Morrissey v. Commissioner
56 S. Ct. 289, 1935 U.S. LEXIS 580, 296 U.S. 344 (1935)
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Rule of Law:
A trust is taxable as a corporation (an "association") under federal income tax law if it possesses sufficient corporate attributes, including associates, an objective to carry on business and divide gains, centralized management, continuity, free transferability of interests, and limited liability, regardless of the degree of control exercised by the beneficiaries.
Facts:
- In 1921, petitioners (trustees of an express trust) created a declaration of trust for real estate in Los Angeles, to be designated in their collective capacity as "Western Avenue Golf Club."
- The trust authorized trustees to purchase, encumber, sell, lease, and operate lands; construct and operate golf courses and clubhouses; receive rents, profits, and income; make loans and investments; make regulations; and generally manage the trust estate as if they were its absolute owners.
- The declaration specified that trustees were without power to bind beneficiaries personally, and all persons dealing with trustees were required to look for payment or indemnity solely to the trust property.
- Beneficial interests were to be evidenced solely by transferable certificates for shares, divided into 2,000 preferred shares ($100 par) and 2,000 common shares (no par value), with defined rights.
- Trustees might convene shareholders for reports or recommendations, but shareholders' votes were to be advisory only, not controlling.
- The trust was designed to continue for 25 years unless sooner terminated by the trustees, and the death of a trustee or beneficiary would not end the trust.
- During 1921-1923, the trustees sold beneficial interests, plotted 42 acres into lots (mostly installment sales), constructed a golf course and clubhouse, and then conveyed this developed property to Western Avenue Golf Club, Inc., a California corporation, in exchange for its stock.
- After January 12, 1924, petitioners' activities were confined to collecting installment payments, interest, and fees; executing conveyances; receiving dividends from the incorporated club; and distributing moneys to holders of beneficial interests.
Procedural Posture:
- The Commissioner of Internal Revenue ruled that the trust was an "association" and imposed income taxes for the years 1924 to 1926.
- Petitioners contested this classification, arguing the trust was illegally treated as an "association."
- The Board of Tax Appeals sustained the Commissioner's ruling, classifying the trust as an "association."
- The Circuit Court of Appeals affirmed the decision of the Board of Tax Appeals.
- The Supreme Court of the United States granted certiorari due to a conflict of decisions regarding the distinction between an "association" and a "pure trust."
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Issue:
Does a trust, organized for the purpose of developing and operating real estate, with transferable shares and centralized management, constitute an "association" taxable as a corporation under the Revenue Acts of 1924 and 1926, even if its beneficiaries do not control the trustees?
Opinions:
Majority - Mr. Chief Justice Hughes
Yes, a trust organized for the purpose of developing and operating real estate, with transferable shares and centralized management, constitutes an "association" taxable as a corporation under the Revenue Acts of 1924 and 1926, regardless of beneficiary control. The Court reasoned that the statutory term "association" implies resemblance to corporations, not identity, and clarified that the degree of beneficiary control is not the decisive test for classification as an "association" for tax purposes, as established in Hecht v. Malley. Instead, the focus is on whether the trust is created for the "transaction of business" by "associates" in a quasi-corporate form, sharing gains, which distinguishes "business trusts" from ordinary trusts that merely hold and conserve property. Key corporate attributes indicating an "association" include: associates (persons voluntarily uniting for a common enterprise for profit), an objective to carry on business and divide gains, centralized management by trustees acting like corporate directors, continuity unaffected by death or transfer of interests, free transferability of beneficial interests, and limited liability of participants. Applying these principles, the Court found that the Western Avenue Golf Club trust was created for the business purpose of developing land, constructing facilities, and conducting related activities, with provisions for transferable shares, centralized control, continuity, and limited liability, making it analogous to a corporate organization. The fact that many sales occurred before the tax years in question, or that property was later conveyed to a corporation, did not alter its fundamental character as an organization for profit. The Court also rejected the petitioners' argument that Section 704(a) of the Revenue Act of 1928 retroactively exempted them, as the relevant Treasury Regulations had already been amended to reflect the Hecht v. Malley decision by the time their 1924 tax return was due.
Analysis:
This case is a foundational decision clarifying the distinction between trusts taxable as "associations" (corporations) and "pure trusts" for federal income tax purposes. It decisively shifted the focus from the "beneficiary control" test, which had led to considerable litigation and uncertainty, to a functional approach emphasizing the structural and operational resemblance of a trust to a corporation. The Morrissey test, with its enumerated corporate attributes, provided a clear framework for entity classification, significantly influencing the design and tax treatment of various business organizations, including modern real estate investment trusts (REITs) and other investment vehicles. The principles established here remain central to current Treasury Regulations governing how business entities are classified for federal tax purposes.
