*252 Judgment will be entered for the respondent.
Petitioner, which was on an accrual basis, was a book broker, acting as a depository and distributor of school books. It represented various publishers in sales made by them of school books to the State of Georgia and was paid by them a percentage commission calculated on the sale prices obtained by the publishers. The state was obligated to pay for the school books only out of a "Free Textbook Fund" created and renewed from an excise tax on beer. During the taxable years this fund was not large enough to pay in full for the books purchased by the state. Held, the commissions payable to petitioner on account of school books sold to the State of Georgia were properly accruable to it in the years in which the sales were made.
*463 Respondent has determined deficiencies in petitioner's income tax for petitioner's fiscal years ended March 31, 1938 and 1939, respectively, in the amounts of $ 8,636.11 and $ 1,684.84, and a deficiency in excess profits tax for the year ended March 31, 1938 in the amount of $ 3,534.58.
*253 The sole question presented is whether commissions on the sale of school books to the State of Georgia constitute income to petitioner in the year in which the sales were made or in the year of payment by the state, the petitioner being on an accrual basis.
FINDINGS OF FACT.
The facts herein have been mutually agreed upon by the parties on brief, and we adopt their agreement of facts as our findings herein. We set out herein only those facts which are necessary to an understanding of the problem presented.
Petitioner is a corporation, and for the years in question filed its returns with the collector for the district of Georgia. Its books were kept on an accrual basis of accounting.
*464 Since its organization in 1924 the petitioner has acted as a depository or distributor, on a purely commission basis, of school books published by various publishers.
On March 4, 1937, the State of Georgia enacted a Free Textbook Act, under which the state board of education was directed to inaugurate and administer a system of free textbooks for the public schools of Georgia, and to execute contracts therefor. The act provides that the cost of administering the free textbook system and purchasing*254 the books shall be paid by the state from such funds as may be provided by the General Assembly for that purpose, and that "If funds sufficient to furnish the free textbooks for all grades shall not be available at any time, the Board shall give preference to the elementary grades." (Act of March 4, 1937; Session Laws, 1937, p. 899.) The Legislature thereupon created a free textbook fund, made up solely from excise taxes on the sale of malt beverages in the state. The act provides that funds derived from taxes on malt beverages shall be apportioned as follows: Not over 3 percent shall be paid to the revenue commission for enforcing the malt beverage act and "the remainder shall be set aside and devoted for the support of the common schools of the state and used for the purpose of furnishing free textbooks to the children attending the common schools"; any excess to be used for other school purposes. (Act of Jan. 17, 1938, Session Laws, 1937-1938, p. 419.)
After the enactment of the Free Textbook Act, all school books used in Georgia schools were sold directly to the state by the various publishers, the contracts being made directly by the publishers with the state and all being *255 of a like tenor and effect and for a period of five years.
Thereupon, petitioner became, under its contracts with its various publishers the distributor and custodian of the books. The contracts provided that "all books sold and delivered under the contract to the State of Georgia, f. o. b. Atlanta, Georgia, shall be invoiced to the state at the wholesale and/or exchange prices above set out"; but the invoices had on them "Sold to the Georgia School-Book Depository." Petitioner was further obliged to care properly for the books, to see that there was a sufficient number of books on hand at all times to meet the demands of the state, to collect the accounts due by the state for the books, and to deposit all moneys received from the state in a trust fund for the publisher's account, the petitioner being "absolutely responsible for the forthcoming of said monies at the time for remittance thereof * * *." The contract further provided for compensation to petitioner for its services as follows: "The second party [petitioner], at the time of settlement herein provided, shall receive as compensation for its services under this contract, eight *465 percent of the Net Wholesale or Wholesale*256 Exchange Prices, respectively, at which the books are sold." Petitioner was required to render quarterly formal reports of all sales during the previous quarter, showing an inventory of all books on hand and the exact balance due the publisher by the petitioner, and it was further provided that: "The Depository shall remit to the publisher its pro rata share of all cash received from the collection of warrants issued by the State of Georgia for books sold to the State when and as such warrants are received." The contract specifically provided that the petitioner should be held accountable and responsible to the publisher for all books supplied on its order or disposed of by it or for their return in salable condition, but that it should "Not be held accountable or responsible for payment of books sold and delivered to the State of Georgia until the second party [petitioner] has received payment from the State of Georgia."
Each of the contracts of the State of Georgia with the publishers required the publishers to keep a separate depository of some sort in the state where school books purchased by the state could be had in quantities at all times sufficient to comply with the needs*257 of the public schools, and further provided as follows: "It is understood and agreed that the publishers shall be paid for these books from the Free Textbook Fund and all payments will be made pro rata, if not in full."
When the State of Georgia purchased the school books, it owed the purchase price to the publishers and paid the publishers through the depository. After deducting its commissions, petitioner deposited the money in a trust fund, and remittances were sent to the publishers from this trust fund to apply on the balance due by the state. Petitioner's president had charge of this trust fund and countersigned the checks.
The books were delivered or shipped by petitioner upon requisition or orders from the state department of education.
After the execution of these contracts with the publishers large quantities of school books were purchased by the State of Georgia from the various publishers, and through March 31, 1938, the end of petitioner's fiscal year, the state had purchased from petitioner's publishers $ 875,893.88 worth of school books. During the same period petitioner received payments from time to time from the State of Georgia on these books, aggregating*258 $ 400,679.57. These payments left a balance due petitioner's publishers by the state as of March 31, 1938 (the end of petitioner's fiscal year), of $ 475,304.31. At the end of the state's fiscal year on June 30, 1938, the state owed petitioner for its publishers $ 483,135.52 and the total owed by the state for all textbooks as of that date was $ 1,006,713.48. On the latter date the total amount of cash in *466 the state department of education available for textbooks was $ 6,297.69, and the total amount in the state treasury in the textbook fund was $ 67,589.77, which was set up as follows on the state books as of June 30, 1938:
Balance in Textbook Fund in State Treasury $ 67,589.77.
At June 30, 1938, there was due on the purchase of textbooks $ 1,006,713.48, these amounts representing balances on invoices for textbooks purchased, which is due and payable as funds from the State Malt Beverage and Wine tax become available, and for that reason is not listed as a current liability.
During the next fiscal year of 1939 the state purchased from petitioner's publishers $ 464,112.80 worth of school books. Payments of $ 336,094.92 were made by the state to the petitioner*259 during this time, leaving a balance of $ 603,322.19 due to petitioner's publishers as of March 31, 1939. At the end of the state's fiscal year on June 30, 1939, the state owed the petitioner for its publishers the sum of $ 508,348.52. The state owed all publishers as of this date the sum of $ 821,769.27. As of this same date the state's books showed a cash balance of $ 1,406.12 in the department of education for textbooks, and the amount in the state treasury in the textbook fund was $ 107,701.66, a total of $ 109,107.78, which was set up on the books of the state as follows:
Accounts payable for textbooks at June 30, 1939 amounted to $ 821,769.27, which accounts ripen for payment when and as funds become available in the Textbook Fund. These accounts are therefore a present liability only to the amount now in the Textbook Fund, to-wit, $ 109,107.78, and the balance of $ 712,661.49 represents an encumbrance on the Fund's income in the next fiscal year.
The following entry appears on page 55a of the Report of the State Auditor of Georgia for the year ended June 30, 1939:
There is now a considerable investment in textbooks, probably in excess of two million dollars. Indebtedness*260 for textbooks not covered by the reserve in the Textbook Fund, is only an encumbrance on income from the wine and beer tax allocations. The amount over the reserve of June 30, 1939, was $ 712,661.49. It was $ 865,236.25 as of June 30, 1938.
The books of account of the state show that during the fiscal year ended June 30, 1938, $ 505,000 was diverted from the free textbook fund and applied to payment of teachers' salaries.
Besides the school books sold to the State of Georgia, the petitioner handled for the publishers on a commission basis books on other accounts, books which were not on the state adopted list, and college books. Under these contracts with the publishers, the petitioner is responsible for the collection of all these accounts, and all of petitioner's liabilities on these accounts are accrued at the time of contracting such liabilities. Under petitioner's system it accrued all its income from these accounts at the time of contracting, except the income from the sale of books to the State of Georgia.
*467 In determining the deficiency against the petitioner the respondent held that the commissions on the sales of the books to the State of Georgia during the years*261 1938 and 1939 were earned and accrued as income at the time of the sale of the books and that petitioner had erred in treating the commissions as earned or accrued only when payment for the books was made by the state.
OPINION.
The question is whether petitioner, which was on an accrual basis, should have accrued certain school book commissions at the time the books were sold by the publishers to the state, or should have returned them as income only when the books were paid for by the state, as petitioner contends.
Petitioner was a broker which received an 8 percent commission on all school books purchased by the State of Georgia through it. For this commission it performed certain services of advantage to both parties, such as executing the contracts of the state board of education with various publishers, taking care of the books as a central depository until final distribution, seeing that enough were on hand to meet the state's demands, distributing them, and collecting the moneys in payment from the state and holding them in trust until paid over to the publishers. It was responsible for the return in salable condition of any books not used. It had no title to the books at*262 any time, and (except in the case of one publisher) posted a bond with each publisher to guarantee performance of its duties. Petitioner also carried on a somewhat similar business as a book broker of college books not on the state list and under these contracts was responsible for the collection of all accounts.
Petitioner did not accrue its commissions on the state books but did accrue its commissions on the college books at the same time that its liability for the books to the publishers was accrued. Under the contracts for state school books it was provided that petitioner should receive its brokerage "at the time of settlement" and this term is explained by the provision that the petitioner shall make quarterly reports "so as to show the exact balance due" the publisher by the petitioner, and shall remit "its pro rata share of all cash received from the collection of warrants issued by the State of Georgia for books sold to the state when and as such warrants are received."
The publishers could look for payment from the state, and, consequently, petitioner could look for its commissions only from the "Free Textbook Fund," which was renewed only from the excise laid on beer. *263 During the taxable years 1938 and 1939 this fund was insufficient to pay the petitioner in full. The state, in its accounting, did not treat these large deficits as present liabilities except to the extent that funds were *468 already on hand to meet them, the remainder being considered an encumbrance on the textbook fund in the next year. The "accounts ripen," the auditor reported, "for payment when and as funds become available in the Textbook Fund."
Petitioner contends, first, that the brokerage was not earned until payment, and, secondly, that there was no reasonable expectancy that payment ever would be made; and for these reasons, it urges its ultimate contention that the commissions here involved were not properly accruable in the respective taxable years.
In so far as appears, all acts which were required of petitioner to earn its brokerage, save one, had been done in the taxable year. It had received the books from the publishers, stored them, and later distributed them to the several schools. All it had not done was to receive the money from the state and pay it out to the publishers. On this account the actual payment of the brokerage may not have been due to*264 petitioner until this money was received, but the right to it had accrued by the performance of its duties. . It is the right to receive money which in accrual accounting justifies the accrual of money receivable and its return as accrued income.
The Supreme Court said in (p. 184):
* * * Keeping accounts and making returns on the accrual basis, as distinguished from the cash basis, import that it is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income. When the right to receive an amount becomes fixed, the right accrues. * * *
The receipt of the money from the state, the deduction of petitioner's commission, and the transmission of the balance to the publishers were the least of its duties and can not be made the criterion of the arisal of the right. Paragraph 9 of the contract assumes that the publisher's right to payment had arisen, for it requires that the quarterly reports which petitioner was to submit should "show the exact balance due the first party by *265 the second party [petitioner] * * *." See ; ; and .
The case of , relied upon by petitioner, may be distinguished on its facts, as it was in
We pass, then, to the second question, whether there was a reasonable expectancy that the claim would ever be paid. Where there is a contingency that may preclude ultimate payment, whether it be that the right itself is in litigation or that the debtor is insolvent, the *469 right need not be accrued when it arises. This rule is founded on the old principle that equity will not require a suitor to do a needless thing. The taxpayer need not accrue a debt if later experience, available at the time that the question is adjudged, confirms a belief reasonably held at the time the debt was due, that it will never be paid. *266 (2d Cir.); (9th Cir.), and cases there cited at page 937. On the other hand, it must not be forgotten that the alleviating principle of "reasonable expectancy" is, after all, an exception, and the exception must not be allowed to swallow up the fundamental rule upon which it is engrafted requiring a taxpayer on the accrual basis to accrue his obligations, If this were so, the taxpayer might at his own will shift the receipt of income from one year to another as should suit his fancy. Cf. Clifton Manufacturing Co., I. T. C. 71. To allow the exception there must be a definite showing that an unresolved and allegedly intervening legal right makes receipt contingent or that the insolvency of his debtor makes it improbable. Postponement of payment without such accompanying doubts is not enough. In the case of , the court stated (at page 936) that "the principal issue is the time when the income accrued." Judgments had been given petitioner in May 1927 and December*267 1928 by a Federal District Court, pursuant to an act of Congress conferring jurisdiction for the purpose of determining claims of sealers for unlawful seizure of their vessels by the United States in the Bering sea. The Commissioner had included the income in taxpayer's fiscal year ended January 31, 1930, and the Board of Tax Appeals sustained him. The taxpayer had not accrued or returned the adjudged damages as income in its fiscal year 1930, when it was paid and when also the right to appeal expired. The court said (at page 939) in respect of the two issues, legal contingency and reasonable expectancy:
With respect to the contention that the absence of an appropriation makes the right conditional, we believe that such fact does not affect the right, but the realization of the right. Even if the judgment remained unpaid, the right would not be impaired. But the absence of an appropriation may be considered in connection with the condition in the general definition hereinabove mentioned, that there must be a reasonable expectancy that the right will be converted into money or its equivalent. Respondent points out that Congress has refused to make an appropriation to satisfy *268 the judgment rendered January 12, 1931, in (75 Cong. Rec., Part 2, pp. 1233, 1307; 79 Cong. Rec., Part 10, p. 10816). Respondent says, however, that he "does not wish even to seem to contend that the legislative branch of the Government does not usually appropriate moneys to satisfy judgments rendered against the United States." It is inconceivable that Congress would go through *470 the idle ceremony of enacting a statute authorizing the suits in question, and subsequently render it nugatory by the failure to make an appropriation. We believe that when the appeal time expired, there was a reasonable expectancy that the right would be converted into money.
In conformity with the foregoing, we hold that income from petitioner's claim, on which it recovered judgment, accrued to petitioner during the fiscal year ending January 31, 1930.
* * * *
In (2d Cir.) the question was whether the taxpayer had the right to accrue on its books and to return as income the entire amount awarded it by the German Mixed Claims Commission*269 in the year of the award, 1928, and this question, depending on whether there was a reasonable expectancy that payment would be made in due course, was resolved as follows (at p. 267):
We believe its [Bureau of Internal Revenue] original view was the correct one, at least to the extent of 80 per cent. of the award. It is true that payment of such awards was not absolutely certain in 1928, for that depended upon the continued willingness and ability of the German government to perform its engagements with the United States and upon the latter's continued co-operation in aiding award claimants to obtain payment; they had no means of enforcing collection for themselves. In this respect the petitioner's position differs from that of a creditor accruing upon his books an ordinary debt payable in the future. But the mere possibility of a change in legislative policy after the enactment of a statute granting compensation to claimants who shall obtain an award thereunder is not enough to prevent the application of the accrual basis of accounting if the facts which determine the claimant's rights are not contingent. ;*270 (C. C. A. 2); (C. C. A. 2). In * * *. The petitioner's right to receive the amount of its award became fixed in 1928, and there then existed reasonable ground to believe that it would ultimately be paid. To the extent of 80 per cent. payment was to be expected within six years. Senate Report 273, p. 37, Seventieth Congress, 1st Sess. Committee on Finance, Settlement of War Claims Bill of 1928. To this extent at least it was proper to accrue it on the books in that year. Hence the inclusion of the sums received in 1929 and 1930 was erroneous.
It should be noted that in the Automobile Insurance Co. case a lapse of six years was contemplated before payment, whereas here it is not suggested by petitioner that it would have to wait more than a year or so because of the state's diversion of money from the textbook fund, if that long.
Needless to say that there is no analogy between the situation here and that of*271 commissions on life insurance policy renewal premiums (see ), for there is no contingency as to obligation involved here.
Applying these principles to the instant case, we must conclude that, despite the condition of the treasury of the State of Georgia when the *471 free schoolbook fund was inaugurated and for several years thereafter, there was no reasonable expectation that the sums owed by the state to petitioner's publishers and, consequently, the commissions to petitioner itself, would not ultimately be paid. It would naturally take a few years to establish in full working order a system of such magnitude, but a comparison of the two years before us shows that Georgia was gradually reducing its schoolbook obligations. Georgia is a state possessing great resources and a fine record of fiscal probity, and undoubtedly it can and will meet its obligations. The fact that petitioner, on behalf of its principals, continued to sell and deliver school books to the state indicates that there was no serious doubt as to the ultimate collection of the accounts here involved.
We conclude, therefore, that petitioner's*272 commissions on all books purchased by the state through it in the taxable years should have been accrued and returned as income in those years.
Judgment will be entered for the respondent.