OPINION.
T/wanTT, Jvdg&:
Petitioner reported gross income for the taxable year in the amount of $107,648.18, which included all its receipts for services to subscribers. In the determination of the deficiency, respondent did not adjust that item. He allowed deductions of $2,280.92 not claimed on the return and disallowed deductions of “organization expense” and “production expense” in the amounts of $330.83 and $2,066.63, respectively, as claimed on the return, and $32,347.23 deducted in the return as a “Reserve for future expenses.” In its petition, petitioner “consents that the deductions shown on its said return for promotion expense (in the amount of $2,066.63) and for organization expense (in the amount of $330.83) may be disallowed and consents that its income tax for the year 1939 may be redetermined after such disallowances.”
The only error assigned in the petition is:
4. The Commissioner has erroneously treated all of the money received by the Petitioner during the year 1939 as “income” when, in fact, the money received by it in that year represented, in part, payments for services performed by the Petitioner in that year and for the remaining part represented prepayments to the Petitioner for services to be performed by it in succeeding years. The Commissioner has failed to distinguish between “receipts” impressed with an obligation and “income”. He has erroneously refused to allow as a deduction from the “receipts” of the Petitioner a “reserve for future expenditures” in the amount of $32,347.23, although the Petitioner made its return for income taxes upon the accrual basis.
On brief, petitioner “consents” that it may be taxed upon the sum of $2,397.46. That amount apparently was its reported gross income diminished only by the deductions allowed by respondent and the contested deduction of “reserve.”
No issue is raised involving the right of petitioner to exemption under any of the provisions of section 101 of the Revenue Act of 1938. In fact, from the record it appears clearly that petitioner admits it was not so exempt. Moreover, petitioner implicitly concedes that it did not act as an “agent for its principal” as in All Russian Textile Syndicate, Inc., 23 B. T. A. 1392; affd., 62 Fed. (2d) 614; certiorari denied, 289 U. S. 752, but rather agreed to and did “* * * perform its services in behalf of * * *” others for a consideration. See Creasey Corporation v. Helburn, 57 Fed. (2d) 204. It is argued only that the excess of the consideration received for its services during the taxable year over its expenditures for the same period is not “taxable income” to it.
The premises of petitioner’s position are stated thus:
(2) Such excess represented prepayment in 1939 for services which the Petitioner was obligated to and did perform in subsequent years. The persons who paid in such excess had an interest in such amount and were entitled to repayment in the event that the services were not performed.
(3) The excess was impressed with a trust in favor of the persons who had paid it to the Petitioner and the Petitioner could expend it only in fulfillment of the trust. Accordingly the trust fund is not required to be included as part of Petitioner’s gross income.'
The propriety of including an item in gross income, on the one hand, or its deduction therefrom on the other, under the revenue acts, generally rests on wholly different concepts. Nevertheless, whether petitioner means to argue that this excess was not includible in its gross income or was so includible but was deductible therefrom in computing its taxable income, its position is not sound. West Side Tennis Club, 39 B. T. A. 149; affd., 111 Fed. (2d) 6; certiorari denied, 311 U. S. 674; West Side Tennis Club, 1 T. C. 302.
Petitioner suggests that the payments it received from its share-lolder-subscribers were paid for the stock in petitioner and that, therefore, none of that consideration was income to petitioner. It cites Creasey Corporation v. Helburn, supra. Assuming, however, that this conclusion is sound, the record contradicts the existence of the premise. The subscriber to petitioner’s services, as such, acquired no interest in petitioner nor in any of its assets, by payments for those services. The consideration paid for the stock in petitioner was the contracting of the respective stockholders for the services of petitioner. The duration of their stockholder status was measured wholly by the life of those contracts. That, as stockholders, the subscribers had rights as stockholders to share in the distribution of the net assets of petitioner upon its dissolution, even upon a basis other than that of stock ownership, does not increase or change their rights as subscribers to petitioner’s services. See Uniform Printing & Supply Co. v. Commissioner, 88 Fed. (2d) 75, reversing 33 B. T. A. 1073; Peoples Gin Co., 41 B. T. A. 343; affd., 118 Fed. (2d) 72. Moreover, any doubt about the matter is dispelled by the petitioner, itself. It reported all the payments received from its shareholder-subscribers as consideration for its services. It does not even now deny the correctness of that action except, possibly, as to the excess funds in dispute. That position, if taken, is inconsistent since, obviously, all the reported payments, whether or not expended in the taxable year, constituted consideration for the same thing.
It is said, however, that petitioner was so restricted during the taxable year in its use of this excess as to deprive it of the character of income in that year. Petitioner was organized and existed for the purpose of selling its services to others. The only restriction, if any, upon the use of any of the funds received by petitioner during the taxable year from its service contracts was that they should be used then or in the following years to furnish those services. That restriction is certainly not sufficient to prevent the inclusion of all of such funds, whether expended or not, in the gross income of petitioner in the taxable year when received. Renwick v. United States, 87 Fed. (2d) 123; Commissioner v. Lyon, 97 Fed. (2d) 70; Grand Central Public Market, Inc. v. United States. 22 Fed. Supp. 119; West Side Tennis Club (both cases), supra; E. B. Elliott Co., 45 B. T. A. 82; Edwin B. DeGolia, 40 B. T. A. 845. Nor is this conclusion inconsistent with that of the Circuit Court in Uniform Printing & Supply Co. v. Commissioner, supra. There the annual “refunds,” under the corporate bylaws, were limited to funds paid by the then customers to whom, alone, the “refunds” were distributable. They were, in fact, refunds. The right to those refunds, as the court points out, was “in no way dependent upon stock ownership * * It fastens upon that fact as “the determinative factor.” Here a distribution by the petitioner was not limited to funds received from those sharing in the distribution, but was to include unexpended payments for services made by those who were not subscribers at the time of that distribution. It is true that one of the factors upon which the amount of the participation of the shareholders depended was their respective payments for services rendered by the petitioner. But that fact does not characterize the distribution as a refund. Peoples Gin Co., supra. None except stockholders in petitioner could share in any distribution of its assets.
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OPINION.
T/wanTT, Jvdg&:
Petitioner reported gross income for the taxable year in the amount of $107,648.18, which included all its receipts for services to subscribers. In the determination of the deficiency, respondent did not adjust that item. He allowed deductions of $2,280.92 not claimed on the return and disallowed deductions of “organization expense” and “production expense” in the amounts of $330.83 and $2,066.63, respectively, as claimed on the return, and $32,347.23 deducted in the return as a “Reserve for future expenses.” In its petition, petitioner “consents that the deductions shown on its said return for promotion expense (in the amount of $2,066.63) and for organization expense (in the amount of $330.83) may be disallowed and consents that its income tax for the year 1939 may be redetermined after such disallowances.”
The only error assigned in the petition is:
4. The Commissioner has erroneously treated all of the money received by the Petitioner during the year 1939 as “income” when, in fact, the money received by it in that year represented, in part, payments for services performed by the Petitioner in that year and for the remaining part represented prepayments to the Petitioner for services to be performed by it in succeeding years. The Commissioner has failed to distinguish between “receipts” impressed with an obligation and “income”. He has erroneously refused to allow as a deduction from the “receipts” of the Petitioner a “reserve for future expenditures” in the amount of $32,347.23, although the Petitioner made its return for income taxes upon the accrual basis.
On brief, petitioner “consents” that it may be taxed upon the sum of $2,397.46. That amount apparently was its reported gross income diminished only by the deductions allowed by respondent and the contested deduction of “reserve.”
No issue is raised involving the right of petitioner to exemption under any of the provisions of section 101 of the Revenue Act of 1938. In fact, from the record it appears clearly that petitioner admits it was not so exempt. Moreover, petitioner implicitly concedes that it did not act as an “agent for its principal” as in All Russian Textile Syndicate, Inc., 23 B. T. A. 1392; affd., 62 Fed. (2d) 614; certiorari denied, 289 U. S. 752, but rather agreed to and did “* * * perform its services in behalf of * * *” others for a consideration. See Creasey Corporation v. Helburn, 57 Fed. (2d) 204. It is argued only that the excess of the consideration received for its services during the taxable year over its expenditures for the same period is not “taxable income” to it.
The premises of petitioner’s position are stated thus:
(2) Such excess represented prepayment in 1939 for services which the Petitioner was obligated to and did perform in subsequent years. The persons who paid in such excess had an interest in such amount and were entitled to repayment in the event that the services were not performed.
(3) The excess was impressed with a trust in favor of the persons who had paid it to the Petitioner and the Petitioner could expend it only in fulfillment of the trust. Accordingly the trust fund is not required to be included as part of Petitioner’s gross income.'
The propriety of including an item in gross income, on the one hand, or its deduction therefrom on the other, under the revenue acts, generally rests on wholly different concepts. Nevertheless, whether petitioner means to argue that this excess was not includible in its gross income or was so includible but was deductible therefrom in computing its taxable income, its position is not sound. West Side Tennis Club, 39 B. T. A. 149; affd., 111 Fed. (2d) 6; certiorari denied, 311 U. S. 674; West Side Tennis Club, 1 T. C. 302.
Petitioner suggests that the payments it received from its share-lolder-subscribers were paid for the stock in petitioner and that, therefore, none of that consideration was income to petitioner. It cites Creasey Corporation v. Helburn, supra. Assuming, however, that this conclusion is sound, the record contradicts the existence of the premise. The subscriber to petitioner’s services, as such, acquired no interest in petitioner nor in any of its assets, by payments for those services. The consideration paid for the stock in petitioner was the contracting of the respective stockholders for the services of petitioner. The duration of their stockholder status was measured wholly by the life of those contracts. That, as stockholders, the subscribers had rights as stockholders to share in the distribution of the net assets of petitioner upon its dissolution, even upon a basis other than that of stock ownership, does not increase or change their rights as subscribers to petitioner’s services. See Uniform Printing & Supply Co. v. Commissioner, 88 Fed. (2d) 75, reversing 33 B. T. A. 1073; Peoples Gin Co., 41 B. T. A. 343; affd., 118 Fed. (2d) 72. Moreover, any doubt about the matter is dispelled by the petitioner, itself. It reported all the payments received from its shareholder-subscribers as consideration for its services. It does not even now deny the correctness of that action except, possibly, as to the excess funds in dispute. That position, if taken, is inconsistent since, obviously, all the reported payments, whether or not expended in the taxable year, constituted consideration for the same thing.
It is said, however, that petitioner was so restricted during the taxable year in its use of this excess as to deprive it of the character of income in that year. Petitioner was organized and existed for the purpose of selling its services to others. The only restriction, if any, upon the use of any of the funds received by petitioner during the taxable year from its service contracts was that they should be used then or in the following years to furnish those services. That restriction is certainly not sufficient to prevent the inclusion of all of such funds, whether expended or not, in the gross income of petitioner in the taxable year when received. Renwick v. United States, 87 Fed. (2d) 123; Commissioner v. Lyon, 97 Fed. (2d) 70; Grand Central Public Market, Inc. v. United States. 22 Fed. Supp. 119; West Side Tennis Club (both cases), supra; E. B. Elliott Co., 45 B. T. A. 82; Edwin B. DeGolia, 40 B. T. A. 845. Nor is this conclusion inconsistent with that of the Circuit Court in Uniform Printing & Supply Co. v. Commissioner, supra. There the annual “refunds,” under the corporate bylaws, were limited to funds paid by the then customers to whom, alone, the “refunds” were distributable. They were, in fact, refunds. The right to those refunds, as the court points out, was “in no way dependent upon stock ownership * * It fastens upon that fact as “the determinative factor.” Here a distribution by the petitioner was not limited to funds received from those sharing in the distribution, but was to include unexpended payments for services made by those who were not subscribers at the time of that distribution. It is true that one of the factors upon which the amount of the participation of the shareholders depended was their respective payments for services rendered by the petitioner. But that fact does not characterize the distribution as a refund. Peoples Gin Co., supra. None except stockholders in petitioner could share in any distribution of its assets. Such distribution would not be, in fact, a refund since it was not only not limited to funds paid by the distributees but it could not be said that it was “in no way dependent upon stock ownership.”
It is difficult to reconcile petitioner’s second argument with its implicit admission that all of its receipts from those it served were gross income, except the excess of those receipts over its expenditures for the taxable year. It would seem that all or none of those receipts were impressed with the same alleged trust. In any event, the existence of any trust is conclusively contradicted by the record. No corporate authorization existed for the creation of any trust. All the receipts of the petitioner, including those in the so-called “reserve” account during the taxable year, were subject to its withdrawal for general corporate purposes. This was recognized by H. C. Maurer, president of the petitioner, who testified that these funds were not expended during the taxable year only because no occasion existed during that year, in the judgment of the officers of the petitioner, for their judicious expenditure.- We think no trust arose during the taxable year. Mason Securities Assn. v. Helvering, 102 Fed. (2d) 36, affirming 36 B. T. A. 958; West Side Tennis Club (both cases), supra; Parkview Memorial Association, 34 B. T. A. 406.
Petitioner received all the reported income during the taxable year. Federal income taxes are determinable upon an annual basis. Burnet v. Sanford & Brooks Co., 282 U. S. 359. Petitioner admits that all of its reported income was received in the taxable year. Was any of the excess of that income over expenditures for that year deductible as a business expense under section 23 (a) of the Revenue Act of 1938? We think not.
Deductions are a matter of legislative grace. To support any deduction petitioner must bring itself squarely within the granting provision. New Colonial Ice Co. v. Helvering, 292 U. S. 435. Petitioner was on the accrual basis. But even so, that it intended and may have been obligated in the taxable year to expend that excess in later years in furnishing the services for which it was paid in the taxable year, affords no basis for any expense accrual in the earlier year. During the taxable year no such expenditure had been made. No item of future expense had been contracted for. No liability then existed for the payment of any expense. It was wholly uncertain, in tbe taxable year, whether and to what extent the unused income would be expended for business expenses. Thus, we think that no part of the unused or excess income of the petitioner for the taxable year was within the category of business expenses “paid or incurred” during that year, and its deduction is therefore denied. Brown v. Helvering, 291 U. S. 193; Reuben H. Donnelley Corporation, 22 B. T. A. 175; Jahncke Shipbuilding Co., 11 B. T. A. 479; McCauley-Ward Motor Supply Co., 10 B. T. A. 394; Amigo Coal Co., 8 B. T. A. 598; West Side Tennis Club (both cases), supra; Malloy & Co., 33 B. T. A. 1130.
Reviewed by the Court.
Decision will be entered for the respondent.
Mellott, J., dissents.