SPARKS, Circuit Judge.
Petitioners who are the trustees of the Chicago Real Estate Trust filed their income tax returns, as fiduciaries, for the five fiscal years ending June 30, 1925, to 1929. The Commissioner found that they were taxable as an association under the provisions of section 2 (a) (2) of the Revenue Acts of 1924 and 1926, 26 USCA § 1262 (a) (2), and section 701 (a) (2), Revenue Act of 1928, 26 USCA § 2701 (a) (2), and Treasury Regulations 65, arts. 1502 and 1504, relating to the Revenue Act of 1924, and similar provisions relating to the Revenue Acts of 1926 and 1928, promulgated in accordance with section 1001 of the Revenue Act of 1924 (26 USCA § 1245 and note) and an identical provision of the Revenue Act of 1926, § 1101 (26 USCA § 1245 and note) and Revenue Act 1928 § 62 (26 USCA § 2062). These provisions will be set forth hereinafter. The Board of Tax Appeals sustained the deficiencies asserted by the Commissioner, and from its decisions these appeals are had. The principal question involved is, therefore, whether petitioners constitute a trust or an association according to the definitions above referred to.
There have been a number of eases involving this same question of whether a particular entity is taxable as a trust or as an association.
The trend of these decisions seems
to be to look to the actual activities of the entity first, rather than to its form or possible powers. The first question then is, were the petitioners associated together for the purpose of carrying on a business enterprise, or were they merely holding property for the collection of the income and its distribution among the beneficiaries of the trust!
In 1926, the petitioners owned three buildings, all under long term net rental leases. Construction of one of them had been completed during the first of the taxable years. The trustees had purchased the land on which this was erected already subject to a contract for a lease which had specified the type of building and the main provisions of the rental. The architect’s plans for the building had already been drawn and petitioners had adopted those plans practically without change. The entire cost of land and building was about $2,500,000, or approximately equal to the total amount of the trust receipts outstanding which had been $2,500,-000 a.t least as far back as 1902. At the close of the last taxable year, June 30, 1929, the total value of the real estate holdings was $3,815,630.57, and those holdings wore entirely free from encumbrance.
During the taxable years petitioners had owned securities valued at $520,202, but these had been sold to pay off the mortgage on their last building'. These securities had been purchased for the purpose of investing the depreciation and contingency funds which the trustees were authorized to set aside. The evidence showed that during' the thirty-nine years of their organization the trastees had owned five other pieces of real estate in addition to the three owned during the taxable years. Those five pieces had been disposed of prior to the taxable years.
The ease of Tyson et al. v. Commissioner, 54 F.(2d) 29, 31, was decided by this court shortly before the decisions were handed down by the Board in these eases, and the Board discussed it at length in its opinion. In that ease the trustees owned a single piece of property which was already subject to a long term net rental lease at the time they purchased it. No other property was ever acquired by them although the declaration of trust under which they were organized permitted other activities. Upon the sale of tlieir single piece of property their trust was dissolved. This court in holding that the trustees should be taxed as fiduciaries rather than as an association stated,
“In
short, the investment was one which provided with reasonable certainty lor a sure and fixed income
without either care or
supervision(Italics ours.) Using this as a test, we think it can
not be
said that petitioners in the case at bar are simple fiduciaries. It seems obvious that the duties connected with their investments involved considerable care and supervision. When they found no building suitable for their purposes they put one up. They determined what part of the gross income up to ten per cent, of it should be withheld from distribution for depreciation and contingency funds and then invested those funds. They exercised the authority granted by the trust agreement to dispose of properties, soiling five during the period of their existence. They placed a mortgage on their last acquired piece of property, paying it off within the five taxable years hero involved. Although all the buildings were leased under net rental arrangements whereby the tenants paid all the expenses of maintenance, insurance, taxes and special assessments, nevertheless there were expenses incurred amounting to an average of about $20,000 a year in addition to legal and miscellaneous expenses of over $2,000 a year in each of the taxable years for which balance sheets and income statements were put in evidence. These are rather substantial expenses for an entity which, in order to bring itself within the definition of a trust for taxing purposes, must be practically self-operating', “without care or supervision.” They employed as their agent an experienced real estate management firm of which one of their number was a member. That firm collected the rents, depositing’ them in the trustees’ bank account and accounting' to them.. It also saw to it that taxes were paid by the lessees. With all these facts present, surely it cannot be said that the trustees were a mere conduit through which the income from the properties passed fox distribution to the receipt holders practically without activity on their part. We therefore conclude that the trustees were engaged in sufficient activities to warrant our holding that they were carrying on a business enterprise, hence taxable as an association.
Petitioners, however, argue that even if it were held that they were carrying oil a business, they would be properly subject to tax as a corporation only if in addition they were substantially similar to a Corporation, in other essential characteristics of form and procedure.
Petitioners operated under an Agreement and Declaration of Trust drawn up in
1800, the significant provisions -of which are set forth marginally as amended in 1904.
This appears to provide far the organization of a typical Massachusetts trust, probably chosen as to form for the reason that at that time corporations were not able to engage in the real estate business in Illinois because of a statute which greatly restricted their right to hold title to real estate. Hence the fact that the entity called itself a trust from the time of its organization is of little or no importance in the present discussion. While the taxing statute does not in terms refer to this type of trust, it does define corporations to include associations. Section 2 (a) (2) of Revenue Acts of 1924 and 1926, 26 USCA § 1262 (a) (2); section 701 (a) (2), Revenue Act of 1928, 26 USCA § 2701 (a) (2). A similar statute relating to the excise tax has been beld to be applicable to business trusts provided they are organized in quasi-corporate form for tbe conduct of a business enterprise. Hecht v. Malloy,
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SPARKS, Circuit Judge.
Petitioners who are the trustees of the Chicago Real Estate Trust filed their income tax returns, as fiduciaries, for the five fiscal years ending June 30, 1925, to 1929. The Commissioner found that they were taxable as an association under the provisions of section 2 (a) (2) of the Revenue Acts of 1924 and 1926, 26 USCA § 1262 (a) (2), and section 701 (a) (2), Revenue Act of 1928, 26 USCA § 2701 (a) (2), and Treasury Regulations 65, arts. 1502 and 1504, relating to the Revenue Act of 1924, and similar provisions relating to the Revenue Acts of 1926 and 1928, promulgated in accordance with section 1001 of the Revenue Act of 1924 (26 USCA § 1245 and note) and an identical provision of the Revenue Act of 1926, § 1101 (26 USCA § 1245 and note) and Revenue Act 1928 § 62 (26 USCA § 2062). These provisions will be set forth hereinafter. The Board of Tax Appeals sustained the deficiencies asserted by the Commissioner, and from its decisions these appeals are had. The principal question involved is, therefore, whether petitioners constitute a trust or an association according to the definitions above referred to.
There have been a number of eases involving this same question of whether a particular entity is taxable as a trust or as an association.
The trend of these decisions seems
to be to look to the actual activities of the entity first, rather than to its form or possible powers. The first question then is, were the petitioners associated together for the purpose of carrying on a business enterprise, or were they merely holding property for the collection of the income and its distribution among the beneficiaries of the trust!
In 1926, the petitioners owned three buildings, all under long term net rental leases. Construction of one of them had been completed during the first of the taxable years. The trustees had purchased the land on which this was erected already subject to a contract for a lease which had specified the type of building and the main provisions of the rental. The architect’s plans for the building had already been drawn and petitioners had adopted those plans practically without change. The entire cost of land and building was about $2,500,000, or approximately equal to the total amount of the trust receipts outstanding which had been $2,500,-000 a.t least as far back as 1902. At the close of the last taxable year, June 30, 1929, the total value of the real estate holdings was $3,815,630.57, and those holdings wore entirely free from encumbrance.
During the taxable years petitioners had owned securities valued at $520,202, but these had been sold to pay off the mortgage on their last building'. These securities had been purchased for the purpose of investing the depreciation and contingency funds which the trustees were authorized to set aside. The evidence showed that during' the thirty-nine years of their organization the trastees had owned five other pieces of real estate in addition to the three owned during the taxable years. Those five pieces had been disposed of prior to the taxable years.
The ease of Tyson et al. v. Commissioner, 54 F.(2d) 29, 31, was decided by this court shortly before the decisions were handed down by the Board in these eases, and the Board discussed it at length in its opinion. In that ease the trustees owned a single piece of property which was already subject to a long term net rental lease at the time they purchased it. No other property was ever acquired by them although the declaration of trust under which they were organized permitted other activities. Upon the sale of tlieir single piece of property their trust was dissolved. This court in holding that the trustees should be taxed as fiduciaries rather than as an association stated,
“In
short, the investment was one which provided with reasonable certainty lor a sure and fixed income
without either care or
supervision(Italics ours.) Using this as a test, we think it can
not be
said that petitioners in the case at bar are simple fiduciaries. It seems obvious that the duties connected with their investments involved considerable care and supervision. When they found no building suitable for their purposes they put one up. They determined what part of the gross income up to ten per cent, of it should be withheld from distribution for depreciation and contingency funds and then invested those funds. They exercised the authority granted by the trust agreement to dispose of properties, soiling five during the period of their existence. They placed a mortgage on their last acquired piece of property, paying it off within the five taxable years hero involved. Although all the buildings were leased under net rental arrangements whereby the tenants paid all the expenses of maintenance, insurance, taxes and special assessments, nevertheless there were expenses incurred amounting to an average of about $20,000 a year in addition to legal and miscellaneous expenses of over $2,000 a year in each of the taxable years for which balance sheets and income statements were put in evidence. These are rather substantial expenses for an entity which, in order to bring itself within the definition of a trust for taxing purposes, must be practically self-operating', “without care or supervision.” They employed as their agent an experienced real estate management firm of which one of their number was a member. That firm collected the rents, depositing’ them in the trustees’ bank account and accounting' to them.. It also saw to it that taxes were paid by the lessees. With all these facts present, surely it cannot be said that the trustees were a mere conduit through which the income from the properties passed fox distribution to the receipt holders practically without activity on their part. We therefore conclude that the trustees were engaged in sufficient activities to warrant our holding that they were carrying on a business enterprise, hence taxable as an association.
Petitioners, however, argue that even if it were held that they were carrying oil a business, they would be properly subject to tax as a corporation only if in addition they were substantially similar to a Corporation, in other essential characteristics of form and procedure.
Petitioners operated under an Agreement and Declaration of Trust drawn up in
1800, the significant provisions -of which are set forth marginally as amended in 1904.
This appears to provide far the organization of a typical Massachusetts trust, probably chosen as to form for the reason that at that time corporations were not able to engage in the real estate business in Illinois because of a statute which greatly restricted their right to hold title to real estate. Hence the fact that the entity called itself a trust from the time of its organization is of little or no importance in the present discussion. While the taxing statute does not in terms refer to this type of trust, it does define corporations to include associations. Section 2 (a) (2) of Revenue Acts of 1924 and 1926, 26 USCA § 1262 (a) (2); section 701 (a) (2), Revenue Act of 1928, 26 USCA § 2701 (a) (2). A similar statute relating to the excise tax has been beld to be applicable to business trusts provided they are organized in quasi-corporate form for tbe conduct of a business enterprise. Hecht v. Malloy, 265 U. S. 144, 44 S. Ct. 462, 68 L. Ed. 949. The statute also gives the Commissioner authority with the approval of the Secretary of the Treasury to prescribe all needful rules and regulations for the enforcement of the Act. Section 1001 of the Revenue Act oí .1924, and
section 1101 of the Revenue Act of 1926 (26 USCA § 1245 and note), and section 62 of the Revenue Act of 1928 (26 USCA § 2062). Under this authority, the Commissioner promulgated articles 1502 and 1504 of Regulations 65
and 69 (with amendments), articles 1312 and 1314, Regulations 74, including common law trusts in the associations to be taxed as corporations, provided they were doing business in an organized capacity. Such regulation, being reasonable and appropriate for the enforcement of the provisions of the taxing act is binding and has the effect of law. United States v. Morehead, 243 U. S. 607, 37 S. Ct. 458, 61 L. Ed. 926. Moreover, since this regulation was promulgated, Congress has re-enacted the statute without material change, thereby approving in effect the administrative construction placed upon it. Brewster v. Gage, 280 U. S. 327, 50 S. Ct. 115, 70 L. Ed. 457; National Lead Company v. United States, 252 U. S. 140, 40 S. Ct. 237, 64 L. Ed. 496; Burnet v. Brooks, 288 U. S. 378, 53 S. Ct. 457, 77 L. Ed. 844, 86 A. L. R. 747.
That the organization of the trustees was of a very loose and informal character we think is not sufficient to take them out of the classification contemplated by the administrative regulations cited. Even though no formal meetings of the trustees were held, they had adopted a regular practice for the administration of their trust. At regular intervals the trustees living in Chicago would go over the accounts which were kept in the offices of their agent, and determine wha.t dividends should be paid to the receipt holders. They would then prepare a dividend resolution and send it to the trustees who lived in Boston for their approval. The various leases on properties owned by the trustees were signed by all of them individual^-, with some designation of their trust capacity. Where matters arose which in the judgment of their agent needed to be considered by all of the trustees, they were handled by correspondence. Although the receipt holders never exercised their right to call meetings, they received printed annual statements shortly after the close of each fiscal year, and were thus kept in touch with the activities of the trust. Tho receipts evidencing their beneficial interest in the trust were engraved ones with transfer forms on the back. The trustees employed a regular transfer agent to take charge of and record all transfers of receipts. It is true that neither the trustees nor the receipt holders ever drew np a codo of rules or by-laws for the government of the trust, but such action seems entirely unnecessary in view of the comprehensive nature of the trust agreement under which they were organized in the first place. We think that those facts are sufficient to warrant our classifying petitioners as a qua-si-corporate organization in farm and procedure and as such taxable as a corporation.
Petitioners raised a further question as to the admission of certain evidence elicited on cross-examination which they argued was .outside the scope of the direct examination. Their claim is that the direct examination was limited to the last four taxable years, namely from June 30,1925, to 1929, hence respondent had no right to cross-examine as to the first taxable year, June 30, 1924, to 1925, nor-as to the period preceding the taxable years. The evidence in question had to do with the fact of the construction of the building on the last piece of property acquired by petitioners, and also with the fact of the sale of the five other pieces of property owned by them at various times. However, the record discloses that on direct examination, the witness referred to his early connection with the trust as far back as 1892, and in several instances, referred to the period beginning June 30,1924. We think that these instances were enough to open up the entire period for cross-examination. Even if this evidence were incompetent, however, it was not prejudicial, and there was substantial evidence
aside from it upon which the Board based its decisions.
Petitioners also object to a finding by the Board that the other two of the three buildings now owned by them were built by them. They base their objection on the ground that there is absolutely no evidence in the record as to the building of one of them, and that the question which brought forth the fact as to the other was later withdrawn. The reeord shows that witness testified on cross-examination, without objection, “During the years in which I was associated with the Chicago Real Estate Trust, the part of the Monadnoek Building which we acquired was built. It was just completed the year I came back here, in 1893. * * * The Cable Building was built about five or six years later, I think. Somewhere about 1898.” The natural inference to be drawn from these two statements, we think, is that both buildings were erected by petitioners. However, even if this be not true, we think it is not of such material importance as to warrant a reversal, since the Board did not place any substantial reliance upon these two facts, but grounded its decisions upon many other facts which it appears to have considered of more importance.
The Decisions of the Board are
Affirmed.