and action taken by the bondholders. There were not many of these transactions and at least some were taken on the specific recommendation of the trustee.* It is impossible, however, to find from these papers that the somewhat divergent small group of Bliss relations and former associates now holding bonds function as true partners. A pattern for efficient operation has developed for which the trustee and designated representatives of the bondholders have primary responsibility and most of the advantages of centralized corporate organization have been substantially secured.
Great weight must be given to the terms of the trust instrument, particularly where the implications of the trustee's activities are being considered. The taxpayer obviously cannot escape taxation by declining to exercise some or all of the powers which the Indenture grants. Second Carey Trust v. Helvering, 75 U.S. App. D.C. 263, 126 F.2d 526 (1942); Fidelity-Bankers Trust Co. v. Helvering, 72 App. D.C. 1, 5, 113 F.2d 14, 18 (1940); Helvering v. Coleman-Gilbert Associates, 296 U.S. 369, 374, 80 L. Ed. 278, 56 S. Ct. 285 (1935). In this instance the Indenture is explicit. It places full managerial responsibility in the trustee. While the trustee may be removed by the bondholders at will and the bondholders must release their lien on property, these limitations do not deprive the trustee of its centralized managerial functions under the Indenture, a responsibility which the trustee has in fact carried out at least in many ways as the review of the minutes above well demonstrates. This managerial responsibility, coupled with the profit-making characteristics of the enterprise, provides ample authority for the view that the trust must be treated as a corporation for federal income tax purposes. A recent decision, Abraham v. United States, 272 F. Supp. 807 (W.D. Tenn. 1967), collects the authorities.
When all this is considered in the light of the voting procedures, the complexity and many ramifications of the enterprise, the procedures followed in taking out profits to be mentioned later, and the significance that must be given under the decisions to the provisions of the Indenture, particularly those placing management in the trustee, the Court concludes as a matter of law that the taxpayer is substantially more similar to a corporation than to an association and must be treated as such for income tax purposes. We are concerned with resemblance, not identity, as Morrissey emphasizes. Form is not as significant as substance and the crux of the issue is whether corporate circumstances have been achieved in practice. The incidents of taxation depend on the substance of the transaction and the decision here is compelled by the conduct of the participants and the instruments under which they function. Taxpayer has not met its burden. Helvering v. Taylor, 293 U.S. 507, 514, 79 L. Ed. 623, 55 S. Ct. 287 (1935).
As a second and alternative position, taxpayer claims the right to treat as interest and accordingly to deduct as an expense an amount equal to the 4% paid on the bonds in each of the years in question. Amounts paid bondholders in excess of 4% in those years would be treated as dividends.
This issue must be determined by an analysis of the true nature of the payments to bondholders and the nature of the security-designated bond which they hold. A candid bondholders' minute is particularly decisive on this issue. A minute of January 26, 1935, recites:
"It has been customary since the formation of the trust for the bondholders at their annual meeting to decide and declare the rate of interest to be paid on these bonds during each ensuing year, basing the rate as directors of a corporation declare dividends, on the earnings of the corporation for the past year."
On top of this, the following factors all point against treating the interest as deductible:
(1) The bondholders are the sole equity owners of the enterprise and control its operations by their vote. They and they alone take the risk.
(2) There is no fixed maturity date for the so-called debt. Originally 30 years, it was extended another 30 years and may be extended further. There is no enforceable obligation to pay a definite sum at a fixed time because, among other things, the maturity date of the bonds may be accelerated at any time by vote of a majority of the bondholders attending a regular or special meeting of the bondholders.
(3) There is no way under the terms of the Indenture that the debt can be paid off without liquidating the enterprise and there are neither business nor tax considerations that make this prospect even within serious contemplation. The resources of the enterprise were more than sufficient to satisfy the debt but this had not been attempted even in cases where bondholders were themselves indebted to the trustee as a result of borrowings.
(4) Interest at 4% has not been paid or accrued in every year. A sinking-fund provision of the Indenture (para. 12) to secure the payment of the bonds and interest has never been utilized.
(5) Payments have ranged from 0% to 10%, fluctuating with the operating results and the requirements of the bondholders in the handling of their individual affairs. Payments of at least 4% on the outstanding bonds was not made in eight of the first 30 years, i.e., 1923, 1930, 1931, 1932, 1934, 1935, 1940 and 1941. In 1945 trustees were given discretion to determine the amount of payment to be made in 1946. The Indenture provides that upon the default in payment of any installment of interest the trustees shall have the power and duty upon requests of a majority of the bondholders to sell the property in the trust at public auction for the benefit of the bondholders. While defaults occurred, there is no indication that the bondholders even considered exercising the prerogative thus given them under the Indenture.
This arrangement was not, of course, designed with income taxes in mind. Whatever the original intent and practice, the enterprise has so evolved that the securities which as pieces of paper have all the indicia of interest-bearing secured obligations have in fact as a matter of practice and law become pure equity obligations and the payments denominated interest can no longer by 1960-1961 be given the status of expense deductions under the clear rationale of the numerous decisions. It would be wholly artificial to treat the payments as interest under the conditions obtaining in 1960 and 1961. Mertens, Law of Federal Income Taxation, Vol. 4A, Ch. 26; Tomlinson v. 1661 Corporation, 377 F.2d 291 (5th Cir. 1967). Again, taxpayer has not met the burden as to this issue.
This Memorandum Opinion shall constitute the Court's findings of fact and conclusions of law. Judgment shall be entered in all respects for the United States, without costs. Counsel to submit an appropriate order in one week.
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