Findings of Fact 149 C. Cls. account in plaintiff's general ledger. At the end of each calendar year plaintiff closed this account and transferred part of the balance in it to a "Reserve for Members" account. In this way, it reserved on its books a part of the year's income to meet obligations to its members under their service or membership contracts which might arise in the following year, and before the expiration of their membership contract. 12. In line with the foregoing, plaintiff prepared and submitted its Federal income tax returns on a calendar year basis and adjusted its reported income as follows: In the 1946 return it deferred from income $40,005 of dues collected in that year, but credited the amount to income in 1947; in the 1947 return it deferred from income $67,360.50 of dues collected in that year, but credited that amount to income in 1948; in the 1948 return it deferred from income $85,207.07 of dues collected in that year, but credited that amount to income 1949; in the 1949 return it deferred from income $71,094.26 of dues collected in that year for credit to income in 1950. In the years 1947, 1948, and 1949, the plaintiff incurred expenses relating to the acquisition of members of $30,840.96, $33,028, and $38,057.81, respectively. The full amount of these expenses was deducted on the plaintiff's tax return in the year when these expenses were incurred. 13. Subsequently, the Internal Revenue Service examined plaintiff's tax returns for the years in question. It made no adjustments to the returns with respect to any of the expenses claimed by plaintiff except for an adjustment of $400 for depreciation which is not in controversy here. It did, however, disallow plaintiff's deferral of income from one year to another and, by restoring the deferred income to the year in which it was received by plaintiff, it determined that plaintiff owed additional taxes of $1,535.27 for the year 1947; $948.74 for the year 1948 and $2,904.63 for the year 1949. These deficiencies in tax plus interest of $387.35 for the year 1947; $182.44 for the year 1948 and $384.29 for the year 1949 were paid by plaintiff on June 17, 1952. 14. On November 13, 1953 plaintiff filed timely claims for refund for each of the years in suit which claims for refund 344 Syllabus raised the issues upon which plaintiff now seeks recovery in this action. After consideration of plaintiff's claims for refund, the Commissioner of Internal Revenue notified plaintiff by registered letter, dated June 15, 1954, that its claims for refund had been denied. 15. The method of accounting used by the plaintiff, both in the keeping of its books of account, and in the reporting for Federal income tax in the years 1947, 1948, and 1949, did not clearly reflect its income. 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 plaintiff is not entitled to recover, and its petition is therefore dismissed. 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] ON THE PROOFS Taxes, income and excess profits; capital gains; ordinary income.— In an action to recover income and excess profits taxes assessed and collected from plaintiffs on the theory that plaintiffs were an association taxable as a corporation under section 3739 of the Internal Revenue Code of 1939 and that the gains realized from the sale of real estate were taxable as ordinary income rather than as capital gains, it is held (1) that the plaintiffs were liquidating trustees of the bondholders' property acquired on foreclosure to enforce a debt, and on the basis of all the facts of record, were not engaging in the real estate business and thus the gains were taxable as capital gains and not as ordinary income; and (2) that under the tests traditionally applied by the courts and the Treasury Department regulations to determine whether a trust is an association taxable as a corporation or as a fiduciary, the plaintiffs' organization did not bear a substantial resemblance to a corporation and should not be taxed as such. Plaintiffs are entitled to recover. Internal Revenue 409.8, 813 Opinion of the Court 149 C. Cls. Taxes, income; capital gains; property held for sale to customers.— Where realty sales were made by liquidating trustees of bondholders' property acquired on foreclosure to enforce a debt as the only means of obtaining satisfaction, and the trustees did not delay sale of the land in the hope of speculative increases in future prices, the sales were made by a broker who defrayed promotion costs from commissions and the trustees did not engage in extensive development work even though it took 28 years to liquidate half of the land holdings and even though the frequency and continuity of the sales during the four years in suit would be sufficient to hold, if the decision were dependent on such sales alone, that gains were from sales in the ordinary course of business, the sales were sales of capital assets and the proceeds were subject to treatment as capital gains for tax purposes. Internal Revenue 409.8 Taxes, income; corporations; associations taxable as corporations; trusts as associations.-Whether or not an association is taxable as a corporation or as a trust depends upon whether the association substantially resembles a trust or a corporation under the various criteria laid down by the courts and the regulations of the Treasury Department. Thus, where the association does not own property as an entity, has no continuity of existence and has no limitation on personal liability, the association was not a corporation for tax purposes. Internal Revenue 815 Mr. Valentine Brookes for the plaintiffs. Mr. Arthur H. Kent, Mr. Paul E. Anderson, and Messrs. Kent and Brookes were on the briefs. Mr. Harold S. Larsen, with whom was Mr. Acting Assistant Attorney General Howard A. Heffron, for the defendant. Mr. James P. Garland and Mr. Lyle M. Turner were on the brief. LARAMORE, 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 357 Opinion of the Court 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 refund 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. Opinion of the Court 149 C. Cls. 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. 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 the 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 |