income from any source made it liable for the tax, but it may now be in receipt of net income without being liable for the tax if the credits to which it is entitled equal or exceed such net income. Thus, a corporation may be in receipt of net income not in excess of $2,000 and be entitled to a credit of $2,000 against such net income for the purpose of the income tax, as a result of which it will be in receipt of net income without being liable for the tax. Doing business is not a necessary element of taxability.10 The tax is an income tax and not an excise tax.11 Certain special provisions of the law applicable only to insurance companies are discussed in another chapter.12 Definitions. The tax is imposed on every corporation, domestic or foreign. The word "corporation" is used in this chapter as defined in the present law,13 and includes associations, joint-stock companies, and insurance companies. As used in the regulations issued under the 1916 Law, the term "corporation" was construed to include all corporations, joint-stock companies and associations, and all insurance companies coming within the terms of the law as well as all business trusts organized or created for the purpose of engaging in commercial or industrial enterprises, the capital of which was evidenced by certificates or shares of interest issued or issuable to members on the basis of which profits were distributed or distributable.14 9 Revenue Act of 1918, §§ 234 and 236. 10 The numerous cases under the 1909 Law holding certain corporations not to be taxable on the ground that they were not "doing business'' have no application to the income tax laws. 11 The tax assessed on corporations for the months of January and February, 1913, under the 1913 Law, was an excise tax and not an income tax and, therefore, applied only to corporations "doing business," but the exemptions and deductions to which a corporation was entitled were those allowed by the 1913 Law, which law did not permit the deduction of dividends. (Butterick Company v. U. S., 240 Fed. 539.) 12 See Chapter 13 on Insurance Companies. 13 Revenue Act of 1918, § 1. 14 Reg. 33 Rev., Art. 57. JOINT-STOCK COMPANIES AND ASSOCIATIONS.15 There seems to be no constitutional or legal objection to including joint-stock companies in the same category with corporations.16 A joint-stock company organized pursuant to the New York Joint-Stock Association Law was held, under the 1909 Law, to be practically a "corporation," 15 The 1909 Law taxed "Every corporation, joint-stock company or association, organized 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 of any State or Ter. ritory of the United States or under the Acts of Congress applicable to Alaska or the District of Columbia, or now or hereafter organized under the laws of any foreign country and engaged in business in any State of Territory of the United States or in Alaska or in the District of Columbia."' (Act of August 5, 1909, § 38.) The 1913 Law taxed "Every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how created or organized, not including partnerships.'' (Act of October 3, 1913, § G (a)). The 1916 Law taxed "Every corporation, joint-stock company or association, or insurance company organized in the United States, no matter how created or organized but not including partnerships. (Revenue Act of 1916, § 10 (a)). The 1918 Law taxes every corporation and defines the term "corporation" to include "associations, joint-stock companies, and insurance companies." (Revenue Act of 1918, § 1, 230.) It will be noted that the phrase "no matter how created or organized'' used in both the 1913 and 1916 Laws is omitted from the definition of corporation contained in the 1918 Law. On the other hand, the phrase "joint-stock company or association" (between commas) has been changed to "associations, joint-stock companies." The purpose of this transposition is to separate the word "associations'' from any limitation imposed by conjunction with the word "joint-stock" and to use it to cover organizations which cannot be included within the terms "corporations, ""joint-stock companies," or insurance companies." The phrase "no matter how created or organized'' seems to have been aimed to include organizations not "organized under the laws of the United States or of any state which were held not liable to tax under the 1909 Law, in view of the language of that Act. See Eliot v. Freeman, 220 U. S. 178; T. D. 2418; Reg. 38 Rev., Art. 2, General Instructions 3; see also Chapter 46 on Capital Stock Tax. 66 * * 16 As to including such organizations in the provisions applicable to corporations, see Spreckels Sugar Refining Co. v. McClain, 192 U. S. 397; Flint v. Stone-Tracy Co., 220 U. S. 107. despite the absence of the important corporate attribute of limited liability, and was held taxable as such.17 It was held under the 1913 Law that an association formed as a partnership under the laws of Hawaii and having as its members a number of corporations was not a corporation. In the association involved in this case there were no special partners nor was there limited liability. The partnership arrangement lacked the element of changeability of membership or transferability of shares, an element often used as a determining criterion as between ordinary partnerships and joint-stock companies. In a jointstock company the members have no right to decide what new members shall be admitted to the firm; on the other hand, such a right is an inherent quality of the ordinary partnership.18 By regulation issued under the 1918 Law, it is provided that the terms "joint-stock companies" and "associations" include associations, common-law trusts, or organizations by whatever name known which carry on or do business in an organized capacity, whether created under and pursuant to State laws, trust agreements, declaration of trusts, or otherwise, the net income of which if any, was distributed or distributable among the members or 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.19 "SYNDICATES" ARE NOT CORPORATIONS. Where a block of securities are purchased in joint account by several corporations, partnerships or individuals for the purpose of disposing of them to the public through the syndicate managers, the only obligation of the members of the syndicate being to take and pay for the portion of the securities not disposed of, such temporary combinations of business interests are neither corporations, joint-stock companies or 17 Roberts v. Anderson, 226 Fed. 7. 18 Haiku Sugar Co. v. Johnstone, 249 Fed. 103; 19 Reg. 45, Art. 1502; Reg. 33 Rev., Art. 58. Art. 79. Reg. 45, Art. 1503. associations, nor partnerships, within the meaning of the income tax law and the profits of the syndicate are not taxable in the hands of the syndicate. The several members pay the tax on their respective shares of the profit of the transaction.20 TRUSTS TAXABLE AS ASSOCIATIONS. In the case under the 1916 Law of a trust created to hold certain land and to dispose of the same and distribute the proceeds to the beneficiaries, the title stood in the names of the trustees who received and distributed moneys, and transacted all of the business connected with the management and control of the trust property. The pro-rata interests of the beneficiaries were represented by beneficial certificates issued to them by the trustees. These certificates could be transferred if the transferee executed and became a party to the original declaration of trust and articles of agreement. The purpose of the trust was to dispose of the land from time to time and pay the net proceeds over to the beneficiaries and the trustees had no power to carry on any other business. It was held that this trust partook of the character of an association and was subject to the tax as an entity.21 In the case of a common-law trust created in Massachusetts before the passage of the 1913 Law, authorizing the trustees to collect the income from real estate and shares of stock in a Massachusetts corporation, the legal title of which real estate and stock was vested in the trustees, and to pay over to the beneficiaries such portion of the income received as the trustees might in their discretion determine to be fairly distributable net income, the beneficiaries being given no right to compel the trustees to pay over any sum whatever, it was held that the trustees, though not subject to taxation as partners, were an association, as their power resembled the power of directors of a corporation, and as the income of the trust could not be deemed income to the 20 Letter from Treasury Department dated February 25, 1916. 21 Letter from Treasury Department dated March 14, 1917. beneficiaries until received by them.22 Where, however, the interest of each beneficiary in the income of trust property, as received, belongs to him as his separate, individual property, and the trustee is required to make prompt distribution of it and is not responsible for the operation of the property from which it is derived, the trustee and cestuis que trust do not constitute an association.23 PRIVATE BANKS. A partnership bank conducted like a corporation and so organized that the interests of its mem 22 Crocker v. Malley, 250 Fed. 817. This case is No. 649 on the docket of the United States Supreme Court, a petition for a writ of certiorari having been granted on November 4, 1918. In the opinion of the Circuit Court of Appeals it was said in part: "However important it may be to distinguish between a trust under which there is no partnership relation among the beneficiaries, and an association under which such relation exists, for the purposes of systems of taxation such as that of Massachusetts (Williams v. Milton, 215 Mass. 1, 102 N. E. 355), or for the purposes of statutes such as that construed in Smith v. Anderson, 50 L. J. Ch. 39, it does not seem to us that the distinction so made necessarily excludes an organization like this from the general class of organizations to which the terms voluntary association' or 'association' may properly be applied. The holders of the assignable certificates representing the different beneficial interests in this 'trust' may certainly be described, without using language in any extraordinary or unusual sense, as associated together for their common benefit or profit. Their individual interests in the trust property are combined for the purposes of a joint business venture managed for the common benefit of all. The trust declaration in effect associates them for the purposes of allowing extra compensation to the trustees, of filling vacancies in the office of trustee, or of modifying the terms of the declaration itself, when it requires for those purposes written assent from a 'majority in amount' or a 'majority in interest.' Believing, in view of the entire scheme for taxation of incomes as established by this statute, that the legislative intent as to incomes such as these plaintiffs have received was to treat them as arising or accruing to the trustees collectively, rather than to the individual beneficiaries for whose ultimate benefit they were received, we are obliged to hold that the taxes for the years here in question were lawfully assessed and collected, and that the District Court erred in its decision to the contrary." 23 Reg. 45, Art. 1504. |