SECTION 1, ARTICLE 1504: Association distin guished from trust. 17-21-1587 O. D. 886 The M trust has been taxed as an association. An amendment to the declaration of trust under which it was organized removes all control over its affairs from the shareholders so far as the instrument itself is concerned. In the language of the amended agreement, however, it appears that the trustees hold a majority of the shares of beneficial interest. If the trustees in fact hold a majority of the shares a return as an association should be made for the entire year. If the majority of the shares are not held by the trustees a return as an association should be filed for that portion of the taxable year up to the date when the amendment to the trust agreement became effective and a return as a trust for the remainder of the taxable year. SECTION 1, ARTICLE 1504: Association distin guished from trust. (Also Section 239, Article 622.) 22-21-1658 O. D. 931 The charter of the M Company expired in 1919, but under section 6198 of the Minnesota Statutes the existence of the corporation continued for the purpose of prosecuting and defending its actions, closing its affairs, disposing of its property, and dividing its capital. The section provides that such existence shall be for but three years and that the corporation shall exist for no other purposes than those mentioned. The stockholders of the corporation found that if the manufacturing plant and other property were sold immediately or in the near future, there would be a large shrinkage in the assets of the corporation. The only way to avoid such a loss was to continue the manufacturing business, particularly in connection with numerous existing contracts, and eventually close out the property at a favorable time. This, however, they could not do under section 6198 of the Minnesota Statutes and they, therefore, transferred the entire properties of the corporation to A and B, trustees under a trust agreement. By the terms of the trust agreement the trustees were to hold and operate the property as the N organization; were given full and exclusive power and authority to control and manage the trust property and business; and neither the beneficiaries nor the trustees were to be liable or responsible for any indebtedness or obligations contracted or incurred by the trustees in their conduct or management of the business. The trust was to continue for a period of 10 years unless sooner terminated by sale and disposition of the trust property and business. The evidence submitted clearly shows that the sole purpose in thus conveying the entire properties of the M Company to the trustees was to enable the business to continue as a going concern and not merely for the purposes of dissolution as provided for by section 6198 of the Minnesota Statutes. Section 239 of the Revenue Act of 1918 provides in part as follows: In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. * * The above section refers only to cases where the business of a corporation is being operated by receivers, trustees in bankruptcy, or assignees for the corporation. This is made clear by article 622 of Regulations 45, where the following language is used: Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control If, in the present case, the M Company at the expiration of its charter had placed its affairs in the hands of trustees in order to dissolve the corporation within the three year limit, the trustees would be required to file returns as provided by section 239 and article 622, Regulations 45. But that is not the situation here. The trustees are not trustees in dissolution. The property of the corporation has been conveyed to them absolutely and they are continuing the business, formerly operated by the corporation, until such time as the property may be disposed of advantageously. In the meantime, the M Company still exists by force of section 6198 of the Minnesota Statutes above referred to. If the trustee of the M Company are trustees in dissolution, then their actions as such trustees are contrary to law, as they are operating the corporate business in violation of section 6198 of the Minnesota Statutes. It is not believed, however, that this is the case. If it be granted then that the trustees are not trustees in dissolution and acting for the corporation but are acting for themselves as trustees of a trust property, do such trustees constitute a corporation, joint-stock company, association or insurance company within the meaning of section 1, Revenue Act of 1918? Clearly the trustees are not a corporation or an insurance company. The only question, therefore, is whether they constitute a joint-stock company or an association within the meaning of section 1 of the Revenue Act of 1918. It is not believed that the trustees constitute a joint-stock company or association. They have full power and control over the property of the corporation conveyed to them and hold and operate such property until an advantageous opportunity arises for disposing of it. The beneficial interest remains in the stockholders of the corporation in proportion to their stock holdings but the power and control is vested in the trustees. The previous stockholders have no power to remove the trustees or appoint new trustees but must apply to the court. It has been consistently held that it is the extent of the control vested in beneficiaries under a trust agreement that is determinative of the question whether the trust is in fact an association. (Article 1504, Reg. 45; O. D. 407, C. B. 2, p. 11; S. 1337, C. B. 2, p. 9). Here the beneficiaries exercise no control whatever. It is, therefore, the opinion of this office that the trustees holding and operating property under the name of the N organization are simply a trust and should not be compelled to file returns as a corpo ration. SECTION 1, ARTICLE 1505: Limited partnership as partnership. 7-21-1440 O. D. 800 The M Company was organized as a limited partnership under the Pennsylvania Uniform Limited Partnership Act of 1917 (Laws of Pennsylvania, 1917, page 55). The word "limited" does not appear in the firm name; the liability of only one partner is limited; there is no provision in the partnership agreement for the free transferability of partnership shares; no provision is made for yearly meetings of the partners; no mention is made of a common seal; the books of account are to be open and accessible to each of the copartners at any time so that each copartner may at any and all times be fully cognizant and aware of the conduct of the business. The organization in question differs from the ordinary partnership in that it is not dissolved by the death of a member and that one of the partners enjoys limited liability. However, it has most of the distinguishing features of an ordinary partnership as noted in the preceding paragraph. It is held, therefore, that the M Company is a partnership of the type described in article 1505 of Regulations 45, and will be required to file returns as such. PART I.-GENERAL PROVISIONS. SECTION 200.-DEFINITIONS. SECTION 200, ARTICLE 1522: Fiduciary distinguished from agent. (Also Section 256, Article 1071.) 16-21-1569 O. D. 875 Under a certain agreement, A is designated trustee, and requests a ruling as to his liability for the filing of an income tax return to account for the income received by him in such capacity. An agreement addressed to the M Company sets forth that the persons signing such agreement are the owners of a certain royalty interest in certain oil wells, each owning the respective interest set opposite his name and that on account of the diversity of ownership in said property it is impracticable for the signers, as well as for the M Company as purchaser of the oil and gas, to keep separate books of account showing the respective interests of the several owners. In order to facilitate the keeping of such accounts, the owners of the royalty rights selected and appointed A as their "trustee " to collect of, and from, the purchaser of said oil and gas any and all moneys arising from the sale and running of oil and gas from said property, belonging to the signers of the agreement, and to account therefor to them. It was further agreed that for the purposes aforesaid, the said trustee should have authority to sign any and all division orders respecting the sale and the running of oil and gas from said land, or any part thereof. Held, that as no property was conveyed to A by the agreement, his duties being merely to receive from the M Company income payable to the signers of the agreement, to account to such signers for the income so received and to sign division orders with respect to the sale and running of oil and gas from the land to which the royalty interest attaches, he is not a trustee within the meaning of the Revenue Act of 1918, but an agent of the persons signing the agreement in question. He is not, therefore, required to file a return on either Form 1040 or Form 1041, to account for the income received by him for the benefit of the persons for whom he acts and in view of the fact that the amounts to be paid over by him to his principals can not be said to be fixed and determinable gains, it is held that he is not liable for the filing of returns of information prescribed by section 256 of the Revenue Act of 1918. SECTION 200, ARTICLE 1523: Personal service corporation. (Also Section 327, Article 901.) REVENUE ACT OF 1917. " 3-21-1394 A. R. R. 363 The Committee has had under consideration the appeal of the M Company, a corporation, from the action of the Income Tax Unit in denying assessment of taxes for the calendar year 1917, upon the basis of section 209 of the Revenue Act of 1917. The company was incorporated in June, 1911, taking over the assets and liabilities of the business of A who, with B, was engaged in developing certain patents. The assets so taken over consisted of a dollars. Against these assets there were accounts payable aggregating a dollars, which were assumed. For these net assets capital stock, in the amount of 2x dollars was issued, of which 49 per cent was issued to B, 50 per cent to A, and 1 per cent to D. No additional funds were paid in to the corporation since it appears that A possessed no funds which he could invest and B, having no faith in the practical ability of the patents, refused further financial assistance. The patents did not prove a success but, as a result of several years of experimental and development work, the corporation secured various patents for automobile bumpers, the use of which it sold to the N Company, which operated the same on a license, paying the M Company royalties on the number of bumpers manufactured. The only income received by the corporation in the year 1917, was from these royalties and it amounted to 4x dollars. The only disbursements made were salaries, attorney's fees, commissions, and certain miscellaneous expenses, the aggregate amount being 21 dollars, leaving net income for the year 1917 of 14 dollars. It is contended by the taxpayer that the income of the corporation consisted of royalties received from these bumper patents developed by the ingenuity and personal services of the stockholders, and the continuance of these personal services on the part of such stockholders is absolutely essential if the income of the corporation is to continue. The license agreement with the N Company provides that A shall devote his time to demonstrating, improving, and developing the bumper patents, and it is claimed that the result of these efforts is being reflected in the royalties received by the corporation. The books of the company are kept on a cash receipts and disbursements basis, and at January 1, 1917, the cash book and stock record book show an asset of cash, e dollars, liabilities, attorney's fees, and capital stock, 2x dollars. Article 71 of Regulations 41 provides: Section 209 applies primarily to occupations, professions, trades, and business engaged principally in rendering personal service, in which the employment of capital is not necessary, and the earnings of which are to be ascribed primarily to the activities of the owners. Advisory Tax Board Memorandum 9 (C. B. 1, p. 13) covers a case quite analogous to this. The memorandum reads, in part, as follows: The facts are briefly that the net income of 9 dollars was derived entirely from license fees paid by users of machines embodying the company's patents. This is the only source of revenue that the company now has or ever has had. Certain patents on a new form of mold for vulcanizing tires were assigned to the company. It originally intended to manufacture the tires, but later determined to grant licenses under the patents, and has never engaged in manufacturing. The paid-in capital is a dollars. Inasmuch as the income of the corporation is derived entirely as a result of the ownership of certain property, namely, patents; and is in no sense derived from the personal activities of any of the stockholders, other than such activities as are normally required for the management of any property of any company, it is recommended that the claim under section 209 should be denied. |
