*360OPINION.
Van Fossan:The basic issue in this proceeding is whether or not the petitioner received income of $522,895.11 at the time of the payment of such sum by Shell in 1982.
The petitioner contends that under the stipulated facts it derived no income from the payment because it was not a profit received by the petitioner for its separate use, for its benefit, or for its disposal. The petitioner relies on Eisner v. Macomber, 252 U. S. 189, particularly the following paragraph thereof:
* * * Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital, however invested or employed, and coming in, being “derived”, that is received or drawn by the recipient (the taxpayer) for his separate use, benefit, and disposal; that is income derived from property. Nothing else answers the description.
The respondent’s position is that the petitioner received the title and possession of the payment with no restrictions as to its use, and cites in support thereof North American Oil Consolidated v. Burnet, 286 U. S. 417, as the leading case on the subject.
Reviewing briefly the pertinent facts stipulated in the record, we find that in 1931 suit was brought by the petitioner against Shell for the recovery of royalties alleged to have been withheld by Shell. In April 1932 the trial court gave judgment to the petitioner for additional royalties, interest, and costs, and imposed a forfeiture of the lease unless the judgment should be paid by August 29, 1932. On July 8,1932, Shell paid the judgment, costs, and interest to that date, but specifically stated that payment was made “involuntarily and solely by virtue of duress, coercion and compulsion of said judgment.”
Shell appealed to the Supreme Court of California, which entertained the appeal and on January 9, 1933, denied the petitioner’s motion to dismiss the appeal.
The petitioner deposited the cashier’s check, tendered by Shell, in a term deposit bank account and made an entry on its books “to record the payment” thereof. The petitioner also spread upon its books a comprehensive recital of the conditions under which the payment was made and received. Shepard-Pendleton, which had a 35 percent interest in the judgment, agreed to the disposition of the fund and also consented to the change in the form of the investment of a part of the fund from the deposit account to Treasury notes. The item was not accrued on petitioner’s books nor included in its tax return. On the contrary, petitioner explained in its return how the money was received and held pending determination of appeal of the case.
*361After reversal, upon appeal, the petitioner tendered to Shell the amount of its original payment, together with all the gains and profits earned by the fund while in the petitioner’s custody, and gave a complete accounting of its transactions relating to the fund.
We have here an unusual situation. The judgment of the trial court imposed the penalty of forfeiture of the lease if payment of the judgment were not made by a given date. For some undisclosed reason, Shell did not appeal from that portion of the judgment, but preferred to pay and then perfect its appeal. Unquestionably, at the time of payment, it was the understanding of the petitioner, Shell, and Shepard-Pendleton that an appeal would be taken. In referring to the harshness of the decree of the lower court, the Supreme Court of California, in Alamitos Land Co. v. Shell Oil Co., 17 Pac. (2d) 998, said:
* * * It is manifest that in the face of the alternative to pay or lose the lease and then pay, it was wise for defendant to advance and pay the money demands. Such a payment, therefore, was under the clearest and most urgent compulsion and should not bar the right of review. Defendant received no benefits by accepting the lighter of the two burdens. It merely adopted the only safe course.
The petitioner’s theory, that it did not have unrestricted use of the fluid but held it for the benefit of the winner of the pending litigation, is borne out by its action in securing an agreement with Shepard-Pendleton to place the fund on time deposit. That company was the owner of 35 percent of the amount, if any, to be recovered from the judgment and before final determination had a property right therein to that extent. If Shell won, the fund and its accretions would go to it; if the petitioner won, it and Shepard-Pendleton would share the fund.
Under similar circumstances, the courts of California have held that a judgment pronounced by a lower court is not final with reference to property or rights affected thereby so long as it is subject to appeal and liable to be reversed. Hills v. Sherwood, 35 Cal. 474; Estate of Blythe, 99 Cal. 472 ; 34 Pac. 108; Cook v. Ceas, 143 Cal. 221; 77 Pac. 65; contra, Costa Water Co. v. City of Oakland, 165 Fed. 518. In Ward v. Sherman, 155 Cal. 287; 100 Pac. 864, the Supreme Court of California said:
There is no dispute between the parties as to the rules of law governing an action of this kind. Where a judgment or decree of an inferior court is reversed by a final judgment on appeal, a party is generally entitled to restitution of all the things lost by reason of the judgment in the lower court; and accordingly, the courts will, where justice requires it, place him as nearly as may be in the condition in which he stood previously. (Cowdery v. London, etc. Bank, 139 Cal. 298 (96 A. St. Rep. 115, 73 Pac. 196) ; Freeman on Judgments, Sec. 482.) The restitution may be directed and provided for in the original action itself (Code Civ. Proc., Sec. 957), or may, as here, be sought in a separate action, instituted *362for that purpose. (Cowdery v. London etc. Bank, 139 Cal. 298 (96 A. St. Rep. 115, 73 Pac. 196) and cases cited.) In such action the defendant must account for the property received under the judgment which has been reversed and the rule governing the extent of his liability is that applicable to a trustee, which, in 28 Am. & Eng. Ency. of Law, 2d Ed., p. 1059, is stated as follows: “The general doctrine being that trustees ought to conduct the business of the trust in the same manner as an ordinarily prudent man of business would conduct his own, they will not be chargeable with more than they have received nor held responsible for losses that may arise, when they have acted in good faith and with common skill, prudence and diligence.”
Thus it is that, on receipt of the fund, it could not be said that petitioner received it free of limitation and for its unrestricted use.
In Virginia Iron Coal & Coke Co., 37 B. T. A. 195; affd., 99 Fed. (2d) 919, the Board considered a case where payments were made in 1930 and 1931 under an option to purchase, which payments were to be applied to the purchase price in case the option was exercised but were to be retained in case the option was not exercised. The option was surrendered in 1933. In holding that the payments were income in 1933 the Board stated:
Thus it was impossible for either the taxpayer or the Commissioner to determine in 1930 and 1931 whether or not the payments would eventually represent income and how they should be reported. * * *
Thus it is necessary to exclude such payments from the income of the year in which received and to include them for the later year when, for the first time, a satisfactory determination of their character for income tax purposes can be made. The other party to the contract in the taxable year for the first time released and abandoned it's right under the agreements to have the payments applied against the purchase price, and charged off its loss. The recipient then knew for the first time that it could retain the payments without any obligation to apply them against the purchase price.
So it is .here, in 1932, when the fund was received and set apart by taxpayer it was impossible for either the taxpayer or the court to determine when, if ever, the payment would be income. Here, as in the cited case, there was a limitation attached at the time of receipt, a limitation fixed by California law and incident to the right of the losing party to appeal, that is, that the fund be held intact pending appeal and if necessary restitution be made. As it worked out in the instant case it was necessary for taxpayer to make restitution in full. In the light of such fact the payment in 1932 was never true income. Clearly also, in the light of such fact, it would be a gross injustice to tax petitioner with income in 1932, depending for equalization on the uncertainty of a deduction from income later. Where possible, tax cases should be decided on realities and not on abstract hypotheses.
The conclusion we have reached, that petitioner was not taxable in 1932, is supported also by the decision of the Board in Sara R. Preston, 35 B. T. A. 312, where two attorneys who had performed services for clients received a check in payment payable to order of both, but could *363not agree on the amount to which each was entitled. They deposited the check in a bank in a joint account and in the taxable year each drew down such amount as the other conceded, agreeing that the balance should be drawn only on settlement of the dispute. Taxpayer reported only the amount actually received. Respondent held the entire fund constructively received. We sustained the taxpayer, citing, among others, Eisner v. Macomber, 252 U. S. 189; Commissioner v. Cleveland Trinidad Paving Co., 62 Fed. (2d) 85; Stoner v. Commissioner,, 79 Fed. (2d) 75. In the last cited case the court held that a stockholder’s share of an amount deposited, out of proceeds of the sale of corporate stock by a stockholder who acted on behalf of all the stockholders, as an indemnity fund to insure buyer of the fulfillment of the seller’s obligations, was not taxable income of the year so deposited, since such stockholder had only qualified possession and control of the whole fund, and was not entitled to his share until the terms of the contract were fulfilled. Certiorari was denied, 296 U. S. 650.
The facts here present distinguish this case from North American Oil Consolidated v. Burnet, supra. Here it can not be said that the taxpayer received the fund without restriction as to its disposition. The law of California imposed a restriction. Petitioner here recognized that it held the money subject to very positive limitations. It did not set it up on its books as its own, nor did it claim it as its own in its tax return. On the contrary, it explained its true character. Its treatment of the fund was, of itself, a disclaimer of a present right to unrestricted use. In the cited case the funds were unquestionably income, the matter in dispute being the year of accounting. Here, as determined by the Supreme Court of the state, petitioner never had a right to the fund and accordingly it never possessed the character of true income.
We are of the opinion that the fund of $522,895.11 paid in 1932 and the accretions thereto in 1932 and 1933 were not income to petitioner in those years.
In view of our decision on the first, and major, issue, it is unnecessary to discuss the second and third issues. The interest paid on the fund of $522,895.11 during 1932 and 1933 and received by the petitioner was accounted for and paid to Shell and, hence, is not taxable to petitioner. The amount of $182,205.76, representing the interest of Shepard-Pendleton in the proceeds of the judgment, is claimed by the petitioner as a deduction only in the event that it is held taxable on the trust fund. It was not deducted in the petitioner’s income tax return for 1932 and, consequently, no question is raised for us to decide.
Reviewed by the Board.
Decision will be entered v/nder Rule 50. •