*145 Decision will be entered for the respondent.
Receipt of share of insurance commissions by petitioner estate pursuant to contract with general brokerage firm providing for such payments on business written for decedent's former clients, held, for tax purposes, to represent proceeds of decedent's personal services during his lifetime or agreements not to compete and, as such, taxable as ordinary income.
*99 By this proceeding petitioner challenges a deficiency in income tax for the taxable period November 10, 1941, to September 30, 1942, in the amount of $ 375.20. In*146 its petition petitioner claims an overpayment of $ 360.
The question to be determined is the character of receipts by petitioner during the taxable period, arising from participation in insurance commission.
*100 FINDINGS OF FACT.
Petitioner, estate of decedent Thomas F. Remington, by the duly qualified executrix, filed the income tax return for the estate for the taxable period with the collector of internal revenue for the second district of New York. Decedent's will was probated January 14, 1942.
Decedent, who died November 10, 1941, was a licensed insurance broker in New York City for the ten years preceding his death.
No person can act as an insurance broker in New York State without a license issued to him by the superintendent of insurance. A licensed insurance broker is not an agent of insurance companies, but represents the persons for whom insurance is procured. After ascertaining the needs of his customers, an insurance broker obtains the appropriate insurance from various companies; he helps collect losses, modifies policies, and affords the customer the benefit of his special knowledge in the insurance field. A broker receives his compensation through commissions*147 or brokerage in the form of payment by the insuring company of a share in the premiums paid it for the insurance issued. General insurance -- other than life insurance -- gives protection for fixed periods of usually three or five years, and the broker's compensation for arranging such policies is a percentage of the insured's total premium for the policy and varies according to the type of insurance and other elements of risk and expense involved for the issuing company. When a life insurance policy is written the insuring company pays the broker who arranged the policy 50 per cent of the premium received from the insured for the first year, and in the ensuing years the company pays the broker 5 per cent of the annual premium by the insured for a period up to nine years.
It is customary for an insurance broker to assemble records as to the insurance needs of his customers and related information. A broker's service includes the preparation of new policies on the expiration of old ones and consideration of possible alterations due to changed conditions.
It is the general understanding in the trade that the commissions earned by an insurance broker may be shared only with other *148 licensed brokers.
An insurance broker establishes a going business of service to customers which has a "good will," due to the tendency of satisfied customers to ask or permit the same broker to write all the new insurance the customer desires.
A general custom exists in New York City whereby on the death of an insurance broker his "good will" and business as "a going concern" is carried on by someone to whom it is sold by the estate. *101 There are two customary methods of payment for the business, records, and "good will" of an insurance broker:
(1) An agreement to pay a percentage -- commonly one-third to one-half -- of the total brokerage commissions accruing from new insurance arranged by the purchaser for decedent's customers over a period of five to six years after his death; or
(2) The payment of a fixed price in full, generally determined by computing the average commissions earned by a decedent in a period of three years before his death, the purchaser paying between 150 and 250 per cent of such average commissions.
Brown, Crosby & Co., hereinafter sometimes referred to as Brown Crosby, on and before May 1, 1937, was engaged in an insurance brokerage business in New*149 York City. It maintained an organization, including specialists and experts in insurance matters. On May 1, 1937, decedent was employed by Brown Crosby at a salary of $ 10,000 per year, and continued at this salary until about December 31, 1940. From May 1937 through 1940, decedent produced commissions and received salaries as follows:
| Year | Commission | Salary |
| 1937 | $ 5,139.90 | $ 5,666.56 |
| 1938 | 17,015.01 | 10,500.00 |
| 1939 | 10,606.39 | 10,000.00 |
| 1940 | 8,629.22 | 10,000.00 |
On January 1, 1941, decedent's salary was discontinued and thereafter he was compensated by receipt of payment of one-half the commissions received from customers which he procured or brought to the office of Brown Crosby. About October 15, 1941, decedent left Brown Crosby and associated with Fish & Marvin, another firm of insurance brokers at No. 522 Fifth Avenue.
By reason of friendship with an executive of the Statler chain of hotels, in May 1938 decedent brought about the employment of Brown Crosby as insurance broker for all Statler hotels.
The commissions earned through decedent from January 1 to October 15, 1941, when decedent severed his connection with Brown Crosby, on insurance written by Brown*150 Crosby totaled $ 13,894.22 from Statler insurance and $ 3,136.82 from other customers' insurance. One-half of these amounts, or $ 8,515.52, was paid to decedent.
The size and intricacy of the insurance requirements of Statler for complete service required the availability of experts in the various fields of insurance. The services rendered by Brown Crosby from 1938 on had been completely satisfactory to Statler, and by January 1941 Statler was not dealing exclusively through decedent, but extensively with the brokerage house itself. By 1941 Brown Crosby had built up complete files and records necessary to service the Statler*102 account. So long as Brown Crosby rendered efficient service to Statler, it would have been difficult for decedent or his estate to take the Statler business away from Brown Crosby. Decedent never told his wife that he could control the Statler account.
Under date of October 14, 1941, Henry P. Marshall, as president of Brown Crosby, wrote to decedent:
As requested, I am writing to confirm our agreement as regards the Statler account after you have left us.
We will pay you one-half of the net brokerage commissions received from the account while we*151 continue to handle the business and unless otherwise instructed by the Statler Management.
In the event of your death we will pay the same brokerage to your estate for a period of six years.
You are of course to maintain any licenses which may be required.
Statler was advised of the arrangement provided in the above quoted letter.
When decedent left Brown Crosby he moved all of the accounts of his other customers uptown with him and Brown Crosby made no attempt to solicit them. It was shortly after decedent moved his office that he died. At the time of his death, decedent was heavily in debt and insolvent.
Brown Crosby, on decedent's death, recognized its liability to his estate under the letter of October 14, 1941. They considered the letter an agreement and an expression of intent, and they fully intended to carry it out.
Under date of January 17, 1942, petitioner wrote Brown Crosby that decedent's will had been probated and she was designated to act as executrix. She further wrote as follows:
Accordingly, I am writing to confirm our arrangements for purchase by you of Tom's insurance brokerage business. You desire to purchase the business flowing from his customers subsequent*152 to the date of his death, and as Executrix I agree to sell it to you.
The purchase covers all new business written for the Hotel Statler chain and all business for any other person or concern for whom my husband acted as broker. You agree to pay as the purchase price therefor one-half of the net commissions received from Tom's accounts in connection with all insurance arranged for each and every one of these accounts during the entire period ending December 31, 1947.
The records, as to decedent's customers (other than the Statler account), were turned over by petitioner to Brown Crosby, which has continued to act as broker for such customers unless the business was taken elsewhere.
The letter of January 17, 1942, referred not only to decedent's going business, but also to the Statler account, because Brown Crosby felt this arrangement necessary in order to avoid an apparent violation of the New York rule against dividing commissions with nonlicensed persons.
*103 The commissions earned by Brown Crosby from Statler business from 1942 through 1946 were as follows:
| 1942 | $ 8,827.16 |
| 1943 | 17,723.86 |
| 1944 | 14,849.32 |
| 1945 | 8,058.42 |
| 1946 | 10,222.54 |
| Total | 59,681.30 |
Brown*153 Crosby has earned commissions from new insurance for decedent's customers, other than Statler, as follows:
| 1942 | $ 1,624.72 |
| 1943 | 1,066.18 |
| 1944 | 1,289.26 |
| 1945 | 1,244.28 |
| 1946 | 853.30 |
| Total | 6,077.74 |
Brown Crosby paid petitioner by December 31, 1946, $ 29,840.65 on account of Statler insurance and $ 3,038.86 on account of other insurance.
Decedent was overdrawn in his account with Brown Crosby at the time of his death and no payments were made by Brown Crosby to decedent after October 14, 1941, or to petitioner until February 1942. The amounts paid were one-half of the total commissions received by Brown Crosby from accounts originally obtained by decedent. These amounts were carried on the books of Brown Crosby in the name of the estate and were debited to "brokerage."
The books of Brown Crosby do not reflect the acquisition by that company of a capital asset as a result of the acquisition of the Statler or any other accounts from decedent or his estate. The minutes of the meetings of the board of directors of Brown Crosby do not contain any authorization for purchasing the Statler Co. account.
In the taxable period petitioner received $ 3,662.02 commissions on Statler*154 account renewals from Brown Crosby. On its income tax return petitioner treated these funds as long term capital gains on the sale of a capital asset and reported one-half of this amount, or $ 1,831.01, on the return. During the same period renewals from non-Statler accounts were received in the amount of $ 923.39. These amounts were not reported on the income tax return of petitioner. Respondent's determination included both sums in full in petitioner's gross income for the taxable period.
Attached to the return for petitioner covering the period November *104 10, 1941, through September 30, 1942, was a general statement in which the following appears:
* * * His [decedent's] license as a broker terminated with his death and his estate was not under New York law permitted to carry on any insurance business. Under New York law, however, his widow was entitled to a temporary license as insurance broker, which she took out. By passing certain tests she could have obtained a permanent license and could then have acted as insurance broker for any customers of Mr. Remington who desired to continue placing their insurance through her -- also for others. In lieu of seeking such*155 a license and embarking in the business of insurance broker, Mrs. Remington negotiated a separate agreement with Brown, Crosby & Co. whereby that firm agreed to handle all other brokerage accounts that Mrs. Remington could direct to them for a period of six years, paying over one-half the resulting broker's commissions.
There also appeared, typed in at the bottom of page 1 of the return, the following:
Consent is hereby given by Elizabeth M. Remington, individually and as executrix, that the taxes of this Estate, also her own, be computed under the provisions of section 126 (g) of the Code; this consent shall automatically be deemed amended to conform with any provisions of regulations adopted by the Commissioner under said sub-section (g).
OPINION.
Section 134 of the 1942 Act, reflected in Internal Revenue Code, section 126, 1 appears to be pertinent here. Upon the return filed for the period in question petitioner, in order to qualify under the new law, gave the required "full consent" to make the amendments retroactively applicable. Under these provisions the character of receipts by the estate is to be determined by what they would have been in the hands of decedent. If the*156 payments of a portion of the commissions on insurance had been made to decedent, they could have been nothing but income. Indeed, there is no suggestion that while *105 decedent lived, and after he had severed his connection with Brown Crosby, the commissions would have constituted anything but income to him. Such a view of the case could be dispositive of it.
*157 But if it be thought that the 1942 amendments, which the parties do not discuss, are inapplicable for any reason, we must conclude that the receipts constituted ordinary income in any event.
Petitioner's position that the receipts were exempt as property received by devise or inheritance can not be sustained. The question is not what character a capital asset assumes in the hands of decedent's legatees. See Helvering v. Enright, 312 U.S. 636">312 U.S. 636. Nor can they be treated as payments on account of the sale of a capital asset, since there was no capital asset to dispose of. See Bull v. United States, 295 U.S. 247">295 U.S. 247. In the latter case the provision was that in the event a partner died the survivors should continue the business for one year, and the survivors' estate should "receive the same interest, or participate in the losses to the same extent" as the deceased would if living, "based on the usual method of ascertaining what the said profits or losses would be." The enterprise required no capital and none was contributed; it was stated that, except for a share in profits to the date of his death, decedent "had no other*158 accumulated profits and no interest in any tangible property belonging to the firm." The Supreme Court held that the payments of the partnership income earned after the death of the deceased partner were income to the estate. In considering whether the payment of income earned after the death of the partner was consideration for the purchase by the survivors of the decedent's interest in the partnership, the Court said:
* * * Where the effect of the contract is that the deceased partner's estate shall leave his interest in the business and the surviving partners shall acquire it by payments to the estate, the transaction is a sale, and payments made to the estate are for the account of the survivors. It results that the surviving partners are taxable upon firm profits and the estate is not. Here, however, the survivors have purchased nothing belonging to the decedent, who had made no investment in the business and owned no tangible property connected with it. The portion of the profits paid his estate was therefore income and not corpus; and this is so whether we consider the executor a member of the old firm for the remainder of the year, or hold that the estate became a partner*159 in a new association formed upon the decedent's demise.
* * * *
Since the firm was a personal service concern and no tangible property was involved in its transactions, if it had not been for the terms of the agreement, no accounting would have ever been made upon Bull's death for anything other than his share of profits accrued to the date of his death * * * and this would have been the only amount to be included in his estate in connection with his membership in the firm. * * *
The case at bar is substantially similar, and in our view governed by the Bull case. Decedent had no investment in the business, and the payments to petitioner were payments of income. If the mere *106 transfer from decedent to his estate at death were sufficient to create a basis for the value of his business, the same would have been true in the Bull case. As the Supreme Court observes in Bull:
* * * Had he lived, his share of profits would have been income. By the terms of the agreement his estate was to sustain precisely the same status quoad the firm as he had, in respect of profits and losses. Since the partners contributed no capital and owned no tangible property connected with*160 the business, there is no justification for characterizing the right of a living partner to his share of earnings as part of his capital; and if the right was not capital to him, it could not be such to his estate. Let us suppose Bull had, while living, assigned his interest in the firm, with his partners' consent, to a third person for a valuable consideration, and in making return of income had valued or capitalized the right to profits which he had thus sold, had deducted such valuation from the consideration received, and returned the difference only as gain. We think the Commissioner would rightly have insisted that the entire amount received was income.
In both the Bull case and the case at bar, the future income was contingent in the sense that it had not been actually received, but the same can be said of many anticipatory assignments of income. Cf. Lucas v. Earl, 281 U.S. 111">281 U.S. 111, and Helvering v. Eubank, 311 U.S. 122">311 U.S. 122.
A consideration of the letters relied upon by petitioner does not lead to a contrary result. The letter from Brown Crosby of October 14, 1941, to decedent before his death is clearly *161 no attempt to dispose of the business by sale or any other means; it is an arrangement looking to the division of income, including the division to be made after decedent's death, and is strikingly comparable to the agreement in the Bull case. The arrangement set forth in petitioner's letter of January 17, 1942, to Brown Crosby, confirmed by them, is of similar import, except that it is couched in terms of "purchase" and "sale." Whether this is satisfactory to meet the asserted restriction of New York law relating to the splitting of commissions with parties not holding brokerage licenses, we are not called upon to decide. We are, however, convinced that it can not serve to transform an item of income into any other type of receipt. See Irwin v. Gavit, 268 U.S. 161">268 U.S. 161. Disposition of an issue of Federal tax law can not be dependent upon such circumstance. See Estate of Mildred K. Hyde, 42 B. T. A. 738, 746. Any attempted disposition would have been nothing more than an ineffectual assignment of future income. Helvering v. Eubank, supra; cf. Louis Karsch, 8 T. C. 1327.*162
If the commissions were not wholly earned by decedent's efforts prior to his death, the most that can be said is that the payments were made under agreements not to compete, by decedent himself as to the Statler business2 and by petitioner as to the balance, there being *107 some reference in the record 3 to the executrix's abandonment of any purpose to develop her temporary broker's license into a permanent one upon concluding her agreement with Brown Crosby. Agreements not to compete give rise only to ordinary income. Estate of Mildred K. Hyde, supra.
Estate of George R. Nutter, 46 B. T. A. 35; affirmed sub nom. McClennen v. Commissioner (C. C. A., 1st Cir.), 131 Fed. (2d) 165,*163 the principal authority relied upon by petitioner, is an estate tax case, and is further distinguishable here upon the similar grounds used to distinguish it in Charles F. Coates, 7 T. C. 125. As in Coates, we do not have here any interest in a business possessed of tangible assets which would permit us to regard such an interest as a capital asset. And in that case it was recognized that an estate might be taxable on a right to receive income, acquired as part of the estate, and then on that income when received. See Bull v. United States, supra; Enright v. United States, supra, footnote 9. And we have previously indicated our view that petitioner's letter of January 17, 1942, did not evidence any real intent to sell the business.
Petitioner's efforts to distinguish the kind of insurance dealt with here from life insurance do not persuade us that decedent's personal services were any less accountable for this income. Having brought the client to his employer, he was undoubtedly entitled to any renewal commissions on that business, notwithstanding that, unlike life insurance, the renewals would constitute*164 new policies. Any payments received, by him or his estate, and however long delayed, were the fruits of his efforts and nothing else.
Estate of F. S. Bell, 46 B. T. A. 484; reversed (C. C. A., 8th Cir.), 137 Fed. (2d) 454, and Beulah Eaton McAllister, 5 T.C. 714">5 T. C. 714; reversed (C. C. A., 2d Cir.), 157 Fed. (2d) 235; certiorari denied, 330 U.S. 826">330 U.S. 826, are inapplicable. They represent in fact the converse of the present situation. There, no one questioned that receipts by the original life tenant would have been ordinary income when received. It was only because there was a "sale" of the right to receive such future payments that the controversy arose. Here, the right to receive the payments in question was never disposed of. The payments would have been income to decedent had he lived, and hence retain the character of income after his death. Bull v. United States, supra;Helvering v. Enright, supra.What was income to begin with was never converted into capital by a lump sum*165 disposition as in McAllister, supra, and Bell, supra.
Decision will be entered for the respondent.
Footnotes
1. SEC. 126. INCOME IN RESPECT OF DECEDENTS.
(a) Inclusion in Gross Income. --
(1) General Rule. -- The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period shall be included in the gross income, for the taxable year when received, of:
(A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent;
(B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or
(C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.
* * * *
(3) Character of income determined by reference to decedent. -- The right, described in paragraph (1), to receive an amount shall be treated, in the hands of the estate of the decedent or any person who acquired such right by reason of the death of the decedent, or by bequest, devise, or inheritance from the decedent, as if it had been acquired by the estate of such person in the transaction by which the decedent acquired such right; and the amount includible in gross income under paragraph (1) or (2) shall be considered in the hands of the estate or such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount.↩
2. As suggested in petitioner's brief: "It seems probable that if Mr. Remington had tried to take away the Statler account he would have failed; but, he had the right to try, and abstention from trying was legal consideration for Brown Crosby's promises * * *."↩
3. See findings of fact, last two paragraphs.↩