Eliot v. Freeman

Background

Two Massachusetts trusts — one called the Cushing Real Estate Trust and another formed to hold and lease a department store building — held and managed Boston property and issued transferable $100 shares to investors. Trustees had full control of management, could sell property, and paid dividends from income. Shareholders had no legal title and could not demand partition. Both trusts earned net income over $5,000 and continued for certain lives in being plus twenty years. The federal Corporation Tax Law imposed a tax on corporations and joint stock associations “organized under the laws of” a State.

Reasoning

The Court addressed whether these trusts were “organized under” Massachusetts law so as to fall under the federal corporation tax. The opinion explains the statute targets organizations that derive their powers from statutory law — corporations or joint stock companies created under state statute. The Court found these real-estate trusts were not created by or dependent on statutory corporate law, did not have perpetual succession, and comparable statutory joint stock forms did not exist under Massachusetts law. Concluding Congress meant to tax only those organized under statute, the Court held these trusts are not within the act and reversed the lower-court decrees.

Real world impact

As decided here, these specific trusts are not subject to the federal corporation tax under this statute, and the cases are sent back to the lower court with instructions to overrule demurrers and proceed consistent with this opinion. The ruling narrows which business forms the statute reaches under its terms.