*108 Decision will be entered for the respondent in Docket No. 23536.
Decision will be entered under Rule 50 in Docket No. 23537.
Petitioner Foster G. Beamsley and one R. H. Johnson were officers in a corporation engaged in the insurance brokerage business, the stock of which was held equally by their families. Pursuant to contract, petitioner's family withdrew completely from the corporation; inter alia, petitioner resigned as officer, and his wife and daughter surrendered the stock held by them. As part of the consideration, certain payments equal to one-half the gross commissions received on insurance placed by the corporation for one of its principal clients, National City Lines, Inc., were made annually to petitioner's wife. Petitioner was a vice president of National City Lines, Inc. Held, these payments did not constitute part consideration for the surrender of the stock by petitioner's wife; they were made for Mr. Beamsley's influence or assistance, real or supposed, in assuring the continuance of National City Lines, Inc., as a client of the corporation, and are therefore taxable to him rather than to his wife.
*989 In these proceedings, which were consolidated for hearing and decision, the Commissioner determined the following deficiencies in income tax:
| Foster G. | Inez L. | |
| Year | Beamsley | Beamsley |
| 1945 | $ 11,449.68 | $ 5,195.22 |
| 1946 | 8,599.09 | 2,551.21 |
Of the adjustments in petitioners' tax liability made by the Commissioner which are responsible for these deficiencies, only one is in controversy, and concerns certain payments made to Inez L. Beamsley in 1945 and 1946. The questions are, first, whether, under section 22 (a) of the Internal Revenue Code, these payments are taxable to Foster G. Beamsley rather than to Inez L. Beamsley; and, secondly, if not, whether they are*110 taxable to the latter as capital gain rather than ordinary income.
FINDINGS OF FACT.
The stipulation and annexed exhibits filed by the parties are incorporated herein, and the facts so stipulated are adopted as part of these findings.
Petitioners Foster G. Beamsley and Inez L. Beamsley are husband and wife, residing at Kenilworth, Illinois. For the years in issue, they filed separate tax returns with the collector of internal revenue for the first district of Illinois.
In 1917 and for some years thereafter Mr. Beamsley served as an executive in a state bank at Duluth, Minnesota, which, after a number of years, became a national bank. In connection with this change, the bank divested itself of an insurance brokerage business that it had been conducting. A separate corporation was formed about 1927, called National Duluth Agency, Inc., to which the bank's insurance *990 business was transferred. Operation of National Duluth Agency, Inc., was put under R. H. Johnson (hereinafter also referred to as "Johnson"), who acquired part of the stock in this enterprise, the remainder of the stock being owned by stockholders of the bank.
At about the same time, Mr. Beamsley also was in*111 charge of a finance company operated by the same bank. It was called Transportation Securities Company, and financed bus equipment purchases. In about 1930, this finance business was moved to Chicago, where it was expanded and carried on under the name of Transportation Credit Corporation. Mr. Beamsley likewise went to Chicago, continuing to supervise this business.
At about the time the finance business was moved to Chicago, liquidation was begun of National Duluth Agency, Inc. Part of is assets were bought for $ 8,000 by Transportation Underwriters Agency, Inc. (hereinafter referred to as "Underwriters"), a corporation organized in 1931 under the laws of Illinois. The remaining assets were sold to another Duluth insurance agency for about $ 7,500.
The authorized capital stock of Underwriters at the time of its incorporation was 2,000 shares of no par common stock, of which 1,600 shares were issued, at $ 5 per share, for $ 8,000 to nominees of Transportation Credit Corporation. The latter then owned the entire outstanding stock in Underwriters. Under date of January 3, 1934, Underwriters' charter was amended to authorize issuance of 250 shares of preferred stock; 155 of these*112 shares were issued to or for the interests controlling Underwriters' common stock. No other shares of preferred stock were issued.
At the end of 1933 or the beginning of 1934, liquidation began of Transportation Credit Corporation. The interests controlling that corporation made a gift to Mr. Beamsley at that time of the 1,600 shares of common stock in Underwriters held by or for them. Mr. Beamsley transferred 800 of those shares to his wife, who then became the owner thereof of record. He gave the remaining 800 shares to Johnson, who transferred them to his wife, Claire M. Johnson. Johnson wanted a larger portion of these 1,600 shares, but Mr. Beamsley thought he was not entitled to more than one-half.
Two or three years after 1933, the 155 shares of Underwriters' outstanding preferred stock were acquired by Underwriters at a cost of about $ 8,000 or $ 9,000. Thereafter Mrs. Beamsley and Mrs. Johnson each held one-half of those shares. As to the 77 1/2 preferred shares held by Mrs. Beamsley, the cost thereof was charged against salary credits then owing by Underwriters to Mr. Beamsley.
On September 9, 1939, Mrs. Beamsley transferred to her daughter, Martha J. Beamsley (hereinafter*113 referred to as "Martha"), one-half of the common stock (or 400 shares) and one-half of the preferred *991 stock (or 38 3/4 shares) in Underwriters of which she was the record owner, and she reported this transfer in a Federal gift tax return.
In or about 1918, an uncle of Mrs. Beamsley had died, and she had inherited $ 4,000 in cash from him. This money was given by her to her husband. There was no legal obligation on him to repay it to her. Prior to 1929, Mr. Beamsley attained a maximum net worth of about forty to fifty thousand dollars, but he never repaid the $ 4,000 thus obtained from his wife. The stock in Underwriters received by her was not a repayment of the $ 4,000 she had thus given to him.
After 1934, the sole holders of record of the stock in Underwriters, except for some qualifying shares held by directors of the company, were Mrs. Beamsley and Mrs. Johnson and, later, also Martha. Mrs. Beamsley was also a director of the company. Neither Mrs. Beamsley nor Mrs. Johnson attended any stockholders' or directors' meetings, or in any way participated in the business affairs of the company. Neither of them knew anything about insurance, or directly or indirectly*114 were responsible for the sale of any insurance by or in behalf of the company. For at least seven or eight years prior to 1951, Mrs. Beamsley was seriously ill with asthma. Martha in no way participated in the affairs of Underwriters.
In 1938, Mrs. Beamsley received dividends, on the Underwriters preferred stock, in the amount of $ 2,286.25, on which she paid an income tax. In her Federal income tax return for 1939, Martha reported dividends of $ 322.50.
Mr. Johnson and Mr. Beamsley were officers of Underwriters; in 1939 and for some years theretofore, Johnson was president and Beamsley was vice president of Underwriters. The following compensation was paid to them as officers of Underwriters for the indicated years:
| Year | Beamsley | Johnson |
| 1934 | $ 9,000.00 | $ 9,000.00 |
| 1935 | 9,000.00 | 13,300.00 |
| 1936 | 8,663.55 | 21,261.91 |
| 1937 | 4,000.00 | 16,327.56 |
| 1938 | 11,565.48 | 25,426.54 |
During and after 1934, the management and business affairs of Underwriters were controlled by Mr. Johnson and Mr. Beamsley. Johnson was the only one at Underwriters who had a license to sell insurance; at no time did Beamsley have such a license.
When Mr. Beamsley was in charge of Transportation Securities*115 Company and Transportation Credit Corporation, he tried, through those finance companies, to get customers for the insurance brokerage company that was run by Johnson.
*992 After 1933, when the stock of Underwriters came under the control of Johnson and Beamsley, the latter did not actively write insurance or directly sell it. It was his function to get insurance business for Underwriters through encouraging or inducing potential customers to deal with Johnson. Beamsley introduced Johnson "to a lot of people," and at these introductions usually "would say he was the best man in the United States." From that point on, it was Johnson's job to "follow it" and sell insurance to such persons; "in a good many cases he fell flat and wasn't able to bring in the business. But he brought in a substantial volume of business." After such business was obtained, Johnson saw to it that it was serviced. Through Beamsley's connections with the bus transportation industry, he provided contacts from which Johnson obtained business for Underwriters.
Beamsley was interested in the location and exploration of oil deposits. Underwriters also invested money and participated in such ventures. He*116 managed Underwriters' interests in these matters and rendered services to Underwriters in connection with them; he spent time at the oil fields, negotiated oil leases, and engaged in other related activities. During the years 1934, 1935, and 1936, there were periods during which Beamsley spent considerable time on these matters; beginning in 1936 with his association with National City Lines, Inc., described hereinafter, he devoted most of his time to the latter's affairs, and reduced his activities relating to oil, for the most part only concluding matters in which he had theretofore been engaged.
Beamsley also advised Underwriters as to investments made by it. He was responsible for both Underwriters and Johnson investing in National City Lines, Inc.; they owned a comparatively small percentage of the stock of that company. Johnson never participated in the affairs of National City Lines, Inc. After 1936, Beamsley devoted very little of his time to the affairs of Underwriters.
National City Lines, Inc. (hereinafter also referred to as "National") was a corporation organized in March 1936. It was a holding company, and controlled a large number of subsidiaries which operated*117 bus lines over an area of about fifteen states. The president of National was E. Roy Fitzgerald (hereinafter referred to as "Fitzgerald"), who, with his brothers, dominated National's operations. Beamsley, since National's organization, had been a director, stockholder, and the vice president in charge of its financial affairs, arranging loans, and handling transactions with banks.
The insurance required by National's subsidiaries, in connection with their bus operations, was placed by National with Underwriters during the years in issue and for years prior thereto. This insurance was purchased on an annual premium basis, and National was not bound in any way to give its insurance business to Underwriters. It *993 consisted largely of public liability, property damage, and fire insurance. The decision as to where that insurance was to be placed was made by Fitzgerald.
Beamsley knew Fitzgerald in Minnesota from about 1926. He and Fitzgerald were friendly and their friendship was in part at least responsible for Fitzgerald bringing Beamsley into National. Fitzgerald participated in some of the oil activities in which Beamsley was involved. Fitzgerald was one of the clients*118 whose business was transferred from the National Duluth Agency, Inc., to Underwriters in 1931.
Fitzgerald at times discussed with Beamsley the matter of insurance to be placed by National and its system of subsidiaries. In placing the insurance required by National's subsidiaries, Fitzgerald was interested in the insurance rates charged, and would not have permitted the business to be placed with Underwriters if its rates had compared unfavorably with the rates obtainable elsewhere. Although Beamsley was not in a position to direct the placing of the insurance of National's system, he was in a position, in 1939 and years prior and subsequent thereto, to exercise some influence over Fitzgerald's choice in placing such insurance, and over Fitzgerald's choice thereafter in permitting the insurance to remain with the same broker.
National's insurance accounted for a large part of Underwriters' business. Another large part of its business was represented by insurance for certain Greyhound bus companies. This insurance also was purchased on an annual premium basis, and these Greyhound companies were not bound in any way to give their insurance business to Underwriters. The Greyhound*119 insurance was not controlled by National or any of its officers. During one year Underwriters lost the Greyhound insurance because another broker provided lower rates, but the following year Underwriters recovered the Greyhound business when Johnson found a source from which insurance could be bought at rates which "met" those quoted by the competing broker.
At a meeting of the board of directors of Underwriters on September 11, 1939, as reported by minutes of that meeting, the following occurred:
The Chairman [R. H. Johnson] stated that F. G. Beamsley, Inez L. Beamsley and Martha Janes Beamsley had offered to enter into an agreement with the company and its President [R. H. Johnson] and Claire M. Johnson, providing for the sale to the company of all the stock held by the Beamsley family in exchange for cash and certain securities and providing that F. G. Beamsley and Inez L. Beamsley shall not act as insurance brokers during the joint lives of F. G. Beamsley and R. H. Johnson, or for a period of five years from July 1, 1939, whichever is longer, in return for certain monthly payments to be measured by the amount of gross commissions earned and retained on account of business of *120 National City Lines, Inc. A copy of the proposed agreement was presented to the directors and examined by them.
*994 The directors then adopted a resolution authorizing execution of such an agreement by Underwriters.
On September 11, 1939, a written agreement was entered into between petitioners, their daughter Martha, Johnson, Mrs. Johnson, and Underwriters, which provided as follows:
WHEREAS, FOSTER G. BEAMSLEY is Vice-President and Director of TRANSPORTATION UNDERWRITERS AGENCY, INC., INEZ L. BEAMSLEY is a Director of said Company, and INEZ L. BEAMSLEY and MARTHA JANE BEAMSLEY are the owners of one-half of the common and preferred stock of said Company; and
WHEREAS, it is the desire of FOSTER G. BEAMSLEY and INEZ L. BEAMSLEY to retire from the business of insurance brokerage and to sever their several connections with TRANSPORTATION UNDERWRITERS AGENCY, INC.; and
WHEREAS, TRANSPORTATION UNDERWRITERS AGENCY, INC. is desirous of purchasing its stock so owned by INEZ L. BEAMSLEY and MARTHA JANE BEAMSLEY,
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, IT IS MUTUALLY COVENANTED AND AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS:
*121 1. FOSTER G. BEAMSLEY agrees to resign as officer and Director of TRANSPORTATION UNDERWRITERS AGENCY, INC. as of January 1, 1939.
2. TRANSPORTATION UNDERWRITERS AGENCY, INC. agrees to pay to FOSTER G. BEAMSLEY in cash, on or before December 31, 1939, the unpaid balance of his salary for the year 1938.
3. INEZ L. BEAMSLEY agrees to assign, transfer and set over to TRANSPORTATION UNDERWRITERS AGENCY, INC. 400 shares of its common capital stock and 38 3/4 shares of its preferred stock.
4. MARTHA JANE BEAMSLEY agrees to assign, transfer and set over to TRANSPORTATION UNDERWRITERS AGENCY, INC. 400 shares of its common capital stock and 38 3/4 shares of its preferred stock.
5. TRANSPORTATION UNDERWRITERS AGENCY, INC. agrees to transfer, assign and set over to INEZ L. BEAMSLEY 544 3/4 shares of the common capital stock of NATIONAL CITY LINES, INC., a Delaware corporation, and to pay to her the sum of $ 2,091.88 and to assign, transfer and set over to INEZ L. BEAMSLEY $ 5,357.93 of the amount due to it from FOSTER G. BEAMSLEY on account of insurance premiums previously paid by it for him.
6. TRANSPORTATION UNDERWRITERS AGENCY, INC. agrees to assign, transfer and set over to MARTHA JANE BEAMSLEY*122 544 3/4 shares of the common capital stock of NATIONAL CITY LINES, INC., a Delaware corporation, and to pay to her the sum of $ 2,091.88 and to assign, transfer and set over to MARTHA JANE BEAMSLEY $ 5,357.93 of the amount due to it from FOSTER G. BEAMSLEY on account of insurance premiums previously paid by it for him.
7. TRANSPORTATION UNDERWRITERS AGENCY, INC. agrees to pay to INEZ L. BEAMSLEY for and during the joint lives of FOSTER G. BEAMSLEY and R. H. JOHNSON, or for a period of five years from July 1, 1939, whichever is the longer, an amount equal to one-half of the gross commissions earned and retained by it on account of insurance policies written for NATIONAL CITY LINES, INC., its officers, employes, subsidiaries and affiliates, their [officers] and employees (except any person, not now an officer or employe of NATIONAL CITY LINES, INC. or an officer or employe of a subsidiary or affiliate of *995 NATIONAL CITY LINES, INC., who is a regular customer of TRANSPORTATION UNDERWRITERS AGENCY, INC. at the time he becomes such officer or employe) or any corporation with which it may merge or consolidate or which may succeed to its business (other than corporations which are*123 customers of TRANSPORTATION UNDERWRITERS AGENCY, INC. prior to the time of such merger, consolidation or succession. In the event of a merger or consolidation of NATIONAL CITY LINES, INC. with any corporation which is a customer of TRANSPORTATION UNDERWRITERS AGENCY, INC. at the time of such merger or consolidation or in the event that any such corporation succeeds to the business of NATIONAL CITY LINES, INC., then payments as above specified shall be paid on the basis of the gross commission earned and retained by it on account of the officers, employes, subsidiaries and affiliates of NATIONAL CITY LINES, INC. who were such at the time of such merger or consolidation, and on any insurance covering persons, property or liabilities carried by NATIONAL CITY LINES, INC. at the time of such merger, consolidation or succession.) Payments shall be made monthly on the 20th day of each month for the commissions earned and retained during the preceding calendar month. R. H. JOHNSON and CLAIRE M. JOHNSON guarantee the payment of each such monthly installment when due.
8. TRANSPORTATION UNDERWRITERS AGENCY, INC. agrees to keep and preserve adequate accounts and records of all gross commissions*124 earned and retained by it on account of the insurance policies above in paragraph 7 specified, and such books and records shall be subject to inspection by INEZ L. BEAMSLEY or her duly appointed representative during regular business hours on any business day. TRANSPORTATION UNDERWRITERS AGENCY, INC. shall furnish to INEZ L. BEAMSLEY on or before the 20th day of each calendar month a statement of the gross commissions earned and retained by it during the preceding calendar month on account of NATIONAL CITY LINES, INC. business as above in paragraph 7 defined.
9. FOSTER G. BEAMSLEY and INEZ L. BEAMSLEY jointly and severally covenant and agree that they will not become insurance brokers, agents or solicitors as defined by the statutes of the State of Illinois now in force, nor will they become financially interested in any corporation or partnership which is such broker, agent or solicitor, so long as the payments provided for by paragraph 7 herein are made to INEZ L. BEAMSLEY.
* * * *
On September 11, 1939, the outstanding stock of Underwriters consisted of 1,600 shares of common and 155 shares of preferred.
The agreement of September 11, 1939, providing in effect for the severance*125 by the Beamsley family of its interest in Underwriters, in part grew out of Johnson's dissatisfaction with the fact that Beamsley was devoting so much of his time to National and so little of it to Underwriters. Johnson felt he could continue to get the Greyhound insurance without Beamsley. Johnson had threatened to cause the liquidation of Underwriters and then to start another agency himself which would succeed in getting the business formerly handled by Underwriters.
The negotiations, resulting in the agreement of September 11, 1939, were carried on between Beamsley and Johnson, except for participation by counsel, Neither Mrs. Beamsley nor Martha took any part *996 in those negotiations. Beamsley and Johnson disagreed as to the consideration that should be paid, and, with advice of counsel, they worked out the arrangement provided for in the agreement.
During the negotiations, Beamsley knew that Johnson felt that he (Beamsley) "had a lot of influence" with Fitzgerald in placing the insurance business of National's system, but Beamsley at no time did or said anything to Johnson to contradict Johnson's understanding in this respect.
Disposition of the share of the future*126 commissions allocated to Mrs. Beamsley under paragraph 7 of the agreement was at that time within the control of Beamsley once Johnson agreed that they should be paid. Beamsley could have arranged to have those monies paid to himself. Instead, he arranged to have them paid to his wife. The payments thus provided for in paragraph 7 were not made in order to obtain Mrs. Beamsley's stock; they were agreed to and made for Mr. Beamsley's real or supposed influence in having National continue to place the insurance business of its system with Underwriters.
The covenant not to compete, contained in paragraph 9 of the agreement, was of no importance in so far as Mrs. Beamsley herself was concerned, since she herself posed no threat of competition to Underwriters. It was of value to Johnson and Underwriters in so far as it might preclude Beamsley from participating directly or indirectly in another insurance business in competition with Underwriters.
Insurance brokerage businesses were often sold for a consideration measured by a per cent of gross commissions earned, and such consideration was often made payable out of earnings of the business in specified amounts over a specified period. *127 Such consideration often was based primarily on the good will or earning power of the brokerage business. Before arriving at a valuation of the brokerage business, it was customary to look into the source of the expected earnings and to analyze the accounts that it would retain or lose in the event of a sale.
Underwriters continued to comply with paragraph 7 of this agreement, and to make payments to Mrs. Beamsley pursuant to that paragraph, through May 1946. By that time it had become known to Johnson that National would withdraw its insurance from Underwriters and would institute a system of self-insurance for its subsidiaries. Johnson made threats to Beamsley that the payments would be discontinued, and they were in fact discontinued after May 1946, although National permitted its insurance to remain with Underwriters until January 1, 1947.
The amounts paid to Mrs. Beamsley in accordance with paragraph 7 of the agreement were reported annually by her, and not by her husband, on their Federal income tax returns. The amount paid pursuant to paragraph 7 in 1945 was $ 20,526.49, and she reported this *997 amount as ordinary income, as she had reported other payments under*128 paragraph 7 in earlier years. On March 14, 1947, she filed a claim for refund with respondent for 1945, asserting that the $ 20,526.49 should have been reported as capital gain on the sale of stock in Underwriters, rather than as ordinary income. Respondent allowed the claim, and she received a refund in the amount of $ 5,195.22. Underwriters paid Mrs. Beamsley $ 11,169.45 in 1946 under paragraph 7. In her Federal income tax return for that year, she reported that amount as capital gain on the sale of stock in Underwriters.
Respondent mailed notices of deficiency dated March 8, 1949, to petitioners. In a statement attached to the notice of deficiency sent to Mr. Beamsley, respondent treated the foregoing payments made to Mrs. Beamsley, of $ 20,526.49 in 1945 and $ 11,169.45 in 1946, as ordinary income taxable to Mr. Beamsley. In a statement attached to the notice of deficiency sent to Mrs. Beamsley, respondent treated the same amounts, of $ 20,526.49 and $ 11,169.45, as ordinary income taxable to her for 1945 and 1946, respectively. In both statements it was said that these amounts were being taxed to Mr. and Mrs. Beamsley respectively "pending a final determination as to whom*129 it is properly taxable and as to whether it is ordinary income or capital gain."
In amended petitions filed herein in both proceedings, petitioners alleged that respondent erred (1) in taxing these amounts to Mr. Beamsley, and (2) in taxing them to Mrs. Beamsley as ordinary income rather than capital gain.
OPINION.
Petitioners Foster G. and Inez L. Beamsley are husband and wife. From 1934 until September 1939, Mr. Beamsley and R. H. Johnson controlled the affairs of Transportation Underwriters Agency, Inc., the stock of which, except for some qualifying directors' shares, was held by their wives, Mrs. Beamsley and Mrs. Johnson. Underwriters was organized to act as an agent or broker in the sale of insurance, from which it derived income in the form of commissions. Its most important customers were in the bus transportation industry, and a very substantial portion of its income came from insurance sold to National City Lines, Inc., with which Mr. Beamsley was closely connected, and which controlled a large number of companies operating bus lines. National placed its insurance with Underwriters from 1936, when National was organized, through 1946, after which it adopted a system*130 of self-insurance.
Friction had arisen between Mr. Beamsley and Mr. Johnson, an important element of which was Mr. Johnson's charge that Mr. Beamsley was not giving any attention to the insurance business and was not earning his salary. Mr. Johnson had threatened to cause liquidation *998 of Underwriters and to start a new insurance business of his own. The matter came to a head in September 1939, when the Beamsleys completely withdrew from Underwriters in accordance with an agreement executed on September 11, 1939, by the Beamsleys, the Johnsons, and Underwriters. The agreement undertook to deal comprehensively with all phases of the situation. Among other things, Mr. Beamsley agreed to resign as an officer and director of Underwriters as of January 1, 1939, and Underwriters agreed to pay him the balance of his salary for 1938, which had theretofore been in dispute; Mrs. Beamsley and her daughter Martha (to whom Mrs. Beamsley had given one-half of her stock interest in Underwriters two days earlier) agreed to surrender their stock to Underwriters; Underwriters agreed to give to each of Mrs. Beamsley and Martha 544 3/4 shares of common stock in National City Lines, Inc., *131 as well as $ 2,091.88 in cash, and to assign to each of them $ 5,357.93 of the amount due to it by Mr. Beamsley on account of insurance premiums which it had previously paid for him; and Underwriters agreed also, in paragraph 7, to pay to Mrs. Beamsley, during the joint lives of Mr. Beamsley and Mr. Johnson or for 5 years from July 1, 1939, whichever might be longer, an amount equal to one-half of the gross commissions earned by it on account of insurance policies written for National, its officers, employees, subsidiaries, and affiliates.
The present proceedings grow out of the payments (representing one-half the commissions on National's business) made to Mrs. Beamsley during 1945 and 1946 pursuant to paragraph 7 of the foregoing agreement. The Commissioner contends that these payments constitute income to Mr. Beamsley, whereas both petitioners contend that the payments must be ascribed to Mrs. Beamsley rather than to Mr. Beamsley and that they constitute capital gain to her rather than ordinary income. In short, petitioners contend that these payments were merely part of the price at which Mrs. Beamsley disposed of her stock in Underwriters. The Commissioner denies that these*132 payments are part of the purchase price for the Underwriters stock; his principal contention is that they were made in consideration of such assistance or cooperation as might be forthcoming from Mr. Beamsley in assuring the continuance of National as a client of Underwriters. 1 The question is predominantly one of fact, and, after a careful study of the entire record, we have reached the conclusion that the payments *999 did not represent a part of the purchase price paid for Mrs. Beamsley's stock, but were attributable to Mr. Beamsley.
*133 Mr. Beamsley had never sold insurance, and at no time was he licensed to do so. Johnson was the only one at Underwriters who had such a license and who actually made sales of insurance for Underwriters. But Mr. Beamsley had been in intimate contact with the bus transportation industry since the 1920's, and he used his contacts with that industry to put Johnson in touch with potential purchasers of insurance. Johnson would then attempt to sell insurance to the prospect, and would service the insurance thereafter, if he succeeded in making the sale. Mr. Beamsley also rendered other services for Underwriters, such as advising it on investments and managing its interests in oil properties.
Although the decision as to where National would place its insurance was made by its president, E. Roy Fitzgerald, we are unable to believe, on the evidence, that Mr. Beamsley was not in a position to influence that decision. He was a vice president of National, in charge of its financial operations; he was also a director and stockholder of National; he had known Fitzgerald for many years, was friendly with him, and had been brought into National's organization by Fitzgerald; and, as Mr. Beamsley*134 testified, among other things "Naturally, we talked about the insurance." He was not only in a strategic position to make affirmative suggestions in regard to the original placement of National's insurance, but thereafter, as that insurance expired periodically, he could influence its further placement at Underwriters, if only by a course of inaction and silence through which he refrained from exercising his influence in favor of some broker other than Underwriters. It may well be true that Fitzgerald would not have placed National's insurance with Underwriters at the outset, and he would not have renewed it there each year thereafter, unless Underwriters provided low rates and good service. But there is no satisfactory evidence in the record before us that there were no other brokers who could have matched Underwriters' rates and otherwise competed for National's business. Petitioners are wide of the mark when they argue that Mr. Beamsley could not have forced Fitzgerald to place National's business with Underwriters. The point is that, other things being equal as far as rates, etc., were concerned, Mr. Beamsley was in a position where he could, either by subtle hints or forthright*135 recommendations to Fitzgerald or even by inaction at times, exert a powerful influence in relation to the retention of Underwriters as National's insurance broker. And we think that the payments provided for in paragraph 7 of the agreement were intended as compensation for such influence. Moreover, even if such influence were virtually nonexistent, as petitioners insist, the significant thing *1000 is that Johnson thought it was real, that Beamsley knew of Johnson's belief, and did nothing to contradict it. 2
*136 It was this understanding that prevailed between the bargaining parties and it was on this understanding that the payments in issue came to be made. Beamsley's influence, whether real or supposed, over the placement of National's insurance was responsible for those payments. On the Beamsley's side, he was the source of those payments. Of course as a matter of detail he could, as he did, arrange to have them paid to his wife rather than to himself. Nonetheless they remain taxable as his income. Cf. Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Helvering v. Eubank, 311 U.S. 122">311 U.S. 122; Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579; Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591, 603et seq.; Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 378; Schermerhorn Oil Corporation, 46 B. T. A. 151, 162et seq.
Although the contention is made that these payments, if taxable to Mrs. Beamsley, give rise to capital gain rather than ordinary income, no comparable claim is made with respect to Mr. Beamsley, either as error alleged in the pleadings*137 or as part of the argument on brief, in the event the payments are found to be taxable to him. Concluding that these payments must be treated as his income, we hold them taxable to him as ordinary income.
In addition to the various provisions of the agreement of September 11, 1939, already mentioned, Mr. and Mrs. Beamsley covenanted that they would not engage in the insurance brokerage business so long as the payments provided for in paragraph 7 were made to Mrs. Beamsley. Petitioners contend that no part of these payments is attributable to the covenant not to compete (cf. Ethyl M. Cox, 17 T. C. 1287), and that, if it be otherwise, the covenant is not capable of severance from the rest of the agreement in such a way as to cause the payments, or the portion of them allocable to the covenant, to be taxable as ordinary income. Cf. Toledo Blade Co., 11 T. C. 1079, affirmed per curiam, 180 F. 2d 357 (C. A. 6), certiorari denied, 340 U.S. 811">340 U.S. 811; Toledo Newspaper Co., 2 T. C. 794; Aaron Michaels, 12 T. C. 17;*138 Rodney B. Horton, 13 T. C. 143, appeal dismissed, 180 F. 2d 354 (C. A. 10). These are not questions, however, which confront us in the disposition of this case, and there is no need to pass on them. In *1001 the cited cases the controversy was over the nature of the income -- whether ordinary, or capital gain -- and not, as here, to whom the income is taxable. Cf. Beals' Estate v. Commissioner, 82 F. 2d 268, 270 (C. A. 2); Cox v. Helvering, 71 F. 2d 987, 988 (C. A. D. C.). Our conclusion, that the payments are taxable to Mr. Beamsley, as ordinary income, does not depend on a resolution of these questions concerning the covenant not to compete. We are moved rather by the facts, which the record makes plain to us, that Mr. Beamsley was the source of these payments, and that they were not made in consideration for the surrender of Mrs. Beamsley's stock.
The tax on these payments being due from Mr. Beamsley, it is not also owing by Mrs. Beamsley. As a precautionary measure pending the outcome of this controversy, respondent has charged the payments*139 to both petitioners as ordinary income, and, since the deficiencies asserted against Mrs. Beamsley result entirely from this action, she is entitled to a decision adjudging no deficiency to be owing by her. Furthermore, for 1945 and 1946, the years in issue, Mrs. Beamsley paid a tax on these payments as capital gain, and the pleadings pray, if the payments are ruled taxable to Mr. Beamsley, for a finding that Mrs. Beamsley is entitled to a refund. We cannot direct a refund, but we can determine the amount of an overpayment within the provisions of section 322 (d) of the Internal Revenue Code, which will be taken into account in the decision to be entered under Rule 50.
Decision will be entered for the respondent in Docket No. 23536.
Decision will be entered under Rule 50 in Docket No. 23537.
Footnotes
1. Such payments had been reported each year by Mrs. Beamsley as ordinary income. Subsequently, she filed claims for refund for several years, including 1945, on the ground that the payments should have been reported by her as capital gain. These claims were allowed by the Commissioner, and refunds were made to her. The Commissioner's position herein constitutes a reversal of his prior position; in essence, he says that he was wrong in the action which he had heretofore taken in this connection, since the payments involved were not in fact made as consideration for the surrender of Mrs. Beamsley's stock, but had their source in Mr. Beamsley.↩
2. Petitioners argue that it is common practice to sell insurance brokerage business and to measure the purchase price by commissions to be received in the future. We think that is quite true, but that was not the situation here as we view the facts. Not only does the evidence show that in such sales the commissions are usually taken into account for a comparatively short period of years as contrasted with a potential period here covering the joint lives of Beamsley and Johnson, but the commissions involved here did not relate to all of the insurance sold by Underwriters. The commissions which were the measure of the payments in paragraph 7 were strictly limited to the insurance emanating from National. We think that paragraph 7 reflected an understanding that Mr. Beamsley controlled that business or was a significant factor in the retention of that business, and that the payments were not made as part of the purchase price of Mrs. Beamsley's stock.↩