## Facts

- Seven-Up Co., a Missouri corporation, manufactured and sold concentrated “7-Up” extract and franchised independent bottlers to produce and sell bottled 7-Up in assigned territories.
- During World War II, bottlers faced advertising constraints; Seven-Up proposed a coordinated national advertising program to support product sales.
- Franchised bottlers agreed to pay specified amounts into a national advertising fund administered by Seven-Up to finance national advertising.
- Seven-Up accounted for the bottlers’ payments as a separate advertising fund dedicated to national advertising and did not report the receipts as gross income.
- The Commissioner determined deficiencies in Seven-Up’s declared value excess profits tax and excess profits tax for 1943 and 1944, treating the bottlers’ payments (including any excess over current advertising expenditures) as taxable income.
- Seven-Up petitioned the Tax Court for redetermination and also sought relief under Internal Revenue Code §§ 736(b) and 721.

## Issues

1. Whether bottlers’ payments into the national advertising fund were taxable income to Seven-Up.
2. Whether Seven-Up was entitled to excess profits tax relief under I.R.C. § 736(b).
3. Whether Seven-Up was entitled to relief under I.R.C. § 721 based on “net abnormal income” attributable to other years.

## Decision

- The Tax Court held that the bottlers’ payments were not taxable income to Seven-Up.
- The court found the payments were received subject to an enforceable obligation to spend them for national advertising and were held as a trust/agency fund administered for the bottlers’ benefit.
- Because Seven-Up did not realize gain or profit from receiving restricted funds it could not use for its own purposes, any unexpended balance was not includible in income.
- The court rejected Seven-Up’s claims for relief under §§ 736(b) and 721.
- Decision was to be entered under Rule 50 computations consistent with the court’s holdings.

## Legal Principles

- Amounts received subject to a binding restriction that they be used only for a specified purpose, and held for others as trustee/agent rather than as beneficial owner, are not includible in the recipient’s gross income.
- A “gross-income-then-deduction” approach is improper where the recipient lacks beneficial ownership and functions as a conduit administering restricted funds.
- Claims for excess profits tax relief under I.R.C. §§ 736(b) and 721 require proof of statutory conditions beyond routine business effects; failure to establish those conditions defeats relief.

## Conclusion

The Tax Court treated bottlers’ contributions to Seven-Up’s national advertising fund as restricted trust/agency funds rather than taxable receipts, excluding them from income, while denying Seven-Up additional excess profits tax relief under §§ 736(b) and 721.


Seven-Up Co. v. Commissioner, 14 T.C. 965 (1950)