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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Brief for the Respondent in Opposition
- **Published:** January 1, 1923

## Text

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_0020%3A05. Public record. Not legal advice.