Broadcast Measurement Bureau, Inc. v. Comm.

Decision will be entered for petitioner.

Laurence F. Casey, Esq., for the petitioner. Sheldon V. Ekman, Esq., for the respondent.

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Respondent determined deficiencies in petitioner's income, declared value excess-profits, and excess profits taxes for the fiscal year ended June 30, 1946, in the respective amounts of 18,355.08, 13,116.87, and 29,414.92, together with a penalty of 1,470.75 for failure to timely file the excess profits tax return for that year. Three questions are presented for our determination in this proceeding:

1. Did petitioner realize any income in the fiscal year ended June 30, 1946?

2. If petitioner realized income in the fiscal year ended June 30, 1946, was it exempt from income and excess profits taxes thereon under sections 101 (7) and 727 (a) of the Internal Revenue Code, respectively?

3. Was petitioner liable for a 5 per cent penalty for failure to file its excess profits tax return for the fiscal year ended June 30, 1946, within the time prescribed by law?

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FINDINGS OF FACT. Part of the facts were stipulated and are so found.

Petitioner (hereinafter sometimes called BMB) is a membership corporation organized under Delaware laws on December 28, 1944. The incorporators of petitioner were J. Harold Ryan, president, National Association of Broadcasters (hereinafter referred to as NAB); Paul B. West, president, Association of National Advertisers, Inc., (hereinafter referred to as ANA); and Frederick R. Gamble, president, American Association of Advertising Agencies (hereinafter referred to as AAAA). It was stated in its certificate of incorporation that petitioner "shall be a non-profit membership corporation and shall have no capital stock." Petitioner never authorized any capital stock. As stated in its certificate of incorporation, the purposes for which petitioner was organized were

To foster, promote and conduct research and investigations to establish measurements of broadcasting of all types; to develop standards for the measurement and evaluation of broadcasting audiences of all types; to establish and supervise practices in connection with the collection, tabulation, evaluation, and authentication of audience data with respect to the entire broadcasting industry; to prepare and issue statements and reports of audience data of the broadcasting industry and to perform other acts and services which will further the mutual interests of advertisers, advertising agencies and the broadcasting industry in the accurate and scientific evaluation of the broadcast advertising medium.

At all times since its organization petitioner has had only three members, the NAB, the ANA, and the AAAA. From its organization and throughout the taxable year involved, the control and management of petitioner has been vested, pursuant to petitioner's by-laws, in a board of 21 directors appointed as follows: each member appointed 6 directors, and in addition to the 18 directors so appointed, the respective presidents of ANA, AAAA, and NAB served as directors ex officio. The by-laws provided that the by-laws should be amended or modified only by a majority vote of the directors present, including the affirmative vote of at least three directors appointed by each member.

The chief reason for the organization of petitioner was to meet a crying need for a uniform reliable standard of radio audience measurement for individual stations and networks. Radio broadcasting grew at a rapid pace over a period of 25 years so that by 1945 the Government had licensed about 900 stations. From the very first a need was felt in the broadcasting industry for some sort of acceptable measurement whereby it could be determined how many people were listening to the radio signal of a given station. Competition between radio stations for advertising business became very keen. Stations and networks in the same area laid claim to the largest audience in

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the area, so that conflicting claims resulted. Different measurement techniques were used by various stations or by concerns which they hired. Due to inadequate preparation and poor formulae, the results were unreliable in many instances. The effect of this chaotic condition on advertisers was that they came to believe none of the conflicting claims of the stations. A good many advertisers refused to send programs into certain areas where the claims were in greatest conflict. This condition was harmful to the broadcasting industry which was in competition with such other advertising media as newspapers and billboards, which had authenticated means of proving their circulation.

The immediate background for petitioner's formation started in the summer of 1944 when the research committee of NAB agreed upon a technique for radio station measurement which it recommended to the broadcasting industry. In August 1944 the NAB convention adopted the program for station audience measurement recommended by the NAB research committee, authorized the NAB board to proceed with the formation of a bureau to carry it out, and to negotiate with AAAA and ANA to solicit their cooperation in the organization of such a bureau. Thereafter Hugh Feltis, chairman of NAB research committee, met with committees representing ANA and AAAA. These committees and later their respective associations, approved the plan proposed by NAB for a uniform method for determining station audiences and the establishment jointly by the three associations of a bureau to conduct such measurements based upon the number of radio families which listened to a station at least once during the weekly broadcast cycle, the information to be obtained by a controlled, sample, mailed-ballot research. Thereafter the presidents of the respective associations, acting for their associations, executed and filed petitioner's certificate of incorporation, and organization of petitioner was completed on or about January 1, 1945. Prior to the formation of petitioner, it was understood not only by the three associations but by the broadcasters themselves that the entire expense of the measurement project and operations would be borne through subscriptions by the latter.

In 1945 and 1946 BMB as well as NAB and various national advertisers and advertising agencies carried on an intensive sales campaign to enlist stations and networks to become subscribers in order to make the BMB surveys as valid as possible and give them the greatest possible integrity as a nationwide report. By January 1, 1946, out of a total of approximately 900 licensed stations in this Nation, 605 had become BMB subscribers. By June 30, 1947, the total number of subscribers to BMB was 711.

Study No. 1 was commenced by petitioner in March 1946. In this study 515,000 ballots were mailed to radio families by BMB, of

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which 310,000 were returned, bearing responses indicating the station listened to by such families once a week. The ballots were thereafter subjected to various mechanical and tabulating operations to show the total audiences of particular stations and networks, and the locations thereof. BMB did not perform certain mechanical operations itself, but "farmed" out to various commercial concerns the gathering of names, mailing of ballots, tabulating responses, and publication of the results, since it was not staffed to do such work. At this time, petitioner had only approximately 15 full-time employees. What petitioner paid out to such various concerns and what it paid its own employees out of the funds contributed by subscribers for their services in the performance of the functions for which petitioner was set up represented only cost and not compensation to it for such performance.

In August 1946 BMB published a report entitled "1946 Radio Families -- U. S. A." The data contained therein were compiled in order to estimate the number of families owning radio sets in each of the places to be reported upon by BMB throughout the country's 48 states and 3,000 counties. "Radio Families" listed by states, by counties and by municipalities, the total families in each of such localities, the number of families owning radios and the ratio thereof to total families. The information in question was necessary for the conduct of BMB Study No. 1, but was made available without charge to the radio and advertising industries, as well as to school and government bodies as a contribution to fundamental radio research.

The data indicated by the ballot responses in Study No. 1 were published by petitioner in three separate reports. In October 1946 BMB delivered to each subscribing station a "Station Audience Report." The report showed for each subscribing station, all counties and measured cities in which 10 per cent or more of the radio families listened to the station together with the size of its day and night audiences in such places, expressed numerically and as a percentage of total radio families. The density and location of the daytime and nighttime audiences of the station were also shown by daytime and nighttime maps which formed a part of each station report.

In February 1947 BMB issued a volume entitled "1946 Area Audience Report," which included a section for each of the 48 States and the District of Columbia and, in the Canadian supplement thereto, a section for each of the Canadian provinces. Each section included a map of the state or province geographically divided by counties and showing measured cities, and a list of the subscribing stations located in such state or province as of July 1, 1946. Each section

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listed alphabetically the counties and measured cities located therein; and opposite the name of each county or measured city was listed each station, irrespective of whether it was a subscriber or nonsubscriber to BMB, which was reported as having an audience of 10 per cent or more of the total radio families located in such county or city.

In 1947 BMB also published a "Network Area Report," based on Study No. 1, which showed the estimated size and location of the audiences of the four nationwide and various regional networks, i. e., the number and percentage of radio families that listened to the network in each area in which it was indicated that at least 10 per cent of the radio families listened to such network at least once a week, the data being reported separately for daytime and nighttime.

One copy of the 1946 Audience Area Report was distributed to each subscribing station as a part of its subscription. Copies thereof were distributed without charge to every AAAA agency and every branch office of such agency and to every advertiser member of the ANA which used radio advertising. After June 30, 1946, BMB also sold the Area Report to other interested parties at cost for 35 and to educational groups and libraries for 17.50. In addition to the fees paid by subscribing stations, the performance of Study No. 1 was further financed by a 75,000 loan from NAB and a 15,000 loan from AAAA.

BMB tabulated figures on non-subscriber stations in Study No. 1 and always stood ready to accept as a subscriber and to furnish its audience data to any station which paid the full amount of its subscription fee and conformed to its Rules and Regulations. Late subscribers to Study No. 1 were accepted on the same terms as original subscribers.

The subscription contracts used by BMB and each of the subscribing stations up until July 1, 1947, provided for payment of a fixed amount as a subscription fee for the performance of Study No. 1. The amount of the fee paid by each station was based on its net receipts in 1944. The contract also stated:

In consideration of Broadcast Measurement Bureau, Inc. undertaking a nationwide station audience study, Radio Station agrees to abide by the rules and regulations promulgated by Broadcast Measurement Bureau, Inc. and to pay to it, in accordance with the method indicated on the reverse side hereof, the sum of as and for the subscription fee of Station for the first study.

It is mutually understood and agreed that the amount of this subscription fee may be adjusted by Broadcast Measurement Bureau, Inc., upon the completion of the first study, on the basis of station audience, ballot mentions, net sales, or a combination of other like factors disclosed by said study. Should such adjustment result in an increase in the amount of this subscription fee, such increase shall not exceed 25 per cent.

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Essentially the same clauses were contained in subscription contracts between BMB and networks subscribing for the performance of Study No. 1.

With regard to the funds raised by these subscriptions BMB stated its position in a series of questions and answers in the January 1946 issue of "To Date" as follows:

Question: What happens if you don't spend all the money raised by subscriptions? Answer: BMB is a non-profit organization. All surpluses will be reapportioned to subscribers or can be left as credits to the subscribers toward the next study.

In another section of the same issue of "To Date" petitioner also stated:

* * * The Bureau has declared that at the completion of the first study made, it will adjust the amount of this subscription in accordance with station net audience, ballot mentions, net sales, or a combination of other pertinent factors. * * *

It was the understanding of both BMB and subscribers that the words "may be adjusted" in the contract meant there would be an adjustment either upward or downward at the conclusion of Study No. 1; that is, if the stations were charged more than the costs of the study came to, the entire excess would be returned by BMB, based on a formula which it would determine; there was no ceiling placed on such refund; if, however, the costs of Study No. 1 were more than the subscription fees, BMB had the right to make an added assessment on subscribers which was not to exceed 25 per cent of the original subscription fee. The termination date for Study No. 1 was left within the discretion of BMB as were the date for making refunds or credits and the determination of subscribers eligible for a refund or credit.

Beginning July 1, 1947, BMB entered into a different type of station and network subscription contracts. The new contracts did not call for the payment of a fixed fee for the performance of a single study, but rather provided for monthly payments of a fixed amount by subscribers for an indefinite period, during which the subscriber would be entitled to all the services and reports made by petitioner. The subscriber was permitted to cancel its subscription contract at any time after the contract had been in effect 1 year, provided it gave 90days' notice. The new subscription contract for stations stated in part:

8. At the time of each Final Industry Accounting the Bureau will examine all of its receipts and expenditures since the preceding Final Industry Accounting. If the Board finds that there is an excess of receipts such declared excess shall be returned to the subscribers, as a refund or credit as determined by the Board, on the basis of the subscriber's pro rata share of the total national survey and operating costs. The formula which will be used to determine a

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subscriber's pro rata share of said costs shall be applied uniformly to all station subscribers. The new subscription contract for networks read in part:

8. The Bureau agrees that at the time of any final Industry accounting the total subscription fees paid in by the Subscriber since the preceding final Industry accounting may be adjusted downward by the Bureau as a rebate or credit on the basis of the Subscriber's pro rata share of the total national survey and operating costs. The formula which will be used by the Bureau in order to determine a Subscriber's pro rata share of said costs shall be applied uniformly to all regional network subscribers.

During the fiscal years listed below, petitioner, which kept its books on the accrual basis, had the following receipts and disbursements:

                            Fiscal year     Fiscal year      Fiscal year

Petitioner's board of directors set June 30, 1947, as the close of Study No. 1. The 99,370.19 balance of subscription fees over Study No. 1 costs resulted from the fact that in drafting its contracts for Study No. 1, BMB was faced with two uncertainties, what the study was going to cost and how many stations would subscribe. On December 2, 1947, BMB's executive committee adopted the following resolution:

WHEREAS, the audit of the Bureau's accounts for its fiscal year ended June 30, 1947, discloses an excess of receipts over expenditures, from the date of organization to the close of such period, totaling 99,370.19, including cash and other assets remaining from subscriptions and other receipts in connection with Study No. 1; and

WHEREAS, under its subscription contracts, Broadcast Measurement Bureau, Inc., is liable to adjust the subscription fees by formula at the conclusion of Study No. 1, and such adjustment will involve refunds of over-payments by certain subscribers.

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NOW, THEREFORE, BE IT

RESOLVED, that the amount of such liability to subscribers be entered as a liability upon the Bureau's books of account, and be it further

RESOLVED, that effective immediately upon the conclusion of the final Industry Accounting for Study No. 1, and upon the determination of the Federal income tax liabilitiesof the Bureau, if any, the excess of receipts over expenditures remaining at such date be repaid by formula to subscribers of record as of June 30, 1947.

Upon the adoption of these resolutions an entry was made in petitioner's books of account showing a liability of 99,370.19 to subscribers to Study No. 1. Such amount was also entered as a liability in the balance sheets attached to the income tax returns filed by BMB in 1947. No previous accrual of a liability to subscribers for Study No. 1 had been made on BMB's books. Neither a date for making refunds or credits, nor the amounts thereof have been fixed by BMB, because its executive committee considered that if there were any tax liabilities arising out of the performance of Study No. 1, they would constitute an expense of such study which should be deducted in computing the amounts returnable to subscribers to Study No. 1.

Pending the determination of petitioner's income tax liability arising out of Study No. 1, BMB proposed to release the idle money totaling 99,370.19 in the fund for subscribers to Study No. 1 and make it available for use in Study No. 2, provided that a way be found to assure its restoration to the fund once the tax liability of petitioner was determined. To preserve this fund of 99,370.19 petitioner's subscribers were asked to waive their right to cancel their subscription contracts for future studies. Over 300 subscribers did so. As a further incentive for the release of the money in this fund for use in Study No. 2 pending determination of the tax question, NAB guaranteed payment of any tax liability falling on BMB. The 99,370.19 was then released for Study No. 2, which started early in 1949.

Petitioner was granted an extension of time until November 28, 1947, in which to file its income and declared value excess-profits tax returns for the fiscal years ended June 30, 1945 and 1946, its income tax return for the fiscal year ended June 30, 1947, and its excess profits tax returns for the fiscal years ended June 30, 1945 and 1946. A further extension of time until December 13, 1947, was granted. All of these returns were timely filed by petitioner except the excess profits tax returns which were received by the Bureau on December 24, 1947. On all the returns petitioner claimed that it was exempt from income and excess profits taxes under section 101 (7) and section 727 (a) of the Code, respectively.

In his notice of deficiency respondent determined that petitioner was not a tax-exempt corporation under sections 101 (7) and 727 (a).

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Respondent further determined that petitioner had taxable net income in the amount of 99,370.19 in the fiscal year ended June 30, 1946. This figure was computed by subtracting from gross receipts of 1,004,809.90 in that year both disbursements of 678,972 for Study No. 1 and a net operating loss deduction of 226,467.71, which constituted a carry-back of the unused portion of a net operating loss of 266,214.19 incurred by petitioner in the fiscal year ended June 30, 1947. In addition to determining deficiencies in petitioner's income tax, declared value excess-profits tax, and excess profits tax for the fiscal year ended June 30, 1946, respondent determined a 5 per cent delinquency penalty due to petitioner's failure to timely file the excess profits tax return for that year.

The subscription fees for Study No. 1 received by petitioner in the fiscal year ended June 30, 1946, constituted a fund in the nature of a trust fund in its hands for use by it only to the extent of the costs to it of Study No. 1 and the promulgation of the results thereof.

The failure of petitioner to file a timely excess profits tax return for the fiscal year ended June 30, 1946, was due to reasonable cause. OPINION

The first question for our determination is whether petitioner realized any income in the fiscal year ended June 30, 1946. It is respondent's contention that BMB realized net income in the amount of 99,370.19 in that year. This figure constitutes petitioner's gross receipts, which came totally from subscription fees in these 12 months, less both its disbursements in that year for Study No. 1 and a net operating loss carried back from the fiscal year ended June 30, 1947. Petitioner argues that it had no gross income in the year under consideration on the ground that it received the subscription fees for the specific purpose of performing Study No. 1, and pursuant to a contract with subscribing stations and networks whereby it was obligated to refund any unexpended portion of those fees following the close of Study No. 1. In petitioner's view by virtue of the subscription contracts it did not receive the subscription fees under a claim of right and furthermore it had a definite, unconditional obligation to repay or return the unexpended balance of the subscription fees. Respondent challenges petitioner's contentions for three principal reasons. First, he declares that BMB was not obligated under its contract with subscribers to refund the excess of subscription fees over expenses of Study No. 1. Secondly, assuming such a contractual liability, he asserts that the fees paid in the fiscal year ended June 30, 1946, were received under a claim of right and there was no definite, unconditional obligation to refund any part of them as of the close of the fiscal year in issue so that under the doctrine of both Commissioner

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v. Wilcox, 327 U.S. 404, and North American Oil Consolidated v. Burnet, 286 U.S. 417, these subscription fees constituted gross income. Finally respondent states that petitioner is not entitled to deduct the excess of subscription fees over disbursements existing at the close of the fiscal year ended June 30, 1946, since there was no liability to refund it at that time, and we may not look beyond events occurring in that year, citing Burnet v. Sanford & Brooks Co., 282 U.S. 359, and Security Flour Mills Co. v. Commissioner, 321 U.S. 281.

We are convinced that the subscription fees to Study No. 1 which petitioner received in the fiscal year ended June 30, 1946, were impressed with a trust upon their receipt to expend them solely to meet the costs of Study No. 1 so that they constituted a trust fund in its hands rather than income. Whether a trust existed with regard to the subscription fees received by BMB in the fiscal year ended June 30, 1946, depends upon the intent of the parties. No express words of trust were used, but none are necessary. Hibbard, Spencer, Bartlett & Co., 5 B. T. A. 464. Close analysis of the subscription contracts entered into between petitioner and subscribing stations and networks, the understanding of the parties with regard to these contracts, and the performance of petitioner in execution of these contracts persuades us that the parties intended that BMB receive the subscription fees in trust for the subscribers to carry out Study No. 1. We find a reasonable certainty as to the property, the objects and the beneficiaries, and in such a situation no particular form of words is necessary to create a trust. Chicago, Milwaukee & St. Paul Railway Co. v. Des Moines Union Railway Co., 254 U.S. 196.

The subscription contracts entered into between BMB and subscribing stations and networks for Study No. 1 expressly provide for subscription fees of a fixed amount for the performance of a single study. Use of these fees for any other corporate purposes including any future studies would be in direct violation of the contract terms. Thus petitioner was narrowly restricted in the use of the subscription fees.

Furthermore, we interpret the aforesaid subscription contracts to provide that petitioner was obligated to return to subscribers either as a refund or as a credit on future studies, any excess of fees over the actual costs of Study No. 1 after the conclusion of such study. These subscription contracts expressly state in part:

It is mutually understood and agreed that the amount of this subscription fee may be adjusted by Broadcast Measurement Bureau, Inc. upon the completion of the first study. * * *

Respondent contends that a refund or credit was not contemplated by the parties to the contract when they used the word "adjusted," and even assuming that such was their intent, the words "may be" are permissive

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in nature and therefore a refund of unexpended fees was not mandatory but within petitioner's discretion. This conclusion is borne out, he says, by the new station subscription contract form used after July 1, 1947, which provides that any excess "shall be returned to the subscribers as a refund or credit." He contends that the use of the word "refund" and the mandatory language in this later contract constituted a change in the obligations assumed by petitioner brought on by the fact that a revenue agent was examining petitioner's books at the time.

There can be little doubt that the first subscription contract used by BMB and its subscribers was not drafted in clear language, so that the phrase "may be adjusted" is capable of several interpretations, including that suggested by respondent. In determining the true meaning of this phrase, we find little help from an examination of the contracts used by BMB and its subscribers after June 30, 1947. We note that the language of clause 8 of such subscription contracts with stations and the language of clause 8 of such subscription contracts with networks, while dealing with the same subject matter, contrast sharply in their treatment of a refund or credit following each final industry accounting. It is true the language in the subscription contracts with stations has the effect of making a refund or credit mandatory. But clause 8 of the subscription contract with networks, states in part:

The Bureau agrees that at the time of any final Industry accounting the total subscription fees paid in by the Subscriber since the preceding final Industry accounting may be adjusted downward by the Bureau as a rebate or credit * * *

This language on its face is clearly permissive in nature and would not impose a definite obligation on petitioner to return unexpended subscription fees in the form of a refund or credit. Nevertheless we can find no evidence which would lead us to believe that BMB intended a different treatment of excess subscription fees as between stations and networks. Therefore we hesitate to draw any conclusion from a reference to the later contracts.

We prefer to determine the true meaning of the phrase "may be adjusted," as used in the contracts prior to July 1, 1947, from the testimony of representatives of the contracting parties, and from written evidence introduced at the hearing which was contemporaneous with the signing of these contracts. The testimony of witnesses representing both subscribers and BMB is unanimous that it was their understanding that BMB was obligated by the contract to return either as a refund or as a credit on future research studies, any unexpended fees following the close of Study No. 1. Furthermore, in its publication "To Date," distributed to stations and networks in 1946, BMB made statements set forth in our findings, whose clear

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import is that BMB considered itself bound to return to subscribers as a refund or credit any excess of fees over expenses after the close of Study No. 1.

Moreover, this interpretation of the contract phrase seems entirely reasonable to us. There is a plausible explanation for the use of the words "may be adjusted" other than that BMB had a discretion whether to return unexpended receipts. The fees charged were calculated to cover the costs of Study No. 1, yet due to the uncertainty regarding both the total costs and the total number of stations and networks which would subscribe, it was possible that the fees would either exceed or be less than the costs. In such a case an adjustment would be necessary, but this necessity was not certain. Turning to the word "adjusted," clearly it is susceptible of meaning either an upward or downward revision of the fees paid in. That a refund or credit was contemplated as a possibility by the parties as well as an additional levy on subscribing stations is borne out by a succeeding phrase which states "Should such adjustment result in an increase in the amount of this subscription fee * * *." Furthermore it is difficult to believe subscribers would be willing to enter into a contract whereby BMB had the right to ask additional payments up to 25 per cent of the original fees to meet Study No. 1 expenses, and also had a discretion whether to return any unexpended fees. The fact that so many subscribers voluntarily entered into such a contract is a strong indication of a mutual understanding that a refund or credit was just as much an obligation of petitioner, if expenses were less than fees paid in, as it was a right of petitioner to make a further assessment from its subscribers, if subscription fees failed to meet the cost of Study No. 1. We therefore conclude that under these contracts it was mandatory that BMB return to subscribers the entire amount of any excess of subscription fees over the costs of Study No. 1. The fact that petitioner retained the right to determine the date for the conclusion of Study No. 1 and the date of returning any unexpended fees as well as the right to determine which subscribers would be eligible for a refund or credit in no way detracts from that obligation.

It is thus clear that these subscription contracts were not contracts for the performance of services by BMB at a profit. BMB could only expend the subscription fees to the extent necessary to meet the costs of Study No. 1. Furthermore the mechanical services necessary for performance of Study No. 1 were farmed out by petitioner. It was the understanding of the members of BMB and subscribers alike that the latter would bear the expenses of this study, but nowhere is there any evidence that petitioner was to receive any compensation for the performance of Study No. 1. In this connection we note the provision in BMB's charter that it is a non-profit concern and that there shall be no capital stock. No capital stock has ever been issued. Moreover by

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the very nature of its contractual undertaking it was settled from the outset that petitioner would receive no gain regardless of the fact that it would not be known until the close of Study No. 1 whether subscribers would receive a refund or credit or whether they would be asked to pay over additional sums to meet the costs of Study No. 1. Thus in no sense was petitioner selling services to subscribers. It performed services as the agency of the subscribers at the latter's expense confined to the cost to petitioner in such performance. Petitioner got no compensation for its services.

The terms of the subscription contracts and the understanding of the parties as to their meaning make it clear that BMB was merely a designated fiduciary empowered by subscribers to discharge the specific function of performing Study No. 1 with funds provided entirely by the latter, but any excess fees had to be returned after the conclusion of the study.

In the performance of its subscription contracts BMB conducted itself as a fiduciary empowered to utilize funds for a specific purpose. It compiled broadcast audience data, prepared and distributed surveys to subscribers, and shortly after the close of Study No. 1 on June 30, 1947, it issued a financial accounting to subscribers. In December 1947 petitioner recognized its contractual obligation to return to subscribers the entire excess of subscription fees over the costs of Study No. 1 by a resolution of its board of directors and by entries on its books setting forth a liability of 99,370.19 to subscribers to Study No. 1. The fact that no refund or credit has as yet been made does not derogate from petitioner's recognition of its obligation to do so. It has delayed action until its income tax liability could be determined, considering that any taxes found due were a proper item of expense for Study No. 1.

We find further support for our conclusion that the subscription fees for Study No. 1 constituted a trust fund in the fact that late subscribers to the study were given no financial advantage over those who subscribed at the start. The late subscribers were required to contribute the full amount of their subscription fees.

A further indication that the subscription fees for Study No. 1 constituted a fund in the nature of a trust fund is found in the fact that subscribers to later studies were not allowed to benefit from the excess of fees contributed for Study No. 1 over the costs thereof. This excess of 99,370.19 was not released for use in Study No. 2, pending determination of petitioner's tax liability, until a sufficient number of subscribers to later studies waived their contract cancellation privileges to insure that receipts would be available to replace and preserve this amount in its entirety for the benefit of subscribers to Study No. 1.

It may be argued that the subscription fees to Study No. 1 did not constitute a trust res due to the fact these funds were never segregated

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in a separate bank account from sales receipts received in 1947, loans received by petitioner, and receipts from subscriptions to later studies. But such a commingling of the subscription fees for Study No. 1 with other receipts does not destroy their identity as a trust fund. Seven-Up Co., 14 T. C. 965. Petitioner's books showed the total amount of such fees it received and the unexpended balance thereof at all times. Any improper use of the unexpended balance of these fees by their custodian could have been enjoined by the subscribers to Study No. 1 by a suit in equity. Portland Cremation Association v. Commissioner, 31 F. 2d 843.

In view of all the above circumstances we have found as a fact and now hold that the subscription fees received by BMB for Study No. 1 constituted a fund in the nature of a trust fund in its hands for use by it only to the extent of the cost to it of such study and the promulgation of the results thereof. See Seven-Up Co., supra.

It is thus clear these subscription fees received in the fiscal year ended June 30, 1946, did not constitute gross income to petitioner. Applying the tests laid down by North American Oil Consolidated v. Burnet, supra, BMB did not receive earnings under a claim of right and without restriction as to their disposition in that year. It did not receive the subscription fees as its own property but rather as burdened with the obligation to use them to meet the costs of Study No. 1 and return any excess. While at the close of the fiscal year ended June 30, 1946, there was no definite, unconditional obligation on BMB to refund any part of the subscription fees, since the study had not closed, yet there was always an absolute obligation on petitioner to return any part of the fees not needed to meet the costs of the study. We have previously noted that there was no possibility of gain or profit to petitioner from the receipt of these fees. The Supreme Court in Commissioner v. Wilcox, supra, declared that the possibility of gain or profit was the very essence of taxable income. Therefore we conclude and hold that petitioner realized no gross income and thus no net income in the taxable year ended June 30, 1946.

We do not consider our holding to conflict with our decision in Clay Sewer Pipe Association, Inc., 1 T. C. 529, affd., 139 F. 2d 130, wherein we held that the excess of payments made to the taxpayer corporation by its stockholder-subscribers over the corporation's expenses at the close of the taxable year in dispute constituted taxable income. The taxpayer in that case impliedly conceded that the payments thus received were gross income to it except for the portion thereof which exceeded its corporate expenditures. Furthermore such payments received by that taxpayer could be used in its general business so that there was not such a restriction on its use of fees from its stockholders as would constitute them a trust fund. Thus the

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facts of that case are readily distinguished from those of the present case.

Our decision in the recent case of Krim-Ko Corporation, 16 T. C. 31, is similarly distinguishable on the facts. Taxpayer there was a profit-making concern. It had not undertaken to return the unexpended sums it received from some of its customers for the purpose of furnishing designated advertising materials and services. Its agreements with customers did not place any restriction on the use of any amounts received by it for advertising, nor indicate in any way it was to act as a trustee.

In view of our holding on the first question it is unnecessary for us to determine the second question, whether BMB was exempt from Federal income and excess profits taxes under sections 101 (7) and 727 (a) of the Code, respectively, in the fiscal year ended June 30, 1946.

We pass to the third question for our determination, whether petitioner was liable for a 5 per cent delinquency penalty under section 3612 (d) (1) of the Code for failure to timely file its excess profits tax return for the fiscal year ended June 30, 1946. In view of our prior holding that petitioner received no gross income in this period, it follows thatpetitioner realized no excess profits income that year. By virtue of section 729 (b) (2) of the Code BMB was not required to file an excess profits tax return under these circumstances. We therefore hold that respondent erred in determining a 5 per cent penalty against petitioner for failure to timely file such a return. Decision will be entered for petitioner. TURNER Murdock, concurring: The result in this case would be right even assuming that the petitioner was in position to realize income from the gross amounts which it received from subscriptions because such income could be computed only upon a completed contract basis, the contract was not completed in the fiscal year 1946 and, therefore, the excess of receipts over expenditures for the 3-year period would not be income for the middle year.

Turner, J., concurring: While I agree with the result in this case, I am unable to agree that a trust relationship existed between the petitioner and its members and that the excess of the amounts paid by contributing members, over and above the petitioner's costs of operations, constituted a trust fund. As I read the facts, the operations

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of the petitioner and the use by it in those operations of the moneys received were not intended to be subject to the restrictions and controls applicable to trusts and trustees, and there is nothing in the actual operations from which any implications to that effect are justified. The injection of trust law not only is not needed for the disposition of this case, but, in future cases, where the result must turn wholly upon the existence or non-existence of trusts, the pronouncements here can only cause trouble and confusion.

The relationship between the petitioner and its members was simply a contract relationship. There was no net income, and therefore no deficiency in income tax, merely because there was always a valid and binding obligation requiring the petitioner to repay to dues-paying members any and all sums not required in the making of Study No. 1. The situation here, in many respects, is similar to that which existed in Uniform Printing & Supply Co. v. Commissioner, 88 F. 2d 75.

Due to possible differences in the relationship between the members themselves and between members and the petitioner with respect to the financing of Study No. 2, it is possible a different result might be required. But that is another matter, and is not involved in this case.

¹ Net operating loss.