*185 Decision will be entered under Rule 50.
1. Income -- Insurance Renewal Commissions -- Ordinary Income on Receipt by Widow. -- Insurance renewal commissions received by petitioner on policies sold by husband prior to his death and similar commissions from assignments acquired by husband are taxable to petitioner, his wife and sole beneficiary, as ordinary income. Sec. 126, I. R. C. 1939.
2. Deductions -- Amortization -- Cost of Insurance Agency and Renewal Commission Contract. -- Petitioner entitled to deduction for amortization of cost of contracts in amounts determined to be appropriate.
3. Income -- Withheld for Repayment of Advances. -- Renewal commissions withheld from petitioner by insurance company to recover advances by it under agency contract includible in petitioner's gross income.
4. Statute of Limitations. -- Omission of income amounting to more than 25 per cent of the gross income reported by petitioner justifies application of 5-year statute of limitations. Sec. 275 (c), I. R. C. 1939.
*318 Respondent determined deficiencies*187 in income tax and an addition to tax because of delinquent filing of return in the following amounts: *319
| Addition to tax | ||
| Year | Deficiency | sec. 291 (a) |
| 1946 | $ 6,073.55 | |
| 1947 | 4,597.39 | |
| 1948 | 2,810.99 | |
| 1949 | 2,034.68 | $ 101.73 |
Petitioner has conceded several of the adjustments made by respondent. The primary question for decision is whether insurance renewal commissions received by petitioner in each of the years 1946 through 1949 should be included in her gross income for those years as income in respect of her deceased husband within the meaning of section 126 (a) (1), (3), Internal Revenue Code of 1939.
An affirmative determination of the foregoing question requires the resolution of three additional issues:
1. Whether petitioner is entitled to a deduction for amortization of the cost of the A Agency and A Agency Renewal Contracts and of Flagg's interest in the B Agency.
2. Whether the portion of commissions retained and credited by the insurance company against advances for expenses of the C Agency are to be included in petitioner's gross income for 1946.
3. Whether assessment and collection of the deficiencies determined for the taxable years 1946 and 1947 *188 are barred by limitations under the provisions of section 275 (c), Internal Revenue Code of 1939.
FINDINGS OF FACT.
The petitioner is the widow of Frank J. Latendresse, who died July 3, 1944. She filed her income tax returns on the cash method of accounting with the collector of internal revenue for the district of Indiana.
The Standard Life and Casualty Company, later by change of name Standard Life Insurance Company of Indiana (hereinafter called Standard), was formed in 1934 by Arthur H. Wyatt and George F. Flagg for the purpose of carrying on the life insurance business in the State of Indiana.
Standard designated Wyatt as its general agent for the sale of certain capital stock of the company and life insurance policies, denominated "organization policies" in an aggregate amount of $ 15,000,000. Wyatt was to receive as compensation for his sale of the insurance policies, 85 per cent of the first year's premiums thereon, 7 1/2 per cent of the renewal premiums for the next 9 years, and 2 1/2 per cent of the renewal premiums for the succeeding 5 years. Wyatt employed Flagg to assist him in the performance of these contracts and, on November 30, 1937, a written contract of employment*189 was entered into between Wyatt and Flagg, with the consent of Standard, *320 whereby Flagg was to receive 50 per cent of the net profits from the business as compensation for his services.
Wyatt by written contract dated February 28, 1939 (hereinafter referred to as the A Agency Contract), sold to Frank the unperformed part of his contract with Standard for the consideration of $ 23,000, of which $ 3,000 was contributed by Flagg and $ 3,860.34 was assigned as the purchase price of the tangible assets. This sale did not include the deferred or contingent renewal commissions on insurance and stock already sold. Those contingent sums were impressed with a trust for the payment of existing obligations of the agency. Frank was substituted for Wyatt as the general agent of Standard to sell the remainder of the $ 15,000,000 of life insurance.
Frank, by contract dated April 22, 1940 (hereinafter referred to as A Agency Renewal Contract), purchased from Wyatt for a total consideration of $ 12,500 1 the latter's interest in the contingent renewal commissions retained by Wyatt in 1939 in excess of the amounts necessary to satisfy the several obligations for which these contingent sums*190 had been impressed with a trust pursuant to the A Agency Contract.
Standard entered into a written contract on April 19, 1939 (hereinafter referred to as B Agency Contract), with James J. Latendresse, brother of Frank, whereby James was appointed general agent for the sale of additional capital stock and of certain insurance policies denominated "Special Coupon Policies" to begin upon the completion of the then existing contract between Standard and Frank. The general agent, as compensation for the sale of the insurance policies, was to receive 85 per cent of the first year's premiums on whole life and 20-payment life policies, and 60 per cent of the first year premiums on 20-year endowment policies, 7 1/2 per cent of the renewal premiums for the next 9 years, and 2 1/2 per cent of the renewal premiums for the succeeding 5 years, plus certain bonuses payable out of the first annual premiums. This*191 agreement was amended on May 31, 1939, to provide for the substitution of Frank as general agent in the event of the death of James. Frank agreed to advance up to $ 30,000 for the purpose of financing the sale of the new policies, in consideration of which he was to receive 24 per cent of the net profits of such business in addition to repayment of the amounts advanced. Flagg was employed under this contract to assist in the sale of these policies, for which he was to receive 32 per cent of the net profits of the business, and was named as successor to the general agency upon the death of both James and Frank. James died on May 11, 1940, and Frank thereby became substituted as general agent.
*321 Flagg sold his interest in the B Agency contract to Frank for $ 7,400.63 on December 31, 1941. Frank was the sole owner of that contract at the time of his death and no portion of the commissions belonged either to Flagg or to the estate of James.
Frank entered into a new contract with Standard on May 20, 1941 (hereinafter referred to as the C Agency Contract), under which he was to act as its general agent in the sale of certain life insurance policies known as Profit-sharing Participating*192 Thirty-payment Life policies. He was to receive as consideration for the sale of the insurance policies 85 per cent of the first year's premiums, 12 1/2 per cent of the premiums for the next 5 years, 7 1/2 per cent of the premiums for the next 4 years, and 5 per cent of the premiums for the next 5 years, plus certain bonuses payable out of the first annual premiums. Each party was to advance funds equal to those furnished by the other up to $ 20,000 each to finance the operation of the general agency during its first year. This contract further provided that:
The amount of money furnished by the Company shall be secured solely by the renewal commissions payable to Latendresse hereunder, except, however, that during the actual operation and performance of this contract only fifty per cent (50%) of such renewal commissions shall be applied upon the funds furnished by the Company, and the remaining fifty per cent (50%) of such renewal commissions shall be payable to Latendresse. If, however, performance under this contract shall terminate, then the whole of said renewal commissions shall be applied against the funds furnished by the Company. Latendresse shall not be personally*193 liable to repay to the Company any of the funds furnished by the Company.
No partnership relation is created hereby, and the Company by furnishing funds as herein provided, shall acquire no interest in the business enterprise to be conducted by Latendresse; provided, however, it shall be entitled to receive repayment of the funds furnished by it out of renewal commissions as herein provided.
Standard had advanced $ 10,235 at the date of the death of Frank. That amount was carried as a liability of the general agency and was so treated on the estate tax return of Frank. Standard credited $ 7,441.77 during the year 1946 from renewal commissions due Frances in repayment of its advances.
Frank entered into an agreement with John N. Brown on May 20, 1941, whereby Brown was employed for the purpose of assisting in the carrying out of the C Agency Contract. Brown was to receive 50 per cent of the net profits as compensation. The agreement further provided for the succession by Brown to the general agency upon the death of Frank. Brown was to pay Frances in that case 50 per cent of the net profits less one-half of the bookkeeping and disbursement expenses for all insurance sold up *194 to the date of succession. Brown succeeded to this general agency on July 3, 1944.
*322 The duties of Frank as general agent for the C Agency are set forth in a supplemental agreement with Standard dated June 5, 1942, as follows:
1. The general Agent shall procure agents to enter into contracts with the Company, shall solicit applications for insurance and annuities with the Company either personally or through agents procured by him, shall collect in exchange for official receipts furnished by the Company, and remit immediately to the Company, first-year and renewal premiums on business written by or through his agency or transferred to it by the Company with his consent.
All salesmen and agents engaged in selling life insurance were to be employed by and under the exclusive supervision of Frank.
The A and B Agency Contracts contained similar descriptions. Each of the agency contracts provided that upon the happening of certain events (which were not susceptible of ascertainment) it could be canceled by either party and Standard could revoke the privilege therein granted. One hundred agents, formerly employed by Wyatt and Flagg, were turned over to Frank when he entered the*195 insurance business.
Frank, until 1941 when he moved to Indianapolis, lived in Marion, Indiana, where he and his wife were partners in the S & L Gravel Company. However, George Latendresse, brother to Frank, served as general manager of the Gravel Company at the date of Frank's death and for several years prior thereto and after January 1, 1944, George was entitled to receive 50 per cent of the net profits with the privilege of purchasing the interest of each of the partners upon their respective deaths.
Frank, by a system of "contract amortization" in the years preceding his death, attempted to recover for Federal income tax purposes portions of the cost of the A Agency Contract and portions of the cost of Flagg's interest in the B Agency.
The cost of the A Agency Contract to Frank was $ 16,139.66. The deductions taken for amortization of that contract on the returns of Frank for the period up to the date of his death were as follows: None for 1939; $ 1,513.09 for 1940; the same for 1941; $ 1,975.62 for 1942; the same for 1943 and one-half of this amount for the 6 months of 1944, leaving an unrecovered cost of $ 8,174.43. No amortization was taken on the A Agency Renewal Contract*196 up to the date of Frank's death, since the receipts had not exceeded the amount of the obligations due under the impressed trust and no income was received on this contract until after Frank's death. The deductions taken for amortization of the B Agency Contract during the life of Frank were $ 1,628.14 for 1942, $ 1,406.12 for 1943, and $ 592.05 for 1944, leaving an unrecovered cost of $ 3,774.32.
The income received under the A and B Agency Contracts was greatly in excess of the amounts taken for amortization for the respective *323 contracts on Frank's Federal income tax returns for 1941, 1942, 1943, and 1944. For the A Agency these commissions on the A Agency Contract could stem only from the contract for which Latendresse paid Wyatt $ 16,139.66.
Frank, at the time of his death, had the right to receive renewal commissions earned but not then due and payable for insurance written by him subsequent to February 28, 1939, under the A, B, and C Agency Contracts. He also had the right to receive the renewal commissions (in excess of certain obligations) on insurance written prior to February 28, 1939, by Wyatt pursuant to the contract of July 19, 1934, and the supplement thereto.
*197 Frank also contributed large sums from time to time to the agency for use not only to finance operations but also to purchase investments for the agency.
Frances was sole beneficiary under the will of Frank.
The estimated value of the interest of Frank in the contingent renewal commissions under the insurance agency contracts with Standard, as of the date of his death, was $ 124,365.17. The net value of his interest in the businesses of the general agencies for Standard, was $ 3,994.72, representing cash, corporate stock, notes and accounts receivable, furniture and fixtures, less liabilities.
The books and records of Standard show payments to the petitioner for the years in question, as follows:
| Year | Amount |
| 1946 | $ 24,581.38 |
| 1947 | 17,887.32 |
| 1948 | 13,535.19 |
| 1949 | 9,094.92 |
Renewal commissions received in the years 1944 through 1949 by petitioner as shown by her books and records are as follows:
| Year | A | B | C | Total |
| 1944 (6 mos.) | $ 5,143.45 | $ 1,041.08 | $ 7,235.69 | $ 13,420.22 |
| 1945 | 10,336.47 | 3,304.32 | 12,261.73 | 25,904.52 |
| 1946 | 9,297.39 | 2,536.48 | 5,305.74 | 17,139.61 |
| 1947 | 8,067.94 | 2,313.29 | 7,506.09 | 17,887.32 |
| 1948 | 6,227.21 | 2,058.73 | 5,249.25 | 13,535.19 |
| 1949 | 3,515.83 | 1,869.12 | 3,709.97 | 9,094.92 |
*198 The discrepancy between the two figures for the year 1946 in the above tables constitutes a credit against advances (amounting to $ 7,441.77) made by Standard pursuant to the C Agency Contract.
Appropriate amortization deductions on account of the petitioner's unrecovered costs of the A Agency Contract, A Agency Renewal Contract, *324 and the Flagg interest in the B Agency for the taxable years in question are as follows:
| 1946 | $ 3,000 |
| 1947 | 2,500 |
| 1948 | 2,000 |
| 1949 | 1,000 |
Frances did not report as income renewal commissions received by her during each of the years 1946 through 1949. She reported gross income in the amounts of $ 8,473.70 and $ 10,138.81 on her income tax returns for 1946 and 1947.
Frances entered into an agreement with the Commissioner on June 15, 1951, whereby the period for assessing the taxes due from her for the taxable years 1946 and 1947 was extended to any time on or before June 30, 1952. The statutory notice of deficiency for the years here involved was mailed November 30, 1951.
The Commissioner has determined that certain renewal commissions paid to Frances by Standard during the years 1946 to 1949, inclusive, are taxable to Frances in the years*199 of receipt as ordinary income in respect of her deceased husband within the purview of section 126 (a) (1) and (3) of the Internal Revenue Code of 1939. 2
*200 All stipulated facts are incorporated herein by this reference.
OPINION.
Frances' position appears 3 to be that the gross receipts here in question were not income in respect of a decedent, within the meaning of section 126, but constituted return of a section *325 113 (a) (5) basis and therefore did not result in taxable income to her in the years in question. This contention is apparently predicated on the theory that the contingent renewal commissions were attributable primarily to "a continuing capital investment" rather than "past services rendered" by the decedent.
We do not agree with her premise that Frank's only connection with the insurance agencies out of which the renewal commissions arose was one of investment. He was named general agent in each of the three contracts referred to in our findings as the A Agency, B Agency, and C Agency. His duties enumerated*201 therein were to procure agents (who would be his employees and not those of Standard), to solicit applications for insurance (personally or by agent), to collect and remit premiums to Standard, and to make reports to the home office. Frank alone was responsible to Standard for such performance although in each instance Flagg or Brown was employed to assist in the performance of the contract. The rights to the contingent renewal commissions on insurance sold prior to his death, under the A Agency contract subsequent to February 28, 1939, the B Agency contract subsequent to May 11, 1940, and under the C Agency contract, clearly resulted from personal services rendered by Frank. It is immaterial whether he engaged in other business activities.
Section 126 (a) (1) provides that "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: "* * * (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received*202 after a distribution by the decedent's estate of such right." The renewal commissions involved herein, being contingent upon payment at a future date by the insured persons, had not become payable and clearly were not properly includible in respect of the taxable period in which fell the date of decedent's death or a prior period. Section 126 (a) (3) provides that "The right, described in paragraph (1), to receive an amount shall be treated, in the hands of * * * 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 * * * 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 * * * 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."
Had the renewal commissions on the insurance written while he was general agent under the three agency contracts mentioned above (not *326 including the portions to which Flagg and Brown were entitled) been paid to Frank while he lived, *203 they would unquestionably have been taxable to him under section 22 (a) of the Internal Revenue Code of 1939. We do not understand Frances to contend otherwise. Accordingly, we hold that those commissions are taxable to her as ordinary income, in the year of receipt, under section 126 (a) of the Internal Revenue Code of 1939. Estate of Thomas F. Remington, 9 T.C. 99">9 T. C. 99. See also Estate of Edgar V. O'Daniel, 10 T. C. 631, affd. 173 F.2d 966">173 F. 2d 966.
"Since section 126 provides for the treatment of such amounts as income to the estate and other persons placed in the same position as the decedent with respect to such amounts, the provisions of section 113 (a) (5) with respect to the basis of property acquired by bequest, devise, or inheritance do not apply to those amounts in the hands of the estate and such persons." Sec. 29.126-1, Regs. 111. See also H. Rept. No. 2333, 77th Cong., 2d Sess. (1942), pp. 83-84; S. Rept. No. 1631, 77th Cong., 2d Sess. (1942), pp. 100-101.
Frank, by contract dated April 22, 1940 (referred to as the A Agency Renewal Contract), purchased from Wyatt the latter's interest in*204 the contingent renewal commissions retained by Wyatt in 1939, in excess of the amounts necessary to satisfy the several obligations for which such contingent sums had been impressed with a trust. Those commissions related to insurance policies sold prior to February 28, 1939, the date on which Frank was substituted as general agent for Standard, and as to which all necessary services incident to the earning of such commissions had been performed by Wyatt and his employees. Renewal insurance commissions received by reason of bona fide assignments for value from various insurance agents who had written the policies to which the renewal commissions related constitute ordinary income taxable to the assignee to the extent which the aggregate amount thereof exceeded the total consideration paid by him for such assignments. Lewis N. Cotlow, 22 T. C. 1019, affd. 228 F. 2d. 186 (C. A. 2). 4 Had Frank received any renewal commissions pursuant to the A Agency Renewal Contract during his lifetime, such proceeds would have constituted ordinary income taxable to him in the year received. Such renewal commissions, being contingent upon*205 payment at a future date by the insured persons, were not payable and were not properly includible in respect of the taxable period in which fell the date of decedent's death or a prior period. Accordingly, they constitute ordinary income taxable to Frances in the year of receipt, under section 126 (a) of the Internal Revenue Code of 1939. Estate of Thomas F. Remington, supra.
*327 The same situation applies to the interest of Flagg in the contingent renewal commissions which arose out of insurance policies sold under the B Agency Contract purchased by Frank from Flagg by contract dated December 31, 1941, as well as to any portion of the proceeds which may be attributable to the 24 per cent interest which Frank had in the commissions arising out of insurance policies sold under the B Agency Contract*206 from May 31, 1939, to May 11, 1940. The evidence presented indicates no cost basis as to the latter interest. The proceeds here involved, to the extent they arose out of such interests, constitute ordinary income taxable to Frances in the year of receipt, under section 126 (a). Lewis N. Cotlow, and Estate of Thomas F. Remington, both supra.
The next question is the extent, if any, to which Frances is entitled to deductions on account of the cost to Frank of the interests acquired by him under the various contracts involved. It does not appear that Frances is claiming any deduction on account of cost as to decedent's interests in the B and C Agency contracts and none is indicated by the facts presented. Consideration is limited to the amount, if any, to which Frances is entitled in connection with the A Agency Contract, the A Agency Renewal Contract, and Flagg's interest in the B Agency Contract.
There can be no doubt that at the time of Frank's death there were unrecovered costs of $ 8,174.43 in connection with the A Agency Contract, $ 12,500 in connection with the A Agency Renewal Contract, and $ 3,774.32 in connection with the Flagg interest in the B Agency Contract. *207 All of these contracts appear to have yielded income in the years after Frank's death. Such cost properly can be recovered out of income to be received for limited periods which are ascertainable in length. We noted in the somewhat similar situation in James F. Oates, 18 T.C. 570">18 T. C. 570, that the length of time for which comparable commissions would be paid is actuarially ascertainable, and we said:
As long as the general agents remained in active business the level of these commissions from year to year remained fairly constant. This was because new business written by the general agency would fairly take the place of old business which might not be renewed, or where death intervened, of course, the premiums would stop. However, when these general agents reached the retirement age and new business stopped coming in to them, the bulk of their renewal commissions would be collected in the first five years after retirement and along about the ninth year the collections would dwindle off to practically nothing. * * *
The petitioner has failed to establish facts which would permit the computation of a mathematically accurate allowance for each of the tax*208 years. However, to allow no amortization, under the present circumstance, would be the one completely wrong conclusion, as the Court of Appeals noted in a somewhat comparable situation in Cohan v. Commissioner, 39 F.2d 540">39 F. 2d 540. The teaching of that case is that where *328 there is an evident right to a deduction but there is no showing of the exact amount of the deduction, the Court is to determine an appropriate amount for the deduction, weighing its judgment heavily against the taxpayer who is responsible for the deficiencies in proof. It would be just as harsh here to deny some deduction as it would have been in Cohan. The Court of Appeals in Bodoglau v. Commissioner, 230 F. 2d 336, affirming Michael Potson, 22 T. C. 912, stated:
We think the Tax Court was generous to taxpayer in fixing $ 100,000 as the amount of cash on hand at the beginning of the net worth period, but under the Cohan rule such determination was proper. It is the function of the trier of the fact to weigh all the elements properly considered in the valuation and to translate them into dollars and cents. *209 Commissioner of Internal Revenue v. Thompson, 3 Cir., 222 F. 2d 893, 895; Colonial Fabrics, Inc. v. Commissioner of Internal Revenue, 2 Cir., 202 F.2d 105">202 F. 2d 105, 107. Nor is it essential that there be testimony of the specific figure fixed by the Tax Court. Burford-Toothaker Tractor Co. v. Commissioner of Internal Revenue, 5 Cir., 192 F. 2d 633, 635. * * *
See also David J. Pleason, 22 T. C. 361, affd. (C. A. 7) 226 F.2d 732">226 F. 2d 732.
There was $ 24,448.75 of remaining cost to be amortized at the time of Frank's death. He had claimed no amortization on the $ 12,500 cost of the A Agency Renewal Contract during his life and no income was received from it until after his death. The amounts of the amortization deduction taken on Frank's income tax returns for 1941, 1942, 1943, and 1944 were substantially less than the amounts reported as income from the A and B Agencies. H. B. Hill, 3 B. T. A. 761. That income, at least from the A Agency, could stem only from the contract here involved for which Frank paid Wyatt $ 16,139.66. *210 It is thus apparent that Frank was not computing his amortization on a theory that he was first to recover his entire cost before any income was taxable.
Frank died July 3, 1944, and the taxable years are 1946 through 1949. This means that some amortization is to be attributed to the latter half of 1944, and to 1945. The ultimate finding of fact on this issue is that reasonable deductions to be allowed the petitioner in the taxable years are $ 3,000, $ 2,500, $ 2,000, and $ 1,000 for 1946, 1947, 1948, and 1949, respectively.
The next question is whether the renewal commissions in the amount of $ 7,441.77 which Standard retained as repayment of advances it had made pursuant to the C Agency Contract are to be included in Frances' gross income for 1946. It was agreed in the contract of May 20, 1941, between Standard and Frank, among other things, that each party was to advance equal amounts up to $ 20,000 to finance the operations of the insurance agency during the first year of its operation. The amount furnished by the company was to be secured solely by the renewal commissions payable to Frank, *329 and the latter was not to be personally liable for any of the funds furnished*211 by the company. $ 10,235 of the advances made by Standard remained unpaid as of the date of the death of Frank. The Commissioner states in his brief that $ 2,558.23 of this amount was withheld from renewal commissions paid to Frances in 1945, and that "The balance of $ 7,441.77 was withheld from total renewal commissions due petitioner for the year 1946." Therefore, Frances actually received, in cash, only $ 17,139.61 although the books of Standard reflect income to her in the amount of $ 24,581.38. The amount owed to Standard was carried as a liability on the books of the agency and was so considered in the Federal estate tax return of Frank.
The Commissioner argues that the effect of the above transaction is the same as it would have been had the amount of $ 7,441.77 been received by Frances and she had immediately used the money to pay the existing liability to Standard. Frances argues, however, that the so-called loan was a rearrangement of income distribution and that because the contract provided that no personal obligation of Frank was created and the company was to look only to the renewal commissions for repayment, the $ 7,441.77 was not income to her.
The advances by*212 Standard to finance the first year's operation under the C Agency Contract were clearly loans. It received no interest in the business of the agency. The fact that it was content to look only to the renewal commissions for repayment of its advance does not change the nature of the transaction. The effect is the same as it would have been had Standard paid to Frances the entire amount of renewal commissions arising under the contract and she had used $ 7,441.77 thereof immediately to repay Standard for its advances. Cf. Fay Harvey Moore, 42 B. T. A. 949, affirmed on this point 124 F.2d 991">124 F.2d 991. Accordingly, the $ 7,441.77 withheld by Standard in 1946 is to be included in Frances' gross income for that year.
The assessment and collection of the deficiencies for the calendar years 1946 and 1947 are not barred by the expiration of any statute of limitations but are expressly permitted under section 275 (c) of the Internal Revenue Code of 1939, 5 since the omission of renewal commissions constituted more than 25 per cent of the gross income reported by Frances in her income tax returns for those years. She reported gross income*213 for 1946 and 1947 in the respective amounts of $ 8,473.70 and $ 10,138.81 and omitted from gross income renewal commissions in the respective amounts of $ 24,581.38 and $ 17,887.38, *330 which were properly includible therein. These amounts are in excess of 25 per cent of the gross income reported, and since the statutory notice of deficiency was sent within 5 years after Frances' income tax returns were filed, section 275 (c) applies and assessment and collection of the deficiencies determined for those years are not barred.
Decision *214 will be entered under Rule 50.
Bruce, J., dissenting: I concur with the opinion of the majority with respect to all of the issues determined except the issue dealing with the right of the petitioner to deductions for amortization of the cost of the A Agency Contract, the A Agency Renewal Contract, and of Flagg's interest in the B Agency Contract. As to this issue I respectfully dissent.
With respect to the A Agency Renewal Contract I do not think the evidence sufficient to establish that any of the proceeds involved herein arose out of decedent's rights under the A Agency Renewal Contract, and petitioner is not entitled to deduct the costs of this interest out of the proceeds of other contract interests. Lewis N. Cotlow, 22 T.C. 1019">22 T. C. 1019, affd. 228 F.2d 186">228 F. 2d 186.
With respect to the Flagg interest under the B Agency Contract, assuming petitioner is entitled to recover the cost of this contract through depletion over a period of years, petitioner has failed to produce facts on which the amounts of such deductions may be computed. Unlike H. B. Hill, 3 B. T. A. 761, the record herein does *215 not disclose the total income to be anticipated under such contract, although evidence sufficient to establish such fact was obviously in petitioner's possession or could have been obtained from the insurance company. On the other hand, if the cost of this interest was recoverable out of the first renewal commissions received thereunder, there is no evidence that the receipts prior to the years in controversy were not sufficient to have completely reimbursed decedent or petitioner for the consideration paid therefor. Deductions must be taken in the year allowable and are not to be deferred to a later year at the choice of the taxpayer.
As to the A Agency Contract a different problem is presented from that of the A Agency Renewal Contract and Flagg's interest under the B Agency. Here we are dealing with a capital asset which was to be used for the production of income over an indefinite period of years. Cf. Stewart Title Guaranty Co., 20 T.C. 630">20 T. C. 630; Reserve Natural Gas Co., 12 B. T. A. 219; Christensen Machine Co., 18 B. T. A. 256. Where the contract is for an indefinite period no allowance*216 may be made for exhaustion based on the life of the contract, since no exhaustion was taking place which was susceptible of measurement. See General Equipment Co., 2 B. T. A. 804; Coca-Cola Bottling Co., 6 B. T. A. 1333; *331 Int. Rev. Bull. F (Rev. Jan. 1942), p. 88; Keokuk and Hamilton Bridge, Inc., 12 T. C. 249, 263, reversed on other grounds 180 F.2d 58">180 F. 2d 58. That the A Agency contract was for an indefinite period is not disputed.
Finally, the fact that no question was raised as to deductions for costs taken in decedent's returns for years prior to his death does not estop the Commissioner from contesting such deductions in the years before us. Schafer v. Helvering, 83 F.2d 317">83 F. 2d 317, affd. 299 U.S. 171">299 U.S. 171. In my opinion there is no room for the application of the Cohan rule ( Cohan v. Commissioner, 39 F. 2d 540) in this case. I would accordingly deny the petitioner any deduction for the unrecovered cost of either of the three contracts involved.
Footnotes
1. The consideration recited in the contract was $ 10,500. However the parties have stipulated the cost to be $ 12,500.↩
2. 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 or 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.↩
3. This and similar expressions herein are used advisedly due to difficulty in ascertaining petitioner's position from the briefs presented.↩
4. In the Cotlow↩ case only the amount of renewal commissions which exceeded the consideration paid therefor was involved, such consideration having been recovered out of prior receipts.
5. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
Except as provided in section 276 --
* * * *
(c) Omission from Gross Income. -- If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.↩