Morrissey v. Commissioner

Background

Trustees created a declaration of trust in 1921 to develop a Los Angeles tract and to operate it as “Western Avenue Golf Club.” The trust issued transferable certificates: preferred shares (2,000 at $100 par) and 2,000 common shares, kept share ledgers, and gave trustees broad powers to buy, sell, improve, lease and operate property. From 1921–1923 lots were plotted and sold, improvements were built, and in 1923 remaining property was conveyed to a corporation for its stock; the trustees then leased and operated the golf course until January 12, 1924. By December 31, 1923 there were 3,016 beneficial interests held by 920 people, falling to 2,172 interests held by 275 people by the end of 1926; trustees held about 16–29%.

Reasoning

The Court addressed whether this arrangement was a mere trust or an “association” taxable like a corporation. Looking at the tax laws and prior decisions, the Court explained that the statutory term “corporation” included associations, and that trusts created to carry on business enterprises can be treated as associations. The Court relied on earlier rulings and Treasury regulations that, after the Hecht decision, treated operating business trusts as associations regardless of how much control beneficiaries exercised. Because the trust was organized to develop and sell property, issued transferable interests, provided centralized and continuous management, and limited personal liability, the Court found it analogous to a corporate organization and therefore an association.

Real world impact

The Court affirmed that the trust’s income for 1924–1926 was taxable as an association, rejected the trustees’ retroactive-exemption argument, and lefture the tax consequences tied to the trust instrument’s business character rather than beneficiary control.