consideration. This sublease provided for an increased fixed rental to be paid by Haggarty and contingent rentals equal to a percentage of Haggarty's gross sales over a certain amount to be paid to the petitioner, as lessor. It was contemplated that such contingent rentals were to be assigned by petitioner to John Shirley Ward or his nominees, who were intended to be petitioner's stockholders and creditors. The Haggarty sublease and any other subleases in the Brockman Building were to be assigned to the bank. The petitioner was not to benefit by any receipts from the Brockman Building other than such contingent rentals. The contingent rentals which were to be paid over to the bondholders were to be applied as payment for the bonds under the agreement entered into in 1934; no payments had been made on account of such agreement up to this time in 1941. The bank, however, would not consent to such sublease because it felt that the inclusion of the provision requiring contingent rentals in the lease together with the inclusion of the fixed rental provisions might in some way result in an undesirable conflict of interests at some later date. As a result of the bank's reluctance to enter into an agreement which included provisions relating to the contingent rentals, a plan was formulated whereby Haggarty would enter into a new lease with petitioner providing for a fixed rental and into a separate agreement with the Title Insurance and Trust Company (hereinafter referred to as the Title Company) providing for percentage payments, such percentage payments to be determined in the same way as the contingent rentals. According to that plan, Haggarty, on March 3, 1942, entered into a lease with petitioner which provided for a fixed rental of $5,500 per month, to extend until September 30, 1961. The bank and the bondholders executed consents to the new sublease. The bank also relinquished any possible future claims to the percentage rentals. In addition, Haggarty, on March 3, 1942, agreed with the Title Company that it would pay to it, for the period beginning with the delivery to Haggarty of some newly leased premises on the third floor of the building and ending with the termination of the sublease on September 30, 1961, 41⁄2 per cent of its gross sales between $1,400,000 and $1,800,000 and 4 per cent of gross sales over $1,800,000. The agreement with the Title Company was stated to be in consideration for the efforts of petitioner's stockholders in obtaining a renewal of the lease between Haggarty and petitioner and the bank's agreement to be bound by such lease, in the event of petitioner's default, and the consent of the bondholders to the new arrangement. Haggarty assigned its lease to the Title Company as security for this agreement. Petitioner, on March 3, 1942, also entered into an amendment of its basic lease with the bank, which extended until 1956 the time for determining whether petitioner was in default in payment of its minimum rental to the bank. This amendment also provided for payment to the bank of all of petitioner's receipts from the Brockman Building for as long as Haggarty was not in default on its agreement. The fixed rental provided for in the new sublease with Haggarty was a substantial increase over the previous rental paid by Haggarty and was probably a better rental than could be obtained from any other prospective tenant. On August 12, 1942, the Title Company executed a declaration of trust (hereinafter also referred to as the Haggarty trust). The declaration provided that the percentage payments received from Haggarty, after payment of trustee's fees, were to be held in trust for distribution to named beneficiaries. The net payments available for distribution were to be divided into two portions of 55 per cent and 45 per cent to be paid over to the bondholders and to the named stockholders of petitioner, respectively. Such portions were to be distributed as follows: The distributions to the bondholders were to be made in the proportions in which the bonds were owned. Distributions to the bondholders were to cease when they equaled $92,000, the face amount of the bonds outstanding; at that time the bonds were to be returned to petitioner, as provided for in the 1934 agreement. After that time, all distributions were to be made to the other beneficiaries in the same proportions as above. For all times pertinent to the proceeding, except as noted below, the beneficiaries, as listed above were all of the stockholders of petitioner and owned stock in the proportions as there set forth. Harold S. Chase owned 245 shares of petitioner's stock which he had acquired from one David Blankenhorn on September 24, 1936. On August 24, 1945, David Blankenhorn reacquired those shares from Harold S. Chase. This arrangement, whereby the contingent rentals were to be paid. into the trust for the benefit of petitioner's stockholders and creditors, was merely a change in form from the plan which was rejected by the bank. The activities of petitioner's officers in bringing about this new arrangement were performed on behalf of petitioner and not on behalf of the stockholders and creditors of petitioner, as such. The new Haggarty sublease, the agreement between Haggarty and the Title Company, the Title Company's declaration of trust in favor of the bondholders and named stockholders of petitioner, the assent of the bank to the contingent payments agreement, the bondholders' assent to the new arrangement, and the bank's agreement to be bound as lessor to Haggarty in the event of petitioner's default were all executed as parts of a single plan. The Haggarty trust declaration was signed by the Title Company and the beneficiaries; petitioner was not a party thereto. The negotiations and arrangements were considered, discussed, and approved by petitioner's stockholders and directors. The agreements were all negotiated at arm's length and were not motivated by tax considerations. It was necessary for Haggarty to agree to the payment of a percentage of its sales, in order to obtain a new lease from petitioner. The beneficial interests under the Haggarty trust were transferable in part only with the consent of the trustee and the written acceptance of the transferee, together with his promise to pay a transfer fee. A whole interest in the trust could be transferred without such consents. 245 1,000 On August 24, 1945, Harold Chase assigned his undivided interest in the Haggarty trust to David Blankenhorn and Harold C. Morton. On September 17, 1947, David Blankenhorn and Harold C. Morton executed assignments whereby, in effect, each received a whole 12212 interest in an undivided beneficial interest in the Haggarty 1,000 trust in exchange for his one-half interest in an undivided 245 1,000 interest in the trust. Morton was never a stockholder in petitioner. By June 1, 1945, the bondholders had received full payment for the bonds in distributions from the Haggarty trust and on June 14, 1945, they reassigned petitioner's basic lease and the pledged stock, which they had held as security, and surrendered the bonds to petitioner. In November 1946, the Haggarty trust was amended with the consent of the Title Company and all of the beneficiaries, including Morton; Haggarty, the bank, and petitioner were not parties to this agreement. In June 1947, the Brockman-Haggarty sublease was amended, in details not here relevant. Neither the Title Company nor any of the beneficiaries of the Haggarty trust were parties to such amendment. On November 30, 1948, the percentage-of-sales agreement, of March 3, 1942, between Haggarty and the Title Company was amended with the consent of all of the beneficiaries of the Haggarty trust. The petitioner and the bank were not parties to this amendment. The amendment provided that the percentage payments to the trust would thereafter be 4 per cent of gross sales between $1,800,000 and $3,800,000 and 3 per cent of sales over $3,800,000. 12212 1,000 On April 25, 1949, Harold C. Morton filed against petitioner a complaint to quiet title, in the Superior Court of the State of California in and for the County of Los Angeles. In that suit Morton alleged that he had, since August 24, 1945, been the owner of an undivided beneficial interest in the Haggarty trust, and he sought, in the prayer of the suit, that his interest therein be adjudged and determined and that the court determine that Brockman Building Corporation, Inc., is without "*** any right, title or interest therein; and that “* plaintiff's [Morton's] interest in said trust and in and to said contract of March 3, 1942 and the benefits and avails thereof be quieted as against all possible claims, rights or demands by the defendant [Brockman Building Corporation, Inc.] ***." After having been served with a copy of the summons and complaint to quiet title, petitioner's board of directors met, on May 5, 1949, discussed the Morton suit, and passed the following resolution: RESOLVED, that whereas Brockman Building Corporation, Inc. never had, and has never claimed to have any interest in said contract dated March 3, 1942, or the avails thereof, and never had not [sic] claimed to have any interest in Trust No. B-10543 [Haggarty Trust] of the Title Insurance and Trust Company, nor in the avails thereof, and there existing no basis in fact upon which any claim of interest by this Corporation could be supported, the officers of this Company are hereby instructed and directed, on behalf of this Company, neither to appear in, nor defend said action, with the result that, although defendant's default therein will ensue, the plaintiff will be put to proof before the Court. On August 23, 1949, a judge of the Superior Court entered a decree quieting title in the suit which Morton had brought against petitioner. 12212 1,000 That decree adjudged that Harold C. Morton was the owner of a beneficial interest in and to the Haggarty trust, and the owner of a like interest in the percentage-of-sales contract between Haggarty and the Title Company dated March 3, 1942, and the benefits and avails thereof; and further adjudged that petitioner was without any "right, title or interest therein." The decree also adjudged “*** That plaintiff's interest in said Trust of August 12, 1942, and in said Contract of March 3, 1942, and the benefits and avails thereof be quieted against any and all claims, rights, or demands of the defendant, and defendant is hereby perpetually enjoined and restrained from setting up or making any claim therein." The following schedule sets forth the payments to and distributions from the Haggarty trust for the years 1942 to 1949, inclusive: |