*243 Decision will be entered for the respondent.
Petitioner was organized by producers of clay sewer pipe to promote the use and sale of such pipe. In carrying out this purpose it furnished its services to the subscribers therefor, who were also its stockholders, for 24 cents per ton of clay sewer pipe sold by them respectively. Such receipts of petitioner during the taxable year exceeded its expenditures for the same period. Though petitioner made no contracts during the taxable year to pay any future specific items of expense, its president promised to spend this excess in the following years in furnishing the services for which it was organized and existed and for which it was paid in the taxable year. Upon its dissolution, petitioner's then stockholders, as such, were entitled to share in the net assets of petitioner in proportions based upon the amounts which they had paid to petitioner as subscribers for its services. Held, petitioner's sole contention, which is that the excess of receipts over expenditures for the taxable year is not includible in its "taxable income," is denied.
*529 This proceeding is for a redetermination of an income tax deficiency of $ 5,913.41 for the calendar year 1939. The sole issue is whether petitioner is taxable upon the excess of receipts over expenditures.
FINDINGS OF FACT.
Petitioner, a corporation organized under the laws of Ohio, filed its income tax return for the calendar year 1939 with the collector of internal revenue at Pittsburgh, Pennsylvania. Petitioner's books *530 were kept and its returns prepared on the accrual method of accounting.
In 1938 H. C. Maurer, who had had considerable experience as a sales manager of a clay sewer pipe company, was asked by several men in the clay sewer pipe industry to come to a meeting which they had called in the city of Pittsburgh. Many sewer pipe manufacturers are located along the Ohio River, where there is a good source of clay.
In years prior to 1938 the clay sewer pipe industry was losing much of its market to other competitive materials, such as transite pipe, cast iron pipe, and brick, but chiefly to concrete pipe. *245 In the latter part of 1938 volume and sales had fallen considerably, so that the manufacturers of clay sewer pipe had called this meeting at Pittsburgh to discuss ways and means of combating the situation. At this meeting Maurer was asked to prepare some sort of a program of promotion to submit to the group. At a subsequent meeting he discussed such a promotional program, as well as the method of paying for it. He suggested that the industry hire the services of a competent chief engineer and subordinate who might go out in the various states and by personal contact attempt to expand the use of clay sewer pipe. He also suggested that by advertising and the distribution of technical literature the sale of clay pipe would be promoted. He pointed out to the manufacturers that to begin such a program would entail a period of time. He stated that two or three years would be necessary to get an organization functioning adequately.
At the latter meeting Maurer submitted a tentative budget and a plan for paying for this promotional program. He had estimated that the program could be paid for by computing the amount of money each member was to pay on the tonnage sold at .4 of 1 percent, *246 which amounts to 24 cents per ton of clay pipe. He also stated that receipts in the first year would exceed expenditures since the organization would not be functioning because of the time needed to organize. He told one of the manufacturers that the corporation could put the excess money in a special fund and hold it until they could "judiciously expend" it.
After the meeting Maurer contacted the individual manufacturers and was able to get 19 signed agreements similar to the one set forth in part below:
AGREEMENT
H. C. Maurer, of Cuyahoga Falls, Ohio, and Clay City Pipe Co. of Uhrichsville, O., agree with each other as follows:
(1) Maurer will cause a company to be incorporated, to be known as Clay Sewer Pipe Association, Inc., * * *
(2) Maurer will assign all the benefits of this contract to such corporation, and will require it to agree to perform its services in behalf of and for the benefit of Clay City Pipe Co., and others. Such services shall include diligent efforts to advance Public Knowledge of the advantages of Vitrified Clay Sewer *531 Pipe over pipe made of other materials; to collect and distribute information concerning prospective uses of sewage pipe generally; *247 to collect and distribute information concerning the quantities of Vitrified and other Sewer Pipe used, from time to time, in construction work; to perform laboratory and research work for the purpose of demonstrating the usability and advantages of Vitrified Sewer Pipe in differing soils and locations; to prepare and publish advertising material dealing with the merits of Vitrified Sewer Pipe; and, generally, to promote the use of Vitrified Clay Sewer Pipe and Products in Public Works constructed by Cities, Counties, Villages and the like, and by all other users of Sewer Pipe.
* * * *
(4) Clay City Pipe Co. shall at all times have access to the books and records of the corporation for the purpose of determining its receipts and expenditures, and the nature of the services performed; and the corporation may, at reasonable times, have access to the books and records of Clay City Pipe Co. for the purpose of determining its total sales, as aforesaid.
(5) This contract shall be effective as of Jan. 3-39, and shall continue for a period of One (1) Year, and for annual periods thereafter unless, at least Fifteen (15) days before the expiration of such annual period, either party shall notify*248 the other, in writing, of intention not to continue.
* * * *
Thereafter, articles of incorporation for the petitioner were filed under the laws of Ohio. The articles provided inter alia:
The undersigned, a majority of whom are citizens of the United States, desiring to form a corporation, for profit, under the General Corporation Act of Ohio, do hereby certify:
* * * *
Third, The purpose or purposes for which it is formed are:
To advance Public Knowledge of the advantages of Vitrified Clay Sewer Pipe over pipe made of other materials; To collect and distribute information concerning prospect [sic] uses of sewer pipe generally; To collect and distribute information concerning the quantities of Vitrified and other Sewer Pipe used, from time to time, in construction work; To perform laboratory and research work for the purpose of demonstrating the usability and advantages of Vitrified Sewer Pipe in differing soils and locations; To prepare and publish advertising material dealing with the merits of Vitrified Sewer pipe; and, generally, to promote the use of Vitrified Clay Sewer Pipe and Products in Public Works constructed by Cities, Counties, Villages and the like, and by all*249 other users of Sewer Pipe.
Shares of stock shall be as follows:
Such shares shall be designated as "Subscribers Shares." No share shall be issued except to persons or firms who subscribe for and agree to pay for the services performed by the corporation and whose subscription or agreement has been accepted by the Board of Directors of the corporation. One share only shall be issued to each subscriber.
The holder of each share shall be entitled to one vote at any meeting of the shareholders, whether annual or special.
When any shareholder shall cease to be a subscriber to the services of the corporation, his rights and interests as a shareholder shall likewise cease and the certificate of stock issued to him shall thereupon be surrendered for cancellation.
*532 Upon any liquidation or dissolution or at the time of any other distribution of surplus or of assets, each person or firm then a shareholder shall be entitled to participate in the distribution in proportion to the amount theretofore paid by said shareholder to the corporation for its services.
* * * *
The material portions of the "Code of Regulations" (bylaws) adopted by the stockholder-subscribers are as follows:
Article*250 III.
StockSection 1. -- Certificates. Certificates evidencing the ownership of the stock of the corporation shall be issued to any person or firm who subscribes for and agrees to pay for the services performed by this corporation and whose subscription or agreement has been accepted by the Board of Directors of the corporation. One share only shall be issued to each such subscriber. Each certificate * * * shall contain a recital thereon that the same is not transferable and the right and interest of the holder shall cease and be completely at an end when the holder shall cease to be a subscriber to the services performed by the corporation. It shall likewise recite thereon that when any said holder ceases to be a subscriber to the services of the corporation, he will surrender the certificate of stock for cancellation. It shall recite further thereon that the rights to participate in any distribution of surplus or assets shall be in proportion to the amount theretofore paid by the holder to the corporation for its services.
* * * *
Article IV.
Dividends or DistributionsSubject to the provisions of law and the provisions of the charter of this corporation, the Board*251 of Directors may declare dividends or make distributions from the surplus of property or money at any time possessed by the corporation and not required by it in the conduct of its business.
At any time when a distribution of surplus or of assets is made, each person then a shareholder, as shown upon the books of the corporation, shall be entitled to participate in the distribution in proportion to the amount theretofore paid by said shareholder to the corporation for its services; that is to say, there shall first be determined the entire amount which has been paid in to the corporation by all persons who either are or have been shareholders of the corporation; there shall next be determined the amount paid in to the corporation for its services by each present shareholder; there shall next be determined the ratio which the amount paid by each present shareholder bears to the entire amount paid by all persons who are or have been shareholders. This factor shall be applied to the entire amount available for distribution.
If at any time the corporation shall cease the conduct of its business, or if a dissolution of the corporation is undertaken * * * then and thereupon any assets *252 of the corporation remaining after the complete satisfaction of the claims of its creditors shall be distributed among the persons who are then shareholders of the corporation in the manner herinbefore set forth.
* * * *
*533 Article V.
Directors* * * *
No person shall be elected to serve as a Director of the Corporation or serve as such Director unless he is qualified by being either --
(a) A natural person subscribing to the services of this corporation; or
(b) A member of a partnership or association subscribing to the services of this corporation; or
(c) An officer of a corporation subscribing to the services of this corporation; provided, however, that the person selected as President of this corporation may likewise be a Director thereof.
* * * *
Article XI.
Order of Business and Amendment* * * *
These regulations may be adopted, amended or repealed by the affirmative vote of a majority of the stock of the corporation outstanding at the time of any meeting called and held for that purpose, notice of such purpose having been given to all stockholders.
Stock certificates bearing the following legends were issued to the subscribers:
The right of the holder to*253 participate in any distribution of surplus or assets of this corporation shall be in proportion to the amount theretofore paid by the holder to the corporation for services performed by it for the holder.
If the holder hereof ceases to be a subscriber to the services of this corporation this certificate will promptly be surrendered to the Secretary of the Company for cancellation.
The total amount of authorized capital stock was 250 shares, without par value. The number of shares issued and outstanding, being the same as the number of subscribers to the service, did not exceed 19 at any one time. The total amount of the issued stock was carried on petitioner's books at the declared nominal value of $ 1. No money was paid for capital stock and no amount other than $ 1 was allocated thereto.
An office was established in Pittsburgh and the petitioner began to function. After the personnel was hired the petitioner established offices in various cities, chiefly in the state capitals for the purpose of being in close contact with state highway departments and Federal organizations which might be in need of sewer pipe. The offices in Washington, D. C. were not opened until September*254 1939. Petitioner was not able to do much in the way of promotional advertising during 1939 because the advertising was to be of a technical nature and had to be prepared by engineers. Until August 1939 when a chief engineer had been hired, such preparation was *534 impossible. During the next two years, however, many technical booklets and pamphlets were published and distributed. This advertising material did not mention the name of any manufacturer but was purely for the purpose of creating a demand in the clay sewer pipe industry as a whole.
The manufacturers had begun to make payments to petitioner in January 1939 at the rate of 24 cents per ton of clay products sold and shipped. This money was deposited in petitioner's bank accounts. Petitioner maintained two accounts, one of which it denominated its active account and a second one to which it transferred $ 5,000 in April 1939. The $ 5,000 was in excess of the money that petitioner needed in the actual conduct of its business but which had been collected from the manufacturers. Subsequent transfers during 1939 increased this amount to $ 20,000. Petitioner was under no legal obligation to maintain such an account*255 and it could have restored the amount therein to its active checking account for current expenditures, if and as required, in carrying out the promotional program. Petitioner's balance sheet on December 31, 1939, showed the $ 20,000 as a cash asset and described it as a reserve account.
Petitioner filed an income tax return for the calendar year 1939 on the accrual basis. In this return it reported "service fees" of $ 106,675.25 and "sale of periodicals" in the amount of $ 972.93 as gross income. During the taxable year petitioner expended out of moneys received from subscribers to its service $ 1,351.63 in the purchase of periodicals and took a deduction in its income tax return therefor. The item of $ 972.93 reported as income from the "sale of periodicals" represents the proceeds of the sale of some or all of the above mentioned periodicals purchased and is a pro tanto recoupment of the above item of $ 1,351.63. The periodicals referred to as purchased and sold were of the type admitted in evidence herein and were devoted to extolling the durable qualities of vitrified clay sewer pipe in comparison with competitive products of other materials, under the various conditions*256 and uses to which sewer pipe is subjected. The total reported income was $ 107,648.18. Petitioner took deductions totaling that amount and reported no tax due. Among the deductions so taken, which are the only ones here in question, were the following items:
| (a) Reserve for future expenses | $ 32,347.23 |
| (b) Organization expense | 330.83 |
| (c) Promotion expense | 2,006.63 |
| Total | 34,744.69 |
Respondent in his audit of the return disallowed all of such deductions, but allowed deductions not claimed in the return as follows: *535
| (d) Federal capital stock tax | $ 422.40 |
| (e) Pennsylvania income tax | 1,858.52 |
| Total | 2,280.92 |
According to respondent's adjustment of the return petitioner had a net income of $ 32,463.77, upon which the deficiency herein was determined.
Petitioner consents in its petition to the disallowance of the above deductions in the amounts of $ 330.83 and $ 2,066.63, respectively, and assigns as error only the disallowance of the deduction of the item of $ 32,347.23. The latter deduction was taken in the return with the following notation:
| Income deferred for expenditures for performance of contract | |
| services | $ 32,347.23 |
| This amount represents the excess of income received and accrued | |
| over expenses paid and incurred representing prepayments and | |
| advance billings for services to be performed. |
*257 In that return petitioner denoted its kind of business as "To promote and encourage the use of and relate the advantage of vitrified products."
Petitioner had no means of getting money except by payments for services by the stockholder-subscribers. The amounts paid out in 1940 and 1941 for performing the services were larger than the amounts paid in by the subscribers during those years. Of the original 19 subscribers only 11 remained in 1942, but petitioner continued to render the services.
To the date of the hearing herein petitioner was still rendering the service for which it was organized and no distribution had been made to its subscribers.
During the taxable year petitioner made no contracts to pay any specific future items of expense.
OPINION.
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 *258 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."
*536 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" *259 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 ; affd., ; certiorari denied, , but rather agreed to and did "* * * perform its services in behalf of * * *" others for a consideration. See . 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*260 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. ; affd., ; certiorari denied, ; .
Petitioner suggests that the payments it received *261 from its shareholder-subscribers were paid for the stock in petitioner and that, *537 therefore, none of that consideration was income to petitioner. It cites 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 , reversing ; ;*262 affd., . 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. ;*263 ; ; West Side Tennis Club (both cases), supra; ; . Nor is this conclusion inconsistent with that of the Circuit Court in 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 is a distribution by the petitioner was not limited to funds received from those sharing *538 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*264 the shareholders depended was their respective payments for services rendered by the petitioner. But that fact does not characterize the distribution as a refund. 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*265 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. , affirming ; West Side Tennis Club (both cases), supra; .
Petitioner received all the reported income during the taxable year. Federal income taxes are determinable upon an annual basis. . 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. .*266 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 *539 the 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. ; ; ; ; ; West Side *267 Tennis Club (both cases), supra; .
Decision will be entered for the respondent.
Hill, J., dissenting: The record of this proceeding and the findings of fact disclose:
(1) That petitioner was organized, operated, and financed by the producers of clay sewer pipe for the sole purpose of advancing public knowledge of the advantages of vitrified clay sewer pipe over pipe made of other materials, through the various methods set out in paragraph third of its articles of incorporation and article III of its bylaws, and for the purpose of creating a demand in the clay sewer pipe industry as a whole and not for the promotion of the sale of the products of any particular manufacturer in that industry;
(2) That petitioner's shareholders had only one share of stock each and they were and could be such shareholders by virtue only of their subscription to petitioner's operating fund and not as subscribers to capital stock or to any other capital account;
(3) That petitioner's only source of money with which to organize and carry out the purpose of its organization was the commitments of the individual producers of clay sewer*268 pipe who agreed to participate in financing it;
(4) That all of petitioner's operating funds came from this source and that no part of such funds was or could have been used for a purpose other than that set forth in (1) above;
(5) That should petitioner cease to perform the function for which it was created, or be dissolved, its assets, including unexpended receipts, after satisfaction of all creditors' claims, must be distributed to its shareholders proportionately to the amounts of their several subscriptions paid and not on the basis of the amount of stock held.
On the basis of these disclosures it is obvious that no part of petitioner's receipts can be reckoned as income or profit to it, or can or could have been used for its own benefit in any sense other than to enable it to discharge the specific function for which it was *540 created. By the same token, there was no income or profit which could inure to the benefit of any of petitioner's shareholders or to other individuals.
The sole issue is, as stated at the outset of the majority opinion, Is petitioner taxable upon the excess of receipts over expenditures? This issue is covered by the assignment of error in the *269 petition and in particular by the following language therein: "The Commissioner has failed to distinguish between 'receipts' impressed with an obligation and 'income'."
Of course, the question of whether the excess of receipts over expenditures was taxable depends upon whether the receipts were income. I think they were not. In my view, no part of the gross receipts was income to petitioner and hence we are not concerned with the question of what expenditures were or were not deductible. If there is no income to report there is nothing from which to deduct expenditures for tax purposes.
The authority and duty of this Court is to determine the correct deficiency, if any, upon all of the facts properly in the record. We are not limited in our consideration of the question presented to the legal theories adopted or advanced by the parties. If such legal theories are found to be incorrect, it is our duty to disregard them and to determine the issue presented upon the application of correct legal principles to the facts.
The conclusion reached in the majority opinion appears to be predicated in the main on the following statements therein: "Petitioner was organized and existed for *270 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."
I think it clear that the quoted statements are not consistent with the facts as found and as disclosed by the record. Such facts show that petitioner was not organized and did not exist for the purpose of selling its services to others. Also, in addition to the restriction set forth in the above quoted statements, there was the further restriction that if any of such receipts were not so used they were to be refunded to the contributors. Petitioner was not an independent agency existing and operated separate and apart from the subscribers to its operating fund, but was wholly controlled by them. It neither sold services nor received compensation for services. It was a mere agency set up by certain members of the clay sewer pipe industry through which certain promotional work in the interest of the industry as a whole was carried on with funds contributed by its sponsors, with the obligation that upon the cessation*271 of such *541 work any remaining funds so contributed, whether in money or other assets, should be refunded to the contributors thereof. Under such an arrangement there could not possibly be any profit or economic benefit to petitioner and hence no income to it.
Petitioner suggested in its reply brief the application to it of the provisions of section 101 (7) of the Revenue Act of 1938, but did not present the question in its pleadings. The majority opinion states that it appears clearly from the record that petitioner admits it was not exempt under such section. Such statement is obviously an inference from certain facts appearing in the record and is not intended to convey the thought that petitioner categorically made such admission. However, assuming the correctness of the inference, it was not an admission of fact, but reflected merely a legal conclusion. Neither this Court nor a party litigant is bound by such admission. It is true that petitioner's articles of incorporation recite that it was organized for profit, and in its bylaws there is a provision respecting dividends, but the provisions of such articles and bylaws as a whole completely negative the idea that*272 petitioner was organized for profit or that there could be any net earnings to inure to the benefit of any private shareholder or individual. It was testified, in effect, at the hearing that the reason petitioner was incorporated under the General Incorporation Act of Ohio applying to organizations for profit was to avoid possible charges under the antitrust laws. Certainly the mere fact that petitioner did not plead exemption from tax under section 101, supra, does not constitute an admission that it was not so exempt.
It is my opinion that petitioner was exempt from tax under the cited section, but it is not necessary to so hold in order to determine that the receipts herein involved were not taxable as income. The question of whether or not such receipts were income must be determined from all the circumstances in evidence here. That question is unaffected by section 101, supra. In fact, the circumstances in respect of the receipts here involved may very well have been comprehended within the inducements which led to the enactment of section 101.
It is also true that petitioner filed an income tax return for the taxable year in which it reported as gross income all*273 moneys received from the subscriber-shareholders and sought to take deductions as paid and accrued business expenses in a total amount equal to the amount reported as gross income. The fact that petitioner reported its receipts as income did not make them such. Petitioner conceived the idea that it owed no income tax. Its theory of demonstrating this fact was to report all receipts as income and to deduct the full amount thereof as impressed with the obligation to pay it all out as business expenses. The tax result to petitioner under this theory was the same *542 as if it had excluded such receipts as income and taken no deductions. We are not authorized in law or otherwise justified in determining an income tax on that which is not income merely because the petitioner mistakenly designated and reported it as such. It is true that at the hearing petitioner conceded that items in the amounts of $ 2,066.63 and $ 330.83, designated as promotion expense and organization expense, respectively, were not items properly deductible in its income tax return and consented that its income tax for the year involved might be determined upon the basis of the disallowance of deductions*274 in such amounts. I think, too, that the items mentioned above would not have been deductible even if there had been income against which to apply deductions, but in my view there was no such income and, therefore, the question of their deductibility is immaterial. The consent of petitioner to be taxed on the basis of the disallowance of the deduction of such items was not an admission of fact. It was a concession based, as I deem it, upon an error in legal interpretation. Also, petitioner's consent to the determination of a deficiency based on the disallowance of deductions in the amount of the two items above mentioned does not constitute a stipulation for a deficiency in that amount. It is my view that the question of whether those items are deductible or whether any of the other items herein involved are deductible is immaterial, for the reason that none of petitioner's receipts in respect of which the deficiency herein was determined was income to it, regardless of the question of deductions.
Uniform Printing & Supply Co. and Peoples Gin Co. are cited in the majority opinion. The former case supports the conclusion which I have reached here and the latter is not *275 applicable to the facts in this proceeding. In Peoples Gin Co. there was a profit to the petitioner which it distributed to its stockholders and claimed an expense deduction therefor as a patronage refund. We denied the deduction on the ground that the distribution was a dividend to the stockholders out of profits. The facts of the Gin Co. case present a totally different picture from that here presented. Here the petitioner had no profits and, in the very nature of its undertaking, could have none. Should it not expend all of its receipts in the promotional work in behalf of the clay sewer pipe industry, the remainder thereof was to be refunded to the contributors who were currently subscribers to the fund. Such a refund would not be a distribution of profits.
The record shows that the basis of the rate of subscriptions to petitioner's operating fund was an estimate of the amount of money required to pay the expense of a promotional program to extend over a period of at least three years. It is not reasonable to expect that petitioner could estimate to a penny the financial requirements for carrying on its work year by year, although it was expected that in the *543 *276 first year receipts would exceed expenditures. The record shows, however, that for the second and third years of operations, after the program was well under way, expenditures exceeded receipts and that as some of the subscribers dropped out it was necessary to reduce the budget of expenditures in order to stay within the limit of the receipts. Subscriptions were for yearly periods and it appears that after the promotional program was organized and functioning there would be no surplus of funds of any moment which included contributions by those who were no longer subscribers to the fund. In the very nature of petitioner's operations any balance of funds on hand at any given time obviously represented almost wholly the residue of contributions of current subscribers. It is, therefore, idle to theorize as to the possibility of distributions to current subscribers of money paid in by former subscribers. The possibility of such a distribution is so remote as to occurrence and so negligible as to amount that it does not warrant consideration.