Petitioners Brief — Hecht v. Malley (No. 99-101-119)

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| N OS. ~g O¢ =] 0 0: 101 ym, g ‘sTeeseuer

‘Supreme Court er the United States - ry

- October Term, 1922

Nos. 50Q@pRRaet

SIMON HECHT AND SUMMIT L. HECHT ~

TRUSTEES |

Rg \ ; vV. 2 ‘ :

JOHN F, MALLEY, FORMER COLLECTOR

“OF INTERNAL. KEVENUE

ARTHUR L. HOWARD AND ROBERT S.

BARLOW, TRUSTEES .-

pays: v.

JOHN F. MALLEY, FORMER COLLECTOR

OF INTERNAL REVENUE

ARTHUR L. HOWARD AND ROBERT S.

| BARLOW, TRUSTEES

v.. ed

ANDREW J. CASEY, FORMER ACTING ©

COLLECTOR OF INTERNAL REVENUE |

Brief: for Petitioners

WILLIAM H. DUNBAR _ .

_ EDWARD F. McCLENNEN,

ALLISON L. NEWTON, .

Attorneys for the Petitioners.

TABLE OF STATUTES

Pages

August 5, 1909 — 36 Stat. Ch. 6, Sec. 38, pt. 1, p. 1126, 10, 11

October 3, 1913 — 38 Stat. Ch. 16, Sec. 2, Par. G, pt. 1,

p. 172 14

October 22, 1914 — 38 Stat. Ch. 331, pt. 1, p. 759 15

September 8, 1916 — 39 Stat. Ch. 463, pt. 1, p. 756 16

March 3, 1917 — 39 Stat. Ch. 159, pt. 1, p. 1000 21

October 3, 1917 — 40 Stat. Ch. 63, pt. 1, p. 300 21

February 24, 1919 — 40 Stat. Ch. 18, pt. 1, p. 1057 22

TABLE OF CASES

American Net and Twine Co. v. Worthington, 141 U.S. 468 26, 31

Arthur v. Lahey, 96 U.S. 112 at 116 31

Arthur v. Zimmerman, 96 U.S. 124 31

Benziger v. United States, 192 U.S. 38 26

Buck Stove Co. v. Vickers, 226 U.S. 205, 213 25

Crocker v. Malley, 249 U. 8. 223 14, 15, 20, 28, 29, 33

Dana ». Treasurer and Receiver General, 227 Mass. 562, 565 9

Edwards v. Warren Linoline and Gasolene Works, 168 Mass. 564 9

Eidman v. Martinez, 174 U.S. 578, 583 26

Eliot v. Freeman, 220 U.S. 178 — 2, 6, 7, 8, 11, 12, 13, 16, 18, 23, 28, 33

Flint v. Stone Tracy Co., 220 U.S. 107 6, 11, 12

Frost ». Thompson, 219 Mass. 360 9

Gleason ». McKay, 134 Mass. 419 9

Gould v. Gould, 245 U.S. 151 26

Haiku Sugar Co. rv. Johnstone, 249 Fed. 103 (C.C.A. 9th) 26

Hartranft ». Wiegmann, 121 U. 8. 609 26

Hoadley ». County Commissioners, 106 Mass. 519 9

Horgan v. Morgan, 233 Mass. 381 9

Hussey v. Arnold, 185 Mass. 202 9

In re Guggenheim Smelting Co. 121 Fed. 153 (C.C.D. N. J) 26

Kelley ». Snow, 185 Mass. 288 29

Latimer v. United States, 223 U. 8. 501 26

Logan v. United States, 144 U. S. 263, 302 25

Se! SLES RE OR aaa

il TABLE OF CASES

Mackernan v. Fox, 220 Mass. 197

“Malley v. Bowditch, 259 Fed. 809

MeDonald v. Hovey, 110 U. 8. 619, 628, 629

Movius v. Arthur, 95 U. S. 144

Parkview Bldg. and Loan Assn. v. Herold 203 Fed. 876

(D.C. D. N.Y.); affirmed 210 Fed. 577 (C.C.A. 3d)

Peabody v. Treasurer and Receiver General, 215 Mass. 129

Phillips v. Blatchford, 137 Mass. 510

Ricker v. American Loan and Trust Co., 140 Mass. 346

Roberts v. Anderson, 226 Fed. 7

Schmidt v. United States, 133 Fed. 257 (C.C.A. 9th)

Scott v. Western Pacifie Ry. Co., 246 Fed. 545 (C.C.A. 9th)

Smith v. Anderson (Ct. of App.), 15 Ch. Div. 273

Spreckels Sugar Ref. Co. v. McClain, 192 U.S. 397

Stratton’s Independence v. Howbert, 231 U. 8. 399

Swan and Finch Co. v. United States, 190 U. S. 143

Taber v. Breck, 192 Mass. 355

The “ Abbotsford,” 98 U. 8. 440

United States v. Coulby, 251 Fed. 982 (D.C. N.D. Ohio, E.D.);

affirmed 258 Fed. 27 (C.C.A. 6th)

United States v. Isham, 34 U. 8. 496, 504

United States v. Sixty-Five Terra-Cotta Vases, etc., 18 Fed.

508 (C.C. S.D. N.Y.)

United States v. Trans-Missouri Frt. Assn. et al., 58 Fed. 58

(C.C.A. 8th)

United States v. Wigglesworth, 2 Story, 369; 28 Fed. Cas. No.

16,690

Williams v. Boston, 208 Mass. 497

Williams v. Milton, 215 Mass. 1.

ages

29

——

|

| TABLE OF CASES ili

|

SUMMARY Pages

Statement of the Case 1

Statement of Facts 9

ARGUMENT

The Capital Stock Tax is an Excise on a Special Privilege 6

These trusts enjoy no Special Privileges under Massachusetts

laws, common or statutory 6

Although no Special Privileges are given, under the laws

either of the United States or of Massachusetts, to share-

holders in these trusts, they are in certain cases subject

to personal liability 9

The Excise Tax Act of 1909 laid an excise upon those bodies

only which were organized under law and so enjoyed

a Special Privilege 10

The Excise Tax of 1909 was dropped in the Income Tax

Act of 1913 14

The unauthorized attempt by Treasury Regulation in 1914

to tax trusts as associations 14

The Income and Excise Tax Act of 1916 restored the Excise

Tax of 1909 as to the bodies subject to the Capital

Stock Excise 16

Income and War-Profits Tax Act of 1917 21

The Revenue Act of 1918 did not change the Act of 1909 or

the Act of 1916 as to the bodies subject to the Capital

Stock Excise 22

The attempt by Treasury Regulation to impose the Cor-

poration Excise on trusts merely because the share-

holders have control by vote, is unauthorized 28

The plaintiffs are trustees and not associations 31

LEAN SESP DE ETHNAOL NE ORES EWM LE ALAA TAY LOA NR IEE NE a

bic

F

n

Supreme Court of the United States

OcroserR TERM, 1922.

Nos. 532, 533, 534

SIMON HECHT anp SUMMIT L. HECHT, TrustTEEs,

v.

JOHN F. MALLEY, Former Couiector or INTERNAL

REVENUE.

ARTHUR L. HOWARD anv ROBERT 8. BARLOW,

TRUSTEES,

v.

JOHN F. MALLEY, Former Co.iector or INTERNAL

REVENUE

ARTHUR L. HOWARD anv ROBERT 8. BARLOW,

TRUSTEES,

v.

ANDREW J. CASEY, Former Actinc COLLECTOR OF

INTERNAL REVENUE.

Brief for Petitioners

Statement of the Case

These three cases come before this court on a writ

of certiorari to the Circuit Court of Appeals for the First

Circuit granted on the petition of the plaintiffs. The suits

-

were begun in the District Court of the United States

for the District of Massachusetts against former Collectors

of Internal Revenue for refunds of capital stock excises

paid under protest.

The plaintiffs are Simon Hecht and Summit L. Hecht,

Trustees of the Hecht Real Estate Trust, and Arthur L.

Howard and Robert 8. Barlow, Trustees of the Haymarket

Trust.

These excises were assessed in part under the Revenue

Act of 1916 and in part under the Revenue Act of 1918.

The District Court held that the plaintiffs were Trustees

of trusts and were not corporations, joint stock companies

or associations with a capital stock, and that the class of

bodies subjected to this excise by the Acts of 1916 and

1918 had not been changed from what it was under the

Act of 1909, under which the Supreme Court held, in

Eliot v. Freeman, 220 U. 8. 178, that such trusts as those

at bar were trusts and could hardly be said to be “ organ-

ized” and certainly were not organized ‘under law”

and enjoyed no “privilege.” The District Court gave

judgment for the refunds to the plaintiffs. The Circuit

Court of Appeals reversed this judgment.

The petitioners contended below and now contend

that they are trustees and not a corporation, joint stock

company or association with a capital stock, created or

organized under law, enjoying any privilege or subject to

the capital stock excise.

Statement of Facts

The Declarations of Trust under which these ‘Trustees

act and the methods by which the terms of the trusts

are carried out are set out in the opinion of the District

Court (Record, pp. 20, 52, 25) and in the statement of

facts found (Record, pp. 67, 8).

a

ia, PUENTE ee dig OETA Sat IG oe BENS AD LA Mah NETRA ee RO AA AL IMD Ee BASAL PLCAD TE ATLL AD ILE

3

The Hecht Trust: Members of the Hecht family

holding title as tenants in common to real estate con-

veyed it in 1899 to Jacob H. Hecht to hold in trust for

the beneficiaries named, and their assigns. Certificates

for one thousand (1,000) shares were issued to the

beneficiaries severally in accordance with their pro-

portionate interests. The shares are for one thousandths

of the beneficial interest and have no par or unit value.

The trustee and his successors have managed the property

since and distributed the net rentals to the shareholders.

No meetings of the shareholders have been held. No

amendment of the trust had been made when this case

was tried. Some shares have been transferred. Annual

| statements have been sent to shareholders. The books

contain, among others, a capital account and a surplus

account. Transfers have been made from surplus to

capital. Shareholders in their individual income-tax

returns have treated the distributions from the trust in

the same manner as dividends from a corporation. The

trustees under protest have filed returns as required by

the Commissioner of Internal Revenue and paid the

assessments in question, levied by him as a capital-

stock tax (Record, pp. 95 to 105). The indenture of

trust (Record, pp. 76 to 87) declares that the trust

shall be known as the Hecht Real Estate Trust; that it

shall continue for twenty years after Jacob H. Hecht’s

death; that transferable certificates shall be issued to

the beneficiaries, to be offered to the trustee before any

sale except to a member of the Hecht family; that the

trustee shall have full powers of management, includ-

ing sale of the trust property and purchase of other, and

power to borrow and to mortgage, but no power to

create any personal liability on the shareholders; that

the trustee may appoint one or more co-trustees; that

the trustee shall fill all vacancies except that Louis

eres |

4

Hecht, Jr., and Marcus H. Hecht, successively, shall

succeed Jacob H. Hecht; that the shareholders may

direct an increase in the number of trustees or remove

a trustee by a deed executed by the holders of three-

fourths of the shares, and may, if there is no trustee

to make the appointment, appoint a new trustee by a

deed executed by the holders of three-fifths of the

shares, and may modify or terminate the trust or give

instructions to the trustee by deed executed by the

holders of three-fifths of the shares. The shareholders

have no powers of control.

The Haymarket Trust: In September, 1900, joint

owners of a building in Boston gave a broker an option

to purchase it. At his suggestion, John V. Bryant and

Frank E. Sweetser, as trustees, drew an indenture of

trust to be signed by them and by subscribing share-

holders who should furnish the money to make the

purchase. The money was subscribed. The trustees

acquired the property under the option and paid the

broker $2,500 for obtaining the subscriptions. The

trustees issued certificates for transferable shares to

the subscribers. The trustees and their successors

have managed the property and distributed the income.

They have made annual statements. Annual share-

holders’ meetings have been held. Vaeancies caused

by death and by resignation have been filled by the elec-

tion of new trustees by the shareholders. Shares have

been transferred. The trustees, under protest, have filed

returns as required by the Commissioner of Internal

Revenue and paid the assessments in question levied

by him as a capital-stock tax (Record, pp. 10 to 26).

The indenture of trust (Record, pp. 34 to 42) declares

that the trustees shall be known as Trustees of the

Haymarket Trust; that the trustees shall have general

powers of management including powers of mortgage

Sa al ae LONER AL LOT Uy OMAR. AE OTL LTTE BERNIE —

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°

and sale, and to invest any surplus, but no power to

bind the shareholders personally; that persons contract-

ing with the trustees should look only to the trust

property; that shareholders shall receive transferable

certificates; that income above five per cent shall go

into a sinking fund to retire mortgages; that annual

meetings of shareholders shall be called, and special

meetings may be; that at meetings the holders of a major-

ity of the entire number of shares may fill any vacancy

in the number of trustees, may depose any trustee and

elect others, may authorize the sale of the property,

and may amend the agreement and may decide on

matters properly coming before them; that the trust

shall continue for twenty years after the death of the

last survivor of named individuals.

The trustees of each of these trusts hold Massachusetts

real estate. The trust indentures were executed in Massa-

chusetts by Massachusetts parties. They are Massachu-

setts trusts.

LRA RIND OMEN BSE BE ATS Fe ee an TE ie Rie a Pe Ory AR MEDS

are ! ot) ate

6

Argument

In Eliot v. Freeman, 290 U. 8. 178 this court decided

that the Cushing Real Estate Trust and the Department

Store Trust, which had features in common with the

trusts now before the Court, were trusts and not cor-

porations, joint stock companies or associations liable

to the corporate excise tax under the Act of August 5,

1909. This decision is conclusive of the cases at bar

unless the later capital stock tax acts have so changed

the law as to require a different decision. It is submitted

that they have not.

The Capital Stock Tax is an Excise on a Special Privilege

The capital stock tax is not and has not been an income

tax. It is an excise on a special privilege.

Flint v. Stone and Tracy Co., 220 U.S. 107,

145, 150, 151.

This is shown by the history of the Acts of Congress -

hereinafter referred to in detail, and by the decisions of

this Court in the light of which the later acts were

passed.

These Trusts enjoy no Special Privilege under Massa-

chusetts Laws, Common or Statutory

These trustees have no franchise. The law gives them

no protection not shared by all citizens. The trusts were

established by deeds of trust of the long-time familiar

type. No lawyer would think of them as corporations or

quasi-corporations. They are naturally classified as trusts.

No statute gives them any special powers.

Not only do they have no corporate powers and

privileges, but, on the contrary, the absence of any

—

7

possibility of obtaining such powers and privileges,

under Massachusetts laws, was the occasion for drawing

such trust deeds. At the inception of the trusts now before

the court, there was no general statute in Massachusetts

for the organization of corporations to deal in real estate.

Such an artificial entity, and the attendant absence of

personal liability on the part of the shareholders, was

not Open under general laws to those desirous of becom-

ing shareholders in a real estate business. This privilege,

open to shareholders in other classes of business, was

denied them.

The Cireuit Court of Appeals, of its own initiative,

refers, in the case at bar, to the statutes of Massachusetts

imposing special duties upon trustees of trusts with

transferable shares. Two things are noteworthy: one,

that none of these statutes give any privileges, anc the

other that they were in existence before 1911 and governed

the bodies held not to be subject to the tax in Eliot v.

Freeman.

On May 24, 1909, Massachusetts enacted chapter 441

of the acts of that year, which provided that —

“Section 1. Trustees of a voluntary associa-

tion under a written instrument or declaration of

trust the beneficial interest under which is divided

into transferable certificates of participation or

shares, shall file a copy of such written instrument

or declaration of trust with the commissioner of

corporations and with the clerk of every city or

town in which such association has a usual place

of business.”

This act followed a poliey to provide record evi-

dence of the constituency of business concerns. In

1907, chapter 539, it had been provided that ---

; .

“Section 1. Any person or persons conducting

or transacting business in this Commonwealth

under any name, designation or title other than

the real name or names of the person or persons

conducting or transacting such business, whether

individually or as a firm or partnership, shall file

in the office of the Clerk of the city or town in

which the place or places of business or office or

offices of any such person, firm or partnership may

be situated, a certificate stating the full name and

residence of each person engaged in or transacting

such business.”

Section 2 of this act exempted certain bodies, inelud-

ing —

8

“Any firm, partnership, joint-stock company or

association the business of which is conducted or

transacted by trustees under a written instrument

or declaration of trust, provided that the names

of such trustees with a reference to such instrument

or declaration of trust shall be filed as provided in

Section 1.”

The title of chapter 441 of the acts of 1909, in force

when Eliot v. Freeman was decided, was ‘An Act Rela-

tive to Voluntary Associations Under Written Instru-

ments.” This act without significant change is now

codified in General Laws of Massachusetts, chapter 182,

sections 1 and 2, now in force. The Massachusetts act

of 1916, chapter 184, provided that such a body may be

sued in an action at law for debts and other obligations

or liabilities, and also that its property should be subject

to attachment in like manner as if it were a corporation.

This is now General Laws, chapter 182, section 6. No

rights or privileges were given.

he VE OR Tee WR

9

Although no Special Privileges are given, under the

laws either of the United States or of Massachusetts,

to shareholders in such trusts, they are in certain

cases subject to personal liability.

The decisions in Massachusetts have classified such

trusts into strict trusts and partnership trusts for pur-

poses of taxation and for liability for debts. If the entire

control is in the trustees, they are trusts. If a sufficient

degree of control is in the shareholders, the property of

the trust may be taxed as partnership property and the

shareholders may have the liability of partners, for debts.

Williams v. Milton, 215 Mass. 1.

Horgan v. Morgan, 233 Mass. 381.

Dana v. Treasurer, 227 Mass. 563, 565.

Frost v. Thompson, 219 Mass. 360.

Taber v. Breck, 192 Mass. 355.

Williams v. Boston, 208 Mass. 497.

Hoadley v. County Commissioners, 105 Mass. 519.

Gleason v. McKay, 134 Mass. 419.

Phillips v. Blatchford, 137 Mass. 510.

Ricker v. American Loan and Trust Co., 140 Mass

346.

Edwards v. Warren Linoline Works, 168 Mass.

566.

Hussey v. Arnold, 185 Mass. 202.

Peabody v. Treasurer and Receiver General, 215

Mass. 129.

Under Massachusetts law, no extent of control on the

part of the shareholders converts these trusts into cor-

porations, joint stock companies or associations. They

are either trusts or partnerships. If they are partner-

ships, the shareholders are under the unlimited liability

of partners for debts. There is no special privilege.

saeaeaeaasememanenaaaes tants

: $s Pe EEG TN SE OM BENE LEELA LETT NG MIT EN EN NN DN

Lapeaem RONNIE AY

10

The Excise Tax Act of 1909 laid an excise upon those

bodies only which were organized under law and so

enjoyed a Special Privilege.

The special privilege taxed by this law was that of

doing business by authority of law as an artificial entity

with freedom from general partnership liability. This

was a new tax imposed in 1909.

President Taft, soon after his inaugurat ion on March 4,

1909, sent Congress a message (44 Congressional Record,

p. 3344) in the course of which he said:

“T therefore recommend an amendment to the

tariff bill imposing on all corporations and joint

stock companies for profit an excise tax measured

by 2% of the net income of such corporations.

This is an excise tax upon the privilege of doing

business as an artificial entity and of freedom

from a general partnership liability enjoyed by

those who own the stock.”

On August 5, 1909, evidently in consequence of this

message, an act was passed which provided that —

“Every corporation, joint stock company oF

association, organized for profit and having a capi-

tal stock represented by shares, and every insur-

ance company, now or hereafter organized under

the laws of the United States or of any State or

Territory of the United States or under the Acts

of Congress applicable to Alaska or the District

of Columbia, or now or hereafter organized under

the laws of any foreign country and engaged in

business in any State or Territory of the United

States or in Alaska or in the District of Columbia,

shall be subject to pay annually a special excise tax

<a

11

with respect to the carrying on or doing business

by such corporation, joint stock company or asso-

citation, or insurance company, equivalent to one

per centum upon the entire net income over and

above five thousand dollars received by it from all,

sources during such year, exclusive of amounts

received by it as dividends upon stock of other

corporations, joint stock companies or associa-

tions, or insurance companies, subject to the tax

hereby imposed; or if organized under the laws

of any foreign country, upon the amount of net

income over and above five thousand dollars received

by it from business transacted and capital invested

within the United States and its Territories, Alaska,

and the District of Columbia during such year,

exclusive of amounts so received by it as divi-

dends upon stock of other corporations joint stock

companies or associations, or insurance companies,

subject to the tax hereby imposed.” (36 U. S. St.

at L., ec. 6, sec. 38.)

On March 29, 1910, the Attorney-General gave an

opinion that a partnership having a limited liability by

law was a joint-stock company within this act (28 Opin-

ions of the Atty.-Gen. 189, 192; Treasury Decisions No.

1606, vol. 19, No. 13, p. 32).

On March 13, 1911, the act was construed in two

decisions by this Court — Flint vy. Stone Tracy Co.,

220 U. S. 107, and Eliot v. Freeman, 220 U. 8. 178.

In Eliot vy. Freeman all the trusts involved were

subject to the Massachusetts statute law above quoted.

Two of these trusts, the Cushing Real Estate Trust

and the Department Store Trust, had features in com-

mon with the trusts now before the Court. The Depart-

ment Store Trust had all the elements to make it a

Se cee A As a Ses a a a

RERSIA

partnership or association (in distinction from a trust),

which can be found in either of the trusts now before the

Court.

Flint v. Stone Tracy Co. upheld the constitutionality

of the tax, against an attack upon it as a tax upon

income. The Court held that it was not an income

tax, but that the tax, although measured by income as

a reasonable method, was an excise tax. The Court

said (145, 150 and 151):

“That is, when imposed in this manner it is

a tax upon the doing of business with the advan-

tages which inhere in the peculiarities of corporate

or joint stock organizations of the character described.

As the latter organizations share many benefits of

corporate organization it may be described gen-

erally as a tax upon the doing of business in a

corporate capacity.”

“4 tax upon business done in a corporate capac-

ity.”

“The tax under consideration, as we have con-

strued the statute, may be described as an excise

upon the particular privilege of doing business

in a corporate capacity, i.e., with the advantages

which arise from corporate or quasi-corporate

organization.”

“The requirement to pay such taxes involves

the exercise of privileges.” (192 U. 8S. 363.)

The same view was expressed again, much later, in

Stratton’s Independence v. Howbert, 231 U.S. 399, 416.

In Eliot v. Freeman, decided at the same time with

Flint v. Stone Tracy Co., the Court, in holding the

trusts before the Court (a fortiori the trusts now before

—

13

the Court) to be trusts and not subject to this excise

tax, said (186):

“The language of the Act ‘. . . now or hereafter

organized under the laws of the United States,’

ete., imports an organization deriving power from

statutory enactment.”’

“A trust of the character of those here involved

ean hardly be said to be organized, within the

ordinary meaning of that term; it certainly is not

organized under statutory laws as corporations

are.”

“There is an essential difference between a

joint stock company as it exists at common law

and a joint stock company having extensive stat-

utory powers conferred upon it by the State within

which it is organized. The latter kind of joint

stock company is found in England and in the

State of New York.” (Cook on Corporations,

see. 505.)

In this opinion two grounds are assigned, either of

which is sufficient to hold that these trustees are not

subject to this excise tax, namely, one, that they are

not created under law, and the other, that they are

not organized. This interpretation, in Eliot v. Free-

man, of the language used in the Excise Tax Act of

1909, in the light of which the subsequent acts have

been framed, has never been modified. There has been

no change in the language used by the Congress in the

subsequent acts imposing this excise tax which indicates

an intention to make so radical a change as to impose a

privilege tax upon bodies that do not enjoy any privilege.

ALE SS EET PORT SD vos ne

14

The Excise Tax of 1909 was dropped in the Income Tax

Act of 1913

The first income tax act, of October 3, 1913 (38 Stats.

c. 16, sec. 2), dropped the excise tax on corporations and

imposed an income tax on individuals as well as on

corporations. Section 2, paragraph G, imposing on

corporations the same tax as the normal tax imposed on

individuals, defined corporations as follows:

“Every corporation, joint stock company or

association and every insurance company organ-

ized in the United States, no matter how created

or organized, but not including partnerships, but

if organized, authorized or existing under the laws

of any foreign country, then upon the amount of

net income accruing from business transacted and

capital invested within the United States during

such year.’ (Italics not in original.)

This was not an excise tax. No more was imposed on

corporations than on individuals. The classification

affected the method of levying the tax rather than the

substance of the tax.

Notwithstanding these italicized words, a typical real

estate trust even with transferable shares is not an

association.

Crocker v. Malley, 249 U. 8. 228.

The unauthorized attempt by Treasury Regulation in

1914 to tax trusts as Associations

On June 5, 1914, a treasury regulation was issued which

provided that

“ ‘eorporations’ as used in these regulations shall be

construed to include all corporations, joint stock

companies or associations and all insurance com-

panies coming within the terms of the law and such

—_—_

15

organizations will hereinafter be referred to as

‘corporations,’ ’’ and

“it is immaterial how such corporations are created

or organized,” and the term,

‘“ “ioint stock companies or associations’ shall

| include associations, real estate trusts, or by what-

ever name known, which carry on or do business in

an organized capacity, whether organized under and

pursuant to state laws, trust agreements, declara-

tions of trust, or otherwise, the net income of which,

if any, is distributed or distributable among the

members or shareholders on the basis of the capital

stock which each holds, or when there is no capital

stock, on the basis of the proportionate share of

capital which each has invested in the business and

all of which joint stock companies or associations

shall, in their organized capacity, be subject to the

tax imposed by this act.’” Reg. 33 Art. 78, 79.

?

In Crocker v. Malley, 249 U. 8. 223 (March 17, 1919)

this court held that a trust much like those now at bar

and clearly within the language of this regulation was

not an association. This decision disclosed that the

regulation was unauthorized.

On October 22, 1914, Congress imposed a tax on the

transfer of shares in ‘corporations, associations and

companies”’ without any further definition. The tax

here imposed was not on existence as an association.

It was on transfers of shares. The transfer was the privi-

lege taxed. Malley v. Bowditch, 259 Fed. 809.

On July 21, 1915, the United States Express Com-

pany, which enjoys special privileges under the statutes

of New York, was held to be an association or joint stock

company.

Roberts v. Anderson, 226 Fed. 7.

PLEAD RLS LON IT ALTE ISM Sy). ee se en Eas

16

The Income and Excise Tax Act of 1916 restored the

Excise Tax of 1909 as to the bodies subject to

the Capital Stock Excise

On September 8, 1916, Congress enacted the Income

Tax Act, following the act of 1913, and also re-enacted

the Excise Tax, which had first come into existence in

1909 and had been abandoned in 1913. The excise

at this time was changed from one based on income to

one based on the value of the capital stock. This act,

in defining corporations for income-tax purposes, carried

forward substantially the language of the act of 1913;

and in defining corporations for excise-tax purposes,

carried forward substantially the language of the act

of 1909. This was an enactment of the interpretation

which in Eliot v. Freeman the Supreme Court had put

upon the language of the act of 1909.

Title I, section 10 — the income-tax section — required

the payment of the tax—

“By every corporation, joint-stock company or

association, or insurance company, organized in

the United States, no matter how created or organ-

ized but not including partnerships, . . . by every

corporation, joint-stock company or association,

or insurance company organized, authorized, or

existing under the laws of any foreign country.”

(Italies not in original. )

Title IV, section 407 — the excise-tax section — pro-

vided that —

“Every corporation, joint-stock company OF

association, [now or hereafter] organized |in the

United States] for profit and having a capital

stock represented by shares, and every insurance

company, now or hereafter organized under the

PETS eke Te Peet . . soe

OIE IP EE EN RN Na NY ee pre ae ai ZOLTRS e RR

) —

laws of the United States, or any State or Terri-

tory of the United States, shall pay annually a special

excise tax with respect to carrying on or doing

business by such corporation, joint-stock company

or association, or insurance company, equivalent

to fifty cents for each one thousand dollars of the

fair value of its capital stock and in estimating

the value of capital stock the surplus and undivided

profits shall be included. . . .

‘Every corporation, joint-stock company or asso-

ciation, or insurance company, now or hereafter

organized for profit under the laws of any foreign

country and engaged in business in the United

States shall pay . ” (Italies and brackets not

in original.)

The only change in this language from that of the

act of 1909 was in adding, after the word “association,”

the words ‘‘now or hereafter,” and in adding, after the

word ‘‘organized,”’ the words “in the United States.”

There is no change in the comma after insurance company.

If the words in the brackets are omitted, the description

in this act is the same as that in the act of 1909. The

reason for the addition of these bracketed words is appar-

ent on observing the form in which the tax was imposed

on the domestic corporation and on’ the foreign cor-

poration in the two sections, respectively. In the act

of 1909 the corporate and quasi-corporate bodies were

defined , once for all, at the beginning of the section —

whether they were domestic or foreign. The subsequent

parts of the section fixed the amount of the tax in accord-

ance with the place of organization — whether domestic

or foreign — but did not repeat the words “corporation,

joint-stock company, association or insurance company.”

In the act of 1916 foreign and domestic corporations,

yer SE AAP RET IE L N LONENE M

CVA INLETS LET TTY Ee ae ‘

18

respectively, were thrown into separate paragraphs of

the section, and the words ‘corporation, joint-stock

company, association or insurance company ” are repeated

in the second paragraph. This accounts for the inclu-

sion of the words ‘in the United States” in the first

paragraph. The words “organized under the laws of the

United States or of any State or Territory of the United

States,’ construed in Eliot v. Freeman, appear in the act

of 1916, preceded by the same comma to separate them

from insurance company, and in exactly the same place

in which they appeared in the act of 1909. The Court

had held in Eliot v. Freeman that these words applied

not merely to insurance companies, but also to cor-

porations, joint-stock companies and associations. When

re-enacted in 1916, in the same position, these words had

the same application. They qualified associations.

It is respectfully submitted that if this section stood

alone, it would be clear that it was a re-enactment of

the act of 1909, as interpreted in Eliot v. Freeman; but

the section does not stand alone. The rest of the act

makes the conclusion even clearer, because Congress,

in section 10, when not imposing a privilege tax, but

merely defining the method of application of a general

income tax, used the words ‘‘no matter how created or

organized,” and left out the words “organized under the

laws of the United States or any State or Territory of the

United States.” The words “‘no matter how created or

organized” in the income-tax section were probably

adopted because of the decision in Eliot v. Freeman

and with the intention of imposing the income tax on

associations as a group instead of levying it on the indi-

vidual members of the association. This was a con-

venient method, and did not increase or diminish the

tax. It was not a privilege tax. The Congress which

used these words and omitted the words ‘organized

—

19

under the laws of the United States or any State or

Territory of the United States” in the income-tax

section and reversed the process in the excise-tax sec-

tion must have meant something. What was meant

was not to impose a privilege tax on bodies that enjoy

no privilege.

This marked distinction between the income-tax sec-

tion and the excise section is emphasized by the course

of the act through Congress. The Fill as read in the

House provided for an income tax, but for no corporate

excise tax (Congressional Record, 64th Congress, Ist

Session, vol. 53, p. 10663). In reporting the bill with

amendments to the Senate, the chairman, Senator

Simmons, said: ‘‘We have also provided for imposing a

small tax upon corporations in the nature of a license

tax for doing business.’’ (Senate Reports, 64th Con-

gress, Ist Session, vol. 3, Miscl. 3, Rep. 793, p. 2.) The

section so reported was as follows:

“Section 56. That on and after January first,

nineteen hundred and seventeen, special taxes

shall be and hereby are, imposed annually as follows,

that is to say:

“First. Corporations, joint stock companies, and

associations shall pay 50 cents for each $1000

of capital, surplus, and undivided profits used in

any of the activities or functions of their business,

including such sums as may be invested in or

loaned upon stock, bonds, mortgages, real estate,

or other securities. The amount of such annual tax

shall in all cases be computed on the basis of the

capital, surplus, and undivided profits for the pre-

ceding fiscal year. Every corporation, joint stock

company, or association as defined and limited in

Section ten, Title 1 of this Act, shall be liable to

this tax: ...”

20

Title I, section 10, so referred to, imposed the income

tax and had in it the words ‘no matter how created or

organized.” Apparently the House was unwilling to

make this extension of this excise tax so as to cover

bodies that had no special privilege. The Conference

report is ‘Agreed to Senate amendment #206 and in

lieu of matter inserted by said amendment, insert the

following.” Then follows the title IV, section 407, as

finally enacted, leaving in the words “organized under

the laws of the United States or any State or Territory of

the United States” and leaving out the words “no matter

how created or organized.” With the distinction clearly

brought to its attention, Congress decided not to impose

a privilege tax upon bodies that enjoyed no privileges.

Notwithstanding this, an attempt was made to cover

such trusts as those at bar by Treasury Regulation No.

38, Article 2, which provided that:

“The tax applies to every corporation, joint-

stock company or association (except insurance

companies), now or hereafter organized in the

United States for profit and having a capital stock

represented by shares, irrespective of whether it is

the creature of statute or of contract. A corporation

is organized for profit if its stockholders or members

may benefit pecuniarily from its operations. Joint-

stock associations not organized under any statute

and so-called Massachusetts trusts are subject to

the tax.”

There had been no change in the law from that of

1909 which would warrant such 4 regulation. ‘The inva-

lidity of such a regulation was subsequently shown by the

decision in Crocker v. Malley, 249 U. 8. 223.

—

21

Income and War-Profits Tax Act of 1917

The act of March 3, 1917, made no change of impor-

tance in the present connection, from that of 1916.

The act of October 3, 1917, imposed the war-profits

tax, amended the act of 1916 as to the amount of income

tax, and brought forward the stamp tax. This act did

nothing to the excise-tax law. That law remained as it

was under the act of 1916. The act of 1917 introduced

a definition section (200). This section is in Title IT,

“War Excess Profits Tax.” It provides that:

“Section 200. That when used in this title —

“The term ‘corporation’ includes joint-stock com-

panies or associations and insurance companies;

“The term ‘domestic’ means created under the

law of the United States, or of any State, Territory

or District thereof, and the term ‘foreign’ means

created under the law of any other possession of

the United States or of any foreign country or

government.”

It is evident that this section contemplates nothing

as a corporation, joint-stock company, association or

insurance company unless it is either domestic or foreign.

To be either of these it must be ‘created under the laws

of. Accordingly, this act does not include in this

classification a body formed by voluntary indenture of

trust without any privileges granted by law. It will be

noted that the word “‘ereated’”’ is here used as including

“organized.” The word “‘organized”’ plays no part in

the definition.

22

The Revenue Act of 1918 did not change the Act of 1909

or the Act of 1916 as to the bodies subject to

the Capital Stock Excise

The Revenue Act of 1918, enacted February 24, 1919,

covered war profit, excess profit, income, excise, and

many other taxes. This act has a definition section for

all purposes of the act. The definition is apparently

derived from the act of 1917. It provides that:

“Seetion 1. That when used in this act. . .

“The term ‘person’ includes partnerships and

corporations, as well as individuals; =,

“The term ‘corporation’ includes associations,

joint-stock companies, and insurance companies;

“The term ‘domestic’? when applied to a cor-

poration or partnership means created or organized

in the United States; the term ‘foreign’ when

applied to a corporation or partnership means

created or organized outside the United States.”

Some change in phraseology from the act of 1917

was necessary, even if no change in meaning was intended,

because the definition section covered partnerships as

well as corporations. It would not have been appropri-

ate, in defining ‘domestic’ and “foreign” partnerships,

to speak of them as ‘organized under the laws rl

Therefore, the word “‘in’’ is used as a word which is

applicable both to partnerships and to corporations.

The idea that a corporation could be organized except

“under the laws of” is inconceivable. A general defini-

tion section without more would not be enough to make

a radical change in the character of a tax imposed by a

particular section, couched in language not itself signifi-

cant of any intention to change the nature of the tax.

This act, in imposing the excise tax, shows clearly

we a a ie tia a Pi i li Sia la lla i

—

23

an intention to apply it to the same class of bodies as

had been described in the excise section of the act of

1916, above quoted. It provides that:

“Section 1000 (a). That on and after July 1,

1918 in lieu of the tax imposed by the first subdivision

of section 407 of the Revenue Act of 1916 —

(1) Every ‘domestic’ corporation shall pay

annually a special excise tax with respect to carry-

ing on or doing business, equivalent to one dollar

for each one thousand dollars of so much of the

fair average value of its capital stock for the pre-

ceding year ending June 30th as is in excess of

| five thousand dollars. In estimating the value of

| capital stock the surplus and undivided profits shall

| be included;

‘““(2) Every ‘foreign’ corporation shall pay annu-

ally . . . of the average amount of capital employed

in the transaction of its business in the United

States... ” (Italics not in original.)

This is a corporation excise. There is no change in

phraseology sufficient to indicate an intention to impose

a privilege tax on a body that did not enjoy a privilege

and which would not be taxed under the earlier acts.

Nine years before, the tax had come into existence as a

privilege tax after the President’s recommendation to

impose a tax upon “‘the privilege of doing business as an

artificial entity and of freedom from a general partnership

liability enjoyed by those who own the stock.” The law

had been interpreted by this Court in Eliot v. Freeman

as imposing the tax only as a privilege tax. That defi-

nition had been known for seven years. If the Congress

had any intention to change the nature of the tax, it was

easy to express it. There has been no such expression.

24

That there was no intention to enlarge or to make

any change from the 1916 law in that respect is con-

firmed by the statement of Mr. Kitchin, the House

chairman, in laying the Committee's report before the

House. He said: ““We have made a very important

change in the rates and in the exemptions of what is

known as the corporation capital stock tax that has been

on the statute books for two years. The tax is now

50 cents on each thousand dollars of so much of the

fair average value of its capital stock for the preceding

year as is in excess of 99,000. The fair average value

is the language of existing law and is earried in this

bill. We make the tax $1.00 on each $1,000 of the

‘fair average value’ of the stock in excess of $5,000”

(Congressional Record, vol. 56, part 12, 65th Congress,

2d Session, Appendix, p. 698). Senator Simmons, the

Senate chairman, in his report (65th Congress, 3d _ Ses-

sion, 1918-1919, Senate Reports, vol. 1, No. 617,

p. 17) said: ‘‘The House Bill provided for the continu-

ance of the capital stock tax on the basis of the fair average

value of the capital stock of the corporation for the

preceding year. The determination of fair average value

has proved in administration to be very difficult. The

committee has accordingly provided that the basis of

the tax shall be the amount of the net assets of the

corporation as shown by its books, ete.” The use of the

word “continuance” does not indicate an intention to

tax different bodies from those taxed under the earlier

act. If there had been any intention to make a change

in the class of bodies to be taxed, it would have been

mentioned.

As the act of 1918 consolidated so many different

tax acts which had received prior judicial construction,

the principle announced by this Court becomes appli-

cable, that —

a

25

‘Even where inadvertent changes have been

made by incorporating different statutes together,

it has been held not to change their original con-

struction. Thus, in New Jersey, where several

English statutes had been consolidated, a proviso

in one of them, broad enough in its terms to affect

the whole consolidated law, was held to affect only

those sections with which it had been originally

connected... . ”

“So, upon a revision of statutes, a different inter-

pretation is not to be given to them without some

substantial change of phraseology — some change

other than what may have been necessary to abbrevi-

ate the form of the law.”’

McDonald v. Hovey, 110 U. 8. 619, 628, 629.

“Tt is not to be inferred that Congress, in revising

and consolidating the statutes, intended to change

their effect, unless an intention to do so is clearly

expressed.”

Logan v. United States, 144 U. 8S. 263, 302.

“At the time of the revision in 1872, Section 22

was divided into several shorter sections and included

in the revision according to an arrangement, adopted

for purposes of convenience only, whereby the several

parts of the original section became more or less

separated; but that, in the absence of some sub-

stantial change in phraseology, did not work any

change in their purpose or meaning.”

Buck Stove Co. v. Vickers, 226 U. 8. 205, 213.

It is a general principle of statutory construction

that a re-enactment or an‘enactment of language which

has received an authoritative interpretation by the

Supreme Court is virtually an enactment of that inter-

oO

26

pretation, and also that a change is not to be inferred in

the absence of clear language requiring it.

The ‘ Abbotsford,” 98 U.S. 440.

Latimer v. United States, 223 U. 5. 501.

United States v. Sixty-F ive Terra-Cotta Vases,

etc., 18 Fed. 508 (C.C. 8.D. N.Y).

United States v. Trans-Missouri Freight Asso-

ciation, et al., 58 Fed. 58 (C.C.A. 8th).

In re Guggenheim Smelting Co., 121 Fed. 153

(Cc. C. D. N.J.).

Schmidt v. United States, 133 Fed. 257 (C.C.A.

9th).

Also, it is well settled that an ambiguity in a tax

statute is to be resolved in favor of the taxpayer rather

than in favor of the Government.

Gould v. Gould, 245 U.S. 151.

United States v. Isham, 34 U.S. 496, 504.

Hartranft v. Wiegmann 121 U. 8. 609.

American Net and Twine Co. v. Worthington,

141 U. S. 468.

Eidman v. Martinez, 184 U. 8. 578, 583.

Swan and Finch Co. v. United States, 190 U.S.

143.

Benziger v. United States, 192 U. 5. 38.

Parkview Bldg. and Loan Assn. V. Herold, 203

Fed. 876 (D.C. D. N.Y.), affirmed 210 Fed.

577 (C.C.A. 3d).

Haiku Sugar Co. Vv. Johnstone, 249 Fed. 103

(C.C.A. 9th).

United States v. Coulby, 251 Fed. 982 (D.C.

N.D. Ohio, E.D.), affirmed 258 Fed. 27

(C.C.A. 6th).

—— Re OOP ote my ae ROPE

a . GE

_—

27

Scott v. Western Pacific Ry. Co., 246 Fed. 545

(C.C.A. 9th).

Spreckels Sugar Ref. Co. v. McClain, 192 U. 8.

397.

United States v. Wigglesworth, 2 Story, 369, 28

Fed. Cas. No. 16,690.

The act of 1918 discloses no intention to change the

class of bodies subjected to this privilege excise.

28

The attempt by Treasury Regulation to impose the

Corporation Excise on trusts, merely because the

shareholders have control by vote, is unauthorized.

By the regulation of June 5, 1914, and by Treasury

Regulation No. 38 (above quoted), under the Act of

19.6, an attempt was made to classify real estate trusts,

particularly Massachusetts Trust, as associations sub-

ject to the capital stock excise even if formed by trust

deeds and not organized under any law, if the income was

distributable among the shareholders in proportion to

their interest in the capital of the trust.

On March 17, 1919 the decision in Crocker v. Malley,

249 U. S. 223, disclosed that this attempt was not

warranted by law.

Thereafter these regulations were modified so as to

exclude such real estate trusts where the beneficiaries

had no control but to include them where the beneficiaries

had control. Treasury Regulation No. 50, as revised,

provides that:

‘Art. 7. Massachusetts trusts. — The test of lia-

bility in all cases involving trusts of the Massach-

setts type is whether the cestuis que trustent have

by the terms of the trust agreement a voice in the

management or control of the trust. Where the

trustees are in complete control of the business,

the beneficiaries having no control except the right

of filling vacancies among the trustees or of con-

senting to a modification of the terms of the trust

or of dissolving the trust, no association exists. If,

however, the cestuis que tructent have a voice in

the control or management of the business of the

trust, whether through the right to elect trustees

periodically or to remove the trustees or to restrict

the trustees as to the management of the trust or

eas

29

otherwise, the trust is an association within the

meaning of the statute. Where the trustees hold in

their own right a sufficient number of the certificates

of beneficial interest to constitute control as between

the beneficiaries, the trust will be held to be an

association regardless of the powers conferred upon

the trustee by the instrument creating the trust.”

It is submitted that there is no warrant for this attempt

to limit the effect of the decision in Crocker v. Malley to

those trusts only in which the beneficiaries do not have

control. The shareholders in the Department Store

Trust which was held in Eliot v. Freeman to be a trust

not subject to a capital-stock excise, had a voting control

of the affairs of the trust.

If a trust in which the beneficial interests are repre-

sented by transferable certificates, is, as was held in

Crocker v. Malley, not an association but a trust, it does

not cease to be a trust and become an association merely

because the shareholders have voting powers.

The fact that a trust may be amended or even termi-

nated does not make it any the less a trust.

Kelley v. Snow, 185 Mass. 288.

Mackernan v. Fox, 220 Mass. 197.

In Crocker v. Malley this Court distinguishes clearly

between an ‘‘association” and a “trust,” saying:

“On the other hand, the trustees by themselves

cannot be a joint-stock association within the

meaning of the act unless all trustees with discre-

tionary powers are such, and the special provision

for trustees in D, is to be made meaningless. We

perceive no ground for grouping the two — bene-

30

ficiaries and trustees — together, in order to turn

them into an ‘association,’ by uniting their con-

trasted functions and powers, although they are in

no proper sense associated. It seems to be an un-

natural perversion of a well-known institution of the

law.”

If the distinction attempted by the Treasury Regu-

lation were valid, it would produce this extraordinary

result: Under the laws of Massachusetts, if there is no

control in the shareholders the trust is a trust and the

shareholders are not personally liable. On the other hand,

if there is full control in the shareholders they are under

a general partnership liability. Under the Treasury

Regulation, if the shareholders are not in control, and,

therefore, not personally liable, the trust is not subject

to the capital stock excise, but if the shareholders are in

control, and, therefore, personally liable, the trust is

subject to this excise. Thus, the whole scheme of the

excise law is overturned. This tax came into existence

as an excise upon “‘the privilege of doing business as an

artificial entity and with freedom from general partnership

liability.’ It would take very clear language to indicate

that Congress intended such an inverted result. There is

nothing in the language used which indicates such at

intention.

oe _—

31

The Plaintiffs are Trustees and Not Associations.

The act of 1918 recognizes for purposes of taxation at

least four different taxable bodies, namely, (1) individu-

als, (2) partnerships, (3) corporations (including quasi-

corporations), and (4) trustees. ‘‘ Association” is a loose

general term which has no such well-defined meaning as

“corporation,” ‘joint stock company,” ‘‘partnership”’

or ‘“‘trust.”” (Smith v. Anderson, (Ct. of App.) 15 Ch.

Div. 273.)

It gets its definition from its context, and may well

have a different meaning in different parts of the same

act, as called for by the context. For instance, a gift to

an association that has no special privileges may be a

proper deduction as a charitable gift. Notwithstanding

this, the association may not be subject to an excise tax.

It is a general principle of tax interpretation that where,

in any tax act, there are general and specific descriptions

which in any manner conflict, the tax will be levied

under the more exact description.

Arthur v. Zimmerman, 96 U. 8. 124.

Movius v. Arthur, 95 U.S. 144.

Arthur v. Lahey, 96 U.S. 112 at 116.

American Net and Twine Co. v. Worthington,

141 U.S. 468.

Of the four classes described in the Act of 1918, the

plaintiff trustees naturally fall in to the class of ‘‘ truStees”’

and not into that of “corporations.” The usual char-

acteristics of a trust exist. They were launched by

an indenture of trust. The legal title is in the trustees.

They administer the trust. This is true even if they

could be said to be so far subject to the control of the

beneficiaries that the beneficiaries are subject to the

liability of partners.

32

In the normal use of language it would not occur to

anybody to speak of Louis Hecht and Simon Hecht, or

of Howard and Barlow, as associations. They are trustees.

They enjoy no special privileges. They manage the

real estate in the way that typical trustees under a will

would manage it. They are liable, as contractors would

be at common law. They may bargain for exemption

from liability, but if they obtain it, they obtain it by

voluntary agreement of those who contract with them.

Their liability for damages sustained by others in the

use of the property, and their liability for debts is the

same as that imposed by the law on other owners and

debtors.

Contractual provisions as to the transferability of

shares do not make the relations any the less those of

trustee and beneficiary. Vested beneficial interests under

a trust are usually transferable, in the absence of spend-

thrift restrictions. The transferability is not created by

the certificates which the trustees issue. They are the

letters which the trustees under a will may properly send

to their beneficiaries informing them of the extent of

their interests.

Even with the enlargement of an imported definition,

it is a distortion of language to speak of these trustees

as a “corporation” to be taxed on its ‘capital stock.”

These are words of the law of corporations and not of

trusts.

It is unnecessary to consider whether, because of any

control in the beneficiaries imposing a personal liability

under the Massachusetts decisions, these trusts should

be called partnerships and so, under the second classi-

fication. Partnerships are not subject to the capital

stock excise.

There has been no change in the law indicating an

intention to impose this privilege tax ona body that does

33

not have any special privileges. There has been no

change in the law rendering inapplicable the decisions

in Malley v. Crocker and Eliot v. Freeman.

In the ordinary use of the terms, (1) the trustees are

trustees (2) they are not an association, (3) they are not

organized, (4) they are not created under any law, and

(5) they have no special privilege.

Respectfully submitted,

WILLIAM H. DUNBAR,

EDWARD F. McCLENNEN,

ALLISON L. NEWTON,

Attorneys for Petitioners.

February 1923.