*856 1. The sum of $552,895.11 received in 1932 by petitioner from Shell Oil Co. under decree of court, retained by petitioner for the benefit of the ultimate winner of the litigation, and later, with accretions, returned to Shell Oil Co. upon final adjudication of the Supreme Court of California, was not income to petitioner in 1932.
2. Interest on, and other accretions to, the fund received by petitioner in 1932 and 1933 were not income to petitioner.
*353 This proceeding was brought to redetermine deficiencies in income tax of the petitioner for the years 1932 and 1933 in the sums of $28,978.21 and $2,478.93, respectively. By amendment the respondent asserted a further deficiency of $25,053.28 for the year 1932.
*354 The issues are:
(1) Whether or not the petitioner realized taxable income in 1932 when it received $522,895.11 paid to it by the Shell Oil Co. under a judgment of the Superior Court of California, in order to avoid the forfeiture of an oil lease between that company and the petitioner, *857 the judgment being later appealed from, and reversed by the Supreme Court of California.
(2) Whether or not the petitioner realized taxable income in 1932 and 1933 in the amounts of $5,032.86 and $18,028.57, respectively, representing interest accrued on the fund of $522,895.11 and later delivered to the Shell Oil Co. upon the reversal of the decree of the Superior Court.
(3) Whether or not the petitioner's taxable income for 1932 should be increased in the amount of $182,205.76 representing a contingent fee of 35 percent which the petitioner agreed to pay its counsel out of the amount to be recovered from the Shell Oil Co. This issue was raised by the respondent's amended answer, is collateral to the first issue, and is contingent upon its decision.
FINDINGS OF FACT.
The facts were stipulated substantially as follows:
The petitioner was incorporated in 1888 under the laws of California and has its principal office in Long Beach, California. Since its organization it has been engaged in the business of holding, leasing, and selling real estate, including oil and gas lands.
In 1921 the petitioner, as lessor, entered into an oil and gas lease with the Shell Co. of*858 California (whose name was subsequently changed to Shell Oil Co.), hereinafter called Shell. Under the terms of the lease the petitioner was to receive 16 2/3 percent of all oil and gas produced from the leased property. Oil and gas have been produced upon the property by the lessee since 1921. Beginning in 1921, when oil and gas royalties began to accrue to the petitioner under its lease with Shell, the petitioner each year thereafter accrued on its books and in its income tax returns the December royalty, payable in January.
On September 1, 1930, the petitioner entered into a contract with Shepard-Pendleton, Ltd., a corporation engaged in petroleum engineering work, pursuant to which Shepard-Pendleton, Ltd. (hereinafter called Shepard-Pendleton) was employed to check the methods which Shell had used in determining the quantity and quality of the oil produced from the leased premises and the method of computing the royalties to be paid to the petitioner. The petitioner agreed to pay Shepard-Pendleton for its services a sum equal to 35 percent of the amount recovered from Shell, whether with or without litigation. Shepard-Pendleton was to pay all attorney fees and court costs. *859 The *355 agreement related only to oil, gas, and gasoline produced, saved, and sold under the lease up to but not including September 1, 1930. The contract further provided that Shepard-Pendleton could abandon any claim or litigation instituted by it at any time and that no compromise of any claim should be made without the consent of both parties to the contract. Shepard-Pendleton checked the method by which Shell had determined the quantity and quality of oil produced on the leased premises for the purpose of computing royalties and calculated that, due to Shell's incorrect methods, it owed the petitioner about a half million dollars.
In the year 1931 the petitioner, as plaintiff, brought suit against Shell in the Superior Court of the State of California in and for the County of Los Angeles, hereinafter called the Superior Court, wherein it sought judgment against the defendant for approximately $400,000 back royalties, plus interest, and the forfeiture of the lease for failure to make proper accounting of royalties.
The principal defense raised by Shell was that it had paid on the wet gravity, net quantity basis in accordance with field practice. Shell contended*860 that it was the field practice to test the gravity of the oil before dehydration and to measure the quantity of the oil after dehydration. Shell also pleaded the following special defenses: Accord and satisfaction; account stated; estoppel; laches; and statute of limitations.
In April 1932 the Superior Court gave judgment to the plaintiff in the said suit for additional royalties in the amount of $490,805.75, interest in the amount of $31,226.86, and court costs of $862.50. The judgment was entered June 20, 1932. The judgment also passed upon the petitioner's claim for cancellation of the lease in the following language, appearing in paragraph eighth of the judgment:
That plaintiff have judgment declaring the termination of all the right, title, interest and equity of said defendant, in, to and under said lease of January 3, 1921, and said contract of March 14, 1924, provided, however, that said defendant shall be relieved of such forfeiture in the event that it pays to plaintiff, on or before the 29th day of August, 1932, all sums for which Judgment is herein given.
The lease involved was very valuable to the lessee and, to prevent a forfeiture, Shell, on July 8, 1932, tendered*861 to the petitioner a cashier's check for $522,895.11. Accompanying the check was a letter from Shell to the petitioner, in which it was stated that:
The foregoing payment is made only to avoid the forfeiture decreed by the provisions of paragraph "Eighth" of said judgment, in accordance with the terms of said paragraph, and is made involuntarily and solely by virtue of the duress, coercion and compulsion of said judgment, and particularly of paragraph "Eighth" thereof. The undersigned by making such payment does not in any way relinquish or intend to relinquish, or waive or intend to waive, its *356 right of appeal from all or any part of said judgment, or to recover back the payment made as aforesaid if and to the extent that said judgment may be reversed or modified upon such appeal, or to take such other action or steps as the undersigned may deem appropriate to protect itself and its interests in the premises.
On July 12, 1932, the petitioner, through its attorneys, wrote a letter to the attorneys for Shell in which it was stated that the payment by Shell would be considered as precluding an appeal from the judgment. It also stated that if Shell attempted to appeal, *862 the petitioner would move to dismiss the appeal upon the ground that the judgment had been satisfied by the payment. The petitioner offered to return to Shell the $522,895.11, if Shell felt that its interests might be prejudiced by having made the payment. Shell did not agree with the conditions expressed by the petitioner and did not ask for the return of the money.
On July 14, 1932, Shell took an appeal to the Supreme Court of the State of California from all portions of the judgment of the Superior Court, with the exception of paragraphs sixth and seventh thereof (in which paragraphs the court had ruled adversely to certain claims of petitioner). The petitioner took an appeal to the Supreme Court from paragraphs sixth and seventh of the said judgment. The petitioner immediately moved to dismiss Shell's appeal. On January 9, 1933, the Supreme Court of the State of California denied the petitioner's motion to dismiss Shell's appeal.
The petitioner, on September 22, 1932, deposited the check for $522,895.11 in the Long Beach Branch of Security-First National Bank of Los Angeles in a term deposit account bearing interest at the rate of 3 1/2 percent per annum. On its books*863 the petitioner made the following journal entry:
| Day Description | Acct. No. | Charges | Credits |
| 22 Deposit in connection with pending action vs. Shell Oil Co | 29 | $522,895.11 | |
| Reserve for contingent liability in connection with pending action vs. Shell Oil Co | 39 | $522,895.11 |
To record payment by Shell Oil Co. of Judgment rendered by the Superior Court of Los Angeles County in favor of Alamitos Land Co. in its suit vs. Shell Oil Co. Payment was tendered July 8, 1932, by Cashier's Check No. 2,167,496 of the First Natl. office of Security-1st Natl. Bank of Los Angeles for sum of $522,895.11 and with said check was a letter stating that payment was made only to avoid forfeiture of the Lease and that Shell Oil Co. was making payment involuntarily and without in any way relinquishing or intending to relinquish or waiving or intending to waive its right of appeal from all or any part of said Judgment or to recover back any portion of said sum if Judgment were reversed or modified or to take such other action as might be deemed proper to protect its interests. Cashier's check was held for a time pending determination of proper course for Alamitos*864 Land Co. to pursue. With approval of Shepard-Pendleton, Ltd., who have a considerable interest in the amount of said Judgment, *357 funds were deposited on Sept. 22, 1932, with Long Beach Branch of Security-1st Natl. Bank of Los Angeles, California, in Time Certificate of Deposit No. 41,175 on 6 mos. basis, with interest at rate of 3 1/2% and with arrangement with Bank for interest at rate of 2 1/2% if funds be withdrawn prior to expiration of 6 months. Certificate of Deposit placed in Safe Deposit Box at Long Beach Branch of Security-First Natl. Bank of Los Angeles.
Shepard-Pendleton and petitioner's attorneys consented to the deposit of the $522,895.11 in a savings trust pending the outcome of the appeal. They also consented to the investment of a part of the money in United States Government Bonds.
On June 14, 1933, the petitioner, out of the funds so deposited, purchased United States Treasury Notes for $52,000, and on July 24, 1933, purchased Treasury Notes for $205,000.
Each appellant prosecuted and each respondent defended the appeal in the Supreme Court of the State of California, and that court, on April 26, 1935, reversed the judgment of the lower court*865 in its entirety, except that it affirmed the judgment as to paragraphs sixth and seventh. The court held that Shell had properly computed royalties on the observed or wet gravity, net quantity basis and remanded the cause for further proceedings.
On May 28, 1935, Shell made a written demand upon the petitioner for restitution, demanding repayment of the sum of $522,895.11, together with interest at 7 percent amounting to $105,696.44.
On June 4, 1935, the petitioner tendered to Shell the sum of $522,895.11, plus $41,256.90, being the interest actually received by the petitioner during the time the said principal had been in the petitioner's custody, and the sum of $11,595.31, representing profits accruing from the purchase and sale of United States Treasury Notes, or a total of $575,747.32. The petitioner gave to Shell a complete accounting of the $522,895.11 while in the petitioner's custody.
At the time of the demand a portion of the funds involved in this case was on deposit in a term savings account with the Long Beach Branch of the Security-First National Bank of Los Angeles. In order to avoid loss of 6 months' interest which would be payable June 30, 1935, on the said*866 account, arrangements were made to borrow from the bank at 4 percent interest for the period from June 4, 1935, to July 1, 1935, the amount of the account and interest payable June 30, 1935, less interest for the 27-day period, a net sum of $303,206.15.
Shell received the check for $575,747.32 from the petitioner on June 4, 1935, but subsequently sued the petitioner (Docket No. 417,468, Los Angeles Superior Court) for $53,546.20, being the difference between 7 percent on $522,895.11 and the accretions on the fund while in the petitioner's custody.
Subsequent to the decision of the Supreme Court of the State of California, on April 26, 1935, in the case of Alamitos v. Shell, petitioner, *358 as plaintiff, filed an amended complaint against Shell in the Superior Court. Shell filed a motion to dismiss such amended complaint on the ground that it did not state a cause of action. The motion to dismiss was denied, and Shell filed an answer, leaving the case at issue in the spring of 1938.
In the original complaint, Alamitos simply sued on the lease, contending that the royalties required by the lease had not been paid. Shell had raised the defense that it had paid*867 on the wet gravity, net quantity basis in accordance with field practice. The lower court found against Shell on this point, but the Supreme Court overruled the lower court on this point, holding that there was not sufficient evidence for the lower court's decision.
In the amended complaint, filed in 1937, Alamitos alleged that the royalties had not been paid in conformity with field practice; that the field practice was to test the gravity of the oil after substantially all of the water and other foreign matter had been removed from it and to calculate the quantity of the oil after substantially all of the water and other foreign matter had been removed from it, whereas Shell took the gravity of the gross, or wet, oil before the water and other foreign matter had been removed from it and took the quantity of the net oil after the water and other foreign matter had been removed from it.
Shell admitted that it had computed the royalties as alleged in the amended complaint, but stated that such was the field practice in the locality. (This was the practice which the trial court, in the original had found did not conform to local field practice, but the Supreme Court of California*868 overruled the trial court on this point.)
In addition to the defense set up by Shell in its answer to the amended complaint, it pleaded the following special defenses, the first five of which had been originally pleaded when the case went to the Supreme Court of California but had not been considered by that tribunal inasmuch as it found against Alamitos on the merits and it was not necessary to consider the special defenses of Shell:
1. Accord and satisfaction.
2. Account stated.
3. Estoppel.
4. Laches.
5. Statute of limitations.
6. Res adjudicata.
7. Stare decisis.
8. Estoppel to plead field practices by reason of the fact that Alamitos had accepted checks during the litigation and had a general knowledge of the practices followed by Shell.
9. Written waiver by Alamitos to claim cancellation of the lease and written waiver by Alamitos to claim over 2 1/2% interest during the time prosecution had been unnecessarily delayed.
*359 The petitioner made a motion to strike these affirmative defenses from the record, but the court denied the motion.
While the case was pending trial, the parties in 1938 entered into an agreement settling the*869 case of Alamitos v. Shell and the case of Shell v. Alamitos, whereby the petitioner received $100,000 and the plaintiff in both actions dismissed the complaint, with prejudice. Each party paid its own court costs.
Before entering into the settlement the petitioner obtained the consent thereto of Shepard-Pendleton and agreed to pay Shepard-Pendleton 25 percent of the said $100,000 as its fee. The petitioner in 1938 paid Shepard-Pendleton $25,000 as its fee in the litigation against Shell.
In its 1932 income tax return, the petitioner excluded from income the $522,895.11 received from Shell and the interest earned thereon, explaining in a statement attached to the 1932 return the entire situation, and further stating that the funds must be held intact until there was a final determination of the case by the higher courts. Petitioner did not deduct the sum of $182,205.76 representing its possible liability to Shepard-Pendleton. In its 1933 return, the petitioner also excluded from taxable income the $18,208.57 increase in Shell's funds deposit account, stating that no portion of the funds had at any time been considered or used as income, the deposit being kept*870 intact pending decision by the State Supreme Court.
Included in the $522,895.11 were court costs in the amount of $862.50 and interest thereon of $13.25, or a total of $875.75 costs awarded to the petitioner. The court costs, however, had been advanced by Shepard-Pendleton and, by virtue of the petitioner's agreement with Shepard-Pendleton, belonged to Shepard-Pendleton, and not to the petitioner. The respondent has included the $875.75 in the petitioner's income for 1932.
On its 1935 return, the petitioner did not claim any deduction on account of having returned to Shell the $522,895.11, plus accretions, but paid a Federal corporate income tax for the year 1935 of $7,081. The petitioner, within the statutory period allowed therefor, filed a claim for refund for the year 1935 in the amount of $7,081. This claim has not been acted upon by the Commissioner of Internal Revenue.
In his notice of deficiency as to 1932, the respondent both included the amount received from Shell and deducted the depletion thereon and the fees payable to Shepard-Pendleton. He now asserts that the fee item is not deductible because it was a capital expense and because it had not been paid or*871 accrued.
During 1932 and 1933 the petitioner kept its books and filed its income tax returns on the accrual basis as to royalties.
*360 OPINION.
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 1932.
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">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.
*872 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">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*873 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.
*361 After 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, *874 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 fund 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*875 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">35 Cal. 474; Estate of Blythe,99 Cal. 472">99 Cal. 472; 34 Pac. 108; Cook v. Ceas,143 Cal. 221">143 Cal. 221; 77 Pac. 65; contra, Costa Water Co. v. City of Oakland,165 Fed. 518. In Ward v. Sherman,155 Cal. 287">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. *876 (Cowdery v. London, etc. Bank,139 Cal. 298">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 *362 for that purpose. (Cowdery v. London etc. Bank,139 Cal. 298">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*877 unrestricted use.
In Virginia Iron Coal & Coke Co.,37 B.T.A. 195">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 its 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*878 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 *879 Sara R. Preston,35 B.T.A. 312">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 *363 not 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">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*880 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">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 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*881 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 interst 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 under Rule 50.
*364 DISNEY, dissenting: I can not see why the very language of North American Oil Consolidated v. Burnet,286 U.S. 417">286 U.S. 417, does not preclude the correctness of the majority opinion, for it is in that case said that if the taxpayer receives earnings under a claim of right without restriction as to its disposition, they are income "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*882 its equivalent." Thus, the matter of a reversal of judgment seems particularly in the mind of the Supreme Court of the United States. Therein money was received from oil lease in 1917. The United States, the other party to the litigation, appealed, without supersedeas. In 1920 the Circuit Court, to which appeal was taken, affirmed the decree, and in 1922 further appeal to the Supreme Court was dismissed by stipulation. It was held that the money was income not for 1922, but for 1917, and the Court said in addition to what has been above quoted:
* * * If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year. * * *
The majority opinion seems based upon the fear that there is injustice in the taxpayer's paying taxes "depending for equalization on the uncertainty of a deduction from income later." I think, on the contrary, that the Government should be allowed to collect the tax when taxpayer receives the money, and that it is only fair for him to get his credit, so to speak, when he pays it out again, for the simple reason*883 that otherwise he may receive the money, may go bankrupt, or otherwise never restore the money, and thus receive income upon which he is never taxed. It seems to me that the uncertainty of his repaying the money is greater than the uncertainty of the Government allowing him a just deduction when he in fact makes restitution. I do not think that the United States should be forced to depend upon the uncertainties of the fortunes of a taxpayer who has received money with no restriction as to disposition, when there is available a simple method of giving him credit in later years, if it turns out that he returns the money.
There was no restriction upon taxpayer's use of the money. Shell had no lien upon it. In fact, taxpayer used it in part to purchase securities, and it might have bought yachts or used it in riotous living. It had to put up no bond for the receipt of the money, and was obligated only as a common debtor to return it. If other creditors had judgments against it at the time of restitution, I think they might well, in some circumstances, have prevented the restitution of this money to the Shell Oil Co. as a preference among creditors. It did receive it under a claim*884 of right, as is shown by the notice to the Shell Co. that, *365 if the money was paid, petitioner would move to dismiss the Shell appeal - which it did, although it was unsuccessful. It received it under a claim of right, for the money was merely what it sued for. The taxpayer here was not forced to segregate this money, but did so voluntarily.
Sara R. Preston,35 B.T.A. 312">35 B.T.A. 312, does not help, but rather bears out my conclusion, because there was a restriction, that is, the restriction of the other party to whom a joint check was made and who disagreed with the petitioner about the use thereof; whereas the petitioner was charged with income of that money which he received by agreement with the other party, out of the check. It is plain that there was a positive restriction in that case upon the use of the money in that he could not use it at all, whereas here petitioner had the unrestricted use of the money. The only restriction was a voluntary one on its part for its future financial protection. I think the restriction involved in these cases is in its nature not a voluntary one, but some matter of law or other force which restricts or prevents the use*885 of the money by the possessor.
In National City Bank v. Helvering, 98 Fed.(2d) 93, holding that O'Neil had income on bonds received by him, even though he received them surreptitiously, with liability to account for them later, it was said:
* * * Although taxes are public duties attached to the ownership of property, the state should be able to exact their performance without being compelled to take sides in private controversies. Possession is in general prima facie evidence of ownership, and is perhaps indeed the source of the concept itself, though the time is long past when it was synonymous with it. It would be intolerable that the tax must be assessed against both the putative fortfeasor and the claimant; collection of the revenue cannot be delayed, nor should the Treasury be compelled to decide when a possessor's claims are without legal warrant. If he holds with claim of right, he should be taxable as an owner, regardless of any infirmity of his title; no other doctrine is practically possible, and no injustice can result. We think therefore that O'Neil was taxable upon the bonds for the years 1922 and 1923.
*886 In Champlin v. Commissioner, 78 Fed.(2d) 905, the Tenth, Circuit, in a case as to income from a lease subject to litigation, said:
* * * It is stated in the beiefs and not denied that petitioner in 1923 requested the Commissioner to treat the income from the lease as impounded pending the litigation over the title, and that the taxes be assessed when ownership was determined. Whether this be so or not, the law is that petitioner was liable for the tax on the income received despite the uncertainty of the litigation.
In Victoria Paper Mills,32 B.T.A. 666">32 B.T.A. 666; affd., 83 Fed.(2d) 1022, the petitioner obtained judgment against the city of Fulton, assigned the judgment to a bank, and received the money thereon in 1931, the same year in which he received the judgment. The judgments have never *366 been paid by the city of Fulton "and the question of the city's liability for the amounts thereof is still in litigation in the courts of the State of New York." The petitioner guaranteed the payment of the judgments by the city of Fulton, and we held that the amount received constituted income. The only difference between that case*887 and the present case is that the Shell Co. paid the money instead of it being raised by assignment of the judgment against Shell. Certainly there was the same liability for repayment of the judgment.
In D. H. Byrd,32 B.T.A. 568">32 B.T.A. 568, petitioner received funds subject to an unliquidated claim then pending liquidation. Petitioner denied the claim, asserting his right to the whole amount throughout the taxable year 1931, and until October 1933, when the litigation was determined. We said that until that time it was not "known whether petitioner's right to receive the money would ever be disturbed, or whether he would ever be required to pay over any part of it to the Owen-Sloan Oil Co.", and held that he was taxable on the entire amount. The Owen-Sloan Oil Co. had instituted a suit in the United States District Court for Texas, claiming that it had a contractual right to one-half of the moneys. In 1933 judgment against petitioner was announced, but was settled pending a hearing on the amount. Petitioner apparently received the money before the Owen-Sloan Oil Co. had brought the suit.
I therefore dissent.
TYSON agrees with this dissent.