
    RALPH J. CEBRIAN, A. K. TICHENOR AND THOMAS A. ALLAN, TRUSTEES OF THE BONDHOLDERS COMMITTEE, WEST SACRAMENTO COMPANY v. THE UNITED STATES
    [No. 292-56.
    Decided March 2, 1960]
    
      
      Mr. Valentine Brookes for the plaintiffs. Mr. Arthwr H. Kent, Mr. Paul E. Anderson, and Messrs. Kent and Brookes were on the briefs.
    
      Mr. Harold S. Larsen, with whom was Mr. Aotmg Assistant Attorney General Howard A. Heffrony for the defendant. Mr. James P. Garland and Mr. Lyle M. Turner were on the brief.
   LaeaMOee, Judge,

delivered the opinion of the court:

Plaintiffs sue to recover income taxes paid for the tax years 1946 through 1950, and excess profits taxes paid for 1950, together with deficiency interest paid thereon. The amount claimed is $169,277.20, plus interest as provided by law.

Fiduciary income tax returns had been filed for the years in question, and the deficiencies were based on a redetermination of plaintiffs’ tax liability which asserted that the plaintiffs were taxable as an association under section 3797(a) of the Internal Revenue Code of 1939, and that the amounts of the net gain realized on the sale of certain real estate were ordinary income, and not gains derived from the sale of capital assets within the meaning of section 117(a) of the 1939 Code.

The deficiency assessments were all paid on May 14,1953. Claims for refimd were timely filed, and this suit was timely brought after the claims were denied.

The plaintiffs are, and during the years here involved were, the successor trustees of the Bondholders’ Committee of the West Sacramento Company, a California corporation organized in 1910 for the purpose of acquiring and developing real estate and for related business purposes. In 1910 the company mortgaged all of its property then owned or afterward acquired to secure the payment of an authorized bond issue of $2,000,000. The bonds were issued for a 20-year term and carried an interest rate of six percent per annum. In all, the company eventually acquired approximately 10,000 acres of land in the West Sacramento area.

Soon after the company had commenced operations, it was instrumental in the creation of Reclamation District No. 900, Yolo County, as a political subdivision. With the exception of some riverbank lots, all of the company’s lands were located in the district. After being established, the district sold reclamation bonds totaling $1,500,000 which were secured by a lien on the lands within the district. This lien was superior to the bondholders’ lien.

The company began developing its lands by subdividing, building roads, installing streets, etc. The development program was cut short in 1913 when the company started having financial troubles. By 1919 a series of seven assessments amounting to $25 per share had been levied against the stockholders. Some stockholders permitted their stock to be forfeited to the company.

After the company’s default, the bondholders were given the right to exchange their bonds for land of the company. Between 1914 and 1922, a number of the bondholders exercised this right and acquired the better parcels of the company land. Of the 2,000 bonds originally issued, only 703 were outstanding on January 1, 1922.

By 1922 tbe company was hopelessly insolvent. The delinquent obligations oí the company that were prior to the lien of the bondholders totaled $389,818.14. The principal amount of the bonds outstanding at that time was $703,000, creating a total debt currently payable of $1,092,818.14. The stockholders of the company themselves recognized the insolvency of the company and proposed a plan of reorganization to the bondholders which was rejected.

In June 1922 the bondholders adopted a plan of reorganization under which a committee was named to commence foreclosure proceedings against the company. The plan of reorganization called for each participating bondholder to deposit his bonds plus $200 cash per bond with the Mercantile Trust Company, the trustee under the bond indenture. The reorganization plan became effective with the deposit of 661 bonds together with cash of $132,200.

The formal reorganization, agreement, dated June 15,1922, was approved by a bondholders’ protective committee and signed by a reorganization committee, was executed by the Mercantile Trust Company as trustee under the bond indenture, and accepted by the holders of 661 bonds. The powers and duties of plaintiffs as successor trustees, as well as those of their predecessor trustees, are derived from this agreement, which reads in part as follows:

Seventeenth: In the event that the Committee shall purchase, or cause to be purchased, the said property, or any thereof, at any sale thereof under a decree in the said suit of foreclosure, or under a decree in any other judicial proceedings for the foreclosure of the said mortgage or deed of trust, or under the power of sale provided in the said mortgage or deed of trust, the Committee, upon the conveyance to or for the Committee of the said property so purchased, shall manage the said property either directly or through a corporation which may be incorporated by the Committee for that purpose, and shall sell and convey, or cause to be sold and conveyed, the said property, in such lots or parcels as the Committee may deem to be advisable, and for such prices therefor as the Committee shall deem to be adequate, but not less than the fair market value thereof, and shall sell tire said property as rapidly as the same can reasonably be sold. The said sales may be made for prices payable, in part, in deferred installments, either under contracts of sale, or evidenced by notes of the purchasers therefor secured by mortgages of the property sold, and on such terms and conditions as to times of payment, rate of interest, and otherwise, as the Committee may deem to be advisable.
The said property so purchased, until the same shall be sold or caused to be sold by the Committee, may be leased by or cropped for the Committee under such leases and cropping contracts as the Committee may deem to be appropriate, or if the Committee shall deem it advisable to do so, the said property, or parts thereof, may be farmed or otherwise operated by or for the Committee.

Under the terms of the reorganization agreement the liability of the bondholders for the acts of the committee or any member of the committee, other than for willful misconduct, was unlimited. The bondholders’ liability for the acts of the committee and its members extended not only to contractual matters but also to liabilities incurred which arose out of negligence, omission to act, or other torts.

Pursuant to the reorganization agreement, Mercantile Trust Company accelerated the maturity date of the deed of trust securing the bonds and brought suit to foreclose. The property was sold under court decree to the bondholders (owners of 661 bonds) who participated under the reorganization plan for a foreclosure sale price of $281,137.76. No other bids were made for the property at the foreclosure sale. The 42 non-participating bondholders received a total of $10,571.82 in cash, and their lien as bondholders was extinguished.

The property acquired by the bondholders under the foreclosure proceeding was conveyed to the individual members of the committee named in the reorganization agreement.

Tire company ceased doing business after the foreclosure proceedings. On February 7, 1923, a deficiency judgment was entered in the foreclosure proceedings against the company in the sum of $946,811.27. The company was suspended by the California Secretary of State on March 1, 1924, for failure to pay franchise taxes.

Of the approximately 10,000 acres acquired by the company, only 2,606.76 acres and 235 lots remained at the time of foreclosure and were acquired by the participating bondholders in the names of their trustees. The property other than the 235 lots was described by metes and bounds and consisted of 67 parcels for the purpose of property description, scattered over an area of almost 28 square miles.

The foreclosed lands could not have been readily sold to one party or in one sale, and it was not possible to develop them as one unit. About 750 acres of the land were undesirable for farming purposes as 600 acres were covered with sand, and 125 to 150 acres were covered with trees. Another portion was unusable because it consisted of a levee right-of-way on the boundary of the reclamation district.

Because of geographical factors and local prejudice against the area, the bondholders’ lands were poor for purposes of development and residential sales.

The pertinent lands, being within the reclamation district, were burdened by a heavy reclamation bond lien. At the time of the foreclosure this bonded indebtedness averaged $150 per acre, which in some cases was in excess of the value of the land. Reclamation district lands had a bad reputation throughout California on account of such liens and assessments, and many farmers would not consider purchasing such lands. At the time of the foreclosure a farm depression existed in the area, and there was not much demand for farming land.

After foreclosure the bondholders made every effort to find a purchaser who would buy all of the properties at a reasonable price. These efforts to sell the whole were unsuccessful. The committee then began to sell the land in small parcels.

Pending the sale of lands, the land suitable for farming was leased out whenever possible. A number of acres of the wooded portions of land were cleared by the tenants in exchange for the use of the land. Lease income for the periods 1922-1941 and 1947-1950 was not sufficient to cover the carrying charges on the lands.

The life of the original committee organized under the plan of reorganization was limited to five years. In 1927 the bondholders voted to continue the terms of the reorganization agreement and appointed successor trustees for an additional five years. The same was done in 1932,1937,1942, and 1947, and ever since that time the plaintiffs have been the duly constituted committee under the extended, reorganization agreement.

From 1930 to 1937 there was very little demand for the bondholders’ lands for farming use and no demand for the lands for possible subdivision use.

In early 1932 the bondholders were faced with the probability of defaulting on their assessment for the payment of the reclamation bonds maturing on January 1, 1933. The anticipated default was avoided by the refinancing of the reclamation bonds for another 5 years. By this time the reclamation indebtedness had been reduced to an average of $65 per acre of land.

In 1932 the committee was also faced with a default on real estate taxes and assessments for interest and maintenance charges by the reclamation district. As of the end of March 1932, the committee’s cash on hand was only $943.65; its anticipated revenues to June 30, when $14,364.80 of taxes and assessments would be due, was only an additional $5,200. These taxes and assessments were in fact in default for a period of time but were paid as delinquent taxes before 1937. In the period of the depression it was impossible to borrow money on lands located in the West Sacramento area.

In 1937 the committee paid its first distribution to the bondholders of $20 per bond, which represented a partial repayment of the $200 per bond advanced by the bondholders at the time of foreclosure 15 years earlier.

Accessibility to the bondholders’ lands from Sacramento was improved in 1935 by the construction of a new bridge. From 1937 to World War II a number of other improvements occurred that made the bondholders’ lands more desirable.

Yolo County extended Park Boulevard from the bondholders’ lands to the Davis Highway and opened up Michigan Boulevard. In 1937 the bondholders’ committee interested Clyde W. Henry in coming into the area to provide water service as an independent public utility bearing the name, West Sacramento Water Company. The committee was endeavoring to satisfy requirements of the Federal Housing Administration as to water supply. The committee transferred all of its wells, piping and other properties to the water company and also paid over $4,500 in cash, of which $3,000 was later recovered by suit. A street lighting district was formed in West Sacramento City-Unit One and the county put in street lights. Also a sanitary district was formed by election to provide for sewers in the area. The bondholders contributed $500 to a $1,500 fund to pay attorneys’ fees and expenses incident to the organization of the district. Fire protection in the area was provided by a fire district.

During World War II, home building was halted and the demand for the bondholders’ lands for residential purposes was not great. Some sales were made, but during this period most of the trust income was from leasing.

The first payment for the services of the committee members was authorized and paid starting in 1943 for services rendered from 1922 to the date of payment. This payment was not made until after the final $25 per bond payment was made to repay the $200 per bond advanced by the bondholders at the time of foreclosure. This payment occurred in 1943. The committee made the first payment on bond principal, which consisted of a total of $200 per $1,000 bond, by the end of 1945.

The year 1946 marked the turning point in the committee’s efforts to dispose of the bondholders’ lands. Sales of land during the period 1946-1950 greatly increased. Of the 2,606.76 acres of land (1,951.87 of which was unsubdivided farmland), and 235 lots acquired by the bondholders at the foreclosure in 1922, about half the acreage and 233 of the lots had been sold by the end of 1950. Almost half of the acreage sold was sold during the 1946-1950 period.

By the end of 1950 the bondholders had received repayment of the $200 per bond advanced by them to finance the reorganization agreement plus $500 of the $1,000 principal of each bond. In all this period from 1922 through 1950 no payment was made for interest on the bonds.

At no time during the period from the date of foreclosure to the end of 1950 did the committee delay disposition of the bondholders’ lands in the hope of a speculative increase in prices in the future. At all times the committee was willing to sell the bondholders’ lands if a fair price, based upon conditions existing at the time of sale, were offered. The committee would not, however, sell any land for less than its appraised value at the time of foreclosure. During the period 1946 through 1950 inclusive, no sales were turned down because the prices were inadequate.

During the entire period 1922 to 1950 no additional property was purchased except for a 30-foot right-of-way which had formerly belonged to the bondholders and was repurchased by them in order to clear up land titles of the adjacent properties.

Sometime during the period 1922 to 1929, the committee at the insistence of the health authorities, had a deeper well drilled to provide better water. This improvement cost $20,000. In 1937, at the request of a real estate broker who had approached the committee with a plan for a new subdivision, and to whom it had given the exclusive sales agency for the sale of lots in the subdivision, the committee filed a subdivision map. Minor improvements such as the leveling and graveling of four streets, at a cost of between $2,000 and $3,000, were made in the subdivision.

In 1941, the committee joined with other owners to file a resubdivision which made certain lots more desirable. The sum of $10,000 was spent for minor street improvements in the resubdivided area. Although the committee had decided in 1941 to cease work of a developmental nature, it spent $3,393.50 in 1946 for land leveling which resulted in the reclamation for the bondholders of 12 acres of previously unusable land.

The record does not indicate that the committee engaged in sales activities during the 1922 to 1936 period. In 1937, the committee turned over the selling of its land to Arthur F. Turner on a commission basis. Although Mr. Turner, a licensed real estate broker since 1931, and a holder of 100 bonds that he started purchasing in 1936, was employed by the company in 1913 as a bookkeeper, and has been employed by the committee since the foreclosure as its lease manager or superintendent, his real estate brokerage business was entirely independent of the business of the committee and the committee had no right and made no attempt to supervise this business.

With respect to the selling of bondholders’ lands, Mr. Turner conducted a sales effort through limited advertising in the local newspapers, and also employed salesmen. He paid such sales expenses as a part of the operation of his own business, and was not reimbursed by the committee except through the payment of commissions on accomplished sales.

Prior to 1946, Mr. Turner commenced a program of real estate development independent of the business of the committee, including the building and selling of approximately 2,000 houses. His activities were confined to the West Sacramento area, and hence he operated under the assumed name of West Sacramento Land Company.

In 1946 the committee sold 76 parcels of land to 56 different purchasers; in 1947, it sold 62 parcels to 45 purchasers; in 1948, it sold 60 parcels to 41 purchasers; in 1949, it sold 28 parcels to 19 purchasers; and in 1950, it sold 29 parcels to 19 purchasers.

One of the sales in 1947 was of 30.126 acres to Turner and one Williams for the development of a new subdivision known as Linden Acres. The area was subdivided and developed solely by Turner and Williams. Because Turner and Williams did not have legal title to the property at the time the subdivision map was filed, the signatures appearing on the map are those of the committee members.

Other purchases were made by the partnership of Turner and Williams in 1948 and 1950. Turner, individually, made purchases of the bondholders’ lands in 1947, 1948, 1949, and 1950.

The sales of the lands of the bondholders by the committee and trustees were handled in a manner different from that of a real estate developer. The established policy not to expend funds for developments, and to make sales at a price less than that which would have been obtained by a developer willing to expend capital for improvements, is evidenced by one transaction in 1950 in which the trustees sold slightly over 20 acres of land to the partnership of Turner and Williams for $18,765, which included taxes. Such property was developed as Westfield Unit No. 2, containing 110 lots, at a cost to Turner and Williams of about $70,000 for streets, sewers, water system, sidewalks, gutters, surveying and engineering. Additional expenses of this partnership of approximately $24,000 covered commissions to salesmen, advertising, conveying costs, overhead expenses, office expense, and miscellaneous expense. The total selling price realized by the partnership was $138,650, costs and expenses were $112,250, and the net profit was $26,400. These figures are typical of subdivisions of the same size in the West Sacramento area in the years 1946 through 1950.

The net gain (sale price less expenses of sale and basis) realized from the sale of lands was $87,704.62, in 1946; $138,-016.49, in 1947; $106,377.39, in 1948; $70,797.68, in 1949; and $338,143.19, in 1950. Plaintiffs contend that these amounts should have received capital gains treatment, and that they did not constitute an association taxable as a corporation.

Thus the issues here involved are (1) whether the gain realized from the sale of the land is to be taxed as a capital gain from the sale of capital assets, or as ordinary income received from the sale of property held primarily for sale to customers in the ordinary course of a trade or business, and (2) whether the plaintiffs constituted an association taxable as a corporation.

Both questions number one, Boeing v. United States, 144 C. Cls. 75; Rollingwood Corp. v. Commissioner, 190 F.2d 263; Mauldin v. Commissioner, 195 F.2d 714; and question number two, Fletcher v. Clark, 150 F.2d 239, cert. denied, 326 U.S. 763; Lucas v. Extension Oil Co., 47 F.2d 65; Mullendore Trust Co. et al. v. United States, 59-2 USTC ¶ 9747; must be answered on the basis of the facts of this case.

With reference to the first question here involved, we have indicated that there is no single decisive test that can be applied in determining whether or not property is held primarily for sale to customers in the ordinary course of one’s trade or business. Garrett, et al. v. United States, 128 C. Cls. 100. Among the factors we have regarded as important are the activities of the taxpayer, or his agents, in promoting sales, the extent of the development and improvement of the property, the purpose for which the property was acquired, and the frequency and continuity of sales. McConkey, et al. v. United States, 131 C. Cls. 690; Boeing, et al. v. United States, supra; Lazarus v. United States, 145 C. Cls. 541.

We think the purpose for which the property was acquired is clear. It was acquired to enforce a debt of a hopelessly insolvent corporation. Since no other bids were made for the property at the foreclosure, obtaining the property and then liquidating it was the only means the bondholders had of obtaining satisfaction of the debt.

The defendant contends that the purpose set out in the reorganization agreement to “manage, control and sell the land,” is not substantially different from the objective and purpose of the original West Sacramento Company, which was to engage in the real estate business. The fact that the stockholders were also possible beneficiaries from the sale of the lands, is further evidence of this purpose in the defendant’s eyes. We cannot agree with this interpretation. Considering the circumstances under which the property was acquired by the trustees, the directive to the trustees to sell the property “as rapidly as the same can reasonably be sold” evidences a purpose to liquidate the property for the benefit of the bondholders so that they might obtain satisfaction of the debt. The fact that the bondholders voluntarily made provision for the stockholders to share in the proceeds after they themselves had recovered on their debts is indicative of a purpose to obtain satisfaction of a debt, and not to engage in the real estate business.

The fact that the word “liquidation” was not used in the reorganization agreement does not nullify the bondholders’ intent to liquidate, it simply renders that purpose a little less obvious. This is a situation where substance rather than form governs.

That it took the plaintiffs 28 years to liquidate but half of the committee’s land holdings, does not of itself lead to the conclusion that plaintiffs were engaged in the real estate business. Alabama Mineral Land Company v. Commissioner, 250 F.2d 870; Chandler v. United States, 226 F.2d 403. This is especially true where the properties acquired on foreclosure are scattered over a large area and could not have been sold in one transaction. Alabama Mineral Land Company v. Commissioner, supra.

The Government argues that the plaintiffs extended the period of time during which the sales of their land were made, because for many years there had been the prospect of the establishment of a port district in the area of their holdings which would have increased the value of such lands. This argument is not supported by the record. It was found that the plaintiffs never delayed disposition of the bondholders’ lands in the hope of a speculative increase in future prices.

.The Government further contends, citing Heiner v. Mellon, 304 U.S. 271, and Home Co. v. Commissioner, 212 F.2d 637, that sales in liquidation may nevertheless amount to carrying on a business. We recognized in Boeing v. United States, supra, that this might be the case, but we also indicated that the liquidation should be accompanied by extensive development and sales activity before such a conclusion is reached. As will be seen from the discussion that follows, we do not think that such extensive development and sales activity were here present.

The record does not indicate that plaintiffs engaged in any sales activities. During the tax years in question, all sales, other than those to public agencies and the broker himself, were handled through a real estate broker whose business was entirely independent of plaintiff’s activities. The plaintiffs had no right, and made no attempt to supervise the sale of its lands. The broker paid all the expenses incurred in his sales effort, and was not reimbursed by the committee except through the payment of commissions on accomplished sales. Therefore, the activities of the broker, Mr. Turner, in promoting sales of the plaintiffs’ lands were not the activities of an agent of the plaintiffs. We have held in similar, and less-deserving situations that where little or no effort is made to sell real estate acquired by foreclosure, and being sold pursuant to liquidation, the sales were not in the ordinary course of the seller’s trade or business. McConkey, et al. v. United States, supra; Gordon v. United States, 141 C. Cls. 883; Western and Southern Life Insurance Company v. United States, 143 C. Cls. 460.

The frequency and continuity of sales of the plaintiffs’ lands during the tax years in question were sufficient to hold, if we were basing our decision on this criterion alone, that the gains from the sals of the lands constituted ordinary income. Lazarus v. United States, supra; Brown v. Commissioner, 143 F.2d 468, 470. However, as we pointed out above, no one test is determinative of the issue.

We do not view the developmental and improvement work done by plaintiffs on their lands as extensive. From the time the land was acquired by foreclosure in 1922, until 1945, approximately $32,500 was expended, $20,000 of which was for a deeper well that the health authorities insisted be drilled. The balance of the monies expended during this period was for minor street improvements. The only expenditure of an improvement nature during the years in question was $3,393.50 for land leveling which resulted in the reclamation for the bondholders of 12 acres of previously unusable land.

Defendant contends that because of the above expenditures, because plaintiffs filed one subdivision map itself and joined with other land owners to file one, and because plaintiffs were instrumental in the formation of certain political districts whose activities enhanced the value of plaintiffs’ lands, plaintiffs did in fact undertake extensive developmental work, and hence, were engaged in business. The record, however, does not show that plaintiffs were instrumental in the formation of the political districts. It simply shows that tbe districts were formed. The contention also flies in the face of the finding that the plaintiffs handled the sales of the lands in a manner different from that of a real estate developer.

The developmental work done by the plaintiffs was no more extensive than such work done in Garrett v. United States, supra; Gordon v. United States, supra; and Lazarus v. United States, supra, and in those cases we held that the taxpayers were entitled to treat gains realized from the sale of lands as capital gains.

It is contended by the defendant that the fact that plaintiffs did not reinvest proceeds from sales in additional property does not in itself mean that they were not engaged in business. We agree, but we also think that on the facts before us it is another indication that plaintiffs were not engaging in the real estate business.

On all the facts, we think that the plaintiffs were liquidating real estate acquired on foreclosure to enforce a debt, and were not engaging in the real estate business. They were therefore entitled to treat gains realized from the sale of such property as capital gains. On facts very similar to those of the instant case it has been so held. Alabama Mineral Land Company v. Commissioner, supra.

Having determined that plaintiffs were liquidating trustees of the bondholders’ property, and were not engaged in the real estate business, it would be inconsistent to hold that they constituted an association taxable as a corporation under section 3797 of the 1939 Code.

The 1939 Code does not define the word “association”, so we must look to the case law and Treasury Department regulations for guidance. The cases treating this question are legion, and each one was decided on the basis of its own peculiar facts. Both the cases and the regulations agree that one of the prime factors, if not the controlling one, to be considered in determining whether a trust is an association taxable as a corporation is the purpose for wbicb the trust was created. If the trust arrangement is designed to afford a medium whereby an income or profit seeking activity may be carried on, it is an association taxable as a corporation. Where, as here, the trust form is used for the purpose of liquidation, the trustees do not constitute an association taxable as a corporation; they are taxable as fiduciaries. Broadway-Brompton Buildings Liquidating Trust, 34 B.T.A. 1089, acq. 1938-2 C.B. 4; George I. Fullerton, 22 T.C. 372, acq. 1955-1 C.B. 4; Nee v. Liwwood Securities Co., 174 F. 2d 434.

In Morrissey v. Commissioner, 296 U.S. 344, a leading case heavily relied on by the defendant, the Supreme Court indicated agreement with this treatment when in holding the trust therein involved was an association taxable as a corporation, it said at page 361:

* * * It was not a liquidating trust; it was still an organization for profit, and the profits were still coming 3.IZ H*

Edgar Estates Corp. v. United States, 65 C. Cls. 415, which defendant also relies on, is distinguishable on two bases. First, the purpose there was to acquire and then to liquidate, and secondly, the tax there involved was the Federal capital stock tax (now repealed). We there held that since the plaintiffs had chosen the corporate form for their own benefit, the tax was properly imposed, even though the corporation was liquidating. Magruder v. Realty Corp., 316 U.S. 69, another case defendant relies on, is distinguishable for the same reason.

The Government contends that plaintiffs’ leasing activities evidenced an intent to engage in business for profit. In Broadway-Brompton Buildings Liquidating Trust, supra, a case strikingly similar to the instant case factually, it was held that the leasing activity of the trust pending liquidation was “only such as a reasonably prudent man would undertake in the preservation of the property or the minimizing of his loss, and is consistent with the primary purpose of liquidation * * Nee v. Linwood Securities Co., supra; and Myers v. Commissioner, 89 F.2d 86, are to the same effect.

In Frederick Pitzman et al., Trustees, 36 B.T.A. 81, 92,93, acq. 1937-2 C.B. 22, it was held that conservation of resources pending disposition is quite different from conducting a business for profit, and that the law does not require trustees to sacrifice property in order to speed up liquidation. Helvering v. Washburn, 99 F.2d 478, stands for the proposition that a trust, formed for the purpose of liquidation as soon as circumstances permit and carrying on business only as incident necessary for preservation of trust property, is not an association taxable as a corporation.

Another test applied by the courts and the regulations in determining whether or not a trust constitutes an association taxable as a corporation is the degree of resemblance the trust arrangement bears to a corporation. If the resemblance is substantial, the trust is deemed to be an association taxable as a corporation,

In Morrissey v. Commissioner, supra, the Supreme Court laid down five criteria to be used in determining whether an organization substantially resembles a corporation.

They are: (1) Ownership of property as an entity; (2) Continuity of existence; (3) Transferability of beneficial interest; (4) Centralized management; and (5) Limitation of personal liability.

The criteria set out in the regulations are essentially the same.

Applying these criteria to the instant case we see that the property was conveyed to the trustees individually, and was not owned by the committee as an entity. We also see that there was centralized management and transferability of beneficial interest. There was no limitation of personal liability.

The defendant contends that although the trust was initially formed for five years, since it could be, and in fact was, extended, continuity of existence was present. We cannot agree. This is not the type of continuity of existence that is generally ascribed to a corporation.

It is true that this trust possessed some characteristics of a business organization, but there was no substantial resemblance to a corporation. Three of the five criteria set out by the Supreme Court in Morrissey were not met. The two that were present, transferability of beneficial interest, and centralized management are also common to partnerships. As was said in Myers v. Commissioner, supra, at page 89:

* * * Every trust of the purest type necessarily has attributes of a business organization. Its very existence depends on such. That characteristic alone cannot brand it as an “association”.

Plaintiffs were liquidating trustees, not engaged in the real estate business for profit, and their organization did not bear a substantial resemblance to a corporation. Consequently, they did not constitute an association taxable as a corporation.

Because plaintiffs, during the tax years involved, did not constitute an association taxable as a corporation, and since the gains realized by them from the sales of real property were correctly reported as capital gains, the fiduciary income tax returns filed by tbe plaintiffs for the years 1946 through 1950 were properly filed, and plaintiffs are entitled to recover, with interest as provided by law, and judgment will be entered to that effect.

The amount of recovery will be determined pursuant to Rule 38 (c) of the Rules of this court.

It is so ordered.

Reed, Justice (Bet.), sitting by designation; LittletoN, Judge (Bet.); MaddeN, Judge, and Jones, Chief Judge, concur.

Whitaker, Judge, took no part in the consideration and decision of this case.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Roald A. Hogenson, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiffs are, and during all of the pertinent calendar years 1946 through 1950 were, the successor trustees of a voluntary trust formed by the bondholders of West Sacramento Company. Their principal office is and has been in an office building at San Francisco, California, with their field office located in the administration building erected by the West Sacramento Company in 1914 at West Sacramento.

2. West Sacramento Company, hereinafter called “the Company,” was a California corporation organized in 1910 for the purpose of acquiring and developing real estate and for related business purposes. On July 1,1910, the Company mortgaged all its property then owned or afterwards acquired to Mercantile Trust Company of San Francisco to secure the payment of an authorized bond issue of $2,000,000. The bonds were issued for a 20 year term and carried an interest rate of 6 percent per annum. The lien of the bonds was a first lien on all property then owned or after-wards acquired by the Company. The holders of these bonds are referred to in these findings of fact as “the bondholders” or “bondholders of the Company.”

3. The Company used the proceeds realized on the sale of the bonds principally for the acquisition and development of scattered parcels and tracts of unimproved real property in that part of Yolo County, California, lying immediately west of Sacramento, California, and across the Sacramento River from that city. The larger acquisitions of property by the Company were made by purchase on terms, deeds being taken to the property with a note and first deed of trust back to the seller to secure the remainder of the purchase price. Smaller acquisitions were paid for in cash, a deed being taken at the time of purchase. In addition, lands were purchased from Lizzie H. Glide, Annie E. Peterson, Carrie M. Scliwilk and George J. Bryte under land contracts, the deed to be delivered to the Company when payment had been made. In all, the Company eventually acquired approximately 10,000 acres of land in the West Sacramento area, and laid out plans for extensive development of the properties.

4. Soon after the Company had commenced operations and the acquisition of land, Reclamation District No. 900, Yolo County, California, hereinafter called “the district” or “the reclamation district,” was organized and established as a political subdivision of the State of California. The Company was instrumental in the creation of the district. Eventually the Company acquired all of the more than 10,000 acres of land in the district with the exception of a few small farms. All of the Company’s lands were located in the district with the exception of some Riverbank lots in a nearby reclamation district. After being established, the district issued and sold reclamation bonds totaling $1,500,000, the proceeds of which were used to construct and to elevate levees built along the west shore of the Sacramento River and along the western and southern boundaries of the property to protect the land lying to the west of Sacramento from the ravages of river floods. Part of the proceeds was also spent in constructing drainage systems for the land in the district. The bonds so issued by the district were secured by a lien on the lands encompassed in the district, including the holdings of the Company, analogous to the public lien of a local taxing authority. The reclamation bond lien was therefore paramount to all private securities, including the lien of the bondholders. Maintenance of the levee and drainage systems and interest charges on the district’s bonded indebtedness were provided for by annual assessments levied by the district upon the assessable real property, including the lands of the Company, lying within the district. These assessments were levied in a manner analogous to the levy of local property taxes, and are being currently collected by Yolo County as a part of the county real estate taxes.

5. The Company began developing the lands it acquired by subdividing and filing maps with Yolo County, California. The dates on which these maps were filed by the Company and the acreage involved are as follows:

Date Name of Subdivision Acres
1/24/12-Riverbank Subdivision_ 133.00
1/6/13-Riverbank Subdivision, Extension One_. 53.00
1/6/13-Riverbank Subdivision, Extension Two. 47.70
1/17/13-Subdivision A_ 488.26
3/4/13-Boulevard Subdivision_ 849. 62
4/18/13-Midland Subdivision_ 498. 71
4/18/13-Garden Subdivision_ 427.89
8/8/13-City Earms Subdivision_ 422.86
8/8/13-Jefferson Subdivision_ 470.078
12/2/13-West Sacramento City-Unit One_ 246.904
4/17/15-Glide’s West Sacramento Subdivision_ 760. 06
TOTAL_ 4, 398. 082

The bulk of the other lands of the Company was unsub-divided, except for a number of scattered lots and blocks in Broderick and vicinity.

The Company also built roads, made arrangements for electric train service to Sacramento, installed some streets, sidewalks, curbs and gutters, laid some water pipes, and made land deals with an Oakland contractor who bmlt a number of homes in order to get activity started. The Company also built an administration building on the lands.

6. The Company’s development program was cut short by financial troubles which occurred in 1913 and 1914 due to the lack of current rent income to meet the requirements of sinking fund and interest payments on the bonds, which were defaulted. The Company also defaulted under its land contracts, which put it in additional trouble because some of the land under the contracts had already been subdivided and sold. The Company levied a series of seven assessments against its stockholders amounting to $25 per share in the period 1914 through 1919, or a total of $635,891.63. Stockholders owning $37,746 of stock permitted their stock to be forfeited to the Company.

After the Company’s default, the bondholders were given the right to exchange their bonds for land of the Company. During the period 1914 to 1922 a number of bondholders exercised this right and acquired for themselves the better parcels of the Company land.

Of the 2,000 bonds originally issued by the Company, only 703 were outstanding on January 1,1922, the others having been retired by payment or by being previously exchanged for land.

7. By 1922 the Company was hopelessly insolvent. The delinquent obligations of the Company that were prior to the lien of the bondholders totaled $389,818.14. The principal amount of the bonds outstanding at that time was $703,000, creating a total debt currently payable of $1,092,-818.14. The stockholders of the Company themselves recognized the insolvency of the Company and proposed a plan of reorganization to the bondholders which was rejected.

8. In June 1922 the bondholders adopted a plan of reorganization under which a committee was named to commence foreclosure proceedings against the Company. The plan of reorganization called for each participating bondholder to deposit his bonds plus $200 cash per bond with the Mercantile Trust Company, the trustee under the bond indenture. The reorganization plan became effective with the deposit of 661 bonds, together with cash of $132,200.

The formal reorganization agreement, dated June 15,1922, was approved by a bondholders’ protective committee and signed by a reorganization committee, was executed by the Mercantile Trust Company as trustee under the bond indenture, and accepted by the holders of 661 bonds. A copy of this agreement is in evidence as exhibit C-3 and is included in this finding as if fully set forth. The powers and duties of plaintiffs as successor trustees, as well as those of their predecessor trustees, are derived from this agreement.

9. Pursuant to the reorganization agreement, Mercantile Trust Company accelerated the maturity date of the deed of trust securing the bonds and brought suit to foreclose. The property was sold under court decree to the bondholders (owners of 661 bonds) who participated under the reorganization plan for a foreclosure sale price of $281,137.-76. No other bids were made for the property at the foreclosure sale. The 42 non-participating bondholders received a total of $10,571.82 in cash, and their lien as bondholders was extinguished.

The property acquired by the bondholders under the foreclosure proceeding was conveyed to the individual members of the committee named in the reorganization agreement. The original committee consisted of J. Peltier, Phillip I. Manson, Edward Cebrian, Parker S. Maddux, and A. K. Tichenor.

10. The Company ceased doing business after the foreclosure proceedings. On February 7, 1923, a deficiency judgment was entered in the foreclosure proceedings against the Company in the sum of $946,811.27. The Company was suspended by the California Secretary of State on March 1, 1924, for failure to pay franchise taxes.

11. Of the approximately 10,000 acres acquired by the Company, only 2,606.76 acres and 235 lots remained at the time of foreclosure and were acquired by the participating bondholders in the names of their trustees. The 2,606.76 acres consisted of 1,951.87 acres of unsubdivided farmlands, 28.95 acres at Broderick and vicinity, 37.56 acres at Riverbank and vicinity, and the remaining 588.38 acres of lands in the following subdivisions:

Remaining 95. 80 acres of Subdivision A
“ 153.06 “ Boulevard Subdivision
“ 2.50 “ “ City Farms Subdivision
“ 83.86 “ “ Jefferson Subdivision
“ 233.42 “ “ West Sacramento City-Unit One
“ 19.74 “ “ Glide Subdivision

The property other than the 235 lots was described by metes and bounds and consisted of 67 separate parcels for the purpose of property description, scattered over an area of almost 28 square miles.

12. The foreclosed lands could not readily have been sold to one party or in one sale, and it was not possible to develop them as one unit. About 125 to 150 acres were covered with cottonwood and willow trees, and an additional 600 acres with a varying depth of sand, all of which lands were undesirable for farming purposes. A portion of the foreclosed property was unusable because it consisted of a levee right-of-way on the boundary of the reclamation district.

13. The bondholders’ lands were poor for purposes of development and residential sales. Access to the city of Sacramento was possible only through an undesirable part of the area, over one of two narrow and congested bridges, and the northern part of the lands bordered two communities generally known to be vice areas. Few of the old residents of Sacramento would consider living across the river in West Sacramento. There existed a general belief until after World War II that if Sacramento were ever endangered by the recurring flooding of the Sacramento River, the levee on the west bank would be dynamited to relieve the city at the expense of the lands in West Sacramento.

14. The pertinent lands, being within the reclamation district, were burdened by a heavy reclamation bond lien. At the time of the foreclosure this bonded indebtedness averaged $150 per acre, which in some cases was in excess of the value of the land. Reclamation district lands had a bad reputation throughout California on account of such liens and assessments, and many farmers would not consider purchasing such lands. At the time of the foreclosure a farm depression existed in the area, and there was not much demand for farming land.

15. After foreclosure the bondholders made every effort to find a purchaser who would buy all of the properties at a reasonable price. Proposals for the exchange of the bondholders’ lands for income-bearing city property were considered, but the bondholders’ committee did not feel warranted in accepting any such proposal under the terms of the plan of reorganization. The lands were submitted for sale to realtors in San Francisco, Los Angeles, St. Louis, and New York. In 1925 the committee gave an option on all the lands to McAnulty Bros., a real estate firm, to develop and sell-all of the foreclosed lands. These efforts to sell the whole were unsuccessful. All of the sales of the lands made by the bondholders were therefore sales of portions of the total acreage to individual purchasers. For many years after the foreclosure the reputation of the bondholders’ lands among Sacramento real estate firms was poor because of past failures and financial difficulties. By March 1927, only 151.952 acres and 87 Riverbank lots had been sold.

16. The bondholders took some steps in the 1922-1929 period that made the foreclosed properties more desirable for sale. At the insistence of the health authorities, they hired a contractor to drill a deeper well to provide better water in the area. The total amount spent was about $20,-000. A number of acres of the wooded portion of the lands were cleared at no cost to the bondholders by tenants under leases which permitted them to use the land for 2 to 4 years in exchange for the labor of clearing.

Pending the sale of lands, the bondholders executed leases with tenant farmers on a cash or crop-sharing basis. Cash rentals varied from $10 to $30 an acre, and crop-sharing rentals varied from one-half to one-quarter of the crop. Total lease income from these sources for the period June 15, 1922, to December 31, 1926, was $91,603.96, which was about one-third of the carrying charges on the lands. These carrying charges consisted of state and county taxes, reclamation district assessments for bond principal and interest, maintenance expenses, and some advances to purchasers to cover taxes and assessments on lands being sold under contracts.

17. The life of the original committee organized under the plan of reorganization was limited to 5 years. On July 5,1927, the participating bondholders met at San Francisco and voted to continue the terms of the reorganization agreement an additional 5 years to June 15, 1932. Philip I. Manson, A. K. Tichenor, Parker Maddux, and Ralph J. Ce-brian were constituted as members of the committee under the extended reorganization agreement. The first three had been members of the original committee. Mr. Ralph J. Ce-brian had succeeded his brother Edward Cebrian in 1922 after the latter had served for only a short time. Messrs. Tichenor and Ralph J. Cebrian are plaintiffs in this case. Mr. Tichenor was a stockholder of the Company but owned no bonds. He and Mr. Manson were former officers of the Company.

18. During the years 1930 through 1937 there was very little demand for the bondholders’ lands for farming use and no demand for the lands for possible subdivision use. Some of the land previously sold under land contracts was repossessed because of the failure of the purchasers to make even token payments to cover the charges for taxes and assessments advanced by the bondholders. The committee was liberal in extending time to purchasers on their contracts and in accepting part payments. It did not repossess the land if the purchasers made any effort to meet their obligations.

19. In early 1932 the bondholders were faced with the probability of defaulting on their assessment for the payment of the reclamation bonds maturing on January 1,1933. The anticipated default was avoided by the refinancing of the reclamation bonds for another 5 years. By this time the reclamation indebtedness had been reduced to an average of $65 per acre of land.

29. In 1932 the committee was also faced with a default on real estate taxes and assessments for interest and maintenance charges by the reclamation district. As of the end of March 1932, the committee’s cash on hand was only $943.65; its anticipated revenues to June 30, when $14,364.80 of taxes and assessments would be due, was only an additional $5,200. These taxes and assessments were in fact in default for a period of time but were paid as delinquent taxes before 1937. In the period of the depression it was impossible to borrow money on lands located in the West Sacramento area.

Because of the default in payment of taxes and of the possible default on the reclamation bond payment the committee was apprehensive that the bondholders would lose their lands under a tax sale.

21. In the period March 1927 to March 1932, the bondholders sold 137.550 acres of land and 81 Biverbank lots. In the same period 16.456 acres of lands previously sold were repossessed. In the period January 1,1927, to December 31, 1931, the net income from leases was $145,713.49 which was not sufficient to meet current state and county taxes and reclamation assessments, which totaled $207,122.09, including $10,074.83 advanced for the account of land contract holders.

22. On April 26, 1932, the bondholders met in San Francisco and voted to continue the terms of the reorganization agreement another 5 years to June 15, 1937. Philip I. Manson, A. K. Tichenor, and Ralph J. Cebrian, being three of the four serving in the previous term, were selected to serve as members of the bondholders’ committee under the extended agreement.

23. In the period March 1932 to March 1937, the bondholders repossessed 45.44 acres more than they were able to sell. Lease income from January 1, 1932 to December 31, 1936, was $125,071.12. The taxes and assessments paid on the lands in this period were $103,474.64, including $6,544.02 advanced on account of land contract purchasers. No payment was required in this period for the retirement of reclamation bonds. Accessibility to the pertinent lands from Sacramento was improved in 1935 by construction of a new bridge in lieu of one of the old ones.

24. In 1937 the committee paid its first distribution to the bondholders of $20 per bond, which represented a partial repayment of the $200 per bond advanced by the bondholders at the time of foreclosure 15 years earlier. On May 24,1937, the bondholders met in San Francisco and voted to extend the terms of the reorganization agreement another 5 years to June 15, 1942. Phillip I. Manson, A. K. Tichenor, and Ralph J. Cebrian were again selected to serve as members of the bondholders’ committee under the extended agreement.

25. From 1937 to World War II a number of improvements occurred that made the bondholders’ lands more desirable. Yolo County extended Park Boulevard from the bondholders’ lands to the Davis Highway and opened up Michigan Boulevard. In 1937 the bondholders’ committee interested Clyde W. Henry in coming into the area to provide water service as an independent public utility bearing the name, West Sacramento Water Company. The committee was endeavoring to satisfy requirements of the Federal Housing Administration as to water supply. The committee transferred all of its wells, piping and other properties to the water company and also paid over $4,500 in cash, of which $3,000 was later recovered by suit. A street lighting district was formed in West Sacramento City-Unit One and the county put in street lights. Also a sanitary district was formed by election to provide for sewers in the area. The bondholders contributed $500 to a $1,500 fund to pay attorneys’ fees and expenses incident to the organization of the district. Fire protection in the area was provided by a fire district.

26. In 1937 a firm of Sacramento real estate brokers, Wright and Kimbrough, approached the bondholders’ committee for the formation of a new subdivision on its lands called “Westacres.” The committee granted the brokers an exclusive sales agency and filed a subdivision map at their request. The committee also put in a number of minor improvements, such as the leveling and graveling of four streets, which cost the bondholders between $2,000 and $3,000. The brokers placed signs in the subdivision and sold a few of the lots. Because of their failure to sell more lots, the brokers relinquished their exclusive contract, and the selling of the lots was turned over to Arthur F. Turner on a commission basis, who thereafter sold the remaining lots on the tract.

27. In 1941 the committee joined with other owners to file a resubdivision of West Sacramento City-Unit One under the name West Sacramento City-Unit Two. The resubdi-vision eliminated the excessively wide 80-foot streets and the excessively small 25-foot lots in the old subdivision which made the lots more desirable. The committee spent approximately $10,000 for minor street improvements in the resub-divided area, which consisted of grading, graveling and oiling. The resubdivision was qualified for FHA approval and a master plan of the area was drawn up by FHA without cost to the bondholders.

28. At the time of the Westacres and West Sacramento City-Unit Two subdivisions, a disagreement arose between members of the committee over the development work that was being done. A decision was reached to complete that particular development work but thereafter not to use any of the bondholders’ money for development or for any purpose other than payments to the bondholders and for necessary expenses. As a result no further development work was done by the committee on its lands.

29. In the period March 1937, to December 1941, the committee sold 229.49 acres and 20 Riverbank lots. Lease income from January 1, 1937 to December 31, 1941, amounted to $135,352.58. In the same period taxes, assessments and payments on reclamation district bonds totaled $140,832.41, including $5,622.75 advanced on account of land contract purchasers. The committee paid to each bondholder $155 out of the proceeds of land sales in reduction of the $200 per bond originally advanced.

30. On May 23, 1942, the bondholders met at San Francisco and voted to extend the terms of the reorganization agreement an additional 5 years to June 15, 1947. Phillip I. Manson, A. K. Tichenor, and Ralph J. Cebrian were again selected as members of the committee.

Mr. Manson died on January 11, 1945, and plaintiff Thomas A. Allan, an attorney at law, was appointed to succeed him. Thereafter, by action of the bondholders in a meeting held May 29, 1947, Messrs. Cebrian, Tichenor and Allan, the plaintiffs herein, were again selected to serve for another 5 years to June 15, 1952, and ever since that time have been the duly constituted committee under the extended reorganization agreement.

31. A number of developments occurred in 1941 and 1942 that further enhanced the desirability of the bondholders’ lands. The El Rancho Motel was constructed which materially upgraded the commercial frontage on U.S. Highway 40. The West Sacramento Water Company drilled three new wells and laid 28,000 feet of pipe to provide better water service in the area. In West Sacramento City-Unit One a street lighting system was installed and street signs were erected. The school was enlarged and a new fire station was built.

32. The period 1942-1945 saw an end to home building activity in the area because of World War II. As a result demand for the bondholders’ lands for residential purposes was not great. In the period January 1942 to December 31, 1946, the committee sold 357.52 acres and 36 Riverbank lots.

On January 1,1942, the bondholders owned 2,149.68 acres, of which 1,686.61 were farm lands, and 43 Riverbank lots. On December 31,1946, the bondholders owned 1,792.16 acres, of which 1,425.16 were farm lands, and 7 Riverbank lots.

33. Lease income in the period J anuary 1,1942, to December 31,1946, totaled $229,733.73. All farm lands were leased and the annual lease incomes were as follows: $34,246.35 in 1942; $47,790.58 in 1943; $52,423.56 in 1944; $47,704.60 in 1945; and $47,568.64 in 1946. The lease income in 1941 had been $30,127.08. For the years 1942 through 1946, taxes, assessments and reclamation bond payments totaled $130,-562.60, including $7,180.60 advanced for land contract purchasers. The first payment for the services of the committee members was authorized and paid starting in 1943 for services rendered from 1922 to date of payment. This payment was not made until after the final $25 per bond payment was made to repay the $200 per bond advanced by the bondholders at the time of foreclosure. This payment occurred in 1943. The committee made the first payment on bond principal, which consisted of a total of $200 per $1,000 bond, by the end of 1945.

34. The year 1946 marked the turning point in the committee’s efforts to dispose of the bondholders’ lands. Starting in 1946 a number of circumstances occurred that permitted the bondholders to hasten the sale of their properties. At the end of World War II there was a pent-up demand for homes in the Sacramento area caused by the postponement of building during the war and by the influx of new residents into the community. Sales were easier to make than ever before. The new people coming into the area did not have the prejudice against West Sacramento that old-time Sacramentans had. The communities of Bryte and Broderick were improved by a new development called Hal-com Village. The Davis Highway (U.S. 40) was widened which helped the commercial area developing around the El Rancho Motel. In 1946 commercial activity was further stimulated by the authorization of a federal port development.

35. On January 1,1946, the bondholders owned 2,116.5296 acres and 10 Riverbank lots of the property originally acquired. The property owned was scattered throughout an areas of 28 square miles and was of a mixed character and state of development. The lands of the bondholders in 1946 were not suitable for sale in one transaction because of their scattered and mixed character which made it impossible to establish any uniform standards.

36. In the year 1946 the bondholders sold 136.0139 acres of land for a gross price of $141,036.16, on which $11,824.72 expenses of sale were incurred, leaving a net gain realized of $87,704.62 after allocating $41,506.82 of basis to the property sold. On all of these sales, except one to a church, a broker’s commission was paid. These sales were handled by Arthur F. Turner, a licensed real estate broker since 1931, operating as West Sacramento Land Company. The acreage was sold in 76 parcels to 56 purchasers of whom 7 were builders, 6 were former owners who were extending their holdings, and 40 were persons who came to the committee.

37. In 1946 the committee paid to bondholders an additional $150 per bond, raising the total repaid to $350 per $1,000 bond. In that year the committee made an expenditure of $3,393.50 for land leveling, which was for the purpose of leveling an old river levee and using the soil to fill in the borrow pit, resulting in the reclamation for the bondholders of 12 acres of previously unusable land.

38. In 1946, the bondholders received $47,568.64 in lease income and paid out $29,444.47 in assessments, taxes, and reclamation bond payments, including $2,121.35 advanced for the account of land contract purchasers. Other expenses incurred in the maintenance of the properties totaled $33,711.06, including $18,844.19 for the committee’s West Sacramento office.

39. In 1947, the bondholders sold 144.6021 acres of land for a gross sales price of $181,442.65. These sales resulted in a net gain of $138,016.49 after deducting expenses of sale of $11,047.91 and an allowance for basis of $31,647.04. This net gain was realized on the sale of 62 parcels to 45 different purchasers, 9 of whom were builders and 7 of whom were former owners acquiring additional property. All of the sales were made through West Sacramento Land Company, as in the year 1946, and a broker’s commission was paid, except in the case of sales to the broker himself, to one Merkeley and of a right-of-way.

40. One of the sales in 1947 was of 30.126 acres to Turner and Williams for the development of a new subdivision known as Linden Acres. The area was subdivided and developed solely by Turner and Williams. Because Turner and Williams did not have legal title to the property at the time the subdivision map was filed, the signatures appearing on the map are those of the committee members.

41. In 1947 the bondholders were paid an additional $75 per bond, which raised the total repaid to the bondholders to $425 of principal per $1,000 bond.

In 1947 the taxes and assessments paid on the bondholders’ lands ($35,769.23, including $14,277.24 advanced for land contract holders) exceeded lease income received which amounted to $28,215.11. Expenses other than these carrying charges amounted to $47,276.81, including $18,981.65 for the committee’s West Sacramento office.

42. In 1948 the bondholders sold 109.233 acres of land for a gross price of $137,742.33. They realized a net gain of $106,377.39, after deducting $6,617.08 expenses of sale and $24,747.86 of allocable basis. Sixty parcels of land were sold to 41 separate purchasers, of whom 7 were builders and 4 were former owners acquiring additional property. One of the sales in 1948 was consummated by 5 separate conveyances under the exercise by the purchasers of an option granted earlier in the year. These sales, other than the ones to the broker himself, were handled through West Sacramento Land Company, as in 1946 and 1947, and a commission was paid on them.

43. During the year 1948 an additional $75 per bond was paid to bondholders, raising the total paid toward principal from the liquidation to $500 per $1,000 bond.

In 1948 lease income received by the bondholders from their lands was not sufficient to pay carrying charges against the lands. In that year the carrying charges totaled $35,771.56, including $4,934.14 of taxes and assessments advanced for land contract holders, against lease income of $26,430.49. Expenses other than carrying charges amounted to $42,479.43, including $17,307.42 for the West Sacramento office.

44. In 1949 the bondholders sold 60.66481 acres of land at a gross price of $87,511.61. These sales resulted in a net gain of $70,797.68 after deduction of $2,845.86 for expenses of sale and $13,868.07 for allocable basis. These sales consisted of 28 parcels which were purchased by 19 different purchasers, 4 of whom were builders, 3 of whom were existing owners enlarging their holdings, and 2 of whom were public agencies or utilities. Two of the sales made in 1949 represented the exercise by the purchasers of options granted in prior years. All these sales but the two to the public agencies and the sales to the broker himself were handled through West Sacramento Land Company, as in the preceding years, and commissions were paid.

45. In 1949 the final payment on the reclamation district bonds was made and their first lien was discharged. In that year carrying charges against the lands in the sum of $31,681.17, including $2,881.83 advanced for land contract holders, was less than lease income received in the sum of $39,847.11. However, other expenses of maintenance paid in 1949 amounted to an additional $26,320.06, including $16,851.31 paid as expense of maintaining the West Sacramento office.

46. In 1950, the bondholders sold 133.5654 acres of land for a gross price of $415,334.93, which resulted in a net gain of $338,143.19 after deducting $10,550.10 for selling expenses and $66,641.64 as basis allocable to the lands sold. These sales involved 29 parcels bought by 19 purchasers, 4 of whom were builders and 5 of whom were owners extending their holdings in the area. Two of the sales were made pursuant to option agreements, one of which had been executed in 1948, and the other in 1950. The largest sale of $155,000 was to the State of California for freeway purposes. All the sales, other than those to public agencies and to the broker himself, were handled through West Sacramento Land Company as in previous years, and real estate commissions were paid.

47. In Í950 the bondholders received $28,504.31 of lease income from their lands which exceeded carrying charges on the lands of $23,798.33, including $4,263.75 advanced for the account of land contract purchasers. Expense of maintaining the property amounted to an additional $32,242.95, including $16,857.65 paid as expense of maintaining the West Sacramento office.

48. In 1950 the bondholders spent $9,050 to purchase a 30-foot right-of-way from the Southern Pacific Railroad. The right-of-way had formerly belonged to the bondholders and was repurchased by them in order to clear up land titles of the adjacent properties.

The federal port development, previously mentioned in finding 34, known as the Sacramento-Yolo Port District, had been approved by the voters in 1947, authorized by the Federal Government, and levees and fills had been constructed at the terminal site preparatory to building a grain elevator, warehouse and office. The elevator was completed and in use in 1950.

49. Of the 2,606.76 acres of land and 235 lots acquired by the bondholders at the foreclosure in 1922, the successive committees by the end of 1950 had sold 1,281.17 acres of land and 233 lots. The total price received for such sales was approximately $567,000. During the entire period no purchases of additional property were made except the right-of-way mentioned in finding 48. By the end of 1950 the bondholders had received repayment of the $200 per bond advanced by them to finance the reorganization agreement plus $500 of the $1,000 principal of each bond. In all this period from 1922 through 1950 no payment was made for interest on the bonds.

At no time during the period from the date of foreclosure to the end of 1950 did the committee delay disposition of the bondholders’ lands in the hope of a speculative increase in prices in the future. At all times the committee was willing to sell the bondholders’ lands if a fair price, based upon conditions existing at the time of sale, were offered. The committee would not, however, sell any land for less than its appraised value at the time of foreclosure. During the period 1946 through 1950, inclusive, no sales were turned down because the prices were inadequate.

50. Mr. Arthur F. Turner was the real estate broker who handled the sales of the land of the bondholders in the years 1946-1950, inclusive, during which years he operated his business as an individual under the name of the West Sacramento Land Company. During recent years his business as a real estate broker and land developer has been operated in corporate form under the same name, and the corporate stock is owned entirely by Mr. Turner and his family. Mr. Turner has been a licensed real estate broker since 1931. He and his firm have been engaged for many years in the general real estate brokerage business in the West Sacramento area, representing many clients and customers other than the bondholders’ committee. On sales handled for the committee, other than those to public agencies, or in which Mr. Turner was interested as a purchaser, the bondholders’ committee paid to Mr. Turner the minimum real estate broker’s commission approved by the Sacramento Real Estate Board. Mr. Turner’s real estate brokerage business was entirely independent of the business of the bondholders’ committee and the committee had no right and made no attempt to supervise this business.

51. Mr. Turner was employed by the Company as a bookkeeper in February 1913. After his return from military service in 1919, the Company employed him as a lease manager for outside work, such as the leasing and management of its farm lands, collecting rents, and selling crops. Following the foreclosure, he was employed as superintendent by the bondholders’ committee to continue the duties for which he previously had been employed by the Company. This employment, for which he has been paid a small salary, has continued to the present time. During the years 1946 through 1950, his salary was $250 per month. In both his capacities as an employee of the bondholders’ committee and as an independent broker, Mr. Turner used an office furnished by the committee in the old administration building built by the Company in 1914. The original identification of this office as “West Sacramento Company” remained over the door. Some time after 1950, after the old building had been sold to the port development authority, Mr. Turner built a new building for himself, which thereafter housed both the committee field office and Mr. Turner’s real estate business. During the years 1946 through 1950, the committee furnished a full-time stenographer for Mr. Turner. In addition, the committee employed a part-time bookkeeper and an outside man, but Mr. Turner himself paid part of the salary of these two persons.

Prior to 1946, Mr. Turner commenced a program of real estate development independent of the business of the committee, including the building and selling of approximately 2,000 houses. His activities were confined to the West Sacramento area, and hence he operated under the assumed name of West Sacramento Land Company.

With respect to the selling of bondholders’ lands, Mr. Turner conducted a sales effort through limited advertising in the local newspapers, and also employed salesmen. He paid such sales expenses as a part of the operation of his own business, and was not reimbursed by the committee except through the payment of commissions on accomplished sales. As a developer of bondholders’ lands purchased by him, Mr. Turner operated sometimes through a partnership with Mr. Eugene L. Williams. Mr. Williams never owned any of the bonds of the Company. Commencing in 1936, however, Mr. Turner, because of his confidence in the ultimate success of the West Sacramento area, began to purchase such bonds from individual owners, and eventually acquired a total of 100 bonds. The only other large holder of bonds was Mr. Phillip I. Manson, a committee member, who owned 100 bonds at the time of his death in January 1945. The committee sold the bondholder’s lands in quantity to Mr. Turner and to the partnership of Turner and Williams primarily for the reason that there were no other prospective buyers. Mr. Turner’s confidence in the West Sacramento area and his many years of activity in the development of the area through the efforts of his real estate firm have resulted in his being known as the unofficial “Mayor” of West Sacramento. His personal activities with respect to real estate have greatly exceeded his duties as the property manager of the bondholders’ lands. Mr. Turner made purchases of the bondholders’ lands in 1947,1948, 1949, and 1950. The partnership of Turner and Williams made purchases in 1947,1948, and 1950. Mr. Turner was a member of the Sacramento Real Estate Board, the National Association of Real Estate Boards, and the Urban Land Institute. In 1922 and ever since that time, Mr. Turner has been a trustee of the reclamation district and at the present time is serving as its secretary.

52. Under the reorganization agreement, the successive bondholders’ committees were authorized to lease the lands pending sale, but to sell such lands at a fair price as rapidly as the same could reasonably be sold. The sales by the successive committees were made as rapidly as possible, securing a fair price at or above the base valuation at time of foreclosure, without spending money for development, all in accordance with an established policy of the successive committees.

The reorganization agreement provided that moneys received by the committee from land sales, leases and other sources, were required to be paid out in order of priority (1) for reasonable expenses of management, (2) for taxes and assessments, (3) for mortgage payments, and (4) in payments to the bondholders (a) for their $200 advance per bond and (b) for the repayment of bond principal. Such payments were to disburse all net receipts except sufficient money to meet current expenses and taxes. These requirements of the reorganization agreement were practiced by the sucessive committees as an established policy, and money for the development of the lands was not expended except to the limited extent previously stated in these findings.

53. The sales of the lands of the bondholders by the committee and trustees were handled in a manner different from that of a real estate developer. The established policy not to expend funds for developments, and to make sales at a price less than that which would have been obtained by a developer willing to expend capital for improvements, is evidenced by one transaction in 1950 in which the trustees sold slightly over 20 acres of land to the partnership of Turner and Williams for $18,765, which included taxes. Such property was developed as Westfield Unit No. 2, containing 110 lots, at a cost to Turner and Williams of about $70,000 for streets, sewers, water system, sidewalks, gutters, surveying and engineering. Additional expenses of this partnership of approximately $24,000 covered commissions to salesmen, advertising, conveying costs, overhead expenses, office expense, and miscellaneous expense. The total selling price realized by the partnership was $138,650, costs and expenses were $112,250, and the net profit was $26,400. These figures are typical of subdivisions of the same size in the West Sacramento area in the years 1946 through 1950.

54. In the period 1946-1950, inclusive, the committee did not hold regular meetings but met irregularly as the need for meetings arose. No minutes were kept of meetings.

55. Under the terms of the reorganization agreement the liability of the bondholders for the acts of the committee or any member of the committee, other than for willful misconduct, was unlimited. The bondholders’ liability for the acts of the committee and its members extended not only to contractual matters but also to liabilities incurred which arose out of negligence, omission to act, or other torts.

56. In the years 1946 through 1950, inclusive, the committee filed fiduciary income tax returns as trustees for the bondholders and paid, after adjustment, the following amounts of tax:

Year Tam Paid
1946-$23,535.45
1947- 26,141.31
1948- 14,893.26
1949- 14,196.93
1950- 89,006.83

Thereafter defendant audited the tax returns filed by the committee and determined deficiencies in the following amounts which were paid by the committee, with interest, as follows:

Year Deficiency Interest Paid Total Paid
1946_$11,564.36 $3,557.55 $15,121.91
1947- 18,827.05 4,662.14 23, 489.19
1948- 18,485.81 3,460.49 21,954.30
1949- 11,959.40 2,243.94 14,203.34
1950- 83,811.58 10,696.88 94,508.46

Timely claim for refund was filed for each of these deficiencies paid and this suit was timely brought in this Court after each of the claims was denied. The grounds upon which this suit was presented and tried are the same as those stated in the respective claims for refund.

57. In the event that plaintiffs are held to constitute an association taxable as a corporation, plaintiffs are entitled to recover an overpayment of $9,614.31 of excess profits taxes for the year 1950 as a result of an unused excess profits credit from the calendar year 1951 in the amount of $64,353.20.

58. Pursuant to Rule 38(c) the trial of this case has been limited to the issues of law and fact relating to the right of the plaintiffs to recover, reserving the determination of the amount of recovery, if any, for further proceedings.

CONCLUSION OF LAW

Upon the foregoing findings of fact which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are entitled to recover, with interest as provided by law, and judgment will be entered to that effect.

The amount of recovery will be determined pursuant to Rule 38 (c) of the Rules of this court.

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered on July 1, 1960, that judgment for the plaintiffs be entered for $169,277.20, together with interest thereon from May 14,1953, as provided by law. 
      
       Internal Revenue Code of 1939 :
      “§ 117. Capital gains and losses — (a) Definitions.
      “As used In this chapter—
      “(1) Capital assets.
      “The term ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include—
      “(A) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; * * [26 U.S.C. (1952 ed.) § 117.]
     
      
       Internal Revenue Code of 1939 :
      “Sec. 3797. Definitions
      “(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—
      ******
      “(3) Corporation. — The term ‘corporation’ includes associations, joint-stock companies, and insurance companies.
      * * * * $
      “(6) Fiduciary. — The term ‘fiduciary’ means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.”
      * * • • •
      [26 U.S.C. 1952 ed., Sec. 3797.]
     
      
       Treasury Regulations 111, promulgated under the Internal Revenue Code of 1939:
      “Sec. 29.3797 — 2. Association. — The term ‘association’ Is not used In the Internal Revenue Code in any narrow or technical sense. It includes any organization, created for the transaction of designated affairs, or the attainment of some object, which, like a corporation, continues notwithstanding that its members or participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a committee, a board, or some other group acting in a representative capacity. It is Immaterial whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It Includes a voluntary association, a joint-stock association or company, a ‘business’ trust, a ‘Massachusetts’ trust, a ‘common law’ trust, an ‘investment’ trust (whether of the fixed or the management type), an inter-insurance exchange operating through an attorney in fact, a partnership association, and any other type of organization (by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. If the conduct of the affairs of a corporation continues after the expiration of its charter, or the termination of its existence, it becomes an association.
      “Sec. 29.3797-3 Association Distinguished prom Trust. — The term ‘trust’, as used in the Internal Revenue Code, refers to an ordinary trust, namely, one created by will or by declaration of the trustees or the grantor, the trustees of which take title to the property for the purpose of protecting or conserving it as customarily required under the ordinary rules applied in chancery and probate courts. The beneficiaries of such a trust generally do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. Even though the beneficiaries do create such a trust, it is ordinarily done to conserve the trust property without undertaking any activity not strictly necessary to the attainment of that object.
      “As distinguished from the ordinary trust described in the preceding paragraph there is an arrangement whereby the legal title to a property is conveyed to trustees (or a trustee) who, under a declaration or agreement of trust, hold and manage the property with a view to income or profit for the benefit of beneficiaries. Such an arrangement is designed (whether expressly or otherwise) to afford a medium whereby an income or profit-seeking activity may be carried on through a substitute for an organization such as a voluntary association or a joint-stock company or a corporation, thus obtaining the advantages of those forms of organization without their disadvantages. The nature and purpose of a cooperative undertaking will differentiate it from an ordinary trust. The purpose will not be considered narrower than that which is formally set forth in the instrument under which the activities of the trust are conducted.
      “If a trust is an undertaking or arrangement conducted for income or profit, the capital or property of the trust being supplied by the beneficiaries, and if the trustees or other designated persons are, in effect, the managers of the undertaking or arrangement, whether the beneficiaries do or do not appoint or control them, the beneficiaries are to be treated as voluntary joining or cooperating with each other in the trust, just as do members of an association, and the undertaking or arrangement is deemed to be an association classified by the Internal Revenue Code as a corporation. However, the fact that the capital or property of the trust is not supplied by the beneficiaries is not sufficient reason in Itself for classifying the arrangement as an ordinary trust rather than as an association.
      “By means of such a trust the disadvantages of an ordinary partnership are avoided, and the trust form affords the advantages of unity of management and continuity of existence which are characteristic of both associations and corporations. This trust form also affords the advantages of capacity, as a unit, to acquire, hold, and dispose of property and the ability to sue and be sued by strangers or members, which are eharaetertistic of a corporation; and also frequently affords the limitation of liability and other advantages characteristic of a corporation. These advantages which the trust form provides are frequently referred to as resemblance to the general form, mode of procedure, or effectiveness in action, of an association or a corporation, or as ‘quasi-corporate form’. The effectiveness in action in the ease of a trust or of a corporation does not depend upon technical arrangements or devices such as the appointment or election of a president, secretary, treasurer, or other ‘officer,’ the use of a ‘seal,’ the issuance of certificates to the beneficiaries, the holding of meetings by managers or beneficiaries, the use of a ‘charter’ or ‘by-laws,’ the existence of 'control' by the beneficiaries over the affairs of the organization, or upon other minor elements. They serve to emphasize the fact that an organization possessing them should be treated as a corporation, but they are not essential to such classification, for the fundamental benefits enjoyed by a corporation, as outlined above, are attained, in the case of a trust, by the use of the trust form itself. The Internal Revenue Code disregards the technical distinction between a trust agreement (or declaration) and ordinary articles of association or a corporate charter, and all other differences of detail. It treats such a trust according to Its essential nature, namely, as an association. This Is true whether the beneficiaries form the trust or, by purchase or otherwise, acquire an interest in an existing trust. The mere size or amount of capital invested in the trust is of no importance. Sometimes the activity of the trust is a small venture or enterprise, such as the division and sale of a parcel of land, the erection of a building, or the care and rental of an office building or apartment house; sometimes the activity is a trade or business on a much larger scale. The distinction is that between the activity or purpose for which an ordinary strict trust of the traditional type would be created, and the activity or purpose for which a corporation for profit might have been formed.
      “Sec. 29.3797-9. Fiduciary. — ‘Fiduciary’ is a term which applies to persons who occupy positions of peculiar confidence toward others, such as trustees, executors, and administrators. A fiduciary for income tax purposes is a person who holds in trust an estate to which another has the beneficial title or In which another has a beneficial interest, or receives and controls income of another, as In the case of receivers. A committee or guardian of the property of an incompetent person Is a fiduciary.”
     
      
      
         The Commissioner of Internal Revenue recently reiterated this with reference to the 1954 Code, when on December 23, 1959 he gave notice of his intention to issue the following regulations:
      “§ 301.7701-2. Associations. — (o) Characteristics of corporations. (1) The term ‘association’ refers to an organization whose characteristics require it to be classified for purposes of taxation as a corporation rather than as another type of organization such as a partnership or a trust. There are a number of major characteristics found in a pure corporation which, taken together, distinguish it from other organizations. These are: (i) Associates, (ii) an objective to carry on business and divide the gains therefrom, (iii) continuity of life, (iv) centralization of management, (v) liability for corporate debts limited to corporate property, and (vi) free transferability of interests. Whether a particular organization is to be classified as an association must be determined by taking into acount the presence or absence of each of these corporate characteristics. The presence or absence of these characteristics will depend upon the facts in each individual case. In addition to the major characteristics set forth in this subparagraph, other factors may be found in some cases which may be significant In classifying an organization as an association, a partnership, or a trust. An organization will be treated as an association if the corporate characteristics are such that the organization more nearly resembles a corporation than a partnership or trust. See Morrissey et al. v. Commissioner (1935) 296 U.S. 344.
      “(2) Since associates and an objective to carry on business and divide the gains therefrom are essential characteristics of all business organizations (other than the so-called one-man corporation and the sole proprietorship), the absence of either of these essential characteristics is sufficient to cause an organization not to be classified as an association. Some of the major characteristics of a corporation are common to trusts and corporations, and others are common to partnerships and corporations. Characteristics common to trusts and corporations are not material In attempting to distinguish between a trust and an association, and characteristics common to partnerships and corporations are not material In attempting to distinguish between an association and a partnership. For example, since centralization of management, continuity of life, free transferability of interests, and limited liability are generally common to trusts and corporations, the determination of whether a trust which has such characteristics is to be treated for tax purposes as a trust or as an association depends on whether there are associates and an objective to carry on business and divide the gains therefrom. On the other hand, since associates and an objective to carry on business and divide the gains therefrom are common to both corporations and partnerships, the determination of whether an organization which has such characteristics is to be treated for tax purposes as a partnership or as an association depends on whether there exists centralization of management, continuity of life, free transferability-of interests, and limited liability.” [24 Fed. Reg. 10451.]
     
      
       The Commissioner also recently indicated agreement with this. His proposed regulations include the following:
      “§ 301.7701-4 Trusts
      # # *
      “(e) liquidating trusts. Certain organizations which are commonly known as liquidating trusts are treated as trusts for purposes of the Internal Revenue Code. An organization will be considered a liquidating trust if it is organized for the primary purpose of liquidating and distributing the assets transferred to it, and if its activities are all reasonably necessary to, and consistent with, the accomplishment of that purpose. A liquidating trust is treated as a trust for purposes of the Internal Revenue Code because it is formed with the objective of liquidating particular assets and not as an organization having as its purpose the carrying on of a profit-making business which normally would be • conducted through business organizations classified as corporations or partnerships. However, if the liquidation is unreasonably prolonged or if the liquidation purpose becomes so obscured by business activities that the declared purpose of liquidation can be said to be lost or abandoned, the status of the organization will no longer be that of a liquidating trust. Bondholders’ protective committees, voting trusts, and other agencies formed to protect the interests of security holders during insolvency, bankruptcy, or corporate reorganization proceedings are analogous to liquidating trusts but if subsequently utilized to further the control or profitable operation of a going business on a permanent continuing basis, they will lose their classification as trusts for purposes of the Internal Revenue- Code.” [24 Fed. Reg. 10454-10455.]
     
      
       Footnote 3, supra.
      
     