, replaced after loss, and surrendered for new ones of different denominations, and kept a card record of the constituent shares, which were all held in its name or that of its nominees. The trustee did not maintain in its own name as trustee any office, minute book, or seal, and the trusts had no officers, boards of directors, or similar governing bodies, and owned no property other than that referred to in the agreements. A statement showing the source, nature, and amount of currently distributable funds on June 30 and December 31 of each year was prepared for the depositor until June 30, 1933, by a firm of accountants employed by petitioner, and thereafter by an employee of the depositor. For 1933 and 1934 the depositor also prepared statements to assist the bearers of certificates in computing the income taxes payable by them in respect of income distributed under the agreements.

OPINION.

STERNHAGEN: The Commissioner determined as to each of the four petitioners deficiencies in income and excess profits taxes for 1934. He now concedes the excess profits tax deficiencies to have been determined in error, and they are therefore no longer in issue. The income tax deficiencies result from the determination that petitioners are associations and therefore taxable as corporations, and the petitioners assail this determination. There is no other issue.

The petitioners are investment trusts within the general class commonly known as fixed trusts. They are administered under similar plans of operation, which the findings set forth in resume, and the evidence shows no departure in their conduct from the provisions of the respective instruments. Securities constituting the investments of each are restricted to a prescribed portfolio, which neither the trustee nor the depositor may enlarge and which may be reduced only upon contingencies so minutely specified that only negligible discretion may be exercised by either in respect of the invested funds. Reinvestments are entirely forbidden. Under the agreement of 1931, "Corporate Trust Shares, Accumulative Series" (identical with the other three except in details hereafter mentioned), the trustee, holder of the legal title and certificates of the deposited shares and funds, is directed to collect all cash and other distributions, to convert the other distributions into cash, except those paid in common stock, and to distribute all such moneys proportionately to the trust share holders at semiannual intervals. The trustee may sell none of the shares constituting corpus except at the discretionary direction of the depositor, which may exercise this discretion only upon the occurrence of specified events tending to indicate that the shares are not a sound investment, or in case of the failure of any distribution by a constituent corporation for a year and 30 days, in which case a sale of its shares is mandatory. The proceeds of all such sales and also of liquidating distributions are distributable semiannually, as is income. Since no replacement shares may be purchased under any condition, the trust's stock portfolio might be permanently decreased, and if by such decreases the number of constituent corporations should fall below 16, the trust would terminate. The agreement of 1931 relating to series AA differs principally in that the trustee is also to sell common stock received as dividends and distribute the proceeds. Under the modified agreements, the depositor may direct the sale of any constituent shares which it regards as an unsound investment, and the exercise of its power to make such a direction is not conditioned upon the occurrence of specified events. Continuance of the trust is not dependent on any minimum number of constitutent corporations.

In general, under all of the agreements the trustee is to hold corpus and collect and distribute income and proceeds of trust property sold, and the depositor is to watch over and preserve the safety of investments by directing advisable sales. But it may not direct reinvestment. The trustee's functions, prescribed in detail, are purely ministerial, except in some cases of minor importance, such, for example, as a discretionary election in the course of a constituent corporation's reorganization. The depositor may direct sales to eliminate unsafe investments, and perform other acts, such as voting constituent shares, which are among the usual powers of the ordinary trustee.

The plan clearly provides no "medium for the conduct of a business and sharing its gains", and the trustee's operations under them can not properly be called "an enterprise for the transaction of business", which the Supreme Court in , regarded as implicit in the statutory term "association." The collection and distribution of income, the sales of securities and other acts of the trustee, and the acts of the depositor are but incidental to the holding and conservation of the corpus. These acts are different from such activities as the improvement, subdivision, and sale of real estate, ¹ the operation of apartment houses and other buildings, ² the development of oil lands, ³ and the conduct of a medical clinic, ⁴ which have been held to stamp the trusts performing them as associations. On the contrary, a trust which merely holds property and collects income is not to be classed as an association, (C.C.A., 7th Cir.), even though, as here, the trustee acts in accordance with the directions of an agent or manager whose powers were:

definitely fixed in advance of their exercise. He possessed no authority beyond that expressly delegated by his principal. * * * The duties of the trustee were purely ministerial, with no power to control, direct, or participate in, the conduct of the selling enterprise contemplated by the contract. [

In several cases investment trusts operating under plans similar to that of petitioners have been held associations, but in each instance profits were sought from the sale and reinvestment of trust funds. The combined powers of the trustee and the depositor under petitioners' agreements fall short of any authority "to take advantage of wide swings in the market", as in ; affd., (C.C.A., 2d Cir.); to "invest and reinvest all sums of money deposited * * * making investments in its sole discretion", as in (C.C.A., 2d Cir.); certiorari denied, ; to conduct "an investment business for profit", as in (C.C.A., 2d Cir.), or to trade "on the market", as in .

We find upon the present record that the trustee and depositor or both combined were not given and did not in 1935 exercise any powers beyond those which are necessary incidents to the preservation of trust property, the collection of income therefrom, and its distribution to the holders of trust shares. Unlike the organization in , petitioners' object was only "to hold and conserve particular property, with incidental powers, as in the traditional type of trusts." They were not "created and maintained as a medium for the carrying on of a business enterprise." It is unnecessary to decide whether they had other "salient features" resembling those of corporations which would otherwise invite the tax. The Commissioner erred in classifying the petitioners as associations, and his determination is reversed.

Reviewed by the Board.

Decision will be entered under Rule 50.

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Footnotes

• 1. (C.C.A., 7th Cir.); certiorari denied, . ↩

• 2. ; ; (C.C.A., 9th Cir.); (C.C.A., 5th Cir.); certiorari denied, ; (on review C.C.A., 6th Cir.); (on review C.C.A., 6th Cir.); (on review C.C.A., 3d Cir., and C.A.D.C.). ↩

• 3. ; (C.C.A., 9th Cir., Oct. 25, 1939); (C.C.A., 9th Cir.); certiorari denied, ; . ↩

• 4. (C.C.A., 7th Cir.). See also Gibbs-Preyer Trust No. 1,↩ (on review C.C.A., 6th Cir.).