*301 Decision will be entered under Rule 50.
On December 31, 1948 and 1949, Wallace A. Moritz, a photographer, held customers' deposits for portraits which were not completed and accepted until the following year. He kept his books and records and reported his income on the accrual basis, and did not include such deposits which he held at the end of the year in gross income for that year.
Held, the right to such deposits became a claim of right when received, without restriction as to their disposition, and the amounts thereof were includible in computing income for the years in question.
*623 This proceeding involves deficiencies in income tax of $ 14,845.51 for the year 1948 and of $ 1,665.84 for the year 1949 determined against Wallace A. Moritz (hereinafter referred to as the petitioner) and Ruth K. Moritz, his wife.
The issue to be determined is whether customers' deposits held by petitioner, an accrual basis taxpayer, at the end of the year, pending completion of photographic portraits and acceptance of them by the customers, *302 were properly included by respondent in redetermining petitioner's income for the years in question.
Respondent concedes that if we hold that the deposits were income when received, customers' deposits totaling $ 13,907.02 held on December 31, 1947, should be deducted from petitioner's gross income for the year 1948. Other adjustments made by respondent in his notice of deficiency have been conceded by petitioner and will be taken into account under a Rule 50 computation.
FINDINGS OF FACT.
Petitioner and Ruth K. Moritz were husband and wife during the years here in question, and residents of San Angelo, Texas. Petitioner kept his books and records and filed his returns on the accrual basis with the collector of internal revenue for the second district of Texas.
In 1948 and 1949, petitioner maintained some 30 or more photographic portrait studios in 13 states. Customers were photographed at the various studios; but the development of all negatives, preparation of proofs, and final finishing of the portraits were done in petitioner's laboratory in San Angelo, where some 125 persons were regularly employed.
Petitioner's sales policy was one of complete customer satisfaction. All *303 portraits were finished with the understanding that the customer had the right to accept or reject them. When a customer first appeared at one of petitioner's studios and was photographed, he was asked to make a deposit. When proofs were returned from the laboratory in San Angelo, and the customer tentatively selected one or more *624 to be finished, it was possible to estimate the total cost of the job and the customer was then requested to deposit a minimum of one-third of the tentative total price. All such deposits were received with the distinct understanding that the customer might reject the finished work, and that, if he did so, all of his deposit would be refunded. From time to time, petitioner conducted sales campaigns in which he advertised refunding double the amount of the deposit if customers were not satisfied with the finished work.
Petitioner's largest volume of business was during the Christmas season. Deliveries of finished portraits from negatives taken after December 12, or of proofs returned to the laboratory after December 17, could not be made until the following year. Hence, at the end of each year, the petitioner held a substantial amount representing*304 customers' deposits on unfinished photographs. On December 31, 1947, the amount of such deposits was $ 13,907.02; on December 31, 1948, $ 29,863.96; on December 31, 1949, $ 31,494.89. Such deposits were not segregated from petitioner's other funds.
In his returns for 1948 and 1949, petitioner did not include the amount of customers' deposits held at the end of each year in gross income for such year. Respondent determined that such deposits should have been included in petitioner's income and determined the deficiencies herein.
The deposits here in question were income to the petitioner in the year they were received.
OPINION.
It has long been recognized that a taxpayer who keeps his books and reports his income on the accrual basis in subject to tax liability when the right to receive income becomes fixed. . The Court said in :
If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, *305 even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. * * *
We have found, from the facts before us, that the deposits were income to the petitioner when he received them. This is true even though he might be required to refund part or all he had received. There was no restriction as to the disposition which he could make of deposits once received; and he, in fact, mingled them with other funds in a common bank account and spent them as he chose.
Petitioner has attempted to distinguish such cases as ; ; and , reversed on other grounds (C. A. 7, 1943), affd. . Those cases, and , and ,*306 affd. (C. A. 9, 1951), are not sufficiently distinguishable on their facts to justify our holding that the possibility of refunds of deposits was anything other than a contingent liability, which had no bearing on petitioner's right to the deposits when received.
, upon which petitioner so heavily relies, is distinguishable from the case before us and those we have cited above, because in that case there was an executory contract and not a transaction that was subject only to some future contingent liability.
Pursuant to respondent's concession, the deficiences will be recomputed, taking into account the amount of deposits which petitioner held on December 31, 1947, in the amount of $ 13,907.02, and
Decision will be entered under Rule 50.