The opinion of the court was delivered by: GESELL
This is an action to recover certain federal income taxes paid by plaintiff taxpayer in the years 1960 and 1961, together with statutory interest. The claims for refund are based on two contentions. Taxpayer asserts that it is a trust or association for tax purposes and should not be considered taxable as a corporation, and, alternatively, if it is to be taxed as a corporation, that certain payments made by it during the years in question should be treated as deductible interest expenses rather than as dividends paid. The Internal Revenue Service did not allow either claim. A total of $352,268.36 for the two test years is involved, of which $6,263.07 represents assessments relating to alleged interest expenses. Suit was filed under the provisions of 28 U.S.C. §§ 1346 and 1402.
Facts and exhibits in this case were stipulated and accordingly the matter was presented to the Court on papers. The issues have been thoroughly briefed and argument was had on the facts and law.
At the outset the provisions of the Deed of Trust Indenture under which plaintiff taxpayer now acts as sole trustee should be delineated. On December 20, 1911, before the Income Tax Act was passed or the Sixteenth Amendment adopted, Alonzo O. Bliss and his wife transferred several parcels of real estate, including improvements, thereon, located in the District of Columbia to trustees under an Indenture of that date. The instrument provided for the issuance of 4% bonds payable semi-annually in the aggregate amount of $2,000,000 to Bliss as consideration for the creation of the trust. The trust was to last 30 years, unless sooner terminated, after which the properties were to be disposed of and the net proceeds, plus accumulations, were to be distributed to the bondholders. It was expressly provided that the bonds were a lien on the properties consigned to the trust and on any future property acquired. The Indenture specified that no instrument executed and delivered by the trustees affecting the title to real estate would be valid unless signed by Bliss while he was alive and thereafter unless authorized by resolution of a majority of the bonds.
The trustees were charged by the express terms of the Indenture with the responsibility to manage the property and any other property thereafter acquired by the trust, to collect rents and profits and to rent, sell, lease and mortgage. Regular and special meetings of bondholders were authorized. Each bond of record was entitled to one vote. The bondholders were authorized to adopt by-laws for the internal management and government of the trust "not inconsistent with the provisions of the instrument" and this was done at the first meeting of the bondholders on December 26, 1911. Under the Indenture the trustees were responsible to the bondholders and bound to perform the will of a majority of bondholders, subject to immediate ouster on failure to do so. The bondholders by majority at any regular or special meeting were expressly authorized to change the trustees or terminate the trust entirely. The bondholders were and are the sole equity owners of the plaintiff.
The trust did not terminate in 30 years as originally contemplated. The bondholders by unanimous vote on January 30, 1940, extended the maturity date of the bonds from January 1, 1942, to January 1, 1972, subject to acceleration at any time prior thereto by majority vote at any regular or special meeting of the bondholders. The record does not reflect the reason for this action.
In the period from 1911 to the end of 1961 there were 50 annual meetings and 65 special meetings of the bondholders. The original trustees no longer serve. Mr. Bliss, who created the trust, died before the tax years in question. Plaintiff became trustee in 1951 under the original Indenture, as extended, and is compensated at $10,000 per annum for its services. In the years 1960 and 1961, the trustee held title to 13 or 14 apartment buildings and 5 contiguous lots used for parking. The trust also contained cash and some securities.
The bondholders have regularly elected two officers; a Secretary-Treasurer and General Manager, compensated at approximately $30,000 per annum; and a Chairman, compensated in excess of $11,000 per annum. The General Manager, who was then a bondholder, was responsible for some 94 employees, including resident managers, janitors, elevator operators, and secretarial and managerial employees at a rented office maintained by the bondholders. The trustee was available for consultation with the officers on important matters involving more than normal operation and maintenance and advised and acted for bondholders in various respects, as will appear later in more detail.
The Internal Revenue Service determined that plaintiff taxpayer was an association taxable as corporation for federal income tax purposes in 1925 and corporate income tax returns have been filed for each year since 1925.
Against this factual background the applicable provisions of the Internal Revenue Code and decisions thereunder may be considered. The question whether a trust or association should be taxed like a corporation has been constantly before the Federal Courts. Various theories have evolved over the years and a great variety of differing fact situations have been presented. It is impossible to reconcile the decisions and rulings nor would it serve any useful purpose to attempt to do so. A full treatment of the problem and the course the development of the law has taken is found in Mertens, Law of Federal Income Taxation, Vol. 7, Ch. 38A.
In 1935 in Morrissey v. Commissioner of Internal Revenue, 296 U.S. 344, 80 L. Ed. 263, 56 S. Ct. 289 (1935), the Court laid down certain controlling principles which the parties in this litigation appear to agree should be applied to the facts of this particular case. Morrissey and the three cases immediately following ( Swanson v. Commissioner of Internal Revenue, 296 U.S. 362, 80 L. Ed. 273, 56 S. Ct. 283 (1935); Helvering v. Combs, 296 U.S. 365, 80 L. Ed. 275, 56 S. Ct. 287 (1935); Helvering v. Coleman-Gilbert Associates, 296 U.S. 369, 80 L. Ed. 278, 56 S. Ct. 285 (1935)) all deal with the factors to be taken into account in determining whether a trust or association has the requisite characteristics of an association taxable as a corporation for federal income tax purposes.
Section 7701(a) of the Internal Revenue Code of 1954 provides that the term "corporation" includes associations. Association is not elsewhere defined in the Code. Regulations 118 (26 CFR Pt. 39), in effect in 1960, andT.D. 6503, in effect in 1961, attempt to provide more definitive content to these terms. The regulations are detailed, complex and necessarily intentionally flexible. Without repeating them in extenso it is emphasized that the term "association" is not used in any narrow or technical sense and that each situation is to be determined on its own particular facts after considering both the formal papers and the practices thereunder. These regulations are consistent with the controlling decisions of the Supreme Court of the United States cited above. Morrissey and Coleman-Gilbert are particularly pertinent on the facts of this case.
Any association in the very nature of things is likely to have some corporate characteristics. The question before the Court in a case of this kind is whether a particular association is sufficiently analogous to a corporation to bring the enterprise under the congressional intent to tax it as a corporation. There is no single factor or litmus test that can be applied. The ingenuity of man and the varied, ever-changing complexities of business life have brought about an incredible variety of differing fact situations to which the rational and inexact holdings of the cases must be applied.
It is not disputed that we are concerned with an enterprise which carries on business for profit. Hecht v. Malley, 265 U.S. 144, 68 L. Ed. 949, 44 S. Ct. 462 (1924). While there has been only a limited turnover of properties, there is here presented an enterprise designed to do more than merely protect and conserve property in anticipation of liquidation. In this context five factors receive particular consideration when the ...