*2241 1. The petitioners, having appealed to the Board under section 280 of the Revenue Act of 1926 to secure a redetermination of their liability as transferees, may not, in these proceedings, question the validity of said section. Henry Cappellini,14 B.T.A. 1269">14 B.T.A. 1269.
2. Respondent asserts liability under section 280 of the Revenue Act of 1926 against the respective petitioners as transferees of the assets of the Kentucky Production Co. for an alleged deficiency in income tax assessed against said company for the period October 1 to November 10, 1922. Held, that said Kentucky Production Co. was a trust, and under the provisions of section 704 of the Revenue Act of 1928 is taxable only as such. The income of the trust estate being distributable to the beneficiaries periodically, no tax thereon was payable by the fiduciary, but the distributable shares of the net income were taxable to the beneficiaries, under section 219(d) of the Revenue Act of 1921. There being no tax due from the said Kentucky Production Co., there is no tax liability on the part of the petitioners as transferees of its assets under section 280 of the Revenue Act of 1926.
*1150 These are proceedings for the redetermination of the liability of the several petitioners as transferees of the assets of the Kentucky Production Co. for a deficiency in income tax assessed against said company by the respondent for the period October 1 to November 10, 1922, in the amountof $11,162. The proceedings were consolidated for hearing and decision.
The petitioners allege: (1) That section 280 of the Revenue Act of 1926, under the provisions of which the respondent asserts the liability in controversy, is unconstitutional; (2) that the petitioners are not liable as transferees for the alleged deficiency in tax; and (3) that no tax is due from the Kentucky Production Co., for the reason that said company was taxable only as a trust, and since its income was distributable to the beneficiaries periodically, said income was taxable only to the beneficiaries.
*1151 FINDINGS OF FACT.
The petitioner, Mrs. H. G. (M. R.) Lewis, is a resident of Wichita Falls, Tex., and is the wife of H. G. Lewis, who was one of the trustees of the Kentucky Production*2243 Co.
The petitioner, W. D. Gover, is a resident of Somerset, Ky.
The petitioner, Kentucky Oil Corporation, is a Texas corporation with its principal office at Wichita Falls. It was incorporated November 4, 1922.
The Kentucky Production Co. was a trust, organized November 12, 1921, pursuant to a declaration of trust, the pertinent portions of which are as follows:
DESIGNATION.
The name of this Association shall be the Kentucky Production Company, and all business of this Association shall be conducted under that trade name.
ARTICLE I.
TRUSTEES: Section 1. The Trustees of said Estate shall be three in number, which number shall never be reduced, but which may be increased to any number not exceeding five, which increase shall be made only with the unanimous consent and approval of the Trustees above named, or their successors, so long as they may be acting as such Trustees at the time such increase in the number of Trustees is made. The Trustees named above shall continue to act as such and administer said Trust Estate for, and during their natural life, unless their Trusteeship should be sooner terminated by voluntary resignation, death, or in some other lawful*2244 manner, or for breach of their personal trust. The Trustees as a Board by a majority vote may remove any Trustee for physical or mental incapacity of said Trustee, or because of malfeasance, negligence, and inattention to duty, or for any criminal act committed by said Trustee.
Section 2. In the case of the death, resignation or inability of any of said Trustees to act as such, the remaining Trustees shall have power to accept the resignation of the Trustee resigning and to fill any vacancies caused thereby, and in such event the successor or successors of such resigning Trustee or Trustees shall succeed to the same rights and powers and be subject to the same duties and liabilities and shall have the same compensation as his predecessor; and when any new Trustee is so selected, chosen or appointed by said remaining Trustees, the Trust Estate created hereby shall thereupon and upon the acceptance of such new Trustee of the Trust, immediately vest in such new Trustee, together with the continuing Trustees, whose offices are not vacated, and no formal conveyance of any kind shall be necessary to vest such estate in such new Trustee.
Section 3. In all cases the Trustees who have*2245 been duly selected and qualified to administer said Trust Estate shall hold their office and shall act as such Trustee until their successors may be duly selected and qualified, except in the case of the death of any one or more of such Trustees, or their inability to act as such in which event the remaining Trustees shall have the power to manage, control and dispose of said Trust Estate until the successors of the one who may have died or have become unable to act, shall be chosen and shall have qualified. It is expressly understood and agreed, however, that a majority of the Trustees provided for herein may determine any and all questions of policy, *1152 business management, control and disposition of properties vested in said Trustees.
Section 4. All investments shall be made and the titles to all properties purchased or acquired by said Trustees and by said Trust Estate, shall be held, managed, controlled, and disposed of by the Trustees and their successors under this Declaration of Trust, free from any and all limitations, save and except such as are specially set out herein, and subject to such limitations. Said Trustees shall have power and authority, in conducting*2246 the business of said Trust Estate, to do the following, among other things, to wit: -
a. To raise such sums of money as may be necessary and proper for the purposes of said Trust, and to secure such sums of money by mortgage, pledge, or hypothecation of the whole or any part of the Trust properties, and all income therefrom, all of which said Trustees may do, as their best judgment may dictate.
b. To sell and convey, purchase and dispose of, on such terms as they shall deem best for the interest of said Estate, and of the unit holders thereof, the whole or any part of the trust properties and income derived therefrom.
c. To accumulate money and property for the purposes of exploiting, drilling on and exploring lands which it may own or lease, containing or believed to contain oil or gas or other mineral deposits of any kind, and to carry on the business of searching and prospecting for same, piping, storing, transporting, supplying and distributing gas, petroleum and other oils and minerals from its products, and by-products thereof; also to drill, operate, and maintain oil and gas wells; to construct the necessary buildings, machinery, plants, tanks, warehouses and other*2247 buildings, and to acquire by lease or purchase such other properties as may be necessary or useful in the carrying on and developing of said business; also to refine any of the products or by-products of such gas, oils and other minerals and to operate and maintain such buildings, machinery, plants, tanks, and refineries, together with the accessories, implements, tools and devices and appliances as may be necessary to develop and carry on and exploit said business. And said Trustee shall be duly authorized to manage and carry on all of the business above named, as same may, in their judgment become necessary and proper, bearing and keeping in mind the general object and purpose of this Trust.
* * *
ARTICLE II.
UNIT AND UNIT HOLDERS.
Section 1. The authorized capital of this Trust Estate shall be divided into Six Thousand units, having a nominal par value of ten dollars ($10.00) each. The total capital shall be Sixty Thousand Dollars ($60,000.00). The unit holders or purchasers of units or certificates of interest shall never be liable for any sum greater than the amount paid by them for said units. The said Trustees, by a majority vote, may increase the capital stock*2248 of said Association, whenever in their judgment such increase would be to the interest and benefit of said Trust Estate.
Section 2. All monies derived from the sale of units shall be used under the direction of the Trustees for the benefit of the Trust Estate, and for the development of its properties, and for the use and benefit of said unit holders.
Section 3. Each unit holder shall be entitled to receive from the Trustees a certificate of beneficial interest which certificate shall evidence the beneficial interest of the parties to whom issued. They shall be negotiable and shall *1153 be signed by two of the Trustees of this Trust under the Seal of said Association. * * *
* * *
Section 4. The unit holders of said Trust Estate shall have no right or title to the trust property, and the ownership of the units issued hereunder shall not entitle the owners thereof to any title to said property, nor shall they have the right to call for a partition or division thereof, or for a dissolution of the Trust, but the unit so issued and evidenced by certificates as aforesaid shall be personal property, giving to such shareholders only the right stipulates in this instrument*2249 and in the certificates issued hereunder, but all such unit holders shall be entitled to demand and receive their proportionate part of the net profits arising from the conduct of the business of said Trust Estate, which profits shall be from time to time determined and distributed by the Trustees at such stated periods as they may deem proper and advisable, after such profits are earned. The decision of the Trustees as to what constitutes capital and what constitute income and profit shall be conclusive upon the unit holders. The unit holders shall have the further right, at the termination of this Trust, however such termination may be brought about, to a division of the property of the Estate among the unit holders in proportion to the shares held by them, respectively, it being fully understood and agreed that the management, control and dominion over the property, and the right to dispose of the same shall remain in the Trustees, to be held and administered by them for the purposes of this Trust, as herein set out. But it is expressly understood that the unit holders for the protection of their interest arising from the management of said Estate and from the control and disposition*2250 thereof by the Trustees, shall have the right at reasonable and stated periods to be fixed by the Trustees, to have an accounting by them to the unit holders of the business of said Estate, and to this end the books of the Company shall be open for inspection by such unit holders, or by their duly authorized agents, at such stated periods, as may be determined by the Trustees.
Section 5. The death, insolvency or bankruptcy of any of the unit holders, the transfer of his or her interest by sale, gift, devise, descent or otherwise, during the continuance of this Trust shall not operate as a dissolution of nor terminate the Trust, nor shall it have any effect whatever upon the Estate, its operation or mode of business, nor shall it entitle his or her heirs or assigns or representatives to an accounting or to take any action in the courts of law or equity against the estate, its unit holders, Trustees or property or its business operations of any kind, all of which shall remain intact and undisturbed thereby; but they shall succeed only to the rights of the original unit holders as herein set forth.
ARTICLE III.
MISCELLANEOUS PROVISIONS.
Section 1. This Trust shall continue*2251 during the lifetime of each and all of the Trustees above named and for Twenty one (21) years after the death of the survivor of them, unless said Association is incorporated or otherwise dissolved prior to that time, and at the end of such period of time the Trustees then acting shall proceed to wind up the affairs, liquidate the assets and distribute the same among the then existing unit holders; but until such time no unit holder or unit holders shall ever by [be] entitled to a dissolution, termination or disruption of said Trust, or to an accounting in the Courts of law or equity against said Estate, its unit holders, Trustees, or its property or business operations of any kind, save as above stated, it being hereby distinctly understood and agreed that full and complete title, ownership, management, direction, control *1154 and dominion is vested in said Trustees, and their successors as aforesaid for the term of twenty one years as aforesaid and until estate is liquidated as above provided.
* * *
Section 3. The Trust hereby created shall be collectively designated for all purposes and for convenience in handling said trust properties as The Kentucky Production*2252 Company, as declared above, under which name the said Trustees shall execute all instruments, sue, and be sued, and conduct all business relative to the performance of this Trust, and a common seal may be used in the conduct of said business. Any instrument required to be executed or any business transacted by or with the said Association shall be binding upon The Kentucky Production Company when executed by a majority of said Trustees. Said Trustees also may adopt for the government of said business a set of by-laws to be amended, altered, changed or done away with by them from time to time, as their judgment may dictate not inconsistent herewith.
Section 4. These Articles and Declaration of Trust may be amended at any regular meeting of the Trustees at which all of the Trustees then qualified and acting as such are present and vote for the proposed amendment; provided that if all of such Trustees are not present, or being present do not vote for the amendment, then a majority of all the Trustees may vote for and adopt the amendment, but in such event previous notice of the proposed amendment shall have been given to the absent Trustee or Trustees for a sufficient length of*2253 time to enable him or them to attend the meeting at which the amendment is acted upon. Provided further no amendment shall ever be adopted which will materially change or abrogate the general purpose and scope of the business of the association as set out in this Declaration of Trust.
The Kentucky Production Co. was engaged in the oil-producing business, and the three original trustees continued in office under the trust agreement until dissolution of the said company on November 10, 1922, pursuant to a resolution adopted at a meeting of the trustees held on said last mentioned date, as follows:
Upon the presentation showing the assets of The Kentucky Production Company were $139,725.25, book value, it was resolved, in order to make a final closing of said books, to dissolve The Kentucky Production Company and that said assets be sold to The Kentucky Oil Corporation for the sum of $75,000.00, and it was further agreed upon by the Board of Trustees that said $75,000.00 could be paid by The Kentucky Oil Corporation in the way of stock of the Kentucky Oil Corporation, or cash, or part in stock and part in cash, as Directors of The Kentucky Oil Corporation may decide; also that all*2254 leases and titles invested in The Kentucky Production Company be assigned to The Kentucky Oil Corporation.
It was further moved, seconded, and approved that The Kentucky Production Company be dissolved and cease further operations, and that H. G. Lewis was instructed to secure legal advice, if necessary, and to dissolve said Company.
There being no further business the meeting was adjourned and the Kentucky Production Company was this day dissolved.
The authorized sale was completed on or about November 10, 1922, by the transfer to the Kentucky Oil Corporation of all of the assets of the Production Co., the proceeds of the sale being $50,000 in *1155 cash and $25,200 par value of the capital stock of the corporation, which proceeds were distributed directly to the several shareholders of the Production Co. in proportion to their interests. On the day of the distribution, the capital stock of the corporation had a fair market value equal to its par value.
These transactions left the Production Co. without assets of any kind, and it went out of business. Incident to the acquisition of the assets of the Production Co., the corporation assumed all of the outstanding*2255 liabilities of the Production Co.
At the time of the liquidation of the Production Co. there were outstanding 5,066 shares, of a par value of $10 per share, and the shareholders to whom certificates had been issued, or who were entitled to certificates, were as follows:
| Shares | ||
| F. McC. Barnes | 400 | |
| W. D. Gover | 2,550 | |
| Mrs. H. G. Lewis | 650 shares | |
| Mrs. Mary Lewis | 161 shares | |
| 811 | ||
| E. W. Lewis | 430 | |
| Harry G. Lewis, Jr | 40 | |
| H. G. Lewis | 325 | |
| Mrs. Mary Roberts | 100 | |
| C. G. Smith | 300 | |
| Various other individuals | ||
| holding in small lots | 110 | |
| Total | 5,066 |
The relationships of certain of the shareholders to H. G. Lewis were as follows: E. W. Lewis, brother; Harry G. Lewis, Jr., son; Mary Roberts, his wife's mother.
During 1922 the financial affairs of Lewis were not in satisfactory condition, and he found it expedient to transfer certain of his shares in the Production Co. to his relatives as follows: to his wife, 160 shares; to his brother, 130 shares. In addition to this he transferred to Mrs. Roberts 100 shares, with the understanding that he should receive all of the dividends paid upon these shares until he was reimbursed for the cost*2256 of the shares, whereupon the 100 shares would become the property of Mrs. Roberts.
Distributions in liquidation of the shares of the Production Co. were made as follows: to Mrs. Lewis an aggregate of $4,050 in cash in December, 1922, and $6,833.97 in cash in March, 1923, together with capital stock of the corporation having a par value of $4,000; to Gover, cash in the amount of $12,750.
H. G. Lewis, as trustee, on November 30, 1923, filed a fiduciary return of income on Form 1041 for the fiscal year begun September 30, 1922, and ended September 30, 1923, reporting a net income of *1156 the Production Co. as follows: from operation of the business, $4,823.89; profit from sale of assets, $33,028.87, or a total net income of $37,852.76. In this return all of the net income was reported to be taxable pro rata to the shareholders.
In this return the profit on the sale of assets was computed as follows:
| Selling price received in cash and stock | $115,747.31 |
| Liabilities assumed by purchaser | 8,974.62 |
| 124,721.93 | |
| Cost of assets | 91,693.06 |
| Profit on sale of assets | 33,028.87 |
The respondent has computed the tax liability of the Production Co. as follows: *2257
| Period October 1, 1922, to November 11, 1922 | |
| Net income shown by books | $37,621.99 |
| Add: | |
| Loss claimed in sale of assets | 64,725.25 |
| Bad debts | 230.77 |
| 102,578.01 | |
| Deduct: | |
| Capital expenses | 150.00 |
| Adjusted net income | 102,428.01 |
| Less: net loss section 204 - $13,131.99 | 13,131.99 |
| Exemptions | None |
| Amount taxable at 12 1/2% | 89,296.02 |
| Tax liability | 11,162.00 |
| Tax assessed | None. |
| Deficiency | 11,162.00 |
The deficiency was assessed against the Production Co. on February 19, 1927. The deficiency letters to the alleged transferees were mailed as follows: To the Kentucky Oil Corporation on April 2, 1927; to Mrs. Lewis on April 2, 1927; to Gover on June 7, 1927.
OPINION.
TRAMMELL: In the view we take of these cases, it is necessary to consider only two issues raised by the pleadings. The first issue arises from the allegation of the petitioners that section 280 of the Revenue Act of 1926 is unconstitutional. In Henry Cappellini,14 B.T.A. 1269">14 B.T.A. 1269, we held that a petitioner who invokes the aid of the Board to redetermine his liability as a transferee under section 280 *1157 may not in such proceeding question the validity of said*2258 section. Since our decision in that case two Circuit Courts of Appeal have held section 280 constitutional. Routzahn v. Tyroler, 36 Fed.(2d) 208; Phillips v. Commissioner, 42 Fed.(2d) 177. Upon either theory, we have jurisdiction to determine the issues presented under section 280.
The second and principal issue involves the question of the primary tax liability of the Kentucky Production Co., the transferor. The petitioners say that no tax was or is due from the said company, whose assets they received, and that therefore there is no liability on their part as transferees. We think the contentions of the petitioners on this issue must be sustained.
The material facts are not in controversy. The amount of the net income of the Production Co., as determined by the respondent, is not disputed by the petitioners, nor do they question the correctness of the tax computation. The parties concede the facts relating to the organization of the Kentucky Oil Corporation and its acquisition of the assets of the Production Co., substantially as set out in our findings of fact, above. The petitioners also admit that Gover and Mrs. Lewis each*2259 received assets of the Production Co. in liquidation of their shares in excess of the liability asserted by the respondent, and that the Kentucky Oil Corporation assumed the liabilities of the Production Co. in connection with the purchase of its assets. The respondent admits the fact that the Production Co. was a common law trust, and this fact is clearly established by the declaration of trust under which the company was organized. The parties are in disagreement only on the question whether the Kentucky Production Co. was taxable for 1922 as an association at the rates applicable to corporations, or whether it was taxable as a trust, and if taxable as a trust, whether the tax is payable by the fiduciary or by the beneficiaries. On this point, the following retroactive provisions of the Revenue Act of 1928 apply:
SEC. 704. TAXABILITY OF TRUSTS AS CORPORATIONS - RETROACTIVE.
(a) If a taxpayer filed a return as a trust for any taxable year prior to the taxable year 1925 such taxpayer shall be taxable as a trust for such year and not as a corporation, if such taxpayer was considered to be taxable as a trust and not as a corporation either (1) under the regulations in force*2260 at the time the return was made or at the time of the termination of its existence, or (2) under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue applicable to any of such years, and interpretative of any provision of the Revenue Acts of 1918, 1921 or 1924, which had not been reversed or revoked prior to the time the return was made, or under any such ruling made after the return was filed which had not been reversed or revoked prior to the time of the termination of the taxpayer's existence.
The respondent contends that the above section of the statute is not applicable to these cases, first, because the fiduciary return of *1158 income on Form 1041 filed by H. G. Lewis, as trustee for the Kentucky Production Co., was a fiduciary or information return and not a return of a "taxpayer."
This contention of the respondent appears not to be in harmony with the interpretation of section 704(a), supra, set forth in Memorandum 4842 of the General Counsel, Bureau of Internal Revenue, published in Cumulative Bulletin VII-2, p. 103, July-December, 1928, where it is said:
An opinion has been requested regarding certain general legal*2261 issues raised by section 704, Revenue Act of 1928 * * *.
The issues here under consideration will be discussed seriatim.
1. Are trusts (by which no tax is payable as a result of the computation of their income under section 219, Revenue Act of 1924 or prior Revenue Act), not within the scope of section 704(a), Revenue Act of 1928, merely by reason of the fact that no tax is payable by the trust upon any part of the trust income * * *?
It is contended that section 704(a) refers to those trusts which may be taxable as trusts on Form 1040, and not to trusts the income of which is taxable to the beneficiaries.
This would seem to imply that only trusts whose trustees are * * * obligated to file Form 1040 returns, are by possibility within the purview of section 704(a), Revenue Act, of 1928; and that trusts whose trustees are * * * obligated to file only Form 1041 returns are absolutely without the purview of section 704(a), Revenue Act of 1928. It is not believed that this distinction is tenable. So far as the particular condition "if a taxpayer filed a return as a trust for any taxable year prior to the taxable year 1925" in section 704(a) is concerned, it is satisfied by*2262 the filing by the trustee on behalf of a trust of a return "as a trust," and it is quite immaterial whether the form is 1040 or 1041, the distinction * * * between the two classes of returns being irrelevant for all purposes of section 704(a), Revenue Act of 1928.
The view embodied in the above quoted extract from G. C. M. 4842 is, in our opinion, a correct construction of the statute. A contrary interpretation would result in the taxation, at rates applicable to corporations, of trusts all of whose income was distributable to the beneficiaries and which trusts, therefore, would not be subject to any tax under section 219, when trusts whose income was not distributable to beneficiaries would receive the benefit of section 704(a) and would be taxable as trusts at rates applicable to individuals. Thus, a large class of trusts, peculiarly within the scope of the mischief which section 704 was plainly intended to remedy, would be denied the benefits of the relief provisions. Such reasoning inescapably leads to this contradictory and absurd result, manifestly not intended by Congress.
Section 704 is clearly broad enough to include trusts the income of which was distributable*2263 and thus not required to pay a tax, as well as trusts where the income or some of it was not distributable. Otherwise, a trust which was not required to pay a tax at all, under *1159 rulings of the Commissioner in effect when the trustee filed a return as a distributable trust, would be taxable as a corporation, when if the income was not distributable it would be taxable as a trust.
In the instant case, the trustees took the position that the Production Co. was a trust, taxable only as such, and that since the net income was distributable to the unit holders or beneficiaries periodically, no tax was due from the trust estate. In these circumstances, the return in question was the only proper return which could have been made by the trustees consistently with their position. The return set forth all the information required, and there is no suggestion in the record of fraud or bad faith. It is our opinion, therefore, that the return filed by Lewis for the trust estate was the required return within the purview of section 704(a), supra.
The next objection raised by the respondent is that the Kentucky Production Co. was not considered to be taxable as a trust within*2264 the meaning of section 704(a), but that it was an association taxable as a corporation.
The declaration of trust, set forth in our findings of fact, discloses that the beneficiaries had no right of control over the property or business of the trust estate, and could not exercise control over the trustees, either by removal or by filling vacancies or otherwise. They could exercise no control over the trustees either directly or indirectly. Exclusive and complete control of the trust estate was vested in the trustees, as well as the power to appoint their successors, and the trustees did not, during the taxable period, own a majority of the shares of stock or beneficial interests in the trust.
These facts bring these proceedings squarely within the retroactive provisions of section 704(a), supra, since, under the rulings of the Bureau of Internal Revenue in effect at the time of the termination of the existence of the Kentucky Production Co. and also at the time the return was made, it was considered to be taxable as a trust and not as a corporation. *2265 E. A. Landreth et al.,15 B.T.A. 655">15 B.T.A. 655; Wilkens & Lange,15 B.T.A. 1183">15 B.T.A. 1183; Woodrow Lee Trust,17 B.T.A. 109">17 B.T.A. 109.
In the Landreth case, supra, we discussed at length the rulings of the Bureau applicable to the period involved in that case which was up to March 15, 1922, the date of the filing of the return. Up to and including the period involved in that case the Bureau of Internal Revenue was consistent in ruling that irrespective of whether the taxpayer was engaged in business in quasi corporate form, it was taxable as a trust where shareholders could not control the actions of the trustees.
The rulings of the Commissioner or his duly authorized officers in this respect were not changed until after July 10, 1924, the date of I.T. 2061. In G.C.M. 6417, promulgated with the approval *1160 of the Commissioner and published in C.B. VIII-1, January-June, 1929, August 11, 1924, was set out as the date of the change of rulings of the Commissioner under and pursuant to the decision in the case of *2266 Hecht v. Malley,265 U.S. 144">265 U.S. 144. This is borne out by the published rulings. See S.M. 4104, C.B. IV-2; I.T. 2061; S.M. 5382, C.B. V-1 2685.
It seems clear from the foregoing that at the time the petitioner herein filed the return by a trustee as a trust, in November, 1923, under the rulings of the Commissioner it would have been properly taxable as a trust.
The division decision in Lansdowne Realty Trust,20 B.T.A. 119">20 B.T.A. 119, while containing language and reasoning contrary to the views here expressed, is not necessarily in conflict with the decision herein reached, for the reason that the years there involved were 1923, 1924, 1925, and 1926. For the years 1924, 1925, and 1926 that decision is clearly correct. For 1923 it is not disclosed when the return was filed. Without a knowledge as to the time the return was filed for 1923, we can not determine that the result reached in that decision is in conflict with the views here expressed. While the pleadings show that the returns were for calendar years, extensions may or may not have been granted. When the return was actually filed, not when it was due, is the determinative point, in so far as*2267 the return is concerned. Notwithstanding, therefore, the language of the Lansdowne case contrary to our views expressed herein, we can not say that the result there reached was incorrect.
Having reached the conclusion that the Kentucky Production Co. is taxable as a trust and not as a corporation, we come to the final question arising under this issue, namely, whether the income of the trust is taxable to the fiduciaries or to the beneficiaries. This point is governed by the Revenue Act of 1921, which provides in section 219 that the tax imposed upon individuals shall apply to the income of estates or of any kind of property held in trust, and in case the income is to be distributed to the beneficiaries periodically, whether or not at regular intervals, the tax shall not be paid by the fiduciaries, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year, which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiaries, whether distributed or not.
Under these provisions of the statute, if the income of the Kentucky Production Co. for the taxable*2268 period here involved was distributable to the beneficiaries, then no tax is payable by the fiduciaries or trust estate, but the income is taxable to the beneficiaries.
*1161 The declaration of trust, under which the Kentucky Production Co. was created and organized, provided in Article II, section 4, that -
the unit holders shall be entitled to demand and receive their proportionate part of the net profits arising from the conduct of the business of said Trust estate, which profits shall be from time to time determined and distributed by the Trustees at such stated periods as they may deem proper and advisable, after such profits are earned. The decision of the Trustees as to what constitutes capital and what constitutes income and profit shall be conclusive upon the unit holders. The unit holders shall have the further right, at the termination of this Trust however such termination may be brought about, to a division of the property of the Estate among the unit holders in proportion to the shares held by them, respectively, * * *
And Article I, section 4(c), provided that the trustees should have power and authority, in conducting the business of said trust estate, *2269 to do the following, among other things:
(c) To accumulate money and property for the purposes of exploiting, drilling on and exploring lands which it may own or lease, containing or believed to contain oil or gas or other mineral deposits of any kind, and to carry on the business of searching and prospecting for same * * *
The provisions in the trust instrument as to distribution of income, the right of the trustees to determine what constitutes capital and what constitutes income and profit and the provision as to accumulation appear to be somewhat conflicting. It is our duty to construe the instrument as a whole in order to determine if possible the real intention of the parties. In doing so, if it is possible, we should reconcile the apparent conflicts.
The practical construction of the parties to the instrument, that is, what has actually been done pursuant thereto, is of great weight in determining the intention of the parties and the correct construction to be given to the instrument. But in this case we do not have the benefit of the practical construction of the parties prior to the taxable period and the taxable period itself consisted only of 40 days. The trust*2270 did not begin business until the month of May, 1922. From that period until September 30, 1922, which is the period immediately preceding the taxable period involved, the respondent determined that the trust had a net loss in excess of $13,000. The amount of income as determined by the Commissioner is not in controversy in this proceeding. The trust having a net loss for the preceding period, we can not construe the fact that no distribution was made as a practical interpretation of the parties that the income was to be accumulated. There was no income to distribute. This leaves us, then, with only the 40-day period involved in this proceeding, without the benefit of the practical construction of the parties as an aid in construing the instrument.
*1162 For the taxable period net income from operations of $4,822.89 and profit from sale of assets of $33,028.87 were reported in the trustee's return. The respondent added to the income the amount of $64,725.27 on account of the sale of capital assets.
The operating income for the taxable period, so far as we can determine it from the record, does not appear to have been sufficient to make good the capital deficit or*2271 the impairment of capital on account of the operating loss for the previous period. The trust not having had any income, but having suffered a net loss for the previous period, and actually doing business only since May, 1922, the $13,000 net loss for that period necessarily came out of capital paid in. We do not think that the trust was required to distribute income until a capital impairment had been made good, even considering that it was required absolutely to distribute all income. In any event, we do not think that a 40-day period is long enough to justify us in saying that, because income was not distributed in that period, it amounts to a construction of the parties that the income was to be accumulated. A periodic distribution does not necessarily mean distribution within a 40-day period.
Taking the whole instrument together, however, we think that it might fairly be interpreted as meaning that the profits arising from the conduct of the business or operating profits were not to be accumulated but were to be distributed, and that other profits, that is, from sale of capital assets, might be accumulated, but that such accumulation was only for the specific purpose set*2272 out in the instrument, that is, for exploiting, drilling or exploring lands and the carrying on of the business of searching and prospecting. For no other purpose could accumulation be made. We think that the whole instrument when read together is capable of no other construction. We think that the provision that the decision of the trustees as to what constituted capital and what constituted income and profits would be conclusive gives strength to this interpretation. If all income was to be treated alike this provision as to the discretion of the trustees in determining what was capital and what was income would have little if any effect. Apparently the object of this provision was to enable the trustees to accumulate what they considered capital and that the proceeds of the sale or other disposition of capital assets, although resulting in profits, might have been considered to retain their capital nature. Under this interpretation the instrument is considered as a harmonious whole and the apparent conflicts are reconciled. The return filed by the trustee set forth on its face that all of the income was distributable. This return, however, was not filed until after the trust*2273 had ceased business and had actually distributed the income as well as all assets in complete liquidation.
*1163 With respect to the income arising from the sale of assets, we think that under the terms of the instrument such income under the facts presented was not permitted to be accumulated, but was distributable, for the reason that the very act which gave rise to this income did away with all the purposes for which accumulation could be made. The trust had no assets. It had no property or lands on which it could drill or explore for oil or gas or mineral deposits and it could no longer carry on the business of searching and prospecting for oil and gas, the only purposes for which accumulation could be made. On the same day that it sold its assets, the trust was dissolved and the unit holders immediately thereon became entitled by express provision of the trust instrument to a division of all the property of the trust estate. It could accumulate money and property only for the purpose of exploiting and drilling and searching for oil and gas, and since on the day that it received the income all purposes of this kind were abandoned and liquidation begun, it could not*2274 be said that the money received was to be accumulated.
It is our conclusion, therefore, that the whole amount of the income here in question became distributable to the beneficiaries during the taxable period, pursuant to the provisions of the instrument governing the distribution. Hence, under section 219 of the statute, no tax is imposed upon the fiduciaries or trust estate, but the distributable shares of the net income are taxable to the beneficiaries.
There being no tax due from the said trust, the Kentucky Production Co., the petitioners have no liability, at law or in equity, as transferees of its assets, or otherwise.
This disposes of the proceedings and renders it unnecessary for us to consider other issues and contentions of the parties.
Reviewed by the Board.
Judgment will be entered for the petitioners.