Opinion
Docket No. 108797.
1943-04-13
HUGH MACRAE LAND TRUST, R. M. SHEPPARD, JULIAN W. MORTON, AND R. O. CROCKETT, TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
R. O. Crockett, Esq., for the petitioners. L. W. Creason, Esq., for the respondent.
ASSOCIATION TAXABLE AS A CORPORATION— TRUST.— A trust created to execute a lease on a tract of coal deposit land and pay royalties to a group of beneficial owners was not taxable as a corporation. R. O. Crockett, Esq., for the petitioners. L. W. Creason, Esq., for the respondent.
Respondent originally determined deficiencies in income and excess profits taxes for the year 1937 in the respective amounts of $4,327.07 and $4,326.52. Respondent has conceded error in one determination and now agrees that the deficiencies are not greater than $3,566.73 and $282.34. The only issue involves the question whether the trust is an association taxable as a corporation under section 1001 of the Revenue Act of 1936.
Petitioners filed a fiduciary income tax return for 1937 with the collector for the district of North Carolina.
FINDINGS OF FACT.
Sometimes prior to 1934 a tract of land located in Buchanan County, Virginia, was held as follows: 6,008.5 acres were held by Hugh MacRae, trustee for various persons, and 808.5 acres were held by several individuals. The tract of land was owned jointly by three individuals prior to 1887. During subsequent years several persons acquired interests in the tract through gifts and inheritance, and in 1934 about 35 persons, mostly heirs at law, owned interests in the tract of land. The owners of the interests in this property, with the exception of one who lived in China, lived in various sections of the eastern part of the United States. The property is located in mountains. Its only substantial value is in the coal which underlies it. Prior to the year 1936 the only income derived from the property was from the sale of timber.
In 1934 Hugh MacRae, representing all of the owners of the various interests in the 6,817 acres of land, entered into negotiations with the Page-Pocahontas Coal Corporation, hereinafter called Page, under the terms of which Page would acquire the right to mine coal. Page, as a condition precedent to the acceptance of a lease, required that the parties in interest execute a trust agreement whereby trustees would be appointed to receive the royalties accruing from such lease. On August 30, 1934, Hugh MacRae, trustee, and others, granted to Page an option to lease the mining rights to the coal under the 6,817 acres of land. On November 19, 1934, Page duly exercised the option.
As of June 17, 1935, a deed and declaration of trust was executed by and between all of the owners of the interests in the above mentioned property and Nelson MacRae, Julian W. Morton, and R. O. Crockett, as trustees. The real estate and interests in minerals and timber were conveyed to the trustees, subject to the terms of the trust. The action was taken pursuant to the requirement of Page. (Nelson MacRae died subsequent to the hearing in this proceeding and R. M. Sheppard was appointed successor trustee.
The trust instrument provided that trust certificates were to be issued as evidence of the interests of the grantors under the trust and in the royalties which might accrue from the properties. A total of 6,817 shares, represented by such trust certificates, or one share for each acre of property, were to be issued to the owners of the beneficial interests. Such certificates were to be transferable on the transfer books kept by the trustees as a record of the ownership of the certificates.
The trustees were empowered to sell or lease the property and to receive the proceeds and accruing royalties or moneys, except, however, that the trustees could not sell any of the trust property without first obtaining the permission of the holders of at least 4,546 shares of certificates of interest. It was also provided that the trustees ‘shall not engage themselves in operating, mining, digging or removing such coal and minerals.‘ The trustees were empowered to do those things deemed necessary to properly execute the trust, and to defend and protect the trust and its property.
The trustees were required to keep accurate books of account and to make annual settlements on their accounts before the Commissioner of Accounts in Buchanan County, under the law of Virginia applicable to trustees. Any moneys which the trustees might receive were to be applied as follows: (1) To the payment of taxes and levies upon the property; (2) to discharge the expenses of executing the trust, including compensation, to the trustees in the amount of 5 percent of such moneys; (3) to pay all debts, costs, fees, charges, and expenses incurred in the discharge of the trust; and (4) to distribute the residue of such moneys pro rata to the holders of the trust certificates.
In the event of the incapacity or resignation of any trustee, the remaining trustees could appoint a successor trustee.
The holders of the trust certificates were required to pay the taxes and assessments upon the trust real estate and the costs, fees, and expenses incident to the preparation and execution of the trust in proportion to their interest in the trust, provided that such charges had not been previously paid by the trustees out of funds in their hands.
All of the owners of the beneficial interests under the trust ratified the giving of the option for a lease to Page. The trustees were directed to execute and deliver a lease to Page pursuant to the opinion.
Trust certificates representing 6,817 shares were issued to the individual grantors of the trust in accordance with their respective interests in the tract of land. Nelson MacRae kept the certificate transfer book and a combination check register and journal wherein all receipts and disbursements of the trust were recorded. As the trustees did not have any office, the trust books were kept by Nelson MacRae in his private desk in the office of Hugh MacRae & Co., where he was employed.
On January 14, 1936, the trustees leased the coal and mineral rights under the trust lands to Page pursuant to the option. The lease was for a period of 10 years with automatic renewals of 40 years in case all the merchantable coal was not removed. The lease was to terminate when all the workable and merchantable coal had been mined. The lessee was to pay stated royalties for each ton of coal mined to the trustees. Such royalties were to be paid after the end of each quarter of the year. The lessee was to deduct $1,500 a year from royalties to apply on state and county taxes on coal and on lands leased, and, beginning with the operating period, was to pay the residue taxes due during the life of the lease. Also, the lessee was to pay taxes on all improvements placed on the property.
In 1936 the trustees conveyed a right of way to the Norfolk & Western Railway Co. for its railroad to the present tipple of the lessee so that the coal in the leased premises might be removed. The lease contemplated that Norfolk would construct a line over the property to carry off the coal mined. The trustees received the sum of $828.50 for this right of way. Also, in 1936, the trustees conveyed a right of way for electric power lines to the Appalachian Electric Power Co. to carry power to the coal mines, and they received the sum of $1,265.50 therefor.
Page mined 12,479 tons of coal in 1936 and 298,623 tons in 1937, total, 311,102 tons. The royalty per ton paid was 13 cents. The trustees received $1,622.27 in 1936 and $38,820.99 in 1937 (which included $1,500 of royalties retained by Page to pay taxes, as the lease prescribed), total, $40,443.26. The total received from royalties and the sales of the rights of way was distributed by the trustees as follows: $1,952 was paid for 1935 taxes on the trust real estate; $650 was paid to a real estate agent, W. L. Dennis, for his services in connection with making the lease; $592,92 was paid to R. O. Crockett, attorney, for expenses incurred; and $1,000 was paid him for services rendered in the preparation and execution of the option for the lease, the trust instrument, and the lease; $600 was paid to H. A. Kiser, engineer, for services for one year; $2.20 was paid for a check book; $185.81 was paid to the trustees in compensation for their services as allowed by the trust instrument; $35,789.25 was distributed to the holders of certificates of interest. At the end of 1937 the trustees had on hand a balance of $265.10.
The trust does not have an office, officers, or bylaws. There has never been a meeting of certificate holders. After making the lease and selling the rights of way nothing remained for the trustees to do except to receive royalties and distribute them to the beneficiaries of the trust. Royalties from the mining operations are received quarterly and distributions thereof are made promptly to the beneficiaries. In 1937 such distributions were made on the same date the royalties were received in some instances and within ten days in others. During each year the trustees pay a mining engineer, Kiser, to check on the actual tonnage of coal mined and to compute from that the amounts of royalties due to the trust. Kiser makes this check at least four times a year. The trustees are entitled to receive 5 percent of the trust receipts for trust expenses and their commission. The fee for Kiser's services and the trustees' commission are the chief, if not the only, expenses of administering the trust. The trust has no employees.
During 1936 and 1937 a few certificates of interest were transferred at the request of the holders to their children and to R. O. Crockett.
Petitioners filed a capital stock tax return for 1937 under protest.
OPINION.
HARRON, Judge:
The question is whether the trust is an association taxable as a corporation. Each party contends that the criteria laid down by Morrissey v. Commissioner, 296 U.S. 344,