Court Opinion

ID: 4624363
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:54:59.650536+00
Date Added: 2024-06-11T07:56:30.939957
License: Public Domain

BESS SCHOELLKOPF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  L. R. MUNGER AND J. FRED SCHOELLKOPF, EXECUTORS OF THE ESTATE OF LAURA D. WILSON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Schoellkopf v. CommissionerDocket Nos. 71974, 71975.United States Board of Tax Appeals32 B.T.A. 88; 1935 BTA LEXIS 999; February 19, 1935, Promulgated *999  A private corporation, doing business in the State of Texas, and owning a varied assortment of obligations of subdivisions of the States of Texas and New Mexico, created a trust and transferred the municipal obligations to it, the corporation thereupon issuing trust certificates secured by the obligations in trust, the interest upon the trust certificates, except in certain instances, being payable by the trustee out of interest collected on the obligations.  Held, the interest paid to the holders of the trust certificates is to be included in gross income, and is not free from tax as interest upon the obligations of a state or political subdivision thereof, under section 22(b)(4) of the Revenue Act of 1928.  F. E. Youngman, Esq., and P. W. Phillips, Esq., for the petitioners.  George D. Brabson, Esq., for the respondent.  VAN FOSSAN *88  These proceedings were brought to redetermine deficiencies in the income tax of the petitioner, Bess Schoellkopf, for the year 1930 in the sum of $928.97 and of the petitioners, L. R. Munger and J. Fred Schoellkopf, executors of the estate of Laura D. Wilson, deceased, for the same year in the sum of $1,037.88. *1000  The sole issue is whether or not the petitioners, as owners of certificates of beneficial interests in trusts whose corpus consists only of obligations of states or political subdivisions thereof, are entitled to exclude from their gross income the interest received in accordance with the terms of such certificates.  The facts were stipulated substantially as follows.  *89  FINDINGS OF FACT.  The petitioner in Docket No. 71974, Bess Schoellkopf, is an individual residing at Dallas, Texas.  The petitioners in Docket No. 71975, L. R. Munger and J. Fred Schoellkopf, are the duly appointed, qualified, and acting executors under the last will and testament of Laura D. Wilson, deceased.  During the year 1930 the petitioner in Docket No. 71974 and the petitioners' decedent in Docket No. 71975 owned certain certificates of interest in trusts created by the Texas Bitulithic Co., the Fain-Townsend Co., and the Realty Trust Co., corporations, all of Dallas, Texas, pursuant to trust agreements executed under the dates of March 2, 1925, January 15, 1927, and May 1, 1925, respectively.  The material provisions of the trust agreement executed by the Realty Trust Co. on May 1, 1925, which*1001  is essentially similar to the two other trust agreements, are as follows: WHEREAS, the Company is the Owner of or may hereafter acquire certain claims of special assessments against real estate and against the owners thereof, all evidenced by ordinances of assessment passed by the respective cities in which the said real estate is located, and also claims of special assessment further evidenced by certificates of special assessment or tax bills or warrants, and also municipal bonds and other direct obligations of cities and towns, such certificates and obligations being sometimes hereinafter referred to as "Securities"; and, WHEREAS, the said respective obligations hereinbefore mentioned are in sundry uneven amounts, and mature at various and sundry times and bear sundry rates of interest respectively, and it is impracticable to offer the same for sale separately, and the interest of the Company will be best conserved by selling and conveying the same to said Trustee absolutely, to be by said Trustee held and applied under the provisions of the Trust hereby created and by issuing in lieu thereof ownership certificates in the form hereinafter provided representing the beneficial*1002  interests; and, WHEREAS, the Company is further desirous of assuring to each and every beneficiary hereunder that the funds realized from the collection of the interest on such securities and from the collection or sale of such securities, shall be sufficient at all times for the payment therefrom of all the principal and interest in said respective ownership certificates expressed as and when the same is by said ownership certificates expressed to be due and payable, and for the better accomplishment of such purposes will deposit with and assign to the Trustee hereunder an additional amount of securities to a par amount equal to five per cent (5%) of the face value of all ownership certificates at any time outstanding hereunder; and, WHEREAS, the Company is further desirous of procuring the prompt collection of the principal and interest of the said securities as the same respectively mature and the distribution thereof to and among the respective beneficiaries hereunder, as in this agreement more particularly set forth; and WHEREAS, such ownership certificates and interest coupons to be attached thereto and the Trustee's certificate of authentication thereof it is agreed shall*1003  be in substantially the following form (the number, amount, series, date, date of interest, and date of maturity being properly inserted), to-wit: *90  (Form of Ownership Certificate) MUNICIPAL TRUST OWNERSHIP CERTIFICATE No.  SERIES $ Realty Trust Company, a corporation, duly organized and existing under and by virtue of the Laws of the State of Texas, having its principal office in the City of Dallas, Texas, does hereby certify that the bearer hereof, or, if this ownership certificate be registered, the registered holder hereof, is entitled to participation in the proceeds and avails of certain special assessment certificates, bonds, and direct obligations issued by municipalities of the States of Texas and New Mexico, and heretofore assigned and delivered to City National Bank of Dallas, Texas, as Trustee under a certain agreement of trust, dated as of the first day of May, 1925, to the extent of the principal sum of Dollars ($ ) payable from such proceeds and avails on the first day of , 19 , with interest upon the said principal sum herein expressed from date hereof at the rate of per cent ( %) per annum, payable on the first day of and of in each year upon presentation*1004  and surrender of coupons hereto attached as they severally mature at the office of the said City National Bank of Dallas, Texas, all in the manner and upon the terms more particularly set forth in the agreement of trust between Realty Trust Company and City National Bank of Dallas, as Trustee, hereinbefore mentioned, to which agreement reference is hereby made for a full description of the rights of the holder or registered owner hereof and the terms, provisions, and conditions upon which this ownership certificate is issued and held.  The Realty Trust Company, for better securing the distribution to the holder or the registered owner hereof from the proceeds and avails of the securities held by the said City National Bank of Dallas, as Trustee, under the agreement hereinbefore expressed, has agreed with said City National Bank of Dallas, as Trustee, that the par value of the said securities held by said Trustee under said agreement shall at all times be equal to One Hundred Five Per Cent (105%) of the aggregate principal amount expressed in all of the outstanding ownership certificates of the series of which this ownership certificate is one.  The bearer or registered holder hereof*1005  by the acceptance of this ownership certificate consents to and is bound by all the terms, covenants, and agreements in the said agreement of trust hereinbefore referred to expressed, and particularly waives and releases all interest collected by the said Trustee upon the securities held by it under the provisions of the said agreement of trust in excess of interest at the rate herein specified.  This ownership certificate shall pass by delivery, unless registered in the name of the owner on the books of the Trustee * * *.  Such registration, however, shall not affect the negotiability of the coupons, which shall continue to be negotiable by delivery merely, notwithstanding registration hereof.  * * * (Form of Interest Coupon) No.  $ Due to bearer hereof on the first day of 19 , on surrender hereof at the office of City National Bank of Dallas, in the City of Dallas, Texas.  Dollars, being the agreed semi-annual interest rate on Municipal Trust Ownership Certificate No.  , Series , issued by Realty Trust Company.  * * * SECTION *91  2.  Whenever the Company shall desire to issue any series of ownership certificates pursuant to the provisions hereof, it shall deliver*1006  the same to the Trustee with the written order provided for in Section One of this Article, accompanied by special assessment certificates, or bonds or direct obligations, issued by municipalities either of the State of Texas or of the State of New Mexico, or of both of said States, then duly assigned to the Trustee in such manner as to vest title to the same in the said Trustee, to a par amount of One Hundred Five per cent (105%) of the par amount of the ownership certificates so to be authenticated.  Every such order shall be further accompanied by the following: * * * Every security delivered and assigned to the Trustee under the pvosions [sic] of this Section shall have endorsed thereon by the Company its unconditional guarantee of the prompt payment of the principal and interest of such security as and when the same shall become due and payable, which guarantee shall be in form as shall be satisfactory to the Trustee.  * * * SECTION 3.  The owner or registered holder of each ownership certificate issued hereunder shall, subject to the terms hereof, be a beneficiary in the series of securities sold and assigned to the Trustee hereunder as the basis of the issuance*1007  of the ownership certificates of such series in the proportion that the par amount recited in such ownership certificate bears to the par amount of all the said ownership certificates of the said series issued and outstanding hereunder.  * * * ARTICLE II.  * * * SECTION 2.  In the event the Trustee shall not have in its hands applicable to that purpose funds with which to meet the next accruing installment of principal and interest due to the holders of any series of ownership certificates issued hereunder at least five (5) days preceding the date upon which the said payments are respectively expressed to become due, then the Company upon notification by the Trustee of the deficiency of funds in its hands so to make the said payments shall at once and not less than five (5) days preceding the date on which the said respective payments are so expressed to become due, advance and pay to the Trustee, to be by it applied in the purchase of said ownership certificates or coupons as hereinafter provided, cash in an amount sufficient, with the funds then in the hands of the Trustee, to make said payments respectively in full.  As to all advancements so made by the company from time*1008  to time, the Company shall be entitled to receive from the Trustee as and when the same shall be surrendered to the Trustee and duly purchased by it from said fund, ownership certificates and coupons issued hereunder to the face amount as near as may be to the advancements so made, and thereafter the Company shall be entitled as the owner and holder of such ownership certificates and coupons to all the rights and benefits of the former owner and holder thereof; subject, nevertheless, to the right of the owners and holders of all other ownership certificates of the said series to receive payment in full of all principal and interest expressed to be due upon such ownership certificates prior to any payment of principal or interest being made upon the ownership certificates or coupons so held by the Company; and the Trustee shall endorse upon the face of all ownership certificates and coupons so delivered to the Company that the same are subordinate *92  as to both principal and interest to the right of all other holders of ownership certificates of such series to receive payment in full of principal and interest of the ownership certificates so held by them respectively.  SECTION*1009  3.  All moneys so collected and received by the Trustee either as principal, interest, penalty, or otherwise, upon or in relation to that portion of the securities exceeding the expressed principal amount of the ownership certificates issued and outstanding hereunder and so assigned and delivered to the Trustee under the provisions of this instrument shall constitute a trust fund and shall be by the Trustee applied from time to time, first, to the payment of all expenses, costs and charges of the Trustee in and about the trust hereby created, including counsel and attorney's fees and costs incurred in the collection of any of the said securities assigned and delivered to the Trustee hereunder; second, to the payment, so far as the same will extend, of any interest becoming due upon any of the ownership certificates issued hereunder and outstanding, for the payment of which sufficient funds from other sources shall not be in the hands of the Trustee; third, to the payment of principal, so far as the same will extend, of ownership certificates becoming due and payable hereunder, and for the payment of which sufficient funds from other sources shall not be in the hands of the said Trustee. *1010  In the event of any Deficiency to pay in full the interest or the principal aforesaid, or either, distribution of such funds shall be made by the Trustee pro rata to and upon said interest coupons or ownership certificates, as the case may be.  All interest coupons or ownership certificates paid with funds provided for in this section shall, when so paid and received by the Trustee, be by it delivered to the Company, and the Company shall thereupon become entitled to all the rights and benefits of the former holders of such ownership certificates and coupons, subject, nevertheless, to the payment in full of all other ownership certificates and interest coupons of the same series before any payment of principal or interest upon such ownership certificates or coupons so held by the Company, and the Trustee shall endorse upon the face of all ownership certificates and coupons so delivered to the Company that the same are subordinate as to both principal and interest to the right of all other holders of ownership certificates of such series to receive payment in full of principal and interest of the ownership certificates so held by them respectively.  SECTION 4.  In the event the Trustee*1011  shall not have in its hands applicable to that purpose funds with which to meet any installment of principal or interest as and when the same are expressed to be due and payable to the holders of the ownership certificates and interest coupons issued hereunder, and the Company shall fail to furnish funds to the Trustee, for the purchase as provided in Section 2 of this Article, of such ownership certificates and interest coupons to the extent of such deficiency, the Trustee may of its own motion and shall, upon the written request of the holders of at least one-fourth in amount of the ownership certificates of the said series then outstanding and upon indemnity and security satisfactory to the Trustee, as hereinafter provided, after giving fifteen (15) days' notice of the time and place by advertisement in any daily newspaper published in the City of Dallas, and State of Texas, proceed to sell for cash all of the said securities assigned and delivered to it hereunder as a basis for the issuance of such series of ownership certificates, including the 5% excess of the said securities constituting the additional security furnished by the Company to the holders of such ownership certificates*1012  and interest coupons, as well as the balance of such securities transferred and assigned to the Trustee in respect of said series; * * *.  * * * SECTION *93  7.  In the event there shall at any time be any default in the payment of either the principal or interest of any securities held by the Trustee hereunder, and such default shall continue for a period of twelve months, or in the event that any proceedings had with reference to the issuance of any of said securities shall have been adjudged irregular or invalid, or in the event any lot or lots against which any assessment has been levied constituting any part of the said securities hereunder shall be sold for taxes the Company agrees to substitute immediately upon demand of the Trustee, in lieu of such defaulted or invalid securities, other securities of a like nature, being certificates of special assessment issued by cities and towns of the States of Texas and New Mexico or direct obligations of said States or its municipal subdivisions, of an equal principal face amount exclusive of the face amount of any mechanic's lien or other supplemental security accompanying such security, which said substituted securities shall*1013  in each case be accompanied by all the statements, legal opinions, and documents provided in Article I of this agreement of trust to be filed with the Trustee in like manner and with like effect as when securities are deposited to secure an original issue of a series of ownership certificates hereunder.  But the provisions of this section shall not in any-wise be deemed to impair or affect the right of the Trustee to enforce to the fullest extent the guarantee of the Company of the payment of principal and interest of said securities as herein provided.  * * * ARTICLE III.  * * * SECTION 2.  Each holder or owner of any ownership certificate issued hereunder expressly waives all right to any interest which may be received by the Trustee upon or in relation to any of the securities of the series of which the said ownership certificate pertains in excess of the rate of interest expressly provided in the said ownership certificates and evidenced by the interest coupons thereto appertaining.  SECTION 3.  Neither the Company nor the holder or owner of any outstanding ownership certificate issued hereunder shall have any legal title to or interest in any securities assigned and*1014  delivered to the Trustee hereunder, but the right of the Company and of such holder or owner shall be the right to receive from and through the Trustee as herein provided the income, proceeds, and avails of such securities, and as to said Company the right to receive reassignment of portions of said securities, all in the manner in this agreement of trust provided, it being the intention hereof to vest the full legal title to said securities and all securities substituted therefor in said Trustee.  The Trustee hereunder shall have the sole right to collect or receive any payment for principal, interest, penalty or otherwise on or in respect of the said securities, until the sale thereof as herein provided, including the right in the event of default in the payment of principal or interest upon the said securities to proceed against the Company upon its endorsed guaranty on such securities; but nothing herein contained shall require the said Trustee to proceed at any time upon such guaranty or to take any steps toward collection of the defaulted securities, unless it shall first have been indemnified to its satisfaction against all costs and expenses which it might thereby incur by*1015  the Company or by holder or holders of the ownership certificates, or some of them, outstanding hereunder of the series to which said defaulting securities appertain.  * * * ARTICLE *94  VI.  Whenever all of the ownership certificates of any series shall have been cancelled, or funds for the payment of the same and of all unpaid interest thereon, as therein expressed, and of all fees, expenses, and disbursements of the Trustee hereunder in respect of such series, shall have been deposited with, and paid to the Trustee hereunder, the Trustee shall convey, transfer, assign and set over to the Company all securities and cash in its hands appertaining to such series other than the cash so deposited for the payment of such ownership certificates, interest coupons and expenses.  All cash so deposited hereunder shall be held by the Trustee as a trust fund for the benefit of such ownership certificates and interest coupons of such series, and shall be paid to the holders and owners thereof upon the production of the same to the Trustee for cancellation.  The Company may, from time to time, when not in default in any of its covenants herein contained and when no default exists*1016  in the payment of the principal or interest of any particular series of ownership certificates at any time issued and outstanding hereunder withdraw from the Trustee so much of the securities or cash in the hands of the Trustee appertaining to any series as shall be in excess of one hundred five percent (105%) of the face value of all the ownership certificates of such series then outstanding, but the Company expressly covenants anything to the contrary hereinbefore or in this agreement contained notwithstanding that it will at all times maintain on deposit with said Trustee hereunder securities as aforesaid in equal par value to one hundred five per cent (105%) of the aggregate of all outstanding ownership certificates issued hereunder.  The ownership certificates were issued and sold in the form prescribed by the trust agreement.  Pursuant to the terms of the above trust agreements, the trustee, First National Bank in Dallas, held assets deposited with it and paid interest due on outstanding certificates of ownership issued pursuant to the terms of the trust agreements.  The assets held by the trustee consisted of certificates of special assessment and other direct obligations*1017  of municipalities and counties of the State of Texas, together with cash paid to the trustee by the respective grantors named in the trust agreements when any such special assessment certificates or other direct obligations were withdrawn by the latter without depositing other certificates or obligations of like principal amount.  Such assets or cash were held by the trustee, as required by the trust agreements, in an amount equal to 105 percent of the outstanding ownership certificates.  Trust ownership certificates issued by the grantor corporations and the interest coupons attached thereto, when presented for payment, were paid out of the cash received and held by the trustee under the trust agreements.  During the year 1930 the trustee collected interest in the total amount of $154,337.63 upon such securities deposited with it by the Texas Bitulithic Co. and $75,213.12 upon certificates so deposited by the Fain-Townsend Co., and paid out as interest on the outstanding trust ownership certificates total sums of $115,425 and $52,300, respectively, *95  the respective balances of $38,912.63 and $22,913.12, interest collected, being retained by the Texas Bitulithic Co. and*1018  the Fain-Townsend Co.  During the same year the trustee collected interest upon the securities deposited with it by the Realty Trust Co. in excess of the interest on outstanding trust ownership certificates which it was required to any under the terms of the trust agreement of May 1, 1925, and the balance of such interest was retained by the Realty Trust Co.  During 1930 the petitioner, Bess Schoellkopf, received from the First National Bank in Dallas, as trustee, totals of $2,200 and $1,200, respectively, as interest on the trust ownership certificates owned by her which had been issued by the Texas Bitulithic Co. and the Fain-Townsend Co., respectively, pursuant to the said trust agreements.  During 1930, Laura D. Wilson received from the First National Bank in Dallas, as trustee, totals of $1,250, $1,690, and $1,292.50, respectively, as interest on the trust ownership certificates owned by her which had been issued by the Texas Bitulithic Co., the Fain-Townsend Co., and the Realty Trust Co., respectively, pursuant to the trust agreement above mentioned.  The petitioner, bess Schoellkopf, was a beneficiary of the estate of J. B. Wilson (trust) being entitled to a one-fifth distributive*1019  share in the income of such estate.  During the year 1930 the estate owned certain certificates of interest in the above described trusts created by Texas Bitulithic Co., Fain-Townsend Co., and Realty Trust Co.  The estate received $4,714.72, $3,342.17, and $2,437.50, respectively, as interest on those certificates.  The distributive share of the estate which was received by the petitioner, Bess Schoellkopf, for that year was one fifth, or $2,098.88, of the total interest of $10,494.39 received by such estate on the trust ownership certificates described above.  The petitioner, Bess Schoellkopf, filed her income tax return for the year 1930 with the collector of internal revenue at Dallas, Texas.  In her return she did not report as taxable income any part of the amounts of $2,200, $1,200, and $2,098.88 received by her, as set out above.  In determining the deficiency against the petitioner the respondent has included such interest in taxable income.  The petitioner, Laura D. Wilson, filed her income tax return for the year 1930 with the collector of internal revenue at Dallas, Texas.  In her return she did not report as income any part of the interest payments of $1,250, $1,690, *1020  and $1,292.50 received by her as set out above.  In determining the deficiency against the executors of the estate of Laura D. Wilson, deceased, the respondent has included in taxable income the amounts of interest so received.  *96  OPINION.  VAN FOSSAN: The petitioners' position is that the interest paid to them was interest upon the direct obligations of political subdivisions of the States of Texas and New Mexico and as such was exempt from Federal income tax on constitutional grounds and under the express terms of section 22(b)(4) of the Revenue Act of 1928. 1 They state, on brief, "if these petitioners are taxable on the amounts in controversy it is because under the particular facts of the cases the amounts in issue do not constitute interest upon such obligations." *1021  The respondent contends that the interest so paid was simply interest on the trust certificates which were the obligations of the grantors of the trusts or of the trusts themselves.  The petitioners rely principally on the language of the trust instrument stating that "the owner or registered holder of each ownership certificate * * * shall * * * be a beneficiary in the series of securities sold and assigned to the trustee as the basis of the issuance of the ownership certificates * * *" and of the certificate itself reading "Realty Trust Company * * * does hereby certify that the bearer hereof is entitled to participation in the proceeds and avails of certain special assessment certificates, bonds and direct obligations issued by municipalities of the States of Texas and New Mexico." If the cases at bar were to rest on the quoted phrases alone, the petitioners' theory would be persuasive, but we must look to the entire situation with its varied rights and obligations to determine the true character and the correct legal status of the certificates of participation.  The grantors in the several trusts were corporations.  The corporation purchased the direct obligations of political*1022  subdivisions of states.  It then transferred those securities to a trustee "absolutely", under an agreement which contained many features not usually found in a pure trust.  The so-called beneficiaries of the trust, unknown *97  and unnamed in the trust instrument, purchased "Municipal Trust Ownership Certificates" transferable by delivery, unless registered.  The certificate was signed by the grantor, provided for a fixed rate of interest, matured in five years, and had interest coupons attached, the same being negotiable by delivery.  The certificate provided on its face that the bearer or registered holder, "particularly waives and releases all interest collected by the said Trustee upon the securities held by it under the said agreement of trust in excess of interest at the rate herein specified." Under the trust agreement no definite municipal or state securities were made the corpus of the trust.  The fund of such securities was a flexible and mutable portfolio subject wholly to the control and designation of the company.  Withdrawals, eliminations, and substitutions were made at its will.  Section 3 of Article III of the trust agreement specifically provided that the*1023  certificate holders should have no legal title or interest in the municipal securities themselves, but only in the proceeds from their sale and in a certain portion of the interest therefrom.  Though some provisions of the trust agreement and certificates, at casual reading, seem to indicate that the certificate owner was the direct recipient of interest from municipal and state securities, and though the cash payment of his semiannual coupons and, in part, the return of his capital in five years were presumed to arise from such a source, by the very terms of the plan in certain events those payments might be made from contributions made by the grantors or from previously received surplus interest.  The certificate holder was concerned only with the regular payment of the interest due on the coupons and with the prompt payment of his capital upon maturity of the certificate.  This payment bore no necessary relationship to the collection of the interest on any specific municipal securities.  The company had guaranteed the payment of their principal and interest and had agreed to supply any amounts required by the trustee to pay such principal and interest when due.  The phrase "the*1024  agreed semiannual interest rate" found in the interest coupons is significant.  The company had agreed and guaranteed that the certificate owner should receive that to which his certificate showed he was entitled.  By guaranteeing the payment of the interest on the municipal and their similar securities, which apparently bore a much higher rate than the certificate coupon, the grantors thus made certain that the coupon owner would receive his interest.  By reason of those assurances and other conditions on the part of the company, we are of the opinion that a new security, the "Municipal Trust Ownership Certificate", was created, to which the petitioners looked and upon which security the interest *98  in question was paid.  Attention is called to the fact there is nothing in the trust instrument and certificate, or in the record, to show that the certificate holder knew the kind, amount, interest rate, maturity, name of the obligor, or any other pertinent fact relating to the direct obligations of the state political subdivisions which issued the underlying trust fund securities.  By reason of the guarantee of the company, his return was assured in the fixed amount.  We conclude*1025  that the interest received by the petitioners was not interest upon the obligations of a state or political subdivision thereof and that, therefore, the income accruing by virtue of the ownership of the "Municipal Trust Ownership Certificates" was not tax-free under the law.  In , we held that the taxing of profits of a dealer in tax-exempt securities was too remote to interfere with the governmental function of a state.  . So in the cases at bar we can see no possible influence that the taxing of the interest received by the petitioners on the certificates of participation can have on the functioning of the unnamed political subdivisions whose securities were held by the trustee.  The record discloses that in 1930 out of $154,337.63 collected by the trustee from the securities held under the trust agreements, the Texas Bitulithic Co. received and retained $38,912.63, while in the same yar the Fain-Townsend Co. retained the sum of $22,913.12 out of $75,213.12 collected by the trustee.  These facts cast a revealing light on the inward character of the plan.  *1026  The petitioners rely on  (reversing ), a case which grew "out of the peculiar manner in which the Commonwealth of Virginia has borrowed money for the building of roads." In that case the court observed that "The Ridge Route Corporation was obviously formed and operated merely as an agency to facilitate the borrowing of money by the State." The court concluded: * * * that in reality the banks, and not the corporation, lent the money to the state, that the notes of the corporation were issued merely to indicate the extent of each bank's participation in the transaction, and that the banks, and not the corporation, were the owners of the state and city obligations when the interest was paid.  The facts in these cases are so dissimilar that the cited case is no authority here.  The petitioners also cite , the facts in which, at casual reading, are somewhat similar to those in the cases at bar.  There are, however, vital differences which serve to distinguish the cases.  *99  In the case cited the certificate*1027  provided that the corporation sells to the certificate purchaser "all of its right, title and interest in Municipal Improvement Bonds issued under the special assessment laws of the State of California" and that the certificate owner "is entitled at any time upon demand and surrender of this certificate * * * to receive bonds of unpaid face value equal to the principal sum * * *." The trust agreement provides for the payment of the principal sum as stated in the ownership certificate prior to maturity, upon demand, by delivery to the certificate holder of specific bonds, selected by the trustee, or at maturity by cash or unpaid bonds, at the holder's option.  The agreement further provides: * * * It is the intention of the parties hereto that the delivery to the purchaser thereof of a certified certificate, vests in the holder of such certificate the ownership of an amount in unpaid face value bonds, equal to the par value of the certificate, subject to the implied agreement on the part of the purchaser of such certificate by the acceptance thereof, to allow the said bonds to remain in the hands of the Trustee for collection under the terms and conditions of this Trust, * * * *1028  None of the "interest income" in the Carson case flowed to the petitioners by reason of any of the warranties of the corporation or of bonds bearing an interest rate of less than 7 percent.  In the cases before us the certificate states that the bearer (or registered holder) "is entitled to participate in the proceeds and avails of certain special assessment certificates * * * to the extent of the principal sum, payable from such proceeds and avails" on a day certain.  The trust agreement makes no provision for payment of the certificate prior to maturity nor does it permit the certificate holder, upon maturity, to receive specific bonds in lieu of cash.  On the contrary, it states definitely that: * * * Neither the Company nor the holder or owner of any outstanding ownership certificate issued hereunder shall have any legal title to or interest in any securities assigned and delivered to the Trustee hereunder, but the right of the Company and of such holder or owner shall be the right to receive from and through the Trustee as herein provided the income, proceeds, and avails of such securities, and as to said Company the right to receive reassignment of portions of said securities, *1029  all in the manner in this agreement of trust provided, it being the intention hereof to vest the full legal title to said securities and all securities substituted therefor in said Trustee.  * * * Furthermore, after the ownership certificates of any series shall have been paid or provided for, all surplus of cash and securities shall belong to the grantors.  The comparison of the provisions quoted from the respective trust instruments and certificates demonstrates clearly that in the Carson case the certificate holder was a beneficial owner os certain deposited bonds and could obtain a specific allocation of his share of those *100  bonds on demand before or upon maturity.  The petitioners here had no such right.  They were entitled to only a definite semiannual interest return on the principal sum, which sum was to be repaid in cash at the maturity date of the certificate.  They looked to the grantor for assurance as to both the interest and the return of principal.  Reviewed by the Board.  Decision will be entered for the respondent.LEECHLEECH, dissenting: It seems to me that the result announced in the majority opinion is not supported therein*1030  by any sufficiently material distinction from the situation presented in Carson Estate Co.,31 B.T.A. 607">31 B.T.A. 607, in which we reached a different conclusion.  Accordingly, I respectfully dissent.  BLACK agrees with this dissent.  Footnotes1. (b) Exclusions from gross income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: * * * (4) TAX-FREE INTEREST. - Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (B) securities issued under the provisions of the Federal Farm Loan Act, or under the provisions of such Act as amended; or (C) the obligations of the United States or its possessions.  Every person owning any of the obligations or securities enumerated in clause (A), (B), or (C) shall, in the return required by this title, submit a statement showing the number and amount of such obligations and securities owned by him and the income received therefrom, in such form and with such information as the Commissioner may require.  In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of deposit), the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income taxes. ↩