TAXATION - INCOME TAX - A FIXED INVESTMENT TRUST AS A TAXABLE ASSOCIATION

Bonds of a prescribed kind were deposited in an investment trust with defendant, who issued certificates representing equal undivided interests in the trust corpus. Additional interests were created by the deposit of eligible bonds and sufficient cash to make up the current value of an interest, and all such bonds and cash were commingled. The depositor was not confined in making up the new units to the same kinds of bonds that were used in the original units, but could vary them in his discretion. The depositor could order the elimination of unsound bonds by sale, and the proceeds of such a sale together with interest and the proceeds from called or matured bonds were to become currently distributable funds and could not be reinvested.

The commissioner assessed an income tax deficiency against defendant on the ground that it was taxable as an association. Held, the power in the depositor to vary the character of the investment by exercising his discretion in the selection of bonds for additional units constituted business activity and made the trust taxable as an association under the Revenue Act of 1934, § 801(a) (2). Commissioner of Internal Revenue v. North American Bond Trust, (C. C. A. 2d, 1941) 122 F. (2d) 545 (Chase, J., dissenting).