# Petitioners Brief — Hecht v. Malley (No. 99-101-119) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_0020%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Petitioners Brief - **Published:** January 1, 1923 ## Text Lee oo) ¢ | 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 — FY ; HKG ° 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