John S. Phipps, Henry C. Phipps, and Howard Phipps were the principal organizers of petitioner. They were the owners of more than 50 per cent of the stock. They were the controlling members of the board of directors and were the president and vice presidents, respectively, of petitioner. Petitioner in 1941 had made no disposition of its income since its organization and had paid no dividends.

The income of petitioner in the year 1941 was derived from the following sources:

Petitioner was a "personal holding company" in 1941 and not a "bank."

Petitioner's failure to file a personal holding company tax return for 1941 was not due to reasonable cause, 1947 U.S. Tax Ct. LEXIS 28">*35 but was due to willful neglect.

Petitioner, in its corporation income and excess profits tax return for 1941, reported a net long term capital gain of $ 5,359.25 on the sale of Miami 2 per cent certificates of indebtedness, as follows:

In 1929 petitioner purchased $ 100,000 principal amount of Miami 6 per cent improvement bonds maturing July 1, 1934, to July 1, 1950 9 T.C. 1060">*1064 (hereinafter referred to as improvement bonds), half being purchased on October 11, 1929, and half on December 9, 1929.

The city of Miami defaulted in making certain principal and income payments due on bonds issued by it (including the improvement bonds), and in 1934 adopted a plan for refunding its bonds.

As of October 1, 1934, and in accordance with such refunding plan, the petitioner surrendered to the city of Miami the $ 100,000 principal amount of improvement bonds and received in lieu thereof a like principal amount of Miami 6 per cent refunding bonds maturing January 1, 1964 (hereinafter referred to as refunding bonds). Coupons for semiannual interest payable on January 1, 1947 U.S. Tax Ct. LEXIS 28">*36 1935, and on all subsequent interest payment dates were attached to the refunding bonds.

Under the refunding plan the city of Miami reserved the right to issue Miami 2 per cent certificates of indebtedness maturing January 1, 1947 (hereinafter referred to as certificates of indebtedness), with respect to all unpaid interest accrued on the outstanding improvement bonds up to the date of their surrender for refunding bonds and with respect to that part of the interest in excess of 3 per cent per annum accruing on the refunding bonds for the period from July 1, 1934, to January 1, 1936.

The interest coupons attached to each $ 1,000 refunding bond received by petitioner, evidencing interest payable on January 1, 1935, July 1, 1935, and January 1, 1936, were in pairs designated as A coupons and B coupons, each being for $ 15 (i. e., semiannual interest on $ 1,000 at the rate of 3 per cent per annum). The city of Miami reserved the right to extend to January 1, 1947, the time for payment of the interest evidenced by the B coupons by issuing therefor its certificates of indebtedness maturing January 1, 1947.

To evidence the past due interest on the improvement bonds for the 15-month period1947 U.S. Tax Ct. LEXIS 28">*37 from July 1, 1933, to October 1, 1934, petitioner received in 1934 certificates of indebtedness maturing January 1, 1947, in the face amount of $ 7,500 (i. e., a $ 75 certificate of indebtedness for each $ 1,000 improvement bond, evidencing interest thereon at 6 per cent per annum for 1 1/4 years).

Of each such $ 75 certificate, $ 15 evidenced interest for the period from July 1 to October 1, 1934. The A coupons and B coupons for $ 15 each, payable January 1, 1935, which were attached to the refunding bonds also evidenced the interest for the period from July 1 to October 1, 1934 (as well as for the period from October 1, 1934, to January 1, 1935). To prevent a $ 15 duplication of the interest evidenced by the certificates of indebtedness and by the A and B coupons payable January 1, 1935, $ 5.50 of the interest evidenced by such A coupons was canceled by endorsement on the A coupons, and $ 9.50 of the interest evidenced by such B coupons was canceled by endorsement on the B coupons, leaving $ 5.50 as the amount of each B coupon payable 9 T.C. 1060">*1065 January 1, 1935, which the city of Miami could either pay in cash or with respect to which it could issue certificates of indebtedness. 1947 U.S. Tax Ct. LEXIS 28">*38 The city of Miami elected, in lieu of making payment in cash, to issue certificates of indebtedness to evidence the uncanceled semiannual interest covered by the B coupons payable January 1, 1935. Accordingly, petitioner received certificates of indebtedness maturing January 1, 1947, in the face amount of $ 550 (i. e., $ 5.50 per $ 1,000 bond).

The city of Miami also elected, in lieu of making payment in cash, to issue certificates of indebtedness to evidence the semiannual interest covered by the B coupons attached to the refunding bonds which was payable July 1, 1935. Accordingly, petitioner received certificates of indebtedness maturing January 1, 1947, in the face amount of $ 1,500 (i. e., $ 15 per $ 1,000 bond).

The city of Miami also elected, in lieu of making payment in cash, to issue certificates of indebtedness to evidence the interest covered by the B coupons attached to the refunding bonds which was payable January 1, 1936. Accordingly, petitioner received certificates of indebtedness maturing January 1, 1947, in the face amount of $ 1,500 (i. e., $ 15 per $ 1,000 bond).

Petitioner received the 2 per cent interest on the certificates of indebtedness as the interest 1947 U.S. Tax Ct. LEXIS 28">*39 accrued thereon. During 1941 petitioner sold all of the certificates of indebtedness it received under the refunding plan for $ 10,276.50. The face value of the certificates of indebtedness was $ 11,050, and the value thereof when received by petitioner was $ 4,917.25. No gain or loss was reported by the petitioner in its 1934 Federal income tax return on account of the exchange of the 6 per cent improvement bonds for the 6 per cent refunding bonds and the receipt of the 2 per cent certificates of indebtedness.

OPINION.

Whether petitioner is a personal holding company under section 501, Internal Revenue Code, depends entirely upon its ability to qualify as "a bank," within the excepting language of section 501 (b), the type of income actually received and the distribution of stock ownership being concededly otherwise encompassed by the defining provisions. For the definition of "a bank" we are referred to section 104, which is as follows:

(a) Definition. -- As used in this section the term "bank" means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia), of any State, or of any Territory, 1947 U.S. Tax Ct. LEXIS 28">*40 a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under section 11 (k) of the Federal Reserve Act, 38 Stat. 262 (U. S. C., Title 12, § 248k), as amended, and which is subject by law to supervision and examination by State, Territorial or Federal authority having supervision over banking institutions.

9 T.C. 1060">*1066 Since petitioner is incorporated as a trust company under Florida law and is subject by law to supervision by the banking authorities of that state, but does not receive deposits nor make loans or discounts, the parties join issue in substance on whether "a substantial part" of petitioner's "business" consists of "exercising fiduciary powers similar to those permitted to national banks." ¹

1947 U.S. Tax Ct. LEXIS 28">*41 Petitioner's operations in the fiduciary field consisted of acting as trustee under certificates of beneficial interest covering mortgages held by it for the benefit of its stockholders and their children and grandchildren, and of collecting and transmitting payments of principal and interest thereunder. During the tax year there were 15 such mortgages totaling $ 300,000, on which about 50 collections aggregating some $ 90,000 were made. It is stipulated that petitioner rendered no bill and received no income for these services.

Even if it was contemplated that petitioner was eventually to be paid for these activities, a conclusion which the record by no means demonstrates, ² its conduct of the mortgage operations, restricted and informal as they evidently were, can scarcely be considered a part of its business, certainly not a "substantial" part. The pursuit of an activity for profit is indispensably associated with the concept of "business." Flint v. Stone Tracy Co., 220 U.S. 107">220 U.S. 107. As was said in Chaloner v. Helvering (App. D. C.), 69 Fed. (2d) 571, "it is essential that livelihood or profit be at least one1947 U.S. Tax Ct. LEXIS 28">*42 of the purposes for which the employment is pursued." It is impossible to envisage a true business, conducted with the public at arm's length, being successfully operated along these lines, at least to any substantial extent, where for a period of four years, although to some undisclosed degree theoretically collectible, fees were neither billed nor withheld. Only the stipulated fact that petitioner paid no salaries can account for the continuation of these practices, but that factor does nothing to substantiate the similarity to a true business.

9 T.C. 1060">*1067 That it was not the purpose in excepting "banks" to exclude such restricted and intimate family ventures seems apparent not only from this consideration of the legislative language, but also from the purpose 1947 U.S. Tax Ct. LEXIS 28">*43 to be served. The reason why Congress enacted the cognate exception of "banks" from the operation of the undistributed surplus tax (section 104 (b)) "is succintly stated in the Report of the Committee on Ways and Means, H. R. No. 2475, 74th Cong.: '* * * This seems to be a wise public policy, since the surplus of banks must be built up for the protection of the depositors * * *'. * * * The imposition of an additional tax on the undistributed earnings of a banking institution would have been equivalent to flying in the face of the settled policy of banking authorities requiring the establishment of reserves, out of the bulk of earnings, for the safety and protection of the depositing public." Staunton Industrial Loan Corporation v. Commissioner (C. C. A., 4th Cir.), 120 Fed. (2d) 930. No such public purpose is present on these facts, and the conclusion seems to be required that petitioner, not being a bank within the meaning of the defining section, was during the period in issue a personal holding company.

This determination necessitates disposition of the remaining questions. The first is whether petitioner's sale of city of Miami certificates1947 U.S. Tax Ct. LEXIS 28">*44 of indebtedness received in lieu of interest in connection with a refunding of that city's obligations represented the realization of tax-exempt interest on such obligations or taxable capital gain to the extent of the difference between their fair market value when acquired and the sale price.

That petitioner collected the proceeds of these securities by sale rather than awaiting their maturity must be treated as entirely fortuitous. Collection from the purchaser upon a transfer of tax-exempt interest does not deprive the receipt of its original character. I. T. 1337, I-1 C. B. 29. See H. Gates Lloyd, 4 T.C. 829, 838; affd. (C. C. A., 3d Cir.), 154 Fed. (2d) 643; certiorari denied, 329 U.S. 717">329 U.S. 717. Yet we think respondent would never have sought to tax the proceeds of these certificates had they been held to maturity and surrendered for payment by the municipality. So much was, indeed, conceded by respondent's counsel at the hearing: "Well, if the petitioner had held these two percent certificates until maturity and were paid the interest by the corporation that would have been tax-exempt interest1947 U.S. Tax Ct. LEXIS 28">*45 * * *."

It is stipulated that all of the certificates in controversy were issued either "To evidence the past due interest on" the municipality's original securities or "to evidence the uncancelled semi-annual interest" on the new refunding bonds issued in exchange. All of this interest, if received in cash, would have been tax exempt. That it was 9 T.C. 1060">*1068 actually collected through subsequent disposition of an obligation intended merely to represent it seems to us ineffectual to alter the fundamental nature of the income. To this extent the deficiency is disapproved.

On the penalty issue no evidence whatever was introduced. We know that petitioner failed to file a personal holding company return, but there is no testimony and no record to tell us why this statutory requirement was omitted. Petitioner's sole contention on the subject is that it obviously was of the opinion that it was not a personal holding company because it answered "no" to that question on the income tax return; and that the arguable nature of its liability as a personal holding company made this opinion reasonable. This is said to be the "reasonable cause" for failing to file a return which the penalty1947 U.S. Tax Ct. LEXIS 28">*46 section describes, and to demonstrate that there was no "willful neglect."

Were we to accept this reasoning and eliminate the penalty, it would mean that whenever a taxpayer stated on its income tax return that it was not a personal holding company, and its liability as a personal holding company was not entirely clear, no penalty would attach, regardless of what steps the taxpayer had taken to investigate the question and of the actual state of mind of the taxpayer or its responsible officers, and irrespective of whether the information called for was otherwise available to respondent, and, indeed, of the taxpayer's motives or good faith in withholding it. We know of no case which can be said to have gone to any such lengths.

The present petitioner does not seem to us to have sustained its burden of showing, as the statute requires, that the failure to file the personal holding company return was due to reasonable cause and not to willful neglect. We think the penalty was properly imposed.

Decision will be entered under Rule 50.