Before LUMBARD, Chief Judge, WATERMAN and MARSHALL, Circuit Judges.
The taxpayer appeals from the assessment of federal income tax deficiencies for the years 1953 through 1956 in the respective amounts of $6,744.05, $6,590.52, $22,777.20, and $8,384. We affirm the decisions of the Tax Court, 39 T.C. 580 (1962), except to the extent that the sum paid by the ancillary administrator in satisfaction of the British estate tax, $30,185.95, was held to be includible in the taxpayer's gross income for 1955. Determination of the numerous issues raised requires recital of the circumstances under which the taxpayer received a testamentary bequest, the nature and amount of which are here disputed.
The taxpayer's deceased husband, J. W. Findlay, solicited insurance for Willis, Faber & Dumas, Ltd., insurance brokers and underwriters of London, England. He was also a member of a partnership in New York City engaged in the insurance business. On March 27, 1936 he executed an agreement with Willis, Faber & Dumas, Ltd. providing for the payment of commissions after his death for a specified period. In his will, dated February 17, 1949, the decedent bequeathed onehalf of the commission payments to the petitioner from whom he had been divorced in 1948. J. W. Findlay died in 1951, a citizen of the United States and a resident of New York.
An agreement dated May 6, 1952 was executed by the taxpayer and Lois Elliman Findlay, the decedent's widow, and the Schroder Trust Company, as executor of the will of J. W. Findlay, under which the Schroder Trust Company purported to assign the testator's rights to commissions payable by Willis, Faber & Dumas, Ltd., to taxpayer and Lois Elliman Findlay. On May 29, 1952 the taxpayer, Lois Elliman Findlay, Willis, Faber & Dumas, Ltd., and the Schroder Trust Company entered into a second contract under which the taxpayer and Lois Elliman Findlay agreed to accept $150,000 each in settlement of the obligation of Willis, Faber & Dumas, Ltd., created by the agreement of March 27, 1936. A subsequent agreement dated November 11, 1953, executed by the same parties, modified the details of payment of the May 29, 1952 contract so that the sums payable would be as follows:
"(a) $50,000 each to Lois Elliman Wright and Helen Rich Findlay upon the execution and delivery of the agreement itself;
"(b) $25,000 each to Lois Elliman Wright and Helen Rich Findlay on January 10, 1954; and
"(c) $25,000 each to Lois Elliman Wright and Helen Rich Findlay on December 10, 1954; and
"(d) $50,000 each to Lois Elliman Wright and Helen Rich Findlay on January 10, 1955; provided, however, that no payments need be made under clauses (c) and (d) above unless and until evidence satisfactory to [Willis, Faber & Dumas, Ltd.] has been furnished to it by Schroder Executor & Trustee Company, Ltd., as Ancillary Administrator with the Will annexed of the Estate of J. Wilfred Findlay, that all British death duty on said estate has been paid in full; and provided further that in case, prior to December 10, 1954, said Ancillary Administrator shall certify to [Willis, Faber & Dumas, Ltd.] that British estate assets available to the Ancillary Administrator * * are insufficient to pay all British death duty on said estate, together with the amount required to pay any deficiency therein, then and in such event [Willis, Faber & Dumas, Ltd.] shall forthwith pay to said Ancillary Administrator the amount so required to pay such deficiency (but not in excess of $150,000), and thereupon the obligations of [Willis, Faber & Dumas, Ltd.] to make payments under clauses (c) and (d) above to Lois Elliman Wright and Helen Rich Findlay shall be reduced by the amount so paid to the Ancillary Administrator. * * *"
Taxpayer received payments from Willis, Faber & Dumas, Ltd. of $50,000 in each of the years 1953 and 1954 and $19,815.05 in 1955 pursuant to the agreement of November 11, 1953. Finally, in 1956 the Board of Directors of the British insurance firm voted to make an additional payment of $16,425 to the petitioner.
The taxpayer claims (1) that the payments received in 1953, 1954 and 1955 were not income in respect of a decedent and, therefore, should not be taxed as ordinary income; (2) that if these payments are to be treated as income in respect of a decedent the taxpayer should be able to deduct an amount equal to the full United States estate tax attributable to the commissions; (3) that the $30,185.95 withheld in 1955 by Willis, Faber & Dumas and used to pay a portion of the British estate duty was, in any event, not received by her and not properly includible in her gross income for 1955; and (4) that the $16,425 received from Willis, Faber & Dumas was a gift exempt from tax under § 102(a) of the 1954 Internal Revenue Code.
First we turn to the taxpayer's contention that the payments received from Willis, Faber & Dumas in 1953, 1954 and 1955 were not taxable to her as income in respect of a decedent, but rather they are excludable testamentary bequests. Under § 126 of the Internal Revenue Code of 1939, and the comparable § 691 of the Internal Revenue Code of 1954, it is clear that these sums received are income in respect of a decedent. Section 691 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 after a distribution by the decedent's estate of such right."
The sums paid represented renewal commissions on insurance contracts originally written by Findlay and personally serviced by him during his lifetime and were thus clearly attributable to Findlay's business activities prior to his death. The commissions here involved were not payable until after Findlay's death and therefore were not properly included in his income for his last taxable period. Similar commissions received by Findlay during his life from his insurance business were taxable as ordinary income. The commissions paid to petitioner after decedent's death retain their nature as ordinary income and consequently, are taxable as ordinary income. Latendresse v. Commissioner of Internal Revenue, 243 F.2d 577 (7 Cir.), cert. denied, 355 U.S. 830, 78 S. Ct. 43, 2 L. Ed. 2d 43 (1957).
The taxpayer asserts that Findlay's executor, and not she, is liable for the tax on the commissions since, under the agreement of May 6, 1952, the right to the commission income was transferred by Findlay's executor to the taxpayer. In fact, this agreement states that "the parties (including the petitioner and the executor) are agreed that said bequest constitutes a specific legacy of testator's rights under said contract and of the benefits therein provided." Therefore it is clear that the taxpayer received the commission income directly as a result of the decedent's will and not because of any selection made by the executor to satisfy some ...