Hecht v. Malley

Background

Trustees of three Massachusetts "trusts" — a family real estate trust (Hecht), a commercial Haymarket Trust, and the Crocker (formerly Wachusett) business trust — were assessed federal excise taxes based on the value of capital stock under the Revenue Acts of 1916 and 1918. They paid under protest, sued for refunds, won in the federal district court, but the Circuit Court of Appeals reversed. The question before the Court was whether these unincorporated but businesslike trusts count as "associations" subject to the excise tax.

Reasoning

The Court examined the two statutes and prior decisions. It held the 1916 law imposed the excise only on organizations "organized under" statutory law, so these trusts — not created by statute — were outside that law. But the 1918 law defined corporations and associations more broadly and extended the excise to every association "created or organized" in the United States. Applying that clearer, broader language, the Court found these Massachusetts trusts to be associations engaged in business and therefore taxable under the 1918 Act. The Court also accepted measuring "capital stock" by the net value of an association’s property when no fixed share capital exists, and it ruled the 1918 Act’s retroactive coverage prevents recovery of taxes for the year ending June 30, 1919.

Real world impact

Practically, trustees of similar businesslike Massachusetts trusts can be required to pay federal excise taxes under the 1918 law. Taxes measured by business realities, not bookkeeping labels, are allowed. The decision partly favors taxpayers for some earlier periods under 1916 but upholds broader federal taxing power under 1918.