*1031 Two national banks were consolidated or merged under the amended charter of one of them and certain of their "excess" assets which were not taken over by the new bank were transferred to trustees for liquidation. The income of the trust was to be distributable annually or oftener and capital distributions were to be made at the discretion of the trustees. Held, that the trust so created was liquidating trust and not an association taxable as a corporation; held, further, that the income of the trust was distributable annually and was therefore deductible by the trust and taxable to the beneficiaries.
*473 These proceedings involve income tax deficiencies and penalties for the years 1930 and 1931 as follows:
| Petitioner | Docket No. | Year | Deficiency | Penalty |
| 1930 | $8,396.21 | $2,099.05 | ||
| Fidelity National Bank & Trust Co., alleged to be an association taxable as a corporation | 85644 | 1931 | 991.14 | 247.79 |
| 1930 | 8,396.21 | 2,099.05 | ||
| Fidelity National Bank & Trust Co. of Kansas City, a national banking association | 85648 | 1931 | 991.14 | 247.79 |
| 1930 | 9,258.05 | 2,314.51 | ||
| Henry C. Flower, Lester W. Hall and W. D. Johnson, trustees for 1931 stockholders of Fidelity National Bank & Trust Co. of Kansas City of record, December 31, 1928. | 85649 | 1931 | 280.56 | 70.14 |
*1032 The above deficiencies have all been computed on substantially the same items of income and it is conceded by the respondent that such income is taxable to only one of the petitioners, as the Board shall determine herein.
The respondent, on April 6, 1936, sent out two deficiency notices, one to "Fidelity National Bank and Trust Company, % Union National Bank, Kansas City, Missouri," and one to "Henry C. Flower, Lester W. Hall and W. D. Johnson, Trustees for Fidelity National Bank and Trust Company, % Union National Bank, Kansas City, Missouri."
*474 The Fidelity National Bank & Trust Co. has filed two petitions, one as an alleged association taxable as a corporation (Docket No. 85644), and the other as "a national banking association" (Docket No. 85648).
In addition to the preliminary question as to which of the petitioners, if any, is liable for the deficiencies asserted, there are several issues on the merits in Docket Nos. 85644 and 85649, and a statute of limitations issue in Docket No. 85648.
The facts bearing on the preliminary issue are contained for the most part in documentary evidence consisting of several consolidation and trust agreements and other contracts*1033 between the organizations involved, or their stockholders or other parties in interest. Generally speaking, there is no dispute as to any of the material facts.
FINDINGS OF FACT.
On December 31, 1928, the Fidelity National Bank & Trust Co. of Kansas City, hereinafter called the Fidelity Bank, and the New England National Bank & Trust Co. in Kansas City, hereinafter called the New England Bank, were consolidated in accordance with the laws of the National Banking Act and under the charter of the former corporation. The new organization thus created will be referred to hereinafter as the consolidated bank.
Under the consolidation agreements between the Fidelity Bank and the New England Bank, and other agreements between the stockholders, each of these banks contributed to the consolidated bank certain assets of an aggregate value equal to its capital stock of $3,000,000 and a paid-in surplus of $950,000. Prior to the effective date of the consolidation, each of the old banks transferred its remaining assets, referred to as "excess assets", to trustees for the benefit of its stockholders. The capital structure of the consolidated bank consisted of 30,000 shares of stock of*1034 a par value of $100 each, of which 2,000 were sold to the public and 28,000 were issued to the stockholders of the old banks in proportion to their beneficial interests in the assets contributed to the consolidated bank.
The tax controversy herein arises from the operations of the trustees in handling the excess assets transferred to them by the Fidelity Bank.
At the time of the consolidation referred to above the Fidelity Bank had several subsidiary companies with which it filed a consolidated return for the year 1928. The subsidiary companies and their assets were all brought under the consolidation and such of their assets as were not transferred to the consolidated bank, or the stock of the companies holding them, were transferred to the trustees mentioned above.
*475 The original agreement between the Fidelity Bank and the New England Bank was entered into on November 13, 1928. Its provisions have no direct bearing on the matters in controversy in these proceedings except as referred to above. A further agreement, called the "Agreement of Consolidation * * *", was entered into between the same parties on December 11, 1928. This agreement, after reciting the*1035 general terms of the consolidation substantially as set forth in the prior agreement, provided:
SECTION 6. Such assets of either Association [the Fidelity Bank or the New England Bank] as it shall not consider desirable to carry into the consolidation, or as shall not be necessary to make up its contribution to the capital and surplus as aforesaid, shall be transferred by it before the effective date of the consolidation to a trustee or trustees for the ultimate benefit of its shareholders, upon whatever terms and under whatever conditions shall be deemed proper.
Also, on December 11, 1928, a "Supplemental Agreement * * *" was entered into by the same parties, which contained the provision that the excess assets of the old banks should be transferred to the trustees as provided in section 6 of the consolidation agreement quoted above, and that:
(e) Subject to the provisions of Sub-Paragraphs (a), (b), (c) and (d), [not material here] the Trustees shall proceed to liquidate and distribute the proceeds of the assets in their hands as above provided for the benefit of the stockholders of the Fidelity National as of record prior to the effective date of the consolidation, in*1036 accordance with the terms of a trust agreement to be executed by them and of trust certificates to be issued by them to said stockholders in substantially the form hereto attached.
Also on December 11, 1928, a "Trust Agreement" was entered into between Henry C. Flower, Lester W. Hall, and W. D. Johnson, trustees, and the stockholders of the Fidelity Bank. This agreement provided that certain assets, as set forth in an attached schedule, had been transferred to the trustees, and that:
5. Said Trustees shall, subject to Paragraphs 3 and 4 hereof, [not here material] collect and turn said assets into money and distribute the same from time to time as rapidly as is possible and consistent with the realization of fair prices therefor. * * *
The trustees were given very broad powers intended to embrace all activities necessary to the liquidation of the trust assets. They were specifically empowered and directed to pay out of the trust estate all taxes that had been or might be assessed against the Fidelity Bank and all expenses incurred by it in connection with its business operations prior to January 1, 1929, and also at any time within 180 days from the date of the consolidation*1037 to make substitution out of the assets in their hands of any of the assets which the Fidelity Bank had contributed to the consolidated bank, if so recommended by an appraisal committee acting for the consolidated bank.
*476 It was further provided in the trust agreement that:
7. All income from the trust estate not needed for expenses or for the purposes authorized herein shall be distributed to the beneficiaries annually; but the Trustees may at any time make more frequent distributions of income when in their judgment it can be done without injury or risk to the trust estate.
Distributions of capital shall also be made from time to time at the discretion of the Trustees, it being the intention hereof that all cash capital in the trust estate not in their discretion deemed necessary to be retained for the proper purposes hereunder, shall be distributed annually or oftener.
Transferable certificates were issued by the trustees to the beneficiaries in proportion to their interests in the trust assets.
The trustees were to serve without remuneraton but were to be reimbursed for all expenses and outlays incurred on behalf of the trust.
All of the provisions of*1038 the contract and agreements referred to above were ratified, where necessary, by the stockholders of the corporations involved and were substantially performed in all matters herein material.
The so-called "excess assets" of the Fidelity Bank were formally transferred to the three above named trustees on December 31, 1928, and the trustees have continued to hold them, or some of them, under the conditions of their trust up to the present time.
OPINION.
SMITH: The above facts are all of those essential to the general or preliminary issue raised. In view of our ruling on this issue, as discussed below, that none of the petitioners in these proceedings is liable for any of the tax deficiencies herein asserted, it is not necessary to state the facts pertaining to the issues on the merits.
Questions relating to the income tax liabilities of the various participants in transactions of the same general character as those here involved have been considered by the Board and by the courts in a number of cases. In , the facts were almost identical with those in the instant proceedings except that no certificates of interest were*1039 issued to the stockholders of the old banks representing their interests in the excess assets transferred to the trustees. The Board held that the transfer of the excess assets to the trustees constituted the declaration of a dividend which was taxable to the distributees when the distributions were made to them by the trustees. On appeal the Board was affirmed, .
The case of , involved substantially the same facts as those in , except that there the trustees to whom the excess assets were transferred did issue certificates of beneficial interest to their old stockholders, as was done in the instant proceedings. The Board held, following the Fulton*477 case, that the transfer of the assets to the trustees constituted a dividend by the old corporation and that the distributions made by the trustees were taxable to the distributees not as dividends under section 201, but as exchanges under section 202 of the Revenue Act of 1921 to the extent that the distributions exceeded the base of the certificates in the*1040 hands of the distributees. The Board also held that the trust was not such a trust as was contemplated under section 219 of the Revenue Act of 1921. The Board was affirmed by the Circuit Court of Appeals for the Second Circuit, . The court held, however, that the trust involved was a trust within the meaning of section 219 and was not an association taxable as a corporation, as the Commissioner contended. In its opinion the court stated:
We agree with the appellant that the trust did not create an "association" under section 2(2) of the Revenue Act of 1921 (42 Stat. 227), and that section 201(c) did not in terms apply. This was not a trust like those before the court in , where the trustee was conducting a business. The only purpose was to hold the assets as security for a season, and then to distribute them. Little of the assets proved necessary to make whole the trustee, and the delay arose only because of difficulties in liquidation. We therefore assimilate the trust to those considered in *1041 , and (C.C.A. 1), and we accept section 219 as the controlling section. If so, section 219(c) imposed the tax primarily upon the trustee, and this covered profits arising from the sale of the trust property. . However, in the case at bar the trustee paid over the principal together with any profit as the liquidation proceeded, as well as any interest that was available. Hence the trust was for the "periodic," though irregular, payment of any income that arose, and fell within section 219(a)(4). If so, the certificate holders were subject to the tax under section 219(d), and so we understand every one agrees in the case of property sold by the trustee and distributed in cash.
In both of the above cases the taxpayers were the old stockholders or beneficiaries of the trusts against whom the Commissioner had determined a tax on the distributions made to them by the trustees out of the liquidated assets. In the instant proceedings, *1042 however, the respondent has asserted deficiencies against the trustees in the operation of the trust, as trustees for the Fidelity Bank in the one instance, Docket No. 85649, and in the other, Docket No. 85644, as an association taxable as a corporation.
It is our opinion, as stated above, that no liability for the taxes involved in these proceedings rests upon any of the petitioners before us on either of the theories advanced by the respondent, or on any other theory. It is clear beyond reasonable doubt that the trustees engaged in the liquidation of the excess assets in accordance with the terms of the trust agreement were not an association taxable as a *478 corporation under the provisions of section 701 of the Revenue Act of 1928.
In the first place, the trust here was purely a liquidating trust as distinguished from a business trust. The trustees were not authorized or expected to engage in carrying on any business enterprise and, so far as the facts show, they did not do so. This distinction has always been recognized to be of paramount importance. It was relied upon in our ruling in *1043 Dolese & Shepherd Co., Syndicate No. 3,, and in other of the Board and court cases therein cited, which were decided previous to the decision of the Supreme Court in , and in , and , thereafter decided. In the last named case we said:
* * * Here, the activities of the trust were all reasonably incident to and consistent with orderly liquidation. The declared purpose was neither obscured nor abandoned and its accomplishment was the primary consideration at all times.
We have carefully considered the recent decisions of the Supreme Court and do not believe they dictate a contrary conclusion. In the Morrissey case the Chief Justice was at pains to point out that the trust in question "was not a liquidating trust."
Consequent on the above, it is held that petitioner is taxable as a trust and not as a corporation. See *1044 , and cases there cited.
See also .
We conclude that the trust here was a liquidating trust and not an association taxable as a corporation.
It follows that, if the trust is to be regarded as a taxable entity, it must be under section 161(a)(2) of the Revenue Act of 1928, which provides in material part that:
(a) Application of tax. - The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including -
* * *
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, * * *
It is further provided in section 162 of the Revenue Act of 1928, however, that:
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that -
* * *
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries*1045 * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *
*479 The trust agreement here implicitly directs that "All income from the trust estate not needed for expenses or for the purposes authorized herein shall be distributed to the beneficiaries annually", or more frequently, if desired. Distributions of capital also were to be made from time to time. Whatever income the trust may have realized in the liquidation of the trust assets was therefore deductible by it and taxable to the beneficiaries.
Since the beneficiaries are not before us individually, we are not called upon to determine the amount of the distributable income of the trust for either of the years 1930 or 1931. For this reason we have omitted from our findings of fact the facts relating to the issues on the merits.
As to the petitioners before us, we find that there is no deficiency in tax for either of the years 1930 or 1931. It follows, of course, that since there is no tax liability there is no liability for the penalties asserted.
Judgment of no deficiency will be entered.