The officers of the corporation were directed to do all things required to be done to make their desires effective.

At the close of the year 1913 the Slate Co. had accumulated earnings and profits in the amount of $ 5,578.67. From 1913 to 1922, both years inclusive, a period of 10 years, dividends were paid in 4 years in the total amount of $ 32,500. Profits increased from $ 5,578.67 in 1913 to $ 25,125.96 in 1919, and in 1922 the profits reached the highest point of $ 65,384.38. At the end1946 U.S. Tax Ct. LEXIS 310">*329 of 1922 accumulated earnings and profits amounted to $ 161,354.16. In no years during this period did the company operate at a loss. The above indicates, briefly, the situation as it existed in 1922 when $ 100,000 of earnings was capitalized by the declaration of a stock dividend of 2,000 shares of stock of a par value of $ 50 a share.

During the four-year period 1923 to 1926, both years inclusive, no dividends were paid except in 1926, when $ 15,000 in dividends was paid. During these years the company earned profits of $ 43,143 in 1923; $ 40,122 in 1924; $ 38,190 in 1925; and $ 33,076 in 1926. At the end of 1926 accumulated earnings amounted to $ 300,887.59.

During the fourteen years from 1927 to 1940, both years inclusive, the earnings, dividends paid, and accumulated profits at the end of 6 T.C. 105">*114 each year were as set forth in the following schedule. Beginning in 1934 and continuing through 1939, the sources of dividends were designated in resolutions declaring dividends, and according to those resolutions the sources of dividends in certain years are shown in the following schedule:

The following schedule shows, for the period 1927 to 1942, inclusive, the net sales, net business income, interest and dividends, profit and loss from sale of investments, and total net1946 U.S. Tax Ct. LEXIS 310">*331 income:

6 T.C. 105">*115 The following tables show the total assets, liabilities, and net worth 1946 U.S. Tax Ct. LEXIS 310">*332 of the Slate Co. as of the end of each year for the years 1927 to 1943, inclusive, and the current assets during the same period:

1946 U.S. Tax Ct. LEXIS 310">*334 The stocks and bonds and other investments held by the Slate Co. did not constitute property of a kind which would be included properly in the inventory of the Slate Co., and they were not held by the company primarily for sale to customers in the ordinary course of its business. The Slate Co. was not registered or licensed under state or Federal law as a dealer in securities.

In 1940 there was no indication that Edward L. George Kraus was not managing the business of the Slate Co. satisfactorily. Net sales increased as follows: $ 163,197.52 in 1938; $ 183,087.59 in 1939; $ 217,942.46 in 1940; $ 269,983.79 in 1941; $ 308,723.81 in 1942. Net business income increased as follows: $ 1,244.16 in 1938; $ 13,100.26 in 1939; $ 21,873.88 in 1940; $ 28,055.18 in 1941; $ 39,355.74 in 1942.

6 T.C. 105">*116 From 1927 through 1939 the capital of the Slate Co. was ample to meet all of the needs of the business without in any way employing or drawing upon the funds invested in securities in the so-called securities account. The funds invested in securities were not needed in the conduct of the business of petitioner in 1940, or in earlier years. The securities in the so-called investment account 1946 U.S. Tax Ct. LEXIS 310">*335 had not been used and were not being used in any way in the conduct of the company's business, as collateral to secure loans, or in any other way.

No plan for liquidation of the Slate Co. was drawn up or considered in 1940. The company continued to operate its business profitably after 1940, and it is still in business. Net earnings for 1941 and 1942 were $ 15,337.74 and $ 15,948.05, and dividends were paid in the sum of $ 15,000 in both years. After 1940 the company took steps to acquire another source of slate in addition to the sources previously used.

The Slate Co. was engaged solely in the business of manufacturing slate blackboards and other products from slate. It was not engaged in a business of buying and selling securities. The securities account represented merely the investment of surplus funds which were not needed in the conduct of the company's business.

The sales by the Slate Co. of the securities in the securities account in 1940, and the distributions in 1940 of the proceeds, in the amount of $ 150,000, were made to satisfy the desires of the trustee of the trusts created by Edward L. Kraus during his life and under his will and of the beneficiaries of those 1946 U.S. Tax Ct. LEXIS 310">*336 trusts. Beginning in 1934, the attorney for the Lehigh Valley Trust Co., Steckel, had requested that a policy be adopted of making distributions to stockholders from the accumulated earnings of the business. Steckel, as attorney for the trust company, was anxious to have the Slate Co. sell the securities in the securities account and to get the proceeds from the sales into the hands of the trustee, which, in turn, would invest the proceeds in securities legal for trust funds. It was the desire of the trustee to preserve the fund in the trusts for the remaindermen as well as to provide the life beneficiaries with income from the fund when invested in legal securities for trust funds.

The basis of the 248 shares of stock of the Slate Co. in the trust for Augusta Brady created in 1923 was $ 16,666.

In March of 1942 1,500 shares of the outstanding stock of the Slate Co. were retired. All of the stock certificates were delivered to the company and new certificates were issued on the basis of 1 new share for 2 old shares.

During 1940 the Slate Co. distributed $ 36,000 to stockholders, of which a dividend of $ 18,000 was declared on December 28, 1939, and was paid in January of 1940. 1946 U.S. Tax Ct. LEXIS 310">*337 These distributions were dividends 6 T.C. 105">*117 without any question. In its income tax return for 1940, filed in March of 1941, the company reported in schedule M, as the total distributions to stockholders charged to earned surplus during the taxable year, $ 168,000, which sum includes the distributions totaling $ 150,000.

In the balance sheet of the Slate Co. as of January 1, 1940, before the investment account was liquidated, surplus was stated to be $ 186,155.72. In the balance sheet as of January 1, 1941, after the sales of the securities and the distributions of $ 150,000, the surplus was stated to be $ 16,296.72 after payment of "dividends" in 1940 of $ 168,000. In both of these balance sheets capital was stated to be 3,000 shares of stock of a value of $ 150,000.

The cost of the securities which were sold in 1940 was $ 191,355.39; the proceeds from the sales were $ 151,703.65; and the net loss from the sales was $ 39,651.74.

The capital and surplus account of the Slate Co. is shown to be as follows in the balance sheet of January 1, 1941:

1946 U.S. Tax Ct. LEXIS 310">*338 6 T.C. 105">*118 In the balance sheet of the company as of January 1, 1942, the capital was stated to be 1,500 shares of a value of $ 75,000 and surplus was stated to be $ 92,071.02, as follows:

During 1940 and years prior, the Slate Co. did not conduct an investment business. The decision to sell securities in 1940 did not involve or represent any curtailment of the business of the company. The decision was made primarily to meet the request of the trustee of trusts owning one-half of the company's stock, which request was motivated by reasons pertaining to the trusts and not to the needs and conditions of the business of the Slate Co.

The directors and stockholders of the Slate Co. did not have any plan or intent in 1940 to cancel1946 U.S. Tax Ct. LEXIS 310">*339 or redeem any stock of the company, or to conclude part of its business. There is no evidence that the stockholders intended to liquidate the company in 1940 or prior.

The $ 150,000 distributed by the Slate Co. in 1940 to its stockholders did not constitute amounts distributed in complete cancellation or redemption of a part of its stock or distributions in partial or complete liquidation. At the time the distributions aggregating $ 150,000 were made the company had earnings accumulated after February 28, 1913, in excess of that amount. The distributions aggregating $ 150,000 were ordinary taxable dividend distributions within the meaning of section 115 (a) of the Internal Revenue Code.

OPINION.

The question presented by the pleadings is whether the Slate Co.'s distributions of $ 150,000 in 1940 were distributions in partial liquidation within section 115 (c) of the Internal Revenue Code, as petitioners contend. Petitioners' argument that the distributions in question were made in partial liquidation of the company, as defined in section 115 (i), is founded upon their contention that 6 T.C. 105">*119 the cancellation of 1,500 shares of stock in 1942 was related to the distributions of1946 U.S. Tax Ct. LEXIS 310">*340 $ 75,000 each in 1940; or, in another manner of statement, that those two distributions were made in 1940 in redemption of 1,500 shares of stock, despite the lapse of time between the distributions and the retirement of the stock, and despite the absence of any expression in the resolutions which declared the distributions to be "dividends" to state that stock was to be redeemed and canceled.

Respondent denies the correctness of petitioners' contentions. He contends that the distributions in question were ordinary dividends as defined in section 115 (a). In the event that it is held that the distributions were made in cancellation and redemption of 1,500 shares of stock, respondent then contends that section 115 (g) must be considered to determine whether the company canceled its stock at such time and in such manner as to make the distributions and cancellation of stock in whole or in part essentially equivalent to the distribution of a taxable dividend.

Petitioners contend that in 1940 there was an intention to partially liquidate the Slate Co. because it was decided to sell the securities in which funds of the company had been invested, and because there was concern over the 1946 U.S. Tax Ct. LEXIS 310">*341 possible effects on the slate goods business of actions of Edward L. Kraus, Jr., following a decision not to take him back into the business. Petitioners allege that the company had been conducting two businesses, a slate goods business and an investment business, and that upon the decision to sell the securities it followed that part of the company's business was being terminated, and, hence there was a partial liquidation.

Upon a careful review of all the evidence, we must conclude that the concern in 1940 over the activities of Edward L. Kraus, Jr., was not the controlling reason for selling the securities and distributing the proceeds, and that the facts do not show an intention to partially liquidate the company because of those activities. There was no evidence in 1940 of a decline in business or profits or even the prospect of losing business because of the attitude and actions of Edward. The business continued after the sales of the securities with increased profit, and it was conducted in the same way as before. On this point, the argument of petitioners is rejected as without merit.

We must also reject petitioners' argument that the Slate Co. conducted two businesses, 1946 U.S. Tax Ct. LEXIS 310">*342 one of which was an investment business. We have set forth in the findings of fact substantially all of the evidence of record relating to the investment account of the Slate Co. The Slate Co. was organized to conduct a business of fabricating school slates and products using slate materials made of a particular kind of slate, and it has always conducted that business. The business was conducted profitably and profits were accumulated. The need for capital 6 T.C. 105">*120 in the business is best shown by the size of inventory carried and the cost of fixed assets such as plant and equipment. Taking a year close to 1940, we find that the balance sheet of January 1, 1937, shows plant and equipment having a cost of $ 160,546. In 1936 the depreciated value was $ 27,772. Balance sheets for subsequent years show small annual additions to machinery and equipment so that as of January 1, 1942, the cost of plant and equipment was $ 171,147 and the depreciated value was $ 34,617.08. Over the period from 1927 to 1939, the inventory of the company ranged from $ 23,752 to $ 44,946 annually. There is evidence that the company requires working capital of about $ 146,000. That estimate appears1946 U.S. Tax Ct. LEXIS 310">*343 to be liberal. The paid-in capital was $ 50,000, plus $ 100,000 capitalized in 1922 out of earnings.

The record does not show when the company began investing its surplus funds in securities, or why. But there is testimony that the securities were not used in any way for the purpose of the manufacturing business, or for securing loans and credit. Thus it appears to be a fact that the funds set aside in securities were not needed in the conduct of the business during the time securities were owned. In 1927 and 1928 large sums of cash were on hand, $ 147,296 and $ 124,016. In the same years the company owned securities which presumably cost $ 146,258 and $ 215,016. Total net earnings from 1913 to 1927 aggregated $ 348,387.59, from which only $ 49,500 had been distributed in dividends, leaving a net amount of $ 298,887.59 of accumulated profits. The purpose of capitalizing $ 100,000 of earnings in 1922 has not been shown, but, assuming arguendo that none of that sum was invested in securities, there remained about $ 198,000 of surplus earnings. The logical inference is that the surplus was invested in securities. Testimony supports the inference. It is a customary business1946 U.S. Tax Ct. LEXIS 310">*344 practice to invest surplus funds, for money is not left idle.

The securities yielded income to the company in interest and dividends, about $ 10,000 a year. There were sales of securities, sometimes at a loss.

The only basis for the contention that the Slate Co. engaged in an investment business is that it owned securities. But the ownership of such assets, even though productive of income, does not lead to the conclusion that an investment business was conducted.

The argument is made that an investment business was conducted of course to support the contention that there was a partial liquidation of the company when the securities were sold. But the liquidation of assets of the character we have here does not necessarily result in a liquidation of a "business," nor does the fact that the $ 150,000 which was distributed was most of the proceeds from the sale of securities stamp them as liquidating distributions. See W. E. Guild, 19 B. T. A. 1186, 1206. If the securities represented the investment of accumulated 6 T.C. 105">*121 profits, as we are compelled to conclude, the sales of the securities in 1940 operated to return to the company a fund of accumulated1946 U.S. Tax Ct. LEXIS 310">*345 profits. The distribution of that fund to stockholders is the matter under consideration. Whether or not the distribution was a distribution of dividends under section 115 (a) is to be determined by particular tests under the statute. We think the question at issue must be decided with due consideration of the fact that the Slate Co. conducted a profitable manufacturing business throughout the years in the same way and with adequate working capital apart from the existence of the investment account, both before and after the securities were sold for cash.

Therefore, we reject the argument that the company's business included an "investment business" and that the decision to sell the securities was evidence of a partial liquidation of the company. It is concluded that the business of the Slate Co. was the business of manufacturing slate products. There is no evidence that the business of the company was in process of liquidation in 1940. The question of whether a corporation is in liquidation is one of fact. T. T. Word Supply Co., 41 B. T. A. 965, 981.

Furthermore, there is an abundance of evidence to show that the decision to sell investments 1946 U.S. Tax Ct. LEXIS 310">*346 which had been held for many years was impelled by the strong desires of the trustee of trusts in existence in 1940, owning one-half of the stock of the Slate Co., to put the trusts in a more secure position. The trustee desired distribution of the fund which was tied up in the securities. Cf. Isaac W. Frank Trust of 1927, 44 B. T. A. 934, 937. For several years the trustee had suggested that the Slate Co. should distribute its accumulated surplus, and some dividends had been paid out of surplus instead of out of current earnings. The surplus funds of the company were not invested in securities legal for trust funds. The evidence strongly suggests that the trustee of the trusts owning 50 percent of the stock of the company was fearful that the surplus funds, if left in the securities owned by the company, might be lost or decreased. In fact, a loss was sustained upon the sales of the securities. Thus the sales of the securities in 1940 were not made for any business need of the Slate Co., but for the benefit, if not the protection, of the trusts owning stock in the company. At the date of the death of Edward L. Kraus in 1926, a substantial part1946 U.S. Tax Ct. LEXIS 310">*347 of the value of the stock which passed to the trusts he created lay in the accumulated surplus of the company which was invested in securities. The trustees desired to preserve that value as far as possible and, at least, to take the surplus fund away from the chances of dissipation or diminution.

The word "liquidate" has a restricted meaning in section 115 (c). The popular sense of the word does not aid petitioners. Partial liquidation 6 T.C. 105">*122 in the statute is restricted in its application to "distributions by a corporation in complete cancellation or redemption of a part of its stock." Cf. Beattie Investment Co. v. United States, 101 Fed. (2d) 850, 852. The question is whether there was a partial liquidation as defined in the statute. W. C. Robinson, 42 B. T. A. 725, 735. "It is clear that the statute contemplates partial liquidations of corporations, accompanied by a partial retirement of outstanding stock." Commissioner v. Cordingly, 78 Fed. (2d) 118.

There was no cancellation of capital stock at the time the distributions were made in 1940, and there is no evidence that1946 U.S. Tax Ct. LEXIS 310">*348 the stockholders and directors intended that any capital stock would be retired. Resolutions were adopted declaring dividends. They were neither called liquidating dividends nor declared to be in payment of any stock to be retired. There was no plan to liquidate the business conducted by the company, as shown by facts existing before, during, or after 1940. See A. J. Long, Jr., 5 T.C. 327, 331, 335. It is true that later, in December of 1941, after some correspondence with deputies of the Commissioner who had determined that the distributions were dividends, a resolution was adopted to retire and cancel 1,500 shares of stock. We said in W. E. Guild, supra, that:

Liquidation is not a technical status which can be assumed or discarded at will by a corporation by the adoption of a resolution by its stockholders, but an affirmative condition brought about by affirmative action, the normal and necessary result of which is the winding up of the corporate business.

See, also, Holmby Corporation, 28 B. T. A. 1092, 1103; affd., 83 Fed. (2d) 548. The situation existing1946 U.S. Tax Ct. LEXIS 310">*349 in 1940, when dividends of $ 150,000 were declared, was not one of a corporation in process of liquidation, as we have discussed at length above. Upon the facts as we understand them, the later resolution to cancel half of the outstanding stock could not operate retroactively to the 1940 distribution so as to fit the provisions of section 115 (i), because there was no plan in 1940 to liquidate the business and no affirmative action to that end had been or was being taken. To recognize the subsequent cancellation of stock as part of the 1940 distribution would be to allow the company to assume a technical status of liquidation by the mere adoption of the 1941 and 1942 resolutions. The company was a going concern in 1940 and thereafter. We must regard the sales of the securities, sales of assets which were not being used in the business and which had not been used in the business, as only a return to cash of invested surplus, not as a liquidation of the company, in part.

The situation here is like that in Tate v. Commissioner, 97 Fed. (2d) 658; certiorari denied, 305 U.S. 639">305 U.S. 639, where a corporation sold securities and distributed1946 U.S. Tax Ct. LEXIS 310">*350 the proceeds, $ 731,250, to stockholders. There 6 T.C. 105">*123 no stock of the corporation was retired at the time of the distribution, or afterward, the chief difference from this case. Otherwise the facts in the Tate case closely resemble the facts here, particularly in the unusually large size of the distribution. It was held that the distribution was not in partial liquidation, but was a dividend.

We recognize the force of Hellmich v. Hellman, 276 U.S. 233">276 U.S. 233, and find it a guide here. It points to the distinction between distributions to stockholders by a going concern, and distributions to stockholders in the liquidation of a corporation. Judged by the recognized meaning of the term liquidation, see Mabel I. Wilcox, 43 B. T. A. 931, 939; affd., 137 Fed. (2d) 136, there was no liquidation of the Slate Co. to which the distributions in question were an accompaniment. As in the Wilcox case, all that was done here was to distribute a portion of the accumulated profits which were not needed in the normal course of the company's business. See also John K. Beretta, 1 T.C. 86, 94;1946 U.S. Tax Ct. LEXIS 310">*351 affd., 141 Fed. (2d) 452; certiorari denied, 323 U.S. 720">323 U.S. 720. There an interest in property was sold by a corporation and the proceeds of the sale were distributed to stockholders, just as here securities were sold and the proceeds were distributed. It was held that there was not a partial liquidation.

We can not accept as evidence that there was an intent in 1940 to cancel stock, a letter of Steckel dated May 20, 1941, written on the letterhead of his law firm and addressed to a deputy of the respondent, saying that the distributions in 1940 were "liquidating dividends" and that "in line with the policy of liquidation commenced in 1940," the capital stock would be reduced 50 percent in 1941. That letter was sent in reply to letters from the Commissioner advising the company that the distributions were held to be dividends. We can not pass lightly over the fact that no resolution to cancel or redeem part of the company's stock was adopted until after advice was received in 1941 from a deputy of the Commissioner that the distributions of $ 150,000 would be treated as ordinary dividends. The decision in December of 1941 to cancel1946 U.S. Tax Ct. LEXIS 310">*352 1,500 shares of stock must be recognized to be an afterthought in view of the lack of evidence that there was an intent in 1940 to cancel stock at or about the time the distributions were authorized. While the question now under consideration arises under section 115 (c), and we do not now refer to section 115 (g), the matter of intent of the corporation in considering the question under section 115 (c) is just as important as it is when section 115 (g) is being considered. Here the intent of the corporation in 1940 was bound up with the demands of the trustee of certain trusts, and the distributions were made primarily for the benefit of the trusts which were stockholders. They were not made "primarily from the standpoint 6 T.C. 105">*124 and concern of the corporate business." Rheinstrom v. Conner, 125 Fed. (2d) 790. Cancellation of stock was not a matter under consideration in 1940 by the stockholders and directors.

Under these circumstances and upon the evidence, we must conclude that the distributions in 1940 were not made in cancellation of part of the corporation's stock. The 1940 distributions must be treated in the light of what was done in1946 U.S. Tax Ct. LEXIS 310">*353 1940. The subsequent cancellation of 1,500 shares of stock in 1942 must be regarded as separate and apart from the 1940 distributions, because no plan of liquidation had been adopted. See Alice H. Bazley, 4 T.C. 897; affd., 155 Fed. (2d) 237. The effect of the cancellation of 1,500 shares of stock in 1942 was simply to reduce capital and increase surplus by $ 75,000, as the balance sheet of January 1, 1942, shows. It is held that the distributions of $ 150,000 in 1940 were not liquidating dividends under section 115 (c) and 115 (i).

In view of our conclusion above, it is unnecessary to consider any alternative question under section 115 (g). However, if contrary to our view, there was a cancellation or redemption of stock, it was, we think, at such time and in such manner as to make the two distributions of $ 75,000 each and cancellation or redemption essentially equivalent to the distribution of taxable dividends; and, since the entire amount of $ 150,000 so distributed represented a distribution of earnings or profits accumulated after February 28, 1913, it was properly treated as a taxable dividend. See sec. 115 (g). 1946 U.S. Tax Ct. LEXIS 310">*354 Wilcox v. Commissioner, 137 Fed. (2d) 136; McGuire v. Commissioner, 84 Fed. (2d) 431; certiorari denied, 299 U.S. 591">299 U.S. 591; Flanagan v. Helvering, 116 Fed. (2d) 937; Rheinstrom v. Conner, supra;J. Natwick, 36 B. T. A. 866; Robinson v. Commissioner, 69 Fed. (2d) 972; Brown v. Commissioner, 79 Fed. (2d) 73; W. & K. Holding Corporation, 38 B. T. A. 830; Bass v. Commissioner, 129 Fed. (2d) 300; Smith v. United States, 121 Fed. (2d) 692; Alice H. Bazley, supra.

Mary Dupont Faulkner, 3 T.C. 1082, and George E. Mason, 3 T.C. 1087, cited by petitioners, are not in point. Neither are Ward M. Canaday, Inc., 29 B. T. A. 355; affd., 76 Fed. (2d) 278; certiorari denied, 296 U.S. 612">296 U.S. 612;1946 U.S. Tax Ct. LEXIS 310">*355 Holmby Corporation, supra; and Milton Tootle, Jr., 20 B. T. A. 892; affd., 58 Fed. (2d) 576. Harold F. Hadley, 1 T.C. 496, and John K. Beretta, supra, cited by respondent are not squarely in point, but they lend support to the conclusion reached.

It is immaterial that the decree of the Orphans' Court of Pennsylvania, which was entered to adopt an agreement of the counsel before that court, allocated the $ 150,000 distributed to the trusts owning stock of the Slate Co. to the corpus of the trusts. Ella P. Burdick, 29 B. T. A. 731; affd., 76 Fed. (2d) 672. The question presented, 6 T.C. 105">*125 whether the distributions were liquidating distributions, is not determined by the way they were held in the trusts, subsequently.

In Docket Nos. 4481 and 4541 there should be recomputations of the deficiencies, for there is no contention made that the petitioners in those cases are taxable upon dividends distributed to the trusts created for their benefit by Arthur H. Kraus. It is our understanding1946 U.S. Tax Ct. LEXIS 310">*356 that only the trusts are taxable on the dividends, Docket Nos. 4500, 4501, 4502, and 4503. Accordingly,

Decisions will be entered under Rule 50 in Docket Nos. 4481 and 4541. Decisions will be entered for the respondent in Docket Nos. 4500, 4501, 4502, and 4503.