Brief for the Respondent in Opposition — Hecht v. Malley (No. 99-101-119)

10

petition and the brief in support thereof and of the

entire transcript of the record of the case.

Dated the 14th day of July, 1922.

ROBERT O. HARRIS

United States Attorney for the District of

Massachusetts, Attorney for Respondents,

By Freperic 8. Harvey,

Assistant United States Attorney,

Inthe Supreme Court of the Gnited States

Ocroper TreRM, 1922.

Simon Hecutr anp Summir L. Hecur,

trustees,

v. No. 532.

JoHn IF. MALiEy, Former CoLuecror

of Internal Revenue.

Artur L. Howarp anp Ropserr &. )

Barlow, trustees,

v. +No. 532.

Joun F. Mauiey, Former Coiiector

of Internal Revenue. J

ArrHur L. Howarp anp Roperr &. |

Barlow, trustees,

i f

Anprew J. Casey, Former Actine Cot- |

lector of Internal Revenue. J

No. 534.

_ PETITION FOR WRIT OF CERTIORARI TO THE CIRCUIT

COURT OF APPEALS FOR THE FIRST CIRCUIT.

BRIEF FOR THE RESPONDENT IN OPPOSITION.

_ The above cases arise under the Federal Income

Tax Acts of 1916 and 1918. Petitioners claim they

_4re trustees under a declaration of trust and as such

2

are not subject to the tax imposed by the Revenue

Acts of 1916 and 1918 on “every corporation, joint-

stock company, Or association, now or hereafter

organized in the United States for profit and hay-

ing a capital stock represented by shares, oe

These are class cases and involve the determination

of the taxable status of so-called ‘“ Massachusetts

Trusts,” which are a form of organization whereby

trustees under a declaration of trust hold legal title to

property, manage it for the benefit of those persons

who shall from time to time own the certificates of

beneficial interests therein, and pay the net income

derived therefrom to the shareholders.

Section 407 of the act of September 8, 1916, ¢. 463,

39 Stat. 756, 789, provides:

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:

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 insur-

ance company, now or hereafter organized

under the laws of the United States, or any

State or Territory of the United States, shall

pay annually a special excise tax with respect

to the carrying on or doing business by such

corporation, joint-stock company Or associa

tion, or insurance company, equivalent to 50

cents for each $1,000 of the fair value of its

capital stock and in estimating the value of

a

3

capital stock the surplus and undivided profits

shall be included: * * *

Section 1000 of the act of February 24, 1919, c. 18,

40 Stat. 1057, 1126, provides:

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

carrying on or doing business, equivalent to $1

for each $1,000 of so much of the fair average

value of its capital stock for the preceding year

ending June 30 as is in excess of $5,000. In

estimating the value of capital stock the sur-

plus and undivided profits shall be ineluded;

+ «>

Section 1 of said act defines corporations as fol-

lows:

The term “corporation” includes associa-

tions, joint-stock companies, and insurance

companies; * * *

The United States District Court for the District

of Massachusetts held that the capital stock tax pro-

visions of the acts of 1916 and 1918 were in substance |

a continuation of the corporate excise tax levied by

the revenue act of 1909 and, relying on the construc-

tion of the act of 1909 in Eliott v. Freeman, 220 U.S.

179, held that the tax provisions of the acts of 1916

and 1918, supra, applied only to associations which

derived their powers from some statute. (Hecht et al.

v. Malley, 276 Fed., 830.)

4

The several trust cases were consolidated and the

Circuit Court of Appeals for the First Circuit reversed

the decision of the District Court. ( Malley v. Howard

et al., 281 Fed. 363.)

The Circuit Court of Appeals in its decision above

cited draws a distinction between the provisions of

the acts of 1916 and 1918 and the provision found

in the act of 1909, in the following language (p. 365-

366):

The history of the legislation lends emphasis

to the initial impression of its import. For it

is elementary that, when language used in an

earlier statute has in application received judi-

cial construction, change in language in later

analogous legislation imports legislative pur-

pose to attain a different result. If Congress

had intended the acts in question to have the

restricted application given by the Supreme

Court to the act of 1909, there was no con-

ceivable reason for changing the words

“ organized under the laws of the United States

or of any State,” etc., to “ organized in the

United States.”

We think it plain that by this change Con-

gress intended in the later acts to include non-

statutory organizations, and to avoid the

restriction found by the Supreme Court in the

words of the 1909 act. We can not accord

with the learned district judge in his view

that “it is hard to discover any substantial

distinction between the scope of “the act of

1909 and the acts of 1916 and 1918 “as far as

‘associations’ are concerned.” We think there

is a vital and controlling distinction.

5

The Cireuit Court of Appeals held the petitioners

to be associations within the meaning of the rev-

enue acts and subject to the taxes imposed ‘by the

acts of 1916 and 1918. After reviewing the organi-

zation of the trusts herein referred to, the court

said (pp. 368, 369):

Plainly the Hecht Trust is quasi corporate

in form and power. It is an association with-

in the meaning of the revenue acts.

The Haymarket Trust, both in genesis and

organization, is even more like a corporation.

It has none of the aspects of a family affair.

It started by securing from the investing pub-

lic $250,000 on solicited subscriptions, the

trustee paying a commission of $2,500 to the

promoter for thus raising the capital for doing

business. The declaration of trust provides

for nearly all the machinery and proceedings

of an ordinary corporation. We hold it also

to be quasi corporate and an association within

the meaning of the revenue acts.

Referring to the status of these trusts under the

statutes of Massachusetts the court said (pp. 370,

371):

But the proposition that they are quasi cor-

porate in form need not rest merely on our

own analysis or on observations found in the

decisions of the Massachusetts courts. It has

now been distinctly recognized by the Massa-

chusetts Legislature; they have a statutory

status as associations, not as trusts or as part-

nerships.

6

In the decision below, these organizations

have been treated as having no status not

arising out of the common law; so also in the

briefs of the Government and of counsel for

the defendant. It seems to have been over-

looked that they have acquired in Massachu-

setts a distinct statutory basis. This, if the

question before us were otherwise doubtful,

would seem to us of much significance. See

Gen. Laws Mass. 1921, c. 182, codifying earlier

legislation of 1909, 1913, 1914, 1915, and 1916.

Compare, also, St. 1921, c. 368. The title of

this chapter is “ Voluntary Associations.”

In section 1 of this act, dealing with defini-

tions, it is provided:

‘“< Association,’ a voluntary association un-

der a written instrument or declaration of

trust, the beneficial interest under which is

divided into transferable certificates of par-

ticipation or shares.”

This definition exactly fits the plaintiffs at

bar.

It is readily apparent that the petitioning trust

associations have many of the characteristics of &

corporation and are in fact associations “organized

in the United States for profit and having a capital

stock represented by shares” and are, therefore,

subject to the taxing provisions of the revenue acts

of 1916 and 1918, hereinbefore referred to.

The only grounds advanced by the petitioners for

the issuance of a writ of certiorari are:

(1) The importance of the questions involved ;

—_

(2) That the decision of the Circuit Court of

Appeals is in conflict with the decision of this court

in Eliott v. Freeman, supra.

1. The question involved here is whether these and

other similar trusts are subject to the taxing pro-

visions of the acts of 1916 and 1918. The solution

of this question is important only to trust associa-

tions similar in character to petitioners which are

seldom, if ever, found outside of the State of Massa-

chusetts. They are organized for the purpose of

securing the benefits without assuming the responsi-

bilities of corporations.

2. The change in the language of the acts of 1916

and 1918 was undoubtedly made, as stated by the

Circuit Court of Appeals, to avoid the restriction in

the act of 1909, pointed out by the Supreme Court

in Eliott v. Freeman, supra. That being true, there

exists no conflict between the decision of the Circuit

Court of Appeals for the First Circuit in Malley v.

Howard et al., 281 Fed. 363, and the decision of

this court in Eliott v. Freeman, supra. The alleged

grounds for the issuance of the certiorari are, there-

fore, without merit.

It is submitted that the petition should be denied.

JAMES M. Beck,

Solicitor General.

ALBERT OTTINGER,

Assistant Attorney General.

Harvey B. Cox,

Attorney.

OcToBER, 1922.

fe)

ra a

ST BIW gb Bn Poel at +88 Seiemedntitets 0 ATER A BN AK OI i ST NES Sb RAE) BOR A sll EE

TABLE OF STATUTES.

Pages

August 5, 1909 — 36 Stat. Ch. 6, Sec. 38, pt. 1, p. 112 8

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

p. 172 10

October 22, 1914 — 38 Stat. Ch. 331, pt. 1, p. 759 12

September 8, 1916 — 39 Stat. Ch. 463, pt. 1, p. 756 12

March 3, 1917 — 39 Stat. Ch. 159, pt. 1, p. 1000 17

October 3, 1917 — 40 Stat. Ch. 63, pt. 1, p. 300 17

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

TABLE OF CASES.

American Net and Twine Co. v. Worthington, 141 U.S. 468 23, 24

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

Arthur v. Zimmerman, 96 U. 8. 124

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

Buck Stove Co. v. Vickers, 226 U.S. 205, 213 23

Crocker v. Malley, 249 U.S. 223 11, 17, 25

Dana v. Treasurer and Receiver General, 227 Mass. 562, 565 3

Edwards v. Warren Linoline and Gasolene Works, 168 Mass. 564 4

Ridman v. Martinez, 184 U. 8. 578, 583 23

Eliot v. Freeman, 220 U.S. 178 2, 5, 8,9, 10, 18, 15, 20, 27

Flint v. Stone Tracy Co., 220 U. 8. 107 8,9

Frost v. Thompson, 219 Mass. 360 4

Gleason v. McKay, 134 Mass. 419 4

Gould v. Gould, 245 U.S. 151 23

Haiku Sugar Co. v. Johnstone, 249 Fed. 103 (C.C.A. 9th) 24

Hartranft ». Wiegmann, 121 U. 8. 609 23

Hoadley v. County Commissioners, 106 Mass. 519 4

Horgan v. Morgan, 233 Mass. 381 3

Hussey v. Arnold, 185 Mass. 202 4

In re Guggenheim Smelting Co., 121 Fed. 153 (C.C. D. N.J.) 23

Kelley v. Snow, 185 Mass. 288 25

Latimer v. United States, 223 U. 8. 501 23

Logan v. United States, 144 U. 8. 263, 302 22

ii TABLE OF CASES

Mackernan v. Fox, 220 Mass. 197

Malley v. Bowditch, 259 Fed. 809

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

Movius v. Arthur, 95 U. 8. 144

Parkview Bldg. and Loan Assn. ». 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 Pacific 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. 8. 397

Stratton’s Independence ». Howbert, 231 U. S. 399

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

Taber v. Breck, 192 Mass. 355

The “Abbotsford,” 98 U. S. 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. S. 496, 504

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

508 (C.C. 8.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

i

Pe’, a fe re Be BoP RERSSweae ef eeEEe

Supreme Court of the United States.

Ocroser Term, 1922.

SIMON HECHT anv SUMMIT L. HECHT, Trusrtess,

v.

JOHN F. MALLEY, Former Couiector or INTERNAL

REVENUE.

ARTHUR L. HOWARD anv ROBERT S. BARLOW,

TRUSTEEs,

v.

JOHN F. MALLEY, Former Cotiector or Internal

REVENUE.

ARTHUR L. HOWARD anv ROBERT S. BARLOW,

TRUSTEES,

v.

ANDREW J. CASEY, Former Actinc CoLuector or

InterNaL RevENvE.

Brief in Support of Petition for Writ of

Certiorari.

Grounds for the Writ.

In one opinion in these three eases the Circuit Court

of Appeals for the First Circuit, reversing the decision

eer tes

Le ne Zale hte PVR CASIO RE WEI eS Hs RIP gh RE A INEM ANE a

2

of the District Court for the District of Massachusetts

in suits brought for refunds, has held liable to the

capital-stock excise the trustees of a Massachusetts

real-estate trust existing by voluntary agreement at

common law, on the ground that the trust is an ‘‘asso-

ciation’? in the sense in which that term is used in

conjunction with ‘corporations’? and ‘joint stock

companies’? in the acts of 1916 and 1918 imposing

this tax. This decision is directly opposed to the

decision of this Supreme Court in Eliot v. Freeman,

990 U.S. 178, which held that such a trust can hardly

be said to be ‘‘organized’’ and certainly is not organ-

ized ‘‘under law’’ and enjoys no ‘«privilege.’’ The

Court of Appeals reached this decision because it was

of opinion that the law had been changed by the acts

of 1916 and 1918, not in force when Eliot v. Freeman

was decided. The slight changes made in the language

of the acts—it is respectfully submitted—are entirely

inadequate to indicate an intention on the part of the

Congress to bring under this special-privilege tax men

who enjoy no privilege. The District Court so held.

(The opinion of the Cireuit Court of Appeals

covers also the case of Malley v. Crocker, involving

some different questions and in which separate counsel

argued.)

The question presented is of great public impor-

tance. Although not appearing in the record, it is

so commonly known as to warrant judicial notice, a

great many of these trust deeds have been drawn and

acted under since the decision in Eliot v. Freeman.

The amount of taxes involved is large. All nine cir-

cuits are affected. These cases were brought as test

eases. It is highly important to have a decision by the

RETREAT NES BORNE es CRNA IGN INEST MAME PRED IE BERL EH ME NE pete

, —_

3

Supreme Court, again to set at rest the doubts which

were dissipated by the decision in Eliot v. Freeman.

The capital-stock taxes involved are those assessed

for periods ending June 30, 1917, 1918, 1919 and 1920,

under the laws of 1916 and 1918, respectively. The

facts are set out succinctly in the petition for certio-

rari. The declarations of trust under which these trus-

tees act, and the methods by which the terms of the

trust are carried out, are set out in the opinion of

Judge Morton (Record, p. 27; p. 107) and in the state-

ment of facts found by him (Record, pp. 10, 34; pp.

76, 95).

The petitioners submit that they are trustees, and

not associations, and that they are not created or or-

ganized by law, and that they have their powers and

rights and incur their duties and obligations by volun-

tary agreement only, without the assistance of special

powers provided by law, and that neither the act of

1918 nor the act of 1916 imposed a ecapital-stock tax

on such trustees.

These trustees hold Massachusetts real estate. The

trust indentures were executed in Massachusetts by

Massachusetts parties. No special rights are given

them by the laws of the United States or of Massachu-

setts. Under the laws of Massachusetts they are

either partnerships or trusts, and not associations.

The Massachusetts Courts have held such trusts to be

partnerships if a sufficient degree of control is in the

shareholders, and trusts if the control is in the

trustees.

Williams v. Milton, 215 Mass. 1.

Horgan v. Morgan, 233 Mass. 381.

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

- ype

ee td ied tare eae SNR ali hs a aaa

rr rene oy

ht Siete ‘ —e

Frost v. Thompson, 219 Mass. 360.

Taber v. Breck, 192 Mass. 355.

Williams v. Boston, 208 Mass. 497.

Hoadley v. County Commissioners, 109

Mass. 519.

Gleason v. McKay, 134 Mass. 419.

Phillips v. Blatchford, 137 Mass. 510.

Ricker v. American Loan & 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.

4

It is immaterial in the present case whether the in-

dentures create a trust only or a partnership, because

neither trusts nor partnerships are subject to the

capital-stock tax, but only corporations, joint-stock

companies and associations. It is obvious that the

petitioners are not corporations or joint-stock

companies. That they are not associations, and that

they are not organized or created by law, as these

terms are used in the acts imposing the eapital-stock

excise, is shown by the text of the acts, by their mani-

fest purpose and by the history of the legislation on

this subject. The excise tax, under title X, section 1000,

of the Revenue Act of 1918 and under title IV, section

407, of the act of 1916 is imposed only on corporations

and quasi-corporations having privileges by law. It

is a privilege tax which is not imposed on bodies that

have no special privileges.

Bw Se Oe NEL oy esate ‘ ome .

Baal GRRL STRAP LLL A FL OIE LI IG OEE

at oe

9)

Massachusetts Statutory Law.

The Cireuit Court of Appeals, of its own initiative,

refers 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, and 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 policy to provide record evi-

dence of the constituency of business organizations.

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

Sap GSES RELL OIE AY LEE EEE DE LILES RES

—_— + PETER GT LE IT AE OI ETT IEE SETI Y rte

io POS ZENER ESA -

SSB Se Stabe Ni iat hha ee, ae nae

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, includ-

ing—

‘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 was, ‘‘An

Act Relative to Voluntary Associations Under Written

Instruments.’’ This act without significant change is

now codified in General Laws of Massachusetts, chap-

ter 182, sections 1 and 2, now in foree. The Massachu-

setts act of 1916, chapter 154, provided that such a

body may be sued in an action at law for debts and

other obligations or liabilities, and also that its prop-

erty 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.

Excise Tax Act of 1909.

This excise tax had its inception in 1909. President

Taft, soon after his inauguration 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

Peart

GRO PN TEPER SEP ST

PENH sO SEPHORA AOD NEW AI IORI

7

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 or

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 fureign 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

with respect to the carrying on or doing business

by such corporation, joint stock company or asso-

ciation, 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

mm

ES Rey Dae he ae

Tinta Te

8

income over and above five thousand dollars re-

ceived by it from:business transacted and capital

invested within the United States and its Terri-

tories, Alaska, and the District of Columbia during

such year, exclusive of amounts so received by it

as dividends 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., ¢. 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 v. Stone Tracy Co.,

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

In Eliot v. 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 De-

partment Store Trust had all the elements to make

it a partnership (in distinction from a trust) which

ean be found in any 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 de-

scribed. As the latter organizations share many

benefits of corporate organization it may be de-

scribed generally as a tax upon the doing of busi-

ness in a corporate capacity.”’

‘*A tax upon business done in a corporate ca-

pacity.’’

‘‘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.c., with the advantages

which arise from corporate or quasi-corporate

organization.’’

‘‘The requirement to pay such taxes involves

the exercise of privileges.’? (192 U.S. 363.)

The same view was expressed again, much later, in

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

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 be-

fore 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.”’

10

‘<A trust of the character of those here involved

can hardly be said to be organized, within the or-

dinary meaning of that term; it certainly is not

organized under statutory laws as corporations

are.’’

“There is an essential difference between a

pany as it exists at common law

joint stock com

having extensive stat-

and a joint stock company

utory powers conferred upon it by the State

within which it is organized. The latter kind of

joint stock company ‘s found in England and in

the State of New York.”’ (Cook on Corporations,

see. 505.)

In this opinion two grounds are assigned, either of

s sufficient to hold that these trustees are not

excise tax, namely, one, that they are

and the other, that they are

ation, in Eliot v. Free-

which i

subject to this

not created under law,

not organized. This interpret

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 and 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.

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 corpera-

tions and imposed an income tax on individuals as well

as on corporations. Section 2, paragraph G, imposing

Stel

11

on corporations the same tax as the normal tax im-

posed 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 accuring 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.

Under this act, on March 17, 1919, the Supreme Court

held that a trust much like those at bar was not an

association.

Crocker v. Malley, 249 U.S. 223.

On June 5, 1914, before this decision of the Supreme

Court, a treasury regulation was issued. It provided

that ‘‘ ‘corporations’ as used in these regulations shall

be construed to include all corporations, joint stock

companies or associations and all insurance compa-

nies coming within the terms of the law and such or-

ganizations will hereinafter be referred to as ‘corpora-

tions’.’’ It also provided that, ‘‘it is immaterial how

such corporations are created or organized,’’ and the

term, ‘‘ ‘joint stock companies or associations’ shall

include associations, real estate trusts, or by whatever

name known, which carry on or do business in an

12

organized capacity, whether organized under and pur-

suant to state laws, trust agreements, declarations 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 eapital 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 organ-

ized eapacity, be subject to the tax imposed by this

act.”’

The subsequent decision in Crocker v. Malley dis-

closed that this definition was unauthorized. The trust

involved in that case came within the language of this

regulation.

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

transfer of shares in ‘¢eorporations, 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

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

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

pany, which enjoys special privileges under the stat-

utes of New York, was held to be an association or

joint-stock company.

Roberts v. Anderson, 226 Fed. 7.

Income and Excise Tax Act of 1916.

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

-_

13

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 inter-

pretation which in Eliot v. Freeman the Supreme

Court had put upon the language of the act of 1909.

Title I, section 10—the inecome-t:.« 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 or-

ganized but not including partnerships, . . . by

every corporation, joint-stock company or asso-

ciation, or insurance company organized, author-

ized, or existing under the laws of any foreign

country.’’ (Italies not in original.)

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

vided that—

‘Every corporation, joint-stock company or as-

sociation, [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

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,

14

equivalent to fifty cents for each one thousand dol-

lars 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 OF as-

sociation, or insurance company, how or hereafter

organized for profit under the laws of any foreign

country and engaged in business in the United

States shall pay .. .’”” (Italics and brackets not

in original.)

It will be observed that the only change in this lan-

guage from that of the act of 1909 was in adding, after

the word ‘‘association,’’ the words ‘‘now or here-

after,’’ and by adding, after the word ‘‘organized,”’

the words ‘‘in the United States,’’ and that there is no

change in the comma after insurance company. If

the words in the brackets are omitted, the descrip-

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

The reason for the addition of these words is appar-

ent on observing the form in which the tax was im-

posed on the domestic corporation and on the foreign

corporation 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 see-

tion—whether they were domestic or foreign. The

subsequent parts of the section fixed the amount of the

tax in accordance 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, respectively, were thrown

into separate paragraphs of the section, and the

-—

15

words ‘‘corporation, joint-stock company, association

or insurance company’? are repeated in the second

paragraph. This accounts for the inclusion 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,’’ which were the words on which the decision

in Eliot v. Freeman was based, 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

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, and the rest of the

act makes the conclusion even clearer, because Con-

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

bat merely defining the method of application of a gen-

eral income tax, used the words “no matter how cre-

ated or organized,”’ and left out the words ‘‘organ-

ized under the laws of the United States or any State

or Territory of the United States.’ The words ‘‘no

matter how created or organized’’ 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 in-

dividual members of the association. This was a con-

venient method, and did not increase or diminish the

ne Be 2 ee eS

mingle Gres

16

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

used these words and omitted the words ‘organized

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 bill as read in the

House provided for an income tax, but for no cor-

porate excise tax (Congressional Record, 64th Con-

gress, 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 pusiness.’’ (Senate Reports,

64th Congress, 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 fol-

lows, 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 of

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

Be ae nN My oe Se wy

_ <a

17

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

thie tax: ...*

Title I, section 10, so referred to, imposed the in-

come tax and had in it the words ‘‘no matter how cre-

ated or organized.’’ Apparently the House was un-

willing 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 amend-

ment, 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.

Treasury Regulations No. 33 under the act of 1916

again made an attempt to cover such trusts as those

at bar. There had been no change in the law from that

of 1909 which would warrant such a regulation. The

invalidity of the regulation was subsequently shown

by the decision in Crocker v. Malley, 249 U.S. 243.

Income and War-Profits Tax Act of 1917.

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

portance 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 in-

18

and brought forward the stamp tax. This

act did nothing to the excise-tax law. That law re-

mained as it was under the act of 1916. The act of 1917

introduced a definition section (200). This section is

in Title II, ‘*‘War Excess Profits Tax.’’ It provides

that:

come tax,

“Section 200. That when used in this title—

“The term ‘corporation’ includes joint-stock

companies or associations and insurance compa:

nies;

““The term ‘domestic’ means created under the

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

tory or District thereof, and the term ‘foreign’

means created under the law of any other pos-

session 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 for-

To be either of these it must be created under

ordingly, this act does not include in

formed by voluntary inden-

ture 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.

eign.

the laws of. Ace

this classification a body

Revenue Act of 1918.

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

Ss en ta ee

a

wee

19

all purposes of the act. The definition is apparently

derived from the act of 1917. It provides that:

“*Section 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 organ-

ized 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 in-

tended, because the definition section covered partner-

ships as well as corporations. It would not have been

appropriate, in defining ‘‘domestic’’ and ‘‘foreign’’

partnerships, to speak of them as ‘‘organized under

the laws of.’’ 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 ineconceiv-

able. A general definition section without more would

not be enough to make a radical change in the char-

acter of a tax imposed by a particular section of an

act, couched in language not itself significant of any

intention to change the nature of the tax.

This act, in imposing the excise tax, shows clearly

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

CONANT ROP I ALY ORT

20

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 subdi-

vision of section 407 of the Revenue Act of 1916—

“*(1) Every ‘domestic’ corporation shall pay

annually a special excise tax with respect to car-

rying on or doing business, equivalent to one dol-

lar for each one thousand dollars of so much of

the fair average value of its capital stock for the

preceding 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 an-

nually ... of the average amount of capital

employed in the transaction of its business in the

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

There is no change in phraseology sufficient to indi-

eate 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 this,

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 en-

tity and of freedom from a general partnership lia-

bility 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

definition had been known for seven years. If the Con-

gress had any ‘ntention to change the nature of the

a

ciated —

—_

21

tax, it was easy to express it. There has been no such

expression.

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 av-

erage value is the language of existing law and is ear-

ried 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 Session, 1918-1919, Senate Reports, vol.

1, No. 617, p. 17) said: ‘‘The House Bill provided for

the continuance 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 determina-

tion of fair average value has proved in administra-

tion 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.

ESET ASR LAIN IRE ONE Oe Pe a hare eT

22

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-

eable, that—

‘‘Eyven 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 in-

terpretation is not to be given to them without

some substantial change of phraseology—some

change other than what may have been necessary

to abbreviate the form of the law.’’ ‘

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

‘Tt is not to be inferred that Congress, in re-

vising and consolidating the statutes, intended to

change their effect, unless an intention to do so is

clearly expressed.’’

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

«At the time of the revision in 1873, Section 22

was divided into several shorter sections and

included in the revision according to an arrang®

ment, adopted for purposes of convenience only,

whereby the several parts of the original section

became more or less separated; but that, in the

—

SERS Ne Na Tat ETI epee

i aa ae

_<—

23

absence of some substantial change in phrase-

ology, did not work any change in their purpose

or meaning.’’

Buck Stove Co. v. Vickers, 226 U.S. 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 in-

terpretation, and also that a change is not to be in-

ferred in the absence of clear language requiring it.

The ‘‘ Abbotsford,’’ 98 U.S. 440.

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

United States v. Siaxty-Five Terra-Cotta

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

United States v. Trans-Missouri Freight

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

In re Guggenheim Smelting Co., 121 Fed. 153

(C.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.S. 609.

Amer. Net and Twine Co. v. Worthington,

141 U.S. 468.

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

Swan and Finch Co. v. United States, 190

U.S. 143.

se ge SMHS ERA LEY RIGO GALE SPAR a aE SCE

24

Benziger v. United States, 192 US. 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. v. Johnstone, 249 Fed. 103

(C.C.A. 9th).

United States Vv. Coulby, 251 Fed. 982

(D.C. N.D. Ohio, E.D.), affirmed 258 Fed.

97 (C.C.A. 6th).

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

545 (C.C.A. 9th).

Spreckels Sugar Ref. Co. v. McClain, 192

US. 397.

United States V. Wigglesworth, 2 Story,

369, 28 Fed. Cas. No. 16,690.

Also, it is a general principle of tax interpretation

that where, in any tax act, there are general and spe-

cific descriptions which in any manner conflict, the tax

will be levied under the more exact description.

Arthur v. Zommerman, 96 U.S. 124.

Movius v. Arthur, 99 U.S. 144.

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

Amer. Net and Twine Co. v. Worthington,

141 U.S. 468.

The act of 1918 recognizes, for purposes of taxation,

at least four different taxable bodies, namely, the i-

dividual, the partnership, the corporation (including

qnasi-corporations) and the trust. ‘< Association” 18

a loose, general term which has no such well-defined

meaning as ‘<eorporation,’’ “* joint stock company,”

‘‘nartnership”” oF ‘trust’? (Smith v. Anderson (Ct.

RPA CRT EINE 7

SPREE ISG OPTERON SE LG TRENT TINE

SEEN RITE SRANE YE NS LIE TANT RD crepe ents

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 con-

text. 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.

Of the four classes recognized by the act of 1918

these trustees naturally fall into the class of trusts and

not that of corporations. The usual characteristics

of a trust exist. They are launched by an indenture

of trust. The legal title is in the trustees. They ad-

minister the trust. This is true, even if they are so

far subject to the control of the beneficiaries that the

beneficiaries are to be held to have the liabilities of

partners. That liability is not inconsistent with the

existence of a trust to hold title to the property which

yields the income. The fact that a trust may be

amended, or even terminated, does not make it any the

less a trust (Kelley v. Snow, 185 Mass. 288; Macker-

nan v. F’ox, 220 Mass. 197). In the case of the income

tax, the levy should be made upon the beneficiaries as

beneficiaries of a trust and not upon the trustees as a

corporation. Crocker v. Malley, 249 U.S. 223, so de-

cides. The Court there 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 dis-

cretionary powers are such, and the special pro-

vision for trustees in D. is to be made meaning-

less. We perceive no ground for grouping the two

AGT LEELA OLA EE LS POTS SLO Sg

26

_—heneficiaries and trustees—together, in order to

turn them into an ‘association,’ by uniting their

contrasted functions and powers, although they

are in no proper sense associated. It seems to be

an unnatural perversion of a well-known institu-

tion of the law.”’

It appears to be conceded that even if trustees issue

transferable shares, they are not liable to this excise

tax unless the control of the affairs of the trust is

vested in the beneficiaries so that the trustees are not

really trustees, but merely agents for the beneficiaries.

The contention for the Government then produces this

extraordinary result—that the beneficiaries of a trust

with transferable shares who do not control its affairs,

and who are not liable as partners for its debts, are not

subject to the excise tax; buat if the beneficiaries do

control the affairs of the trust, so that they are liable

as partners for the debts, they are liable to this excise

tax ; notwithstanding the fact that this tax came into

existence as a tax upon ‘‘the privilege of doing busi-

ness as an artificial entity and of f reedom from a gel

eral partnership liability.’’ It would take very cleat

language to indicate that Congress intended such 4

subverted result.

In the cases at bar it would be un abnormal use of

language to call Louis Hecht and Simon Hecht, or

Howard and Barlow, an ‘sassociation.’? They are

naturally described as ‘‘trustees.’’? They enjoy no

special privileges. The trustees 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

Ak OPM ET ON AR TT 7

CETERA NVR TMNT AEP) SD BAF RAI AP ROHS ATION,

f ed he

VP LOT

agen

27

liability, but if they obtain it, they obtain it by a vol-

untary agreement of those who contract with them.

The transferability of the shares is not an unnatural

feature of a trust. If there is no effective spendthrift

provision, and the shares in a trust have vested in the

beneficiaries, they are usually transferable. This qual-

ity is not made or changed by the fact that the trustees

issue certificates that show from time to time who are

the beneficiaries.

The more reasonable construction of the declara-

tions of trust indicates that the beneficiaries are not

even partners. It is immaterial whether they are.

They are beneficiaries of a trust. The trustees as trus-

tees hold the title, manage the investment, incur any

liability that is incurred, by trustees’ contracts with

outsiders. In the ordinary use of the term (1) they

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

‘hey are not created under any law, and (4) they ex-

ercise no special privileges. There has been no change

in the law indicating an intention to impose this privi-

lege tax on a body that does not have any special

privileges. The decision in Eliot v. Freeman is appli-

cable.

Respectfully submitted,

WILLIAM H. DUNBAR,

EDWARD F. McCLENNEN,

ALLISON L. NEWTON,

Attorneys for the Petitioners.

July, 1922.