
    EDGAR ESTATES CORPORATION v. THE UNITED STATES
    [No. E-304.
    Decided April 16, 1928]
    
      On the Proofs
    
    
      Excise tax; sec. 1000(a), revenue act of 1918; carrying on or doing business; corporation organized for settling estate. — A corporation organized solely for the purpose of acquiring from residuary legatees the real and personal property devised and bequeathed to them and liquidating the same, and so conducting its affairs, is carrying on or doing business within the meaning of section 1000(a), revenue act of 1918, and is subject to the special excise tax thereby imposed.
    
      The Reporter's statement of the case:
    
      Mr. Blame Malian for the plaintiff. Mr. John T. Kennedy was on the brief.
    
      Mr. Madure Kelley, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. A certain Mrs. Jane E. Edgar, a citizen of the United States and a resident of the city of New Rochelle, in the State of New York, died testate on or about the 12th day of March, 1895, seized and possessed of certain real and personal estate, which she disposed of by the terms of her last will and testament duly probated and admitted to record in the surrogate’s court of Westchester County, in the State of New York.
    II. By the terms of said will Mrs. Jane E. Edgar, after making certain specific bequests and creating certain trusts, devised and bequeathed the remainder and residue of her estate, real and personal, to three trustees, to be held in trust for the benefit of her two children, and further provided that upon the death of the survivor of these said two children the said remainder and residue of her estate should be divided by her said trustees in the following manner and proportions:
    
      One-quarter to her cousin, Robert T. Emmet.
    One-quarter to her grandniece, Helen Y. 0. Emmet.
    One-quarter to the children of Newbold L. R. Edgar.
    One-quarter to the children of William Edgar.
    HI. The survivor of Mrs. Jane E. Edgar’s two children died in June, 1917, and the trustees of her estate attempted to devise plans for the distribution of the assets of the real estate among the residuary devisees and legatees, but found themselves unable to do so without recourse to partition suits, which would have been detrimental in result to the best interests of the residuary estate.
    IV. Thereupon the plaintiff corporation was organized under the laws of the State of New York on the 7th day of September, 1917, with a capitalization of sixty thousand dollars ($60,000.00), divided into six hundred (600) shares of common stock of the par value of one hundred dollars ($100.00) per share.
    Y. The certificate of incorporation stated the objects and purposes of the corporation to be:
    “ To acquire from the residuary legatees and hold all the real and personal property devised and bequeathed to said residuary legatees under the will of Jane E. Edgar, deceased, and to sell, transfer, mortgage, assign, exchange, and otherwise dispose of any and all of the real and personal property aforesaid, upon such terms as to the board of directors may seem proper, and to receive the proceeds thereof and to distribute the same among the stockholders, after payment of expenses, and to lease and rent the said real property for any term or terms whatsoever, and to receive the rents and income derived from said real and personal property, and to distribute the same, among the said stockholders alter payment of expenses. To alter, improve, reconstract, repair, and otherwise manage and maintain the said real and personal property, and generally to do and perform any and all other things which may be at any time necessary or convenient in the judgment of the board of directors, for the proper maintenance and upkeep of the said real and personal property acquired by the corporation as aforesaid.”
    YI. Upon completion of its organization the plaintiff corporation, pursuant to the provisions of its charter, acquired from the residuary devisees the following real estate:
    No. 110 East 39th Street, New York City.
    
      Corner of Mangin and Delancey Streets, New York City.
    No. 76 Greenwich Street, New York City.
    No. 68 West Street, New York City.
    No. 104 Washington Street, New York City.
    Premises known as Mount Tom, New Rochelle, New York, unimproved.
    No. 415 Pelham Road, New Rochelle, New York, improved.
    No. 407 Pelham Road, New Rochelle, New York, improved.
    VII. Having acquired the aforesaid real estate from the said residuary devisees, the plaintiff corporation held the same until sold, such sales being made on the dates following:
    March, 1919, 110 East 39th Street, which was a private residence.
    May, 1919, Mangin and Delancey Streets, which was a five-story brick tenement.
    December, 1919, 76 Greenwich Street, which consisted of a store and lofts.
    December, 1919, 68 West Street, which consisted of a store on the ground floor, the upper portion being used for lodging purposes.
    March, 1920, 104 Washington Street, which consisted of a store and lofts.
    August, 1920, Mount Tom property, unimproved.
    November, 1920, 415 Pelham Road, which was a private residence and considerable vacant land.
    April, 1922, 407 Pelham Road, which was a private residence and considerable vacant land which was sold for a golf course.
    The proceeds of said sales were distributed to the residuary devisees.
    VIII. Plaintiff corporation, in some instances, sold certain pieces of said real estate under contracts by the terms of which the entire payment was made and received in cash. These cash proceeds were immediately distributed to the parties entitled thereto.
    IX. In other instances the best terms procurable by the plaintiff corporation in its efforts to sell said real estate were part cash and balance in notes, secured by purchase-money mortgages. In transactions of this sort the cash was immediately distributed, and the plaintiff corporation held the notes where said notes, by reason of their terms, were payable in installments. These installment payments, as and when collected and received by plaintiff corporation, were distributed.
    X. From September 7, 1917, the date of its incorporation, and October 11,1917, the date of its acquisition of the real estate from the residuary devisees, as hereinbefore set forth, until April, 1922, the date of the sale of the last piece of real estate so acquired, a little over four years, the plaintiff corporation acted in strict compliance with the terms of its charter. Rents were collected and the properties were managed generally, having in view their maintenance and preservation. The prior trustees had leased the properties, with one exception, for periods from three to five years, which leases were not renewed in any case, after acquisition by the corporation, for a longer period than one year. The plaintiff did not invest or reinvest the proceeds of the sales of properties, nor buy and sell securities for profit except in the three instances, to wit:
    I. September 28, 1920, purchased $7,500.00 U. S. Victory 4%%, $7,284.17. October 2, 1920, sale, $7,500.00 U. S. Victory 43,4%, $7,344.82. Profit, $60.65.
    II. October 21, 1920, purchased $3,000.00 Cuban-American sugar 6’s, $3,04-7.50. January 4, 1921, sale, $3,000.00 Cuban-American sugar 6’s, $3,090.00. Profit, $42.50.
    III. October 21, 1920, purchased $4,000.00 Sears, Roebuck Co. 7’s, $3,975.78. October 15, 1921, sale, $4,000.00 Sears, Roebuck Co. 7’s, $4,000.00. Profit, $24.22.
    Plaintiff made only such repairs to the properties held by it as were necessary to preserve the property itself and prevent deterioration; it was operated and managed by one individual, a lawyer actively engaged in the practice of his profession in addition to his managerial and operative duties to the plaintiff corporation, which duties consumed only a small part of his whole time.
    XI. On the 30th day of September, 1918, plaintiff corpo ration, pursuant to section 3173, Revised Statutes, and othei acts of Congress made and provided, made to the Commissioner of Internal Revenue itjs return, on Official F,orm No. 707, for the year ending June 30, 1918, for special excise tax on corporations imposed by section 407, Title IY, of the revenue act of September 8, 1916. Said return showed that a fair average value of its capital stock for the preceding year was five hundred forty-three thousand seven hundred ninety-four dollars and twenty-one cents ($543,794.21), and that the tax due thereon was two hundred twenty-two dollars ($222.00). This tax was paid by plaintiff corporation on March 1, 1919. On December 22, 1919, plaintiff corporation paid the sum of three hundred /sixteen dollars ($316.00) additional capital-stock tax for the year ending June 30, 1919. Again, on February 24, 1921, plaintiff corporation paid to the collector of internal revenue capital-stock tax imposed by section 1000, Title X, revenue act of 1918, in the respective sums of five hundred and forty dollars ($540.00) and four hundred forty-nine dollars ($449.00) for the taxable years ended June 30,1920, and June 30,1921, respectively. Again, on April 29, 1922, plaintiff corporation paid its capital-stock tax for the taxable year ended June 30, 1922, in the sum of four hundred and two dollars ($402.00). The total capital-stock taxes paid by plaintiff corporation for the years 1918, 1919, 1920, 1921, and 1922 are one thousand nine hundred twenty-nine dollars ($1,929.00).
    XII. On or about August 3, 1922, plaintiff corporation, pursuant to section 3220, Revised Statutes, as amended by the revenue act of 1918, and reenacted by section 1315 of the revenue act of 1921, filed with the Treasury Department, Bureau of Internal Revenue, Official Form 843, a claim for refund of said sum of one thousand nine hundred and twenty-nine dollars ($1,929.00) alleged to have been collected in error.
    XIII. Said claim for refund was rejected by the Commissioner of Internal Revenue on May 1, 1923.
    XIV. All profits as such derived from the sale of said real e,state were returned as income for the taxable year during which the particular property was sold, and the incpme tax thereon was paid in every instance.
    The court decided that plaintiff was not entitled to recover.
   Booth, Judge,

delivered the opinion of the court:

The plaintiff contends for an exemption from corporate tax liability, which the Commissioner of Internal Revenue refused to grant. The amount involved is $1,929.00. The tax was imposed and collected by the commissioner under section 1000 of the revenue act of 1918 (40 Stat. 1126), reading as follows:

“ SbctxoN 1000. (a) That on and after July 1,1918, in lieu of the tax imposed by the first subdivision of section 407 of the revenue act of 1916 (1) every domestic corporation shall pay annually a special excise tax with respect to carrying on or doing business equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000. In estimating the value of capital stock the surplus and undivided profits shall be included; * * * (c) The taxes imposed by this section shall not apply in any year to any corporation which was not engaged in business (or in the case of a foreign corporation not engaged in business in the United States) during the preceding year ending June 30, * *

The tax was collected for the years 1918, 1919, 1920, 1921, and 1922. A refund claim was denied.

The plaintiff corporation was organized under the laws of the State of New York on September 7, 1917, with a capital stock of $60,000.00, divided into 600 shares of common stock of the par value of $100 per share. The certificate of incorporation in the fojlowing language states its objects and purposes, viz:

“ To acquire from the residuary legatees and hold all the real and personal property devised and bequeathed to said residuary legatees under the will of Jane E. Edgar, deceased, and to sell, transfer, mortgage, assign, exchange, and otherwise dispose of any and all of the real and personal property aforesaid, upon such terms as to the board of directors may seem proper, and to receive the proceeds thereof and to distribute the same among the stockholders, after payment of expenses, and to lease and rent the said real property for any term or terms whatsoever, and to receive the rents and income derived from said real and personal property, and to distribute the same among the said stockholders after payment of expenses. To alter, improve, reconstruct, repair, and otherwise manage and maintain the said real and personal property, and generally to do and perform any and all other things which may be at any time necessary or convenient, in the judgment of the board of directors, for the proper maintenance and upkeep of the said real and personal property acquired by the corporation as aforesaid.”

The facts agreed upon disclose that Mrs. Jane E. Edgar, a citizen of New York, died testate on March 12, 1895, leaving an estate made up of various parcels of valuable real estate and some personal property. The last will of the decedent, after making certain specific bequests, devised and bequeathed the resjdue of her estate, in trust for the use and benefit of her two children for life, with a provision that upon the death of the survivor the estate should pass in fee to certain named legatees and devisees. The survivor of Mrs. Edgar’s two children died in June, 1917, and the estate descended as mentioned above. In September following, the plaintiff corporation was organized for the express purpose of acquiring from the aforesaid legatees and devisees the property they inherited as above, and thus administering the estate in what the incorporators regarded as a much more advantageous and profitable way than to pursue the established laws for the administration of deceased persons’ estates in the Probate Court of New York. The corporation continued in existence from its organization until April, 1922. During its continuance eight separate parcels of realty came under its management and control, rents were collected, repairs were made, and the property managed and controlled in such a way as to obtain for it the most advantageous price. When safes were made — in some instances for all cash, in others, part cash and mortgages for balance — the cash received was immediately distributed to the stockholders and the mortgages were held by the corporation. Uniformly, when installment payments were received upon mortgages the funds were at once distributed. In September, 1920, a profit of $60.65 was realized from the purchase and sale of certain Victory bonds, and two stock transactions in the same year yielded a total profit of $66.72. The corporation was under the exclusive management of one man, a practicing lawyer, and its overhead expense was nominal. The record shows that the trustees under Mrs. Edgar’s will had leased all the realty, except one parcel, and. these leases extended from three to five years from date. The corporation did not renew the leases upon the expiration of the term. The plaintiff, relying upon the above state of facts, insists that the corporation was not “ carrying on or doing business ” during the period of its existence, within the meaning and intent of the taxing act, and hence ,is entitled to judgment for the amount of the capital-stock taxes paid.

The nature of the capital-stock tax is obvious. It is, as settled by judicial decision too familiar to cite, an excise tax imposed upon the privilege of doing business as a corporation. The plaintiff in this case was prompted to incorporate in view of a situation wherein incorporation offered, at least in the opinion of the stockholders, a distinct advantage and profit over the ordinary course of law applicable to their situation. The corporation came into existence, manifestly, because it enabled the stockholders, the residuary legatees and devisees of Mrs. Edgar’s will, to conserve an estate of considerable proportions, curtail expenses, and provide for expeditious management and disposition in a way and by a method superior to the established laws of the State respecting the administration of deceased persons’ estates and the sale and division of realty owned by tenants in common. To accomplish the desired end indispensably entailed the customary proceedings involved in the sale of land and personal property. Kents were to be collected, some funds of the corporation were invested, and while the detail of activities resembles a process of liquidation, it is to be remembered that that is precisely the purpose of the incorporation, its one object to the discharge of which all business activities were solely directed. The corporation came into being to manage, control, and dispose of this estate; it had no purpose to continue longer, and while so engaged did carry on and complete all the necessary business activities for which it was distinctly incorporated. Surely this was a privilege. Clearly it was the exercise of a legal option to take from the channels of ordinary and customary legal procedure a considerable estate in lands and personal property, erect a legal entity, and thereby accrue an advantage which ownership in common did not afford those entitled to the property. The fact that overhead expense was nominal, proven profits from investments small, and business activities not especially exacting, in nowise militates against the rule. If the corporation was pursuing the object for which it was organized and doing all the essential things to accomplish that object, it can not claim a classification of an inactive corporation, doing no more than liquidating its assets. It is not the amount of business done which signifies, although in this case it is apparent that the corporation did conserve and save to the estate expenses which otherwise it would have incurred, and likewise enabled the stockholders to await a propitious moment for sales of real estate, as well as enable the corporation to collect rents, maintain the property, and make small investments. ' To do all this we think compelled a degree of business activity within the meaning of the revenue law.

The cases reflecting the various phases of controversies similar to the one in suit are found in the following citations: Von Baumbach v. Sargent Land Co., 242 U. S. 503; Zonne v. Minneapolis Syndicate, 220 U. S. 187; United States v. Emery, Bird, Thayer Realty Co., 237 U. S. 28; McCoach v. Minehill Railroad Co., 228 U. S. 295; Chevrolet Motor Co. v. United States, decided by this court November 7, 1927, 64 C. Cls. 211; Edwards v. Chile Copper Co., 270 U. S. 452; Conhaim Holding Co. v. Willcuts, D. C. Minn., August 10, 1927, 21 Fed. (2d) 91, a case strikingly similar to the one in suit.

The petition will be dismissed. It is so ordered.

Moss, Judge; Graham, Judge; and Campbell, Chief Justice, concur.

GreeN, Judge, took no part in the decision of this case.  