Capital deposits under membership contracts were not taxable income where the association retained a corresponding liability.

Receipts under the membership contracts were characterised by their true legal effect, not their form. Because the sums were deposited with the association, absolute ownership arose only if a member left without a satisfactory successor, and the association remained under a corresponding liability in the meantime, the payments were treated as capital funds received for a capital purpose rather than profits from business. On that basis, the amounts were not taxable income and were not assessable to tax.

---

---

Issues: Whether the sums of $500 received from members under the membership contracts constituted taxable income of the association or capital deposits not assessable as income.

Analysis: The receipts were examined according to the true legal effect of the contracts and not their form. The contractual terms showed that the payments were deposited with the association, that absolute ownership would arise only if the member left and no satisfactory successor was found, and that until then the association carried a corresponding liability. The sums were therefore treated as funds received for a capital purpose and not as profits derived from the business.

Conclusion: The $40,500 was not income of the appellant and was not assessable to tax.

---