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Commissioner of Internal Revenue v. City Nat. Bank & Trust Co.

May 13, 1944


On Petition to Review the Decision of the Tax Court of the United States.


Before BRATTON, HUXMAN, and MURRAH, Circuit Judges.

HUXMAN, Circuit Judge.

The sole question presented by this appeal is whether the trust involved in this case is an "association" within the meaning of Section 901(a) of the Revenue Act of 1938, 26 U.S.C.A. Int. Rev. Code, ยง 3797(a). The same question involving the same trust was before us in Hamilton Depositors Corporation v. Nicholas, 10 Cir., 111 F.2d 385, and we there answered the question in the affirmative. This appeal comes to us from the United States Tax Court. It refused to follow our decision in the Nicholas case, supra, and concluded that the trust was not such an association. It based its decision upon Commissioner v. Chase National Bank, 2 Cir., 122 F.2d 540, 144 A.L.R. 1043. It concluded that there was an irreconcilable conflict between our decision in the Nicholas case and the decision by the Second Circuit. Even if the two cases are distinguishable, there can be no criticism upon the tax court for its failure to follow our decision if it is of a contrary view, for the Nicholas case is not res judicata here. See United States v. Nunnally Investment Co., 316 U.S. 258, 62 S. Ct. 1064, 86 L. Ed. 1455, 140 A.L.R. 792.

There is no uncertainty in the principles of law which must guide us in our consideration of this question. They are spelled out clearly and definitely by the Supreme Court in Morrissey v. Commissioner, 296 U.S. 344, 56 S. Ct. 289, 290, 80 L. Ed. 263. The difficulty, as always, comes when we apply principles of law to a given state of facts.Under the decision of the Supreme Court in the Morrissey case, the decisive factor is whether the trust is an orthodox or pure trust as distinguished from a business trust or association. The court states:

"We granted certiorari because of a conflict of decisions as to the distinction between an 'association' and a 'pure trust.'"

The court emphasizes that the trusts that are outside the definition of an association are ordinary trusts, whether created by will, deed or declaration, and are such trusts in which particular property is conveyed to a trustee, or is to be held by the settlor, in a specific trust for the benefit of named or described persons. It is pointed out that in such trusts the beneficiaries do not ordinarily plan a common enterprise or enter into a combination for the conduct of a business enterprise. Pages 356, 357, of 296 U.S., pages 294, 295 of 56 S. Ct., 80 L. Ed. 263. The same distinction between pure trusts and business trusts is made by the Ninth Circuit in Porter v. Commissioner, 130 F.2d 276, 280,where the court said:

"'A trust does not engage in business, for purposes of the tax, if its sole or principal object and activities are: (1) preservation of specified property; (2) liquidation of a trust estate; (3) distribution of income derived from another source. * * * '"

It does not follow, however, that every trust established for the purpose of conducting a business enterprise is an association within the meaning of that term as used in the act. Neither is it essential to bring a trust within the definition that the organization be identical in its structure and functionings to a corporation. As stated by the Supreme Court:

"The inclusion of associations with corporations implies resemblance; but it is resemblance and not identity." Morrissey v. Commissioner, supra, 296 U.S. page 357, 56 S. Ct. page 295, 80 L. Ed. 263.

In the Morrissey case, the Supreme Court said that a business trust was an association within the meaning of the act when it had: (1) A continuing entity throughout the trust period; (2) centralized management; (3) continuity of the trust uninterrupted by death among the beneficial owners; (4) means for transfer of beneficial interests; (5) limitation of personal liabilities of participants to property embarked in the undertaking.

In the Nicholas case, supra, we held that these salient features were present and that the trust was one for a business enterprise or undertaking and therefore fell within the meaning of "association" as defined in the act. It is urged that we reached an erroneous conclusion and we are respectfully asked to re-examine our pronouncements in the Nicholas case. A re-examination of the entire subject matter leads us to adhere to the conclusion which we reached in the former case, that the trust provides for a continuing entity, centralized management, continuity of the trust, means for transfer of beneficial interests, and limitation of personal liability. It therefore remains only to consider whether the trust was an association for business or was a traditional trust.

In view of the manner in which the question is again presented for review, a more detailed statement of the facts than was outlined in our previous opinion may be helpful. The Hamilton Trust was established July 23, 1931.The parties to the agreement were the Hamilton Depositors Corporation,*fn1 the holders of the Hamilton Trust Shares,*fn2 and the Guardian Trust Company,*fn3 the original trustee. The City National Bank and Trust Company has been substituted and is now the acting trustee. Some amendments were made at different times to the trust instrument, but its essential character remained unchanged.

The trust agreement provided that the corporation would issue certificates of beneficial interests known as Hamilton Trust shares. These were to be sold to investors under a number of different plans, including a monthly installment plan. The corporation retained a certain portion of the proceeds as payment for services to be rendered to the trust, and deposited the balance with the trustee. The agreement established a portfolio consisting of the common stocks of thirty leading corporations. It also provides for "units." A "unit" was defined as consisting of one share of the common stock of each corporation in the ...

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