*72 Decisions will be entered under Rule 50.
1. Decedent died January 2, 1943. During 1942 he was employed by X Co. on a salary plus a bonus consisting of a percentage of profits as ascertained by its certified public accountants. Decedent's percentage of 1942 profits was so ascertained in February 1943, a month or more after death. A credit was then entered on the company books in decedent's favor and interest was computed thereon as of January 1, 1943. The bonus was paid to petitioner, decedent's estate, during 1943. Held, bonus income is taxable to such petitioner in 1943 under section 126 of the Internal Revenue Code.
2. Decedent for some time prior to his death had been a cotrustee of an estate. On July 20, 1943, an appropriate court approved and awarded commissions on account of decedent's service as cotrustee. These commissions were paid to petitioner, decedent's estate, during 1943. Held, the commissions are taxable to such petitioner in 1943 under section 126, Internal Revenue Code.
3. For failure of proof, but with the exception of a duplicated item, certain interest held taxable to petitioner in 1943 under section 126, Internal Revenue Code.
4. Section*73 126 as here applied held not unconstitutional.
*627 Respondent determined a deficiency of $ 6,515.80 for the taxable year January 3 to December 31, 1943, inclusive, in the income and Victory tax liability of petitioner in Docket No. 11793, being the estate of Fred Basch, deceased. Liability for this amount was also determined against petitioners in Docket*74 No. 11791 as trustee-transferees and against petitioner in Docket No. 11792 as fiduciary of the estate, under section 3467, Revised Statutes of the United States, as amended. The proceedings have been consolidated and reference hereinafter to "petitioner" *628 will refer to the estate. The basic question is whether certain income is taxable to the decedent individually or to petitioner. If it should be held that such income is taxable to petitioner, it is conceded that the liability determined as shown in each of Docket Nos. 11791 and 11792 is correct. Otherwise, there is no such liability.
Petitioner's return was filed with the collector of internal revenue for the fifth district of New Jersey.
FINDINGS OF FACT.
Decedent died testate January 2, 1943. Paul Wm. Vortrefflich (or Vort), hereinafter referred to as Vort, qualified as executor. In April 1946 the corpus of the estate was transferred to Vort and Julian H. Basch, as trustees under decedent's will. Vort, as executor, was then discharged.
Bonus. -- Decedent was employed by Herman Basch & Co., hereinafter referred to as the company. Decedent's employment contract with the company provided for a salary of $ 1,500*75 a month. The contract also provided that decedent should receive:
* * * In addition to such salary, further compensation equal to eleven per cent. (11%) of the net annual profits, (before Federal income and excess profits taxes) during such term, of the Employer as ascertained by its Certified Public Accountants. * * *
For present purposes decedent's 11 per cent of the company's profits for the calendar year 1942 amounted to $ 15,826.76. 1 This amount was determined by the company's accountants in February 1943 and entered in the company's general ledger account as of January 1, 1943, under the heading "bonus payable." Interest was paid by the company on the unpaid balance of the bonus from that date. This was the customary treatment. This amount was paid by the company to petitioner during 1943 as follows: $ 7,500 on January 21, $ 3,500 on April 27, and $ 5,006.85 on June 2. The last amount included $ 180.09 of interest. As of December 31, 1942, the company had cash on hand and in the bank in the amount of $ 87,862.03 and current assets of $ 528,203.45, as against current liabilities of $ 178,441.91.
*76 A final individual income tax return was filed on behalf of decedent for the taxable period covering January 1 and 2, 1943. This return reported as income the $ 15,826.76 bonus, which was consequently not reported as income on the fiduciary return filed for petitioner for the period January 3 to December 31, 1943. Petitioner did report, however, the interest on the bonus of $ 180.09 received by it from the company for this period. Respondent, in his deficiency notice, determined that petitioner should have reported the bonus as income.
*629 Commissions. -- Decedent for some time prior to his death had been a cotrustee of the estate of Herman Basch. On July 20, 1943, a surrogate of New York County approved and awarded commissions in the amount of $ 2,072.31 on account of decedent's services as cotrustee up to the time of his death. Of this amount, $ 236.32 was paid to petitioner in February 1943 and the remainder on July 27, 1943. Herman's estate, of which decedent had been cotrustee, had a balance in the bank on January 2, 1943, of $ 11,249.75. The commissions were reported on decedent's final individual income tax return for the period covering January 1 and 2, 1943, *77 and were consequently not reported by petitioner. Respondent determined that this amount should have been reported by petitioner.
Interest. -- The fiduciary return filed for petitioner for the period January 3 to December 31, 1943, reported as interest income the amount of $ 1,865.09. This amount is made up of the following items:
| Interest on North Bergen Realty Co. bonds | $ 1,516.67 |
| Interest on Camp Tarico notes | 168.33 |
| Interest paid by the Company on decedent's bonus | 180.09 |
Respondent, in his deficiency notice, increased petitioner's interest income by $ 477.59. Of this amount $ 180.09 was added by respondent on account of the $ 180.09 received by petitioner from the company as interest on decedent's bonus. Since petitioner reported its interest income in a lump sum, respondent did not know that this amount included the $ 180.09 in question. The remainder of the $ 477.59 by which respondent increased petitioner's interest income is claimed by petitioner to constitute interest which had accrued on securities owned by decedent up to the time of his death and which was reported as interest income on decedent's final individual income tax return for the period covering*78 January 1 and 2, 1943.
With the exception of decedent's final individual return, his and petitioner's returns have been filed on a cash and calendar year basis.
OPINION.
Section 126, Internal Revenue Code, 2 provides in effect that items not properly includible in a decedent's income under the *630 accounting method used by such decedent shall be included in the income of the person who rightfully receives such items. Decedent here consistently reported his income on the cash basis. The question for our determination therefore is whether the items of income in controversy are properly includible in decedent's income. If they are not so includible, then they should be included in petitioner's income, since petitioner rightfully received them.
*79 Decedent was on a cash basis. He did not actually receive any of the items in controversy. The only theory under which such items could therefore be considered properly includible in decedent's income is the one of constructive receipt.
Bonus. -- Decedent, under his employment contract with the company, was entitled to a percentage of profits "as ascertained by its Certified Public Accountants." Decedent's percentage of 1942 profits was so ascertained in February 1943, a month or more after his death. A credit was then made on the company's books in decedent's favor and interest was computed as of January 1, 1943. These circumstances do not, in our opinion, justify the application of a constructive receipt doctrine. The pertinent taxable period with respect of decedent covers the first two days of January 1943. During this period decedent's percentage had not been computed and no credit was then made in his favor. There is no showing that decedent controlled the company. Under these circumstances, we do not think it can be said that during the two-day tax period decedent turned his back on income which was subject to his unfettered command. Constructive receipt is a *80 concept which we have indicated will be sparingly applied and only in clear cases. This is not such a case. See Pedro Sanchez, 6 T.C. 1141">6 T. C. 1141, at 1147et seq.; affd., 162 Fed. (2d) 58.
Petitioner argues that the computation of decedent's percentage could have been made in an hour or so. The potential rapidity of the computation under the present circumstances does not, in our opinion, convert into constructive receipt what otherwise is not such. We hold that decedent did not constructively receive the bonus during the first two days of January 1943. It follows that respondent correctly determined that petitioner should have included this item in its income for the period January 3 to December 31, 1943.
Commissions. -- On July 20, 1943, the appropriate local court awarded and approved the commissions in question. This was almost half a year after decedent's death. There is no showing that decedent as of right under local law could have helped himself from the estate to the commissions. It is not indicated that any credit was made on the estate books in favor of decedent during the taxable period covering January*81 1 and 2, 1943, or prior thereto. Under these circumstances, we do not think the facts and circumstances of record justify an application of the theory of constructive receipt. It follows that respondent *631 must be sustained in determining that petitioner should include them in its income for the period January 3 to December 31, 1943, and we so hold.
Interest. -- We have found as a fact that $ 180.09 of the interest added by respondent to petitioner's interest income was already included in its interest income. This addition is therefore a duplication and we hold that to this extent respondent's determination is erroneous. We otherwise sustain respondent's determination as to interest income. The petition states that the remaining interest which respondent seeks to add to petitioner's income accrued to decedent before his death and was reported in his final return. However, there is nothing in the record at all to substantiate this statement. Nor is there any showing that such interest item was evidenced by interest coupons and/or that it matured and became payable within the lifetime of decedent. For failure of proof on petitioner's part, we therefore sustain respondent's*82 determination in this respect.
Finally, petitioner offers a constitutional objection. Petitioner argues that income has been defined as the gain derived from capital, labor, or from both combined. From this petitioner argues that the income items here in question were derived from decedent's labor and capital, not petitioner's. It is argued that to tax decedent's income to petitioner is not an income tax as to petitioner but a direct tax imposed without apportionment and is therefore unconstitutional. It not clearly appearing to us that the provisions of section 126 as here sought to be applied by respondent are unconstitutional, we hold adversely to petitioner on this point. Cf. Taft v. Bowers, 278 U.S. 470">278 U.S. 470.
It is established by the record and is unquestioned that petitioners in Docket Nos. 11791 and 11792 are liable for the deficiency determined hereunder against petitioner in Docket No. 11793, and we so hold. Petitioners in Docket No. 11791 are liable as transferees and petitioner in Docket No. 11792 is liable as fiduciary under section 3467, Revised Statutes of the United States, as amended.
Decisions will be entered under Rule 50.
Footnotes
1. There is some discrepancy in the record in this connection. The figure $ 15,864.12 sometimes appears rather than the one given above. We have adopted the figure of $ 15,826.76, since this is the amount by which respondent seeks to increase petitioner's income on account of decedent's remuneration for 1942.↩
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;
* * * *
[The legislative purpose of this section is evident from H. R. 2333, 77th Cong., 2d sess., p. 81, and S. R. 1631, same session, p. 100. Also compare sec. 42 (a), Internal Revenue Code, before and as amended by sec. 134 of the Revenue Act of 1942. See also Helvering v. Enright, 312 U.S. 636↩.]