*2285 The Commissioner's action in taxing the petitioners on the value of certain securities received by them in 1922 in connection with the liquidation of a trust fund created as the result of the merger of two corporations in 1912, approved, in the absence of proof that the amounts were not in excess of the March 1, 1913, value or cost of the certificates under which the distribution was made.
*1006 The deficiencies in controversy are for the year 1922 in the amount of $458.51 in the case of Louie S. Allen, and $2,521.71 in the case of Benjamin L. Allen. The issue common to both proceedings is whether the value of certain assets received by the petitioners in 1922 in connection with the liquidation of assets of a dissolved corporation constitutes taxable income in that year. The cases were consolidated for hearing and decision.
FINDINGS OF FACT.
On June 12, 1912, the Columbia-Knickerbocker Trust Co., hereinafter called the new corporation, was formed by a merger of the Columbia Trust Co. and the Knickerbocker*2286 Trust Co., Benjamin L. Allen, husband of Louie S. Allen, being at that time a stockholder and vice president of the latter corporation. The merger agreement provided for the segregation of the assets of the Knickerbocker Trust Co. into three classes to be designated as schedules A, B, and C. The assets placed in schedule C, consisting of stocks, bonds, mortgages and claims, were to be held by the new corporation in trust under the general direction of a designated committee for a period of two years as a guaranty fund for the protection of the new corporation against loss on assets under schedule B, and subject to this provision, for the benefit of holders of beneficial certificates issued as hereinafter mentioned. The stockholders of the Knickerbocker Trust Co. were to receive five-twelfths of a share of stock of the new corporation in exchange for one share of the former's stock and, in addition, beneficial certificates of the new corporation representing their interest in the schedule C assets held in trust. The number of certificates issued to the stockholders of the Knickerbocker Trust Co. was 32,000. In case the condition of the fund warranted, the new corporation was to*2287 pay from time to time to the beneficial certificate holders interest not exceeding $4 per share per annum, and after the fund held in trust had served its purpose, the assets remaining therein were to be reduced to cash under the general direction of the committee and the proceeds distributed pro rata among the then beneficial certificate holders. The merger agreement authorized the trustee to invest any money in the fund in securities of its selection.
The assets transferred to the trust fund, consisting of several hundred items, had a book value of $3,007,163.82 at the time of the merger. Of the assets so transferred, about one-half, having a face value of about $4,000,000, were written down to a value of $1.
By July 21, 1919, there had been distributed to the beneficial certificate holders on account of principal, the sum of $1,075,760, and, as interest, the sum of $452,318. Thereafter the following distributions were made on each outstanding certificate:
*1007
| September, 1920 | $5.00 |
| January, 1922 | 2.00 |
| October, 1923 | 1.00 |
| January, 1921 | $1.00 |
| October, 1922 | 3.00 |
Of the 32,000 certificates issued to the stockholders of the Knickerbocker Trust*2288 Co. at the time of the merger, 29,454 were outstanding July 15, 1919, the difference of 2,546 having been accepted by the trustee in payment of obligations to the trust. The assets then in the trust were carried on the books at a value of $812,886.96, of which $35,169.95 was cash.
On January 1, 1920, B. L. Allen held beneficial certificates representing 920 shares, 820 of which were purchased in 1919 in one block at a cost of $10,493.45. Thereafter he purchased additional certificates at the following costs per share:
| Date purchased | Number | Cost |
| February, 1920 | 50 | $10.00 |
| November, 1920 | 30 | 15.00 |
| August, 1921 | 30 | 12.25 |
| August, 1921 | 90 | $15.00 |
| April 3, 1922 | 6 | 8.00 |
| April 10, 1922 | 30 | 10.00 |
In April, 1922, B. L. Allen held beneficial certificates representing 1,036 shares.
Louie S. Allen did not own any beneficial certificates prior to August 1915. Between August, 1915, and December, 1919, she acquired a total of 492 shares at prices ranging from $8 to $25 per share. In April, 1922, she held 373 shares.
On April 20, 1922, there remained in the trust fund 29,089 shares each of the par value of $10, of stock of the Brunswick Site Co., a corporation, *2289 and $320,000 of participation certificates in a third mortgage dated November 9, 1920, and maturing in 10 years, on the Hotel Gotham, located in New York City. In a letter dated April 20, 1922, to the holders of beneficial certificates, the committee having supervision of fund said:
These securities [ones just referred to] are of such a nature that they cannot readily be turned into cash without considerable sacrifice, while on the other hand they represent valuable equities and produce substantial income. The Committee therefore have decided that it would be to your benefit to make a distribution of these securities in kind instead of waiting until they could be sold as a whole for cash; and have accordingly this day declared a dividend of one share of Brunswick Site stock and $11.00 participation in the Hotel Gotham third mortgage, on account of each certificate, to holders of record May 1, 1922.
To receive certificates representing their share of the distribution, certificate holders must present their certificates on or after May 10, 1922, to the Trust Department of the Columbia Trust Company, 60 Broadway, New, York City, that the proper record of *1008 same may*2290 be endorsed thereon.
Pursuant to this letter, in November, 1922, the petitioners received the following shares of securities:
| B. L. Allen | L. S. Allen | |
| Brunswick Site Co. stock | 1,000 | 373 |
| Mortgage participation certificates | 1,100 | 410.3 |
The petitioners entered the stock on their books November 6, 1922, at a value of $3.50 per share and the certificates, having a par value of $10 each, at a value of $6 each. The certificates were liquidated in full at par in January, 1926.
If the assets still in the trust fund are liquidated on the most favorable terms the additional dividends payable under the beneficial certificates will not exceed $1 per share.
In 1923 Benjamin L. Allen sold all of his Brunswick Site Co. stock to his wife at $4 per share. Louie S. Allen still owns the 373 shares of such stock she acquired.
No part of the value of the securities received by the petitioners in 1922 was returned by them as income in that year. In his determination of the deficiencies in dispute, the respondent treated the securities as taxable income in the amount they were set up on the petitioners' books.
OPINION.
*2291 ARUNDELL: These cases present facts which, up to a certain point, are similar to those in , and . In both of those cases corporate assets were set aside and placed in the hands of trustees to be liquidated and the proceeds were to be paid over to the stockholders. In the Fulton case, as in this, there was a period following the transfer of the assets to trustees during which those assets were held primarily as a guarantee against any shortage that might develop in other property which had been transferred to the merged corporation. In both the Hubbard and Fulton cases we held that the turning over of certain assets to the trustees for the ultimate benefit of stockholders constituted a declaration of a dividend by the corporation and that the distributions made by the trustees were taxable as dividends to the stockholders in the year in which the distributions are made. Petitioners, citing the above cases, contend that their cases should be decided the same way and that as the amounts distributed represented income accrued to the Knickerbocker Trust Co. prior to March 1, 1913, they*2292 are exempt from tax under section 201 of the Revenue Act of 1921. As said above, the several cases are analogous up to a certain point. The point of departure is that in the Hubbard and Fulton cases the proceeds of the assets set aside were distributable and were distributed to stockholders of the corporation which had declared the dividend, whereas here the proceeds were payable to holders of the so-called beneficial certificates *1009 who might or might not be stockholders. Had the proceeds of the trusteed property in these cases been payable only to stockholders of the Knickerbocker Trust Co. we might have occasion to consider and dispose of petitioners' claims based on the theory that the property they received in 1922 represented dividends, but our view is that as a result of the issuance of the beneficial certificates and allowing them to pass into the hands of others the distributions thereafter made lost the character of dividends.
When the dividend was declared in 1912 by the setting aside of property, the relation of debtor and creditor was created between the corporation and its stockholders. The right to receive the amount that would ultimately be*2293 paid under the declaration in 1912 was evidenced by the beneficial certificates issued, which the evidence indicates were assignable, and the holders of such certificates were entitled to collect the debt evidence by them independently of any stock ownership. Accordingly, when distributions were made to certificate holders, to the extent that the distributions were greater than cost or March 1, 1913, value, as the case may be, the holders realized a gain, and, conversely, if the amounts received were less than the basic figure the holders suffered a loss. The process of liquidating the certificates is thus seen to be a transaction falling under the gain or loss provisions under section 202 of the Revenue Act of 1921 rather than under section 201 relating to dividends.
The respondent included in income of the petitioners securities distributed to them at the amounts at which petitioners entered them in their books of account and which were less than the face value of the securities. There is no evidence to show that the figures so used were too high. The problem presented, then, is that of determining the basis prescribed by section 202 - that is, cost or March 1, 1913, value*2294 of the certificates. As to this the evidence is insufficient. In the case of Louie S. Alen it appears that all of her certificates were acquired after 1913, and while the prices she paid for several blocks bought at various dates are shown, her holdings fluctuated and we are unable to determine the cost of those held in 1922. Benjamin L. Allen acquired some certificates before March 1, 1913, but neither the number nor their value on that date is shown. Nor is there evidence as to whether at the time of the distribution in 1922 he still held any of the certificates acquired at the time of the merger. In his case, as in that of Mrs. Allen, the cost of the certificates acquired after March 1, 1913, and held at the time of distribution is not shown. Lacking evidence on these points, we are unable to say that the respondent erred in using the figures he did.
One of the arguments made by petitioners is that they were beneficiaries of an express trust and that the tax must be determined under section 219 of the Revenue Act of 1921. What we have said *1010 above indicates our view on this contention. In our opinion the arrangement whereby certain assets of one of the merging*2295 companies were set aside for the purposes declared in the merger did not create such a trust as is contemplated by section 219.
Decision will be entered for the respondent.