*906 On January 31, 1931, the petitioners, as trustees, were and had been for more than two years the owners of bonds which matured on February 1, 1931. They knew that the bonds were to be redeemed at par at maturity. To insure the taxability of the resulting gain under section 101 of the Revenue Act of 1928 the petitioners on January 31, 1931, sold the bonds at par to the American Securities Co., the securities affiliate of the American Trust Co., the trustee under the bond indenture. Held, that the gains resulting from the sale are taxable as capital net gains under section 101 of the Revenue Act of 1928.
*239 These proceedings, consolidated for hearing, involve income tax deficiencies for 1931 as follows:
| Petitioner | Docket No. | Deficiency |
| Josephine C. Grant Trust | 82177 | $61,989.75 |
| Edith Grant Magee Trust | 82178 | 62,290.58 |
The sole question presented is whether the petitioners are liable to tax upon the gains resulting from the sale of certain bonds on January 31, 1931, under*907 section 101 of the Revenue Act of 1928, or at ordinary rates.
FINDINGS OF FACT.
From August 22, 1928, until January 31, 1931, John D. McKee, S. Waldo Coleman, and the Bank of California, N.A., as trustees for Josephine C. Grant, owned, held, and possessed $591,000 par value bonds of the California Power Corporation. From August 31, 1928, until January 31, 1931, the same parties, as trustees for Edith Grant Magee, owned, held, and possessed $593,500 par value bonds of the same corporation.
*240 The bonds matured on February 1, 1931. The entire issue of such bonds was called for redemption through the American Trust Co., as trustee, at San Francisco, California, for Monday, February 2, 1931, because February 1 fell upon a Sunday.
About 9:30 a.m. on Saturday, January 31, 1931, John D. McKee, trustee, and Stuart F. Smith, vice president and trust officer of the Bank of California, N.A., trustee, determined that, if possible, the bonds of the two trusts aggregating a par value of $1,184,500 should be sold in order to insure the taxability of the resulting gains under section 101 of the Revenue Act of 1928.
Immediately following such determination, Smith went to the*908 American Trust Co. and offered to sell the bonds of the two trusts to that company. One Sims, the trust officer of the company, informed Smith that he had no authority to purchase bonds and suggested that he see James K. Lochead, representing the American Securities Co., the securities affiliate of the American Trust Co. Sims introduced Smith to Lochead, vice president and executive officer of the American Securities Co., and Smith then offered the bonds for purchase by the American Securities Co. at par. Lochead agreed to the purchase of the bonds at par and caused a confirmation of purchase memorandum to be executed on behalf of the American Securities Co., which was delivered to Smith as evidence of the consummation of the purchase and its terms.
After the agreement of the American Securities Co. to purchase the bonds of the two trusts, and prior to 10 a.m. on January 31, 1931, Smith returned to the Bank of California, N.A., and gave instructions for the immediate delivery of the bonds sold. The bonds were counted, segregated, and delivered to the investment department of the American Trust Co. for the account of the American Securities Co. Upon completion of the delivery*909 of the bonds the representative of the Bank of California, N.A., making such delivery was given a cashier's check of the American Trust Co., wherein the American Securities Co. kept its funds, for the amount of $1,184,500, the par value of the bonds. The bonds were sold after the coupons maturing on February, 1, 1931, had been detached therefrom. At the same time a memorandum of purchase executed by the American Securities Co. was delivered to the said representative.
The cashier's check was forthwith deposited with the banking department of the Bank of California, N.A., to the credit of the private trusts account of the trust department of the bank. The check was deposited too late to go through the clearing house on January 31, 1931, but went through the clearing house on the next banking day. All necessary accounting entries were made on January 31, 1931, to credit each of the trusts with its respective share *241 of the $1,184,500 which had been paid to the bank and to account for the disposition of the bonds.
Each of the trusts was indebted to the Bank of California, N.A., and, after the money received from the sale of the bonds was credited to the respective*910 trusts, such indebtedness was paid and charged against the funds of the trusts.
All of the transactions above mentioned were completed before noon on Saturday, January 31, 1931. The bonds were sold on that date.
Petitioners filed income tax returns for 1931 for each of the said trusts disclosing the correct amount of gain realized upon the sale of bonds as aforesaid. The petitioners respectively elected to return the entire amount of said gains upon the capital net gain basis and respectively paid income taxes upon the gains so returned.
OPINION.
SMITH: Section 101 of the Revenue Act of 1928 provides in part as follows:
(a) Tax in case of capital net gain. - In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12 1/2 per centum*911 of the capital net gain.
* * *
(c) Definitions. - For the purposes of this title -
(1) "Capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
At the time the transactions involved in these proceedings took place,
The petitioners, cognizant of the provisions of section 101 of the Revenue Act of 1928 and fearing that if they*912 held the bonds until *242 they matured the respondent might hold that the gains were not realized from a "sale or exchange of capital assets", decided to sell them prior to maturity. They therefore sold them on January 31, 1931, to the American Securities Co. in the manner stated in our findings of fact.
The respondent in the determination of deficiencies has treated the gains on the sales as ordinary gains and has disallowed the contentions of the petitioners that they were capital gains. In his brief he states:
The Commissioner's position is that the petitioners are not entitled to the benefit of the capital net gain section of the statute because they did not make actual sales in good faith to the American Securities Company and because the transactions were not normal business transactions even if they were actual sales and made in good faith. The transaction of each trust was not a sale but essentially a redemption.
We are of the opinion that there is no merit in the respondent's contention that the sales of the bonds were not made in good faith. The petitioners were acting for the best interests of the trusts. They desired to make the savings in tax that would*913 accrue to the trusts if the profits were realized on a sale rather than on the redemption of the bonds. The petitioners were acting in abundant good faith in taking the steps which they took on January 31, 1931. The fact that by selling the bonds on that date they made a saving in income tax gives rise to no complaint on the part of the respondent.
Nor is there any merit in the respondent's contention that the transactions were not normal business transactions. Apparently this contention of the respondent is based upon the fact that the American Securities Co., by purchasing the bonds at par, would not by any possibility realize a gain upon the transaction. With equal truth it can be said that it would not sustain any loss; for it was*914 known to that company, as well as to the petitioners, that the bonds were to be redeemed on February second at their par value. It is unquestionably true that the American Securities Co. purchased the bonds to accommodate the Bank of California, N.A. But this did not alter the fact that the American Securities Co. purchased the bonds on January 31.
The facts clearly show that on the morning of January 31, 1931, the petitioners were the owners of the bonds. Prior to 12 o'clock noon on January 31 they had effectively disposed of all their right, *243 title, and interest in and to the bonds and accepted in payment therefor a cashier's check of the American Trust Co. in the amount of $1,184,400. Although the check is in the same amount as the petitioners would have received if they had retained ownership of the bonds until the maturity date, the profit realized was nevertheless on a sale and not on the redemption of the bonds.
The petitioners are entitled to have the profits realized on the sale taxed under section 101(a) of the Revenue Act of 1928.
Reviewed by the Board.
Judgment will be entered under Rule 50.