80 F. Supp. 781 | D. Mass. | 1948
This is a suit for the recovery of taxes assessed against and collected from the plaintiffs for the years 1940 to 1945, inclusive, under the Federal Unemployment Tax Act, 26 U.S.C.A. §§ 1600-1611, Title IX of the Social Security Act, as amended, c. 531, 49 Stat. 639-645, 42 U.S.C.A. § 1101 et seq., and for the period April 1, 1942 to March 31, 1946 under the Federal Insurance Contributions Act, 26 U.S.C.A. §§ 1400-1403, 1410-1411, 1420-1432, Title VIII of the Social Security Act, as amended, c. 531, 49 Stat. 636-639, 42 U.S.C.A. § 1001 et seq.,
The individual plaintiffs are now, and during the period of time material to this case, have been trustees of the Beacon Chambers Trust (hereinafter called the Trust) under an agreement and declaration of trust dated March 20, 1899. The trustees use the collective designation “Beacon Chambers Trust” and under such name execute the powers and perform the duties conferred upon and required of them collectively by the said agreement.
The property of the trust consists principally of real estate located in Boston, Massachusetts. There is a group of several buildings, parts of which are rented as stores and apartments to various tenants, and in part of which the trust operates a 360-room lodging house for men.
Under the agreement, the trustees are charged with the duty of using the money coming to them as trustees for the purchase and improvement of the real estate and the purchase of furniture and fixtures therefor. They are given sole ownership, control, power of sale, leasing, and letting all property at any time held by them; power to exchange trust property, or to purchase adjoining real estate; power to invest funds in their hands in personal property; to pay necessary expenses; to employ officers, brokers, engineers, architects and agents as they think fit, fix their compensation and define their duties; power to borrow money up to $50,000 to meet temporary exigencies and to the extent of $200,000 by mortgage for the purpose of alteration of the trust property and construction of new buildings.
The beneficial interest in the trust is represented by shares, both common and preferred. These shares are transferable, and shareholders are not to be personally liable on contracts made by the trustees. There is to be an annual meeting of the shareholders with provision for the calling of special meetings. At any meeting the shareholders by vote of three-fourths in value of the shares may fill vacancies among the trustees, remove any or all trustees, direct the sale of the property, alter or terminate the trust or substitute a new trust therefor. From the income of the trust the trustees are to pay cumulative dividends on the preferred shares, set aside, after paying dividends on the preferred and common shares, a contingent fund out of surplus as they think best and divide the remainder of the income among holders of the common shares at such times as they deem best.
The trustees, by the terms of the agreement, receive as compensation for their services 5% of the gross annual income of the trust. The taxes here in question were assessed and paid on the sums received during the tax years in question as a result of a ruling by the Commissioner of Internal Revenue that the commissions of the trustees were taxable wages within the meaning of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act.
The trustees, who are concerned also in other trusts and business ventures, devote only a small part of their time to the affairs of this trust. They engage 30 or 40 employees, with a manager or superintendent who performs the detailed, day to day duties of managing the property. The trustees, who are brothers, and occupy adjoining business offices, meet informally from time to time, usually about once a month, to discuss trust affairs. All important trust matters are discussed, and agreement as to the handling of them is reached a* such meetings.
Caleb Loring, who is also holder of over 31% of the shares of the trust, functions as the active trustee. He spends about 25% of the total time he devotes to trust affairs in working by himself in the handling of trust matters. This portion of his work consists in visiting the property for an hour about once a week, and in consultation with the superintendent during these visits, or during visits by the superintendent to his office.
The other trustee, Augustus P. Loring, Jr., devotes little time to trust affairs outside of the time spent in conferences with his co-trustee and in the study of financial reports. About 5% of the total time he devotes to trust matters is occupied in visits to the property and conferences at his office with the superintendent on occasions when
On the basis of this unequal division of labor, the compensation of the trustees is divided on the basis of % to Caleb Loring and Yt to Augustus Loring. Part of the compensation thus received by each of them is paid' over by them to the Loring Coolidge Service Corporation, which renders bookkeeping services to the trust.
The trustees testified and I find it to be a fact that at all times when the trustees acted individually, they acted as and in their capacity as trustees; in accordance with their duties as trustees; and according to the customary practice of trustees in the kind of trust involved in this case.
The question involved here is whether the trustees of the Beacon Chambers Trust are employees within the meaning of the Social Security Act. Since the tax under the Social Security Act is one levied on the employer-employee relationship, the question resolves itself into one of whether that relationship can be found to exist here.
The pertinent definitions in the Internal Revenue Code, 26 U.S.C.A. §§ 1426(d) and 1607(i), as amended by Sec. 1(a) of P.L. 642, 80th Cong.
There is no single test which will determine in all cases the existence of such a relationship, and each case must rest on its own facts. United States v. Wholesale Oil Co., Inc., 10 Cir., 154 F.2d 745. But the most important factor has been the existence of a right in some one else, either an individual or a collective entity, to control the employee in the performance of his work “not only as to the result to be accomplished by the work but also as to the details and means by which that result is acr complished.” Treasury Regulations 107, Sec. 403.204. This test is appropriate here, where the issue is indeed whether there does exist any entity which can be said to control or have the right to control the trustees in the performance of their duties.
It is the contention of the plaintiffs that they are subject to no such control, that they were under no duty to take orders from any one who could conceivably stand to them in the relation of an employer.
The government has not contended that the elements of ultimate control which may reside in the shareholders of this trust are sufficient to distinguish this case substantially from United States v. Griswold, 1 Cir., 124 F.2d 599, where it was held that the trustees were not employees of the shareholders. But it does contend that the activities of the trustees should be divided into two classes. In one class it contends are those activities of the trustees acting as a unit in the conferences which they held on trust business, and in the performance of which the trustees, like corporate directors in their attendance at and participation in board meetings, are not employees and the wages the trustees received as compensation for their services are not taxable. In the other class are the services which either of the trustees performs as an individual without the collaboration of his co-trustees and which might be delegated to others. In performing these latter services he is to be regarded as an employee subject to the control of the trustees acting collectively as a unit. Cf. United States v. Dunbar, 9 Cir., 154 F.2d 889. The .contention is that a trustee acting individually is the counterpart of a corporate officer in an organization substantially similar to a corporation (Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263) and so can be an employee just as can the corporate officer who is also a director of the corporation.
This involves separating into two distinct categories duties performed by one
The proposal by the government to regard the individual trustee as being subject to the control of the trustees as a unit become no more than an abstract and impracticable concept when viewed in the light of the usual rule which requires the concurrence of all the trustees in the exercise of their powers. 2 Scott, Trusts, Sec. 194; Downey Co. v. Whistler, 284 Mass. 461, 188 N.E. 243. There can be no real right to control a trustee who by his own dissent can invalidate any order given to him. And such right to control involves a corresponding duty of obedience, which would involve a conflict whenever the individual trustee believed that by obeying he would be himself performing an improper action, or at least make himself liable by acquiescing in or cooperating with improper action by a co-trustee. 2 Scott, Trusts, Sec. 224.
There is nothing in the case of Morrissey v. Commissioner, supra, and its companion cases that points to a different solution. They merely determine that for the purpose of income, capital stock, and similar taxes, where the substantial economic nature of the entity governs the tax classification into which it falls, a business trust such as the one in this case, is in so- many ways similar to a corporation that it is for the purposes of these taxes to be classed as an association, rather than placed in the same category with the traditional trust for the collection and distribution of income.
Assuming, as the government contends, that directors of a corporation (see United States v. Dunbar, supra) may
The conclusion is that the trustees of the Beacon Chambers Trust were not employees of the Beacon Chambers Trust during the taxable years in question and the commissions received by the trustees were not taxable wages within the meaning of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act.
Judgment is to be entered for the plaintiffs with interest and costs.
Section 1426 (d). “Employee. — The term ‘employee’ includes an officer of a corporation, but such term does not include (1) any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an inde* pendent contractor or (2) any individual (except an officer of a corporation) who is not an employee under such common-law rules.”