[242]*242OPINION.
Smith:
The Commissioner’s deficiency notice was based on his decision that the petitioner was taxable as a trust estate under the provisions of section 219 of the Revenue Act of 1918, and as far as the record discloses such was his opinion until the matter came to trial. At the hearing counsel for the Commissioner substantially abandoned the position previously taken in the deficiency letter and in the stipulations, and argued that the Board find that the organization was a joint stock association and therefore taxable as a corporation under the Revenue Act of 1918.
This procedure was objected to by counsel for the petitioner. The argument advanced by him at the hearing, however, was based on the theory that the organization was a common law trust and not an association, and he requested and secured permission to file a brief covering this point. Inasmuch as an interpretation of the provisions of the agreement of June 26, 1919, would be necessary in any event, and since the petitioner was not surprised by the change of front on the part of the Commissioner, we are constrained to entertain the issue which developed at the hearing, and which was the real point involved, namely, whether or not the taxpayer was an association that should be classified as a corporation for income-tax purposes. We do not apprehend that the position of the petitioner would be injured thereby, and the assumption by both the Commissioner and the petitioner throughout the early stages of the controversy that it was a trust, either taxable or nontaxable, was a mere conclusion of law not binding on this body.
The form of the organization under consideration is typical of those unincorporated associations commonly designated “Massachusetts Trusts.” Such organizations have existed in Massachusetts for more than a century and for even a longer period in England, but the decisions of the Massachusetts courts are confusing and perhaps irreconcilable concerning the nature of these trusts. Malley v. Howard, 281 Fed. 363 (1922). The great mass of litigation that has arisen through the operations of these associations has resulted in their classification as (1.) trusteeships, or (2) partnerships.
The origin of such division of these unincorporated associations may be traced to the celebrated English case of Smith v. Anderson, 15 Ch. D. 247 (1880). In that case the question of what constituted carrying on business arose and Lord Justice Brett said the shareholders “ were joined together for the purpose of once for all invest[243]*243ing certain money which was delivered into their hands, and not for the purpose of obtaining gain from a repetition of investments.” The court also held that the shareholders did not transact the business of investing. “ It was not their business ” but was that of the trustees, who were “ clearly trustees as distinguishable from agents and from directors.” The organization was held a trusteeship on two points — (1) investment, and (2) lack of control by beneficiaries. This decision has been criticized in a few instances, but it is the law of England to-day. Williams v. Milton, 215 Mass. 1 (1912). It was not until 10 years after the decision in Smith v. Anderson, supra, that the courts of Massachusetts divided them into trusteeships and associations. Mayo v. Moritz, 151 Mass. 481 (1890). Litigation arising since that date has resulted in a number of decisions that are vague and conflicting as to how much or how little control by the shareholders is necessary to support a status as an association or as a trusteeship. Shareholders have little or no authority, practically, in any case, and it appears that the use of the control test, alone, is illogical and prolific of litigation and further confusion.
Cook on Corporations, in discussing Massachusetts trusts, states in Volume III, Eighth Edition, page 2251, et seq.:
What then are these Massachusetts trusts? In order to understand them it is necessary to divide them into two classes. First, where the trustees merely invest and collect dividends or interest or rental (from a single lease) and distribute the same among the shareholders. The supreme court holds that these are simple common-law trusteeships, the saihe as where a trustee under a will collects income and distributes it among the beneficiaries. The English authorities are to the same effect. Lord Halsbury says: “If . . . persons between whom no contractual relation exists subscribe to a fund to be invested in the shares of companies by trustees for the subscribers, the subscribers do not carry on a business, and probably the trustees ... do not either.” In this class of Massachusetts trusts the shareholders are not liable for the debts, and the trust is exempt from certain taxes.
Second, where the trustees carry on an active business for profit. These are simply unincorporated joint-stock associations.
These two lines of decisions probably mark the true line of distinction. Certainly those who carry on an active business for profit, through others, are principals and not mere beneficiaries, irrespective of how much or how little power of management and control they exercise, actually or by the terms of the original agreement. A silent participant in the profits of a business concern is liable for its debts, even though he take no part in its management.
The theory that these trusts should be divided according to whether the shareholders exercise great or little powers of control is only confusing. The trust instrument may be drawn either way. An investment trust agreement may give practically large powers to the shareholders, or a business trust agreement may give practically all powers to the trustees — a premium on irresponsibility. The real test is whether the shareholders or trustees or both combined carx-y on business; if so, they are a business trust, with liability for debts and taxes. Practically the courts apply this test now. A Massachusetts trust in active day by day mercantile or manufacturing or real estate business [244]*244is far removed from a trusteeship to cut coupons, or collect dividends, or a fixed rental and distribute the same, as under a will. The distinction based on shareholders’ powers might well be abandoned. As a matter of fact, the shareholders exercise little actual control in any of these trusts, or in statutory joint-stock companies, or even in full corporation.
We shall now consider two cases, Crocker v. Malley, 249 U. S. 223, and Hecht v. Malley, 265 U. S. 144, which were relied upon both by the petitioner and the Commissioner to support their divergent claims.
In Crocker v. Malley, supra, the court had for consideration a case in which a Maine paper-manufacturing corporation with eight shareholders owned mills and certain real estate. It caused a Massachusetts corporation to be formed, and conveyed to it all of its mills but one, which, together with the real estate, were leased to it for a long term; receiving the stock of the Massachusetts corporation in return. The Maine corporation then transferred to the plaintiffs as trustees the fee of the property subject to lease, left the stock of the Massachusetts corporation in their hands, and was dissolved.
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[242]*242OPINION.
Smith:
The Commissioner’s deficiency notice was based on his decision that the petitioner was taxable as a trust estate under the provisions of section 219 of the Revenue Act of 1918, and as far as the record discloses such was his opinion until the matter came to trial. At the hearing counsel for the Commissioner substantially abandoned the position previously taken in the deficiency letter and in the stipulations, and argued that the Board find that the organization was a joint stock association and therefore taxable as a corporation under the Revenue Act of 1918.
This procedure was objected to by counsel for the petitioner. The argument advanced by him at the hearing, however, was based on the theory that the organization was a common law trust and not an association, and he requested and secured permission to file a brief covering this point. Inasmuch as an interpretation of the provisions of the agreement of June 26, 1919, would be necessary in any event, and since the petitioner was not surprised by the change of front on the part of the Commissioner, we are constrained to entertain the issue which developed at the hearing, and which was the real point involved, namely, whether or not the taxpayer was an association that should be classified as a corporation for income-tax purposes. We do not apprehend that the position of the petitioner would be injured thereby, and the assumption by both the Commissioner and the petitioner throughout the early stages of the controversy that it was a trust, either taxable or nontaxable, was a mere conclusion of law not binding on this body.
The form of the organization under consideration is typical of those unincorporated associations commonly designated “Massachusetts Trusts.” Such organizations have existed in Massachusetts for more than a century and for even a longer period in England, but the decisions of the Massachusetts courts are confusing and perhaps irreconcilable concerning the nature of these trusts. Malley v. Howard, 281 Fed. 363 (1922). The great mass of litigation that has arisen through the operations of these associations has resulted in their classification as (1.) trusteeships, or (2) partnerships.
The origin of such division of these unincorporated associations may be traced to the celebrated English case of Smith v. Anderson, 15 Ch. D. 247 (1880). In that case the question of what constituted carrying on business arose and Lord Justice Brett said the shareholders “ were joined together for the purpose of once for all invest[243]*243ing certain money which was delivered into their hands, and not for the purpose of obtaining gain from a repetition of investments.” The court also held that the shareholders did not transact the business of investing. “ It was not their business ” but was that of the trustees, who were “ clearly trustees as distinguishable from agents and from directors.” The organization was held a trusteeship on two points — (1) investment, and (2) lack of control by beneficiaries. This decision has been criticized in a few instances, but it is the law of England to-day. Williams v. Milton, 215 Mass. 1 (1912). It was not until 10 years after the decision in Smith v. Anderson, supra, that the courts of Massachusetts divided them into trusteeships and associations. Mayo v. Moritz, 151 Mass. 481 (1890). Litigation arising since that date has resulted in a number of decisions that are vague and conflicting as to how much or how little control by the shareholders is necessary to support a status as an association or as a trusteeship. Shareholders have little or no authority, practically, in any case, and it appears that the use of the control test, alone, is illogical and prolific of litigation and further confusion.
Cook on Corporations, in discussing Massachusetts trusts, states in Volume III, Eighth Edition, page 2251, et seq.:
What then are these Massachusetts trusts? In order to understand them it is necessary to divide them into two classes. First, where the trustees merely invest and collect dividends or interest or rental (from a single lease) and distribute the same among the shareholders. The supreme court holds that these are simple common-law trusteeships, the saihe as where a trustee under a will collects income and distributes it among the beneficiaries. The English authorities are to the same effect. Lord Halsbury says: “If . . . persons between whom no contractual relation exists subscribe to a fund to be invested in the shares of companies by trustees for the subscribers, the subscribers do not carry on a business, and probably the trustees ... do not either.” In this class of Massachusetts trusts the shareholders are not liable for the debts, and the trust is exempt from certain taxes.
Second, where the trustees carry on an active business for profit. These are simply unincorporated joint-stock associations.
These two lines of decisions probably mark the true line of distinction. Certainly those who carry on an active business for profit, through others, are principals and not mere beneficiaries, irrespective of how much or how little power of management and control they exercise, actually or by the terms of the original agreement. A silent participant in the profits of a business concern is liable for its debts, even though he take no part in its management.
The theory that these trusts should be divided according to whether the shareholders exercise great or little powers of control is only confusing. The trust instrument may be drawn either way. An investment trust agreement may give practically large powers to the shareholders, or a business trust agreement may give practically all powers to the trustees — a premium on irresponsibility. The real test is whether the shareholders or trustees or both combined carx-y on business; if so, they are a business trust, with liability for debts and taxes. Practically the courts apply this test now. A Massachusetts trust in active day by day mercantile or manufacturing or real estate business [244]*244is far removed from a trusteeship to cut coupons, or collect dividends, or a fixed rental and distribute the same, as under a will. The distinction based on shareholders’ powers might well be abandoned. As a matter of fact, the shareholders exercise little actual control in any of these trusts, or in statutory joint-stock companies, or even in full corporation.
We shall now consider two cases, Crocker v. Malley, 249 U. S. 223, and Hecht v. Malley, 265 U. S. 144, which were relied upon both by the petitioner and the Commissioner to support their divergent claims.
In Crocker v. Malley, supra, the court had for consideration a case in which a Maine paper-manufacturing corporation with eight shareholders owned mills and certain real estate. It caused a Massachusetts corporation to be formed, and conveyed to it all of its mills but one, which, together with the real estate, were leased to it for a long term; receiving the stock of the Massachusetts corporation in return. The Maine corporation then transferred to the plaintiffs as trustees the fee of the property subject to lease, left the stock of the Massachusetts corporation in their hands, and was dissolved. The shareholders were the former stockholders of the Maine corporation. Written consent of a majority in interest of the shareholders was required for increasing the compensation of the trustees ; for the filling of a vacancy among the trustees, and for a modification of the terms of the trust. In no other matter had the beneficiaries any control. The function of the trustees was not to manage the mills but simply to collect the rents and income of such property as might be in their hands, with a large discretion in applying funds to repairs and development of the property and in distributing what they determined to be fairly distributable net income among the beneficiaries.
The court held that the organization constituted a trusteeship on two grounds — (1) lack of control in the shareholders, and (2) no association among the shareholders — saying:
“Tbe certificate holders * * * are in no way associated together, nor is there any provision in the [instrument] for any meeting to be held by them. The only act which (under the [declaration of] trust) they can do is to consent to an alteration ... of the trust ” and to the other matters that we have mentioned. * * * The question is whether a different view is required by the terms of the present act. As by P. above referred to trustees and associations acting in a fiduciary capacity have the exemption that individual stockholders have from taxation upon dividends of a corporation that itself pays an income tax, and as the plaintiffs undeniably are trustees, if they are to be subjected to a double liability the language of the statute must make the intention clear. * * *
If we assume that the words “ no matter how created or organized ” apply to “ association ” and not only to “ insurance company,” still it would be a wide departure from normal usage to call the beneficiaries here a joint-stock association when they are admitted not to be partners in any sense, and [245]*245when they have no joint action or interest and no control over the fund. On the other hand, the trustees by themselves cannot be a joint-stock association within the meaning of the act unless all trustees with discretionary powers are such, and the special provision for trustees in D. is to be made meaningless. We perceive no ground for grouping the two — beneficiaries and trustees— together, in order to turn them into an association, by uniting their contrasted functions and powers, althortgh they are in no proper sense associated.
The pertinent facts in Hecht v. Malley, supra, were stated in the opinion as follows:
The Hecht Real Estate Trust was established by the members of the Hecht family upon real estate in Boston used for offices and business purposes, which they owned as tenants in common. It is primarily a family affair. The certificates have no par value; the shares being for one-thousandths of the beneficial interest. They are transferable; but must be offered to the trustees before being transferred to any person outside of the family. The trustees have full and complete powers of management; but no power to create any liability against the certificate holders. There are no meetings of certificate holders; but they may, by written instrument, increase the number of trustees, remove a trustee, appoint a new trustee if there be none remaining, modify the declaration of trust in any particular, terminate the trust, or give the trustees any instructions thereunder.
The Haymarket Trust is strictly a business enterprise. It was established by the original subscribers who furnished the money for the purchase of a building in Boston used for store and office purposes. The shares are of the par value of $100 each. Except as otherwise restricted, the trustees have general and exclusive powers of management, but no power to bind the certificate holders personally. At any annual or special meeting of the certificate holders, they may fill any vacancies in the number of trustees, depose any or all the trustees and elect others in their place, authorize the sale of the property or any part thereof, and alter or amend the agreement of trust.
The court held that the organization was an association within the meaning of the Revenue Act of 1918. In reaching this conclusion it considered the case from two standpoints — (1) control, and (2) doing business — and based its opinion primarily upon the latter, saying:
We conclude, therefore, that when the nature of the three trusts here involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, but are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to be deemed associations within the meaning of the Act of 1918; this being true independently of the large measure of control exercised by the beneficiaries * * *. We do not believe that it was intended that organizations of this character — described as “ associations ” by the Massachusetts statutes and subject to duties and liabilities as such — should be exempt from the excise tax on the privilege of carrying on their business merely because such a slight measure of control may be vested in the beneficiaries * * *. (Italics ours.)
The trustees of the Hecht Trust insisted that it was not an “ association ” within the meaning of the Revenue Act of 1918, and relied upon the decision in the Crocker case, which involved a determination as to the form of organization of the Wachusett Realty Trust, [246]*246as conclusively determining that it should be judged by the single test of control vested in the shareholders. To this reasoning the court would not assent and stated that in that case—
The precise question was whether the trustees of The Wachusett Realty Trust were subject to the income tax upon dividends received from a Massachusetts corporation that was itself taxable upon its net income.
The court said further that its opinion in the Crocker case was:
* * * Based primarily upon the view that the Income Tax Act, considering its purpose, did not show a clear intention to impose upon the trustees as an “ association ” a double liability in reference to the dividends on stock in the corporation that itself paid an income tax, when considered as “ trustees ” they were by another provision of the Act exempt from such payment. And the language used arguendo in reaching this conclusion that the trustees could not be deemed an association unless all trustees with discretionary powers are such, and that there was no ground for grouping together the beneficiaries and trustees in order to turn them into an association — is to be read in the light of the trust agreement there involved, under which the trustees were, in substance, merely holding property for the collection of the income and its distribution among the beneficiaries, and were not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business. Zonne v. Minneapolis Syndicate, 220 U. S. 187, 190. And see Smith v. Anderson, L. R., 15 Ch. Div. 247.
It results that Crocker v. Malley is not an authority for the broad proposition that under an Act imposing an excise tax upon the privilege of carrying on a business, a Massachusetts Trust engaged in the carrying on of business in a quasi-corporate form, in which the trustees have similar or greater powers than the directors in a corporation, is not an “ association ” within the meaning of its provisions.
The measure of control reserved to the shareholders was not considered as a test by the Supreme Court in its determination of Burk-Waggoner Oil Assn. v. Hopkins, 269 U. S. 110, the question presented being whether or not an unincorporated association which was technically a partnership in Texas, the State in which it was organized, should be deemed to be a partnership or a corporation for income-tax purposes under the Revenue Act of 1918. In holding the plaintiff to be taxable as a corporation the court based its decision on the ground that the power of Congress to tax joint-stock associations and to “ determine how and at what rate the income of the joint enterprise shall be taxed,” is “not affected by the fact that, under the law of a particular State, the association cannot hold title to property, or that its shareholders are individually liable for the association’s debts, or that it is not recognized as a legal entity.”
The reasons for, and the circumstances surrounding, the creation of the present petitioner can best be obtained from the following testimony of W. D. Gordon, who said:
I live at Beaumont, and I bad some clients who had a claim, or ownership of some land right in the river bed of Red River, and adjacent to some older patent surveys.
[247]*247The land up to the discovery of oil in that immediate territory was considered so worthless that the owners, to whom patents had been issued by the State of Texas, the immediate predecessors in interest of my clients, and other persons, other parties cotenants with them, had paid no taxes on them.
They could not be used for any beneficial purpose.
The discovery of oil near this land, however, in what is known as the Burke Burnett Oil field, provided a great oil boom in that section of the State, and there were other lawyers representing other branches of this title up there endeavoring to do something with this land.
There was some minor conflict between the interests represented by the other lawyers, and myself, all holding on to this patent that the State had issued to a man named Walton, and finally I was induced to go to Wichita in an effort to work out a solution of the difference between the cotenants and also to put the property in such condition as that the owners could lease it. At the time I got there there had been numbers of offers made for leases on this land by prospective oil operators, and before a lease could get out and be signed by all of the different cotenants, some of whom were in St. Louis, some in San Antonio, Tex., some in Lampasas, some in Houston, some in Beaumont, some in other sections, some in Dallas, before the lease could get around to be signed up the man who had made the proposition had gone on after something else, because he could not wait.
The boom condition of things was such that immediate action had to be had or you could not make a trade, could not close a trade with anybody.
That was the situation when I got to Wichita Falls. I immediately saw there must be an agency created with power to handle this property, that the individuals could not, in the very nature of things, make any trade for the leasing or development of their property at all in the situation in which it was thrown.
Even if it were not for the conflicting claims among certain of the cotenants, that had to be first adjusted, they could not close any trade, so I suggested to the cotenants, some of whom were there present, and all represented there by attorneys, that an agency would have to be organized, would have to be created to act as a conduit through which the property could be handled without reference to the individuals themselves.
I first thought of organizing a corporation, and that was too slow, so I took up an old trust form that they were using up there, that some of the lawyers had prepared, a form of a trust or an association.
From this, I dictated a document, using the general terms of it and making it directly applicable to the particular nature that was under consideration. I organized a trust. That document is in evidence here. I did that by getting all of the interested parties, all who were parties at interest, or interested in this land, or their attorneys, and the attorneys representing the parties at interest together and making ourselves trustees for the benefit of the others, and giving ourselves as ample power as I know how to put. in there for the purposes which we had in view.
The instrument of June 26, 1919, creating the petitioner is entitled “Articles of Association and Declaration of Trust of Durfee Mineral Company,” and throughout that instrument the organization is constantly referred to as an “association” or a “joint stock association.” Paragraph “ Second ” in the declaration outlines the powers of the trustees. Among other things they were empowered to fill vacancies [248]*248occurring on the Board of Trustees, select and appoint proper officers of the association, conduct the business of the association, draw up and approve by-laws of the association and amend such by-laws and the .declaration of trust. “Voting privileges in the management of the business affairs of the company” were delegated to the shareholders in paragraph “ Sixth ” in the declaration of trust.
The declaration further provided:
For the consummation of this agreement, and the formation and conduct of the affairs of this association, it shall not be necessary for all or any particular number of the shares to be sold; the trustees are hereby empowered to sell the shares of the Treasury stock of the association, as they may deem proper for furthering the interest of this trust. The unsold shares shall be considered as Treasury stock until sold, and dividends shall be declared only upon the stock actually sold and issued.
The deed of conveyance of the property by the tenants in common to the Durfee Mineral Co., dated June 21, 1919, however, provided:
It is further understood that the rights and interest now fixed as among the respective grantors inter sese shall be unaffected by this conveyance and except that by this conveyance their respective interests shall be in the proportion of their stock ownership in said joint stock association, in like manner as the same at the making of this conveyance.
The form of organization chosen by the petitioner to carry out its purposes was complex and cumbersome, and although the articles of association purported to authorize the trustees to have complete control of the management of the property and the distribution of dividends arising therefrom, it is apparent from the action of the trustees in calling a shareholders’ meeting to approve the lease with T. H. Bass, and the leaving of such problems as the determination of the value of the property and the value of the conflicting interests therein to the shareholders for solution, that it was understood by all parties interested, either as trustees or shareholders, that the shareholders should have an active interest in the management of the business. The circumstances surrounding the formation of petitioner and the acts of the trustees and shareholders subsequent thereto indicate that both organizers and shareholders had in mind no more than the delegation of partial authority to a group of agents denominated “ Trustees.”
There can not be much doubt that the petitioner was engaged in doing business irrespective of the fact that as far as the record discloses the trustees did only one act, viz., the leasing of the property. The articles of association provided for the carrying on of a general oil, gas, and mineral production and marketing business in addition to the selling or leasing of the land and it is immaterial that the [249]*249trustees in their discretion did not engage in all of the activities they were authorized to do. Flint v. Stone Tracy Co., 220 U. S. 107, and Zonne v. Minneapolis Syndicate, 220 U. S. 187, differentiating business and holding corporations.
The courts of the State of Texas, the jurisdiction in which the petitioner was organized, have often been called upon to decide whether organizations similar to the one under consideration here were in fact associations constituting trusteeships or partnerships, and a recent decision, after reviewing the Texas authorities and previous decisions in point, has held that associations organized for profit were partnerships irrespective of the element of control. Thompson v. Schmitt, 115 Tex. 53; 274 S. W. 554, cited with favor by the United States Supreme Court in Burk-Waggoner Oil Assn. v. Hopkins, supra. The court fwas asked “ Does the declaration of trust * * * constitute a joint-stock association,” and its reply Avas “Yes,” and the doubts expressed at the hearing by W. D. Gordon, president and organizer of the petitioner, that it would be considered a joint-stock association by the Texas courts were well founded and that under the Texas rule it was at all times a joint-stock association prior to its incorporation in 1920.
The Revenue Act of 1918 defines corporations as including “associations, joint-stock companies and insurance companies,” and the Supreme Court has held that Congress intended in the Revenue Act of 1918 to extend its application to associations or joint-stock companies whether organized under statutory authority or not, and irrespective of whether they may be considered partnerships as regards the liability of shareholders for debts to third parties. Hecht v. Malley, supra. Burk-Waggoner Oil Assn. v. Hopkins, supra.
It seems clear that the articles of association and declaration of trust of the petitioner when considered together with the reasons for and the circumstances surrounding its execution did not clearly set out and define the respective rights, duties and privileges of the trustees and shareholders; that it was engaged in doing business; that it would in all probability be considered by the Texas courts as a partnership Avith respect to its shareholders’ liability for debts to a third party; that as such partnership it would be properly taxable as a corporation under the Revenue Act of 1918; that the better rule and the one used by the courts to:day in classifying such an organization either as a trusteeship or a partnership is the double test of (1) control, and (2) doing business, especially the latter, and that applying such double test would result in confining trusteeships to those declarations of trust where there is no control in the shareholders and the trust is not engaged in doing business.
[250]*250We are, therefore, of the opinion that the petitioner was, during the year 1919, an association engaged in doing business and should be classified as a corporation for income-tax purposes under the Revenue Act of 1918.
Judgment will be entered for the Commissioner on 15 days'1 notice, under Rule 50.
Aktjn’dell and Trussell dissent.
Milliicen not participating.