April 12, 1917, have both general and limited partners and therefore do not come within the scope of Article 1506.

RULINGS. A partnership association or limited partnership organized under sections 8059-8078 of the Ohio Code is an association and not a partnership, within the meaning of section 1 of the Revenue Act of 1918, and is taxable as a corporation. (C. B. 2, 11; O. D. 444.)

Virginia partnership associations or limited partnerships formed under sections 2878 to 2886, inclusive, of the Virginia Code of 1904, are to be treated as corporations or joint-stock companies for income tax purposes.

The status of Virginia limited partnerships formed under the act of March 14, 1918 (acts of Assembly of Virginia, 1918), must be determined in each case by consideration of the certificate of partnership and all pertinent facts. (C. B. 1,9; O. D. 334.)

5

Partnerships composed of corporations.-As a general rule, a corporation cannot legally enter into a partnership. In a few places, as in Hawaii," this rule has been changed by statute. And for income tax purposes, it has been held that a partnership composed of corporations organized under the law of Hawaii should be classed as a partnership rather than as a corporation.7

Corporations

"Corporation" defined.-The law (section 2) merely states that "the term 'corporation' includes associations, joint-stock companies and insurance companies." The regulations define jointstock companies and associations as follows:

REGULATION. Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the shareholders on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. A corporation which has ceased to exist in contemplation of law but continues its business in quasi corporate form is an association or corporation within the meaning of section 2. (Art. 1502.)

'P. L. 37; Laws of Pennsylvania, 1917, page 55.

20 R. C. L. 817. See also C. B. 3, 18; Sol. Op. 36, and C. B. 5, 16;

A. R. M. 139.

Revised laws of Hawaii, 1905, section 2631. 'Haiku Sugar Co. v. Johnstone, 249 Fed. 103.

"Domestic corporation" distinguished from foreign.-The test of a domestic corporation, for the purpose of the Revenue Act, is the same as that applied to a partnership; that is it must be organized in the United States, which include only the states, the District of Columbia, and the territories of Alaska and Hawaii. Corporations created outside these limits are foreign corporations.8

The Treasury has held, however, that a corporation receiving a charter from the United States Court for China, and holding itself out to be a corporation under the laws of the United States, will, for tax purposes, be considered a domestic corporation. Corporations organized under the China Trade Act, 1922, are domestic corporations for income tax purposes (see page 124).

Corporations distinguished from other organizations.

ASSOCIATION DISTINGUISHED FROM PARTNERSHIP.

REGULATION. An organization, the membership interests in which are transferable and the business of which is conducted by trustees or directors and officers without the active participation of all the members as such, is an association and not a partnership. The term "partnership" means only ordinary partnerships, and organizations which have a fixed capital stock divided into shares represented by certificates transferable only upon the books of the company, which manage their affairs by a board of directors or executive officers, and which conduct their business in the general form and mode of corporations are joint-stock companies or associations within the meaning of the statute even though under State law such organizations are technically partnerships. (Art. 1503.)'

When a partnership exists under state laws merely calling it a corporation by the Treasury will not make it a corporation. A survey of the court and Tax Board decisions will indicate how far the Treasury can succeed.

It appears that the Treasury now intends to define the partnership more narrowly than in the past, not only by insisting upon the active participation of all the members but also by including all cases where interests are transferable, even though the consent of all the members to the transfer is required. Since, up to this time, emphasis has been placed upon the conditions which hedge about the right of

* Section 2 (3) and (4), and Art. 1509. See page 5.

[Former Procedure] This regulation as it appeared before its amendment in 1926 insisted that to qualify as an association, it was necessary that membership interests be "transferable without the consent of all the members." The last sentence in the regulation is new.

transfer, the rulings issued under the earlier regulations furnish little guidance.10

An association organized under Texas law as an unincorporated joint stock association was held taxable as a corporation because the shares were transferable, because the association was not bound by the acts of individual members but only by elected trustees, and because the members were not responsible for the debts of the association.11 The plaintiff contended that such an organization had been held to be a partnership under the laws of Texas and of a majority of the states.

DECISION. The term partnership as used in these sections obviously refers only to ordinary partnerships. Unincorporated joint-stock_associations, although technically partnerships under the law of many States, are not in common parlance referred to as such.

See also V-37-2908; G. C. M. 535.

ORGANIZATIONS WHOSE STATUS IS IRREGULAR.-The life of a corporation whose charter had expired was extended for a limited period for the purpose of winding up the affairs of the corporation. In the absence of tangible evidence that the business was carried on as a partnership during the winding-up period, it was held that the organization was taxable as a corporation. (C. B. II-2, 1; A. R. R. 2773.)

The charter of an Oklahoma corporation was canceled for noncompliance with the law. The business was continued by two individuals who agreed to share equally in profits and losses. Neither the corporate form nor organization was retained. It was held that the company was taxable as a partnership. (C. B. III-1, 234; S. M. 1812.)

The foregoing rule was followed by the Board in Hub Shoe Co.'s Appeal [2 B. T. A. 836 (A)], overruling the Commissioner who held that the business carried on after the taxpayer's charter had expired nevertheless was carried on as a corporation until notice of dissolution was prepared.

A corporation's charter expired. Its property was all conveyed Later its corporate character was resumed by a law

to trustees.

10 C. B. 5, 9; O. D. 1083. C. B. I-2, 1; I. T. 1501. C. B. III-2, 2; S. M. 2597. C. B. I-1, 1; I. T. 1150. C. B. II-2, 3; I. T. 1770. C. B. II-2, 2; I. T. 1769. C. B. III-2, 1; S. M. 1724.

Burke-Waggoner Oil Assn. v. Hopkins, 296 Fed. 492; affirmed, 269

U. S. 110.

validating its existence. Held that it did not lose its separate identity as a corporation. (C. B. II-2, 210; I. T. 1814.)

A business, taxed as a corporation, sought classification as a partnership on the ground that certain mandatory provisions of the statutes of Ohio governing the establishment of corporations had not been complied with. It was held to be taxable as a corporation, since it had held itself out as a corporation, since the state had never questioned its corporate existence, and since the circumstances were present which bring a de facto corporation into existence, viz., (1) a valid law which authorizes such a corporation; (2) a colorable attempt in good faith to organize under and comply with the statute; and (3) an assumption of corporate powers.12

When a corporation made returns as such and later made amended returns showing no income, it was held that it would have to stand by its original action. (McDonald Coal Co. v. Heiner, 9 F. (2d)

992.) The court said:

DECISION. They ought not in honesty and good faith to be permitted to represent themselves to be a corporation, file corporate tax returns, file copies of minutes of corporate action, certify the sale and transfer of partnership property to the corporation, and then deny the incorporation when it suits the convenience of the incorporators.

In Suburban Investment Co.'s Appeal [1 B. T. A. 1121 (A)], the taxpayer's charter had been forfeited and cancelled. It continued in business and claimed the benefit of the net loss provision in section 204 (b) of the 1918 law. The Commissioner disallowed the claim on the ground that the corporation had no legal existence during 1918. The Board overruled the Commissioner on the ground that the State of Kansas subsequently had reinstated the taxpayer as a corporation.

SYNDICATES AND JOINT VENTURES.-The ordinary syndicates and joint ventures are held not to be associations.13 But a syndicate where "a shareholder's certificate entitles him to share in the distribution of profits during the life of the enterprise, to share in the distribution of assets upon dissolution, and to vote on questions affecting the management and control of the business," was held to be an association. (C. B. 4, 9; O. D. 896.)

MINING PARTNERSHIPS.-Mining "partnerships" in Colorado and Idaho have been held to be associations because the shares are trans

12 C. B. III-2, 4; S. R. 1123; see also C. B. IV-1, 205; S. M. 3136. 18 Art. 1507. See also C. B. I-1, 2; I. T. 1156, quoted on page 7.

ferable and because such an organization "in all its essential elements is precisely like a corporation." (C. B. 5, 9; A. R. R. 652.)

TRUSTS AS ASSOCIATIONS.-The status of trusts under the federal income and capital stock tax laws was materially changed by the decision of the U. S. Supreme Court in four cases 14 decided May 12, 1924. Although the cases in point arose in actions to recover capital stock taxes, the principles involved and the decision arrived at apply equally to income taxes under the 1918 and subsequent acts, as well as to excess profits taxes under the 1918 and 1921 laws.15

The Supreme Court based its opinion largely upon the fact that the trustees were engaged in operating a business as distinguished from merely holding property and distributing the income therefrom. The court held that organization under statute law was not necessary and that bodies having quasi-corporate organizations came within the class of associations if they were doing business. The question of control by the beneficiaries was not considered by the court as conclusive.

Basing its action upon this decision, the Treasury proceeded to divide trusts into two classes (1) holding trusts, those which merely collect and distribute income, and (2) operating trusts, those which carry on business in an organized capacity. This classification applied to all trusts whether or not of the Massachusetts type.16

Later, however, the Treasury introduced the element of control by the beneficiaries as one of the determining factors. The trustees must now not only refrain from "doing business" but must be free from control by the beneficiaries, as well. If the beneficiaries "have positive control," an association exists. Even if they have no control, the trustees must restrict their activities to the mere collection of funds and their payment, if they would preserve the status of a trust.

REGULATION. Where trustees merely hold property for the collection of the income and its distribution among the beneficiaries of the trust, and are not engaged, either by themselves or in connection with the beneficiaries in the carrying on of any business, and the beneficiaries

Hecht v. Malley; Howard v. Malley; Howard v. Casey; Crocker v. Malley, 265 U. S. 144.

16

[Former Procedure] The Treasury theretofore held that control by beneficiaries was the chief distinction. A full discussion of the Treasury's position will be found in Income Tax Procedure, 1924, pages 44-48.

16 An instructive article on the subject of Massachusetts trusts, by William W. Cook, will be found in Jour. Am. Bar Assn., December, 1923, page 763.