Before DUFFY, Chief Judge, and FINNEGAN and LINDLEY, Circuit Judges.
The Commissioner determined deficiencies in income tax against the taxpayer claiming she had failed to include in her gross income for the years 1946 to 1949, inclusive, renewal commissions which were paid to her in those years by the Standard Life Insurance Company of Indiana. The Tax Court approved the Commissioner's determination except it allowed certain deductions for amortization.
The principal question here for decision is whether insurance renewal commissions received by the taxpayer in 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 § 126(a) (1), (3) Internal Revenue Code of 1939, 26 U.S.C.A. § 126(a) (1, 3). If that question be decided in the affirmative, there arise three additional questions: 1) whether taxpayer is entitled to a deduction for amortization of the costs of certain contracts; 2) whether the portion of commissions retained by the Insurance Company against advances for expenses are to be included in taxpayer's gross income for 1946, and 3) whether the collection of deficiencies for the years 1946 and 1947 are barred by limitations under § 275(c), Internal Revenue Code of 1939, 26 U.S.C.A. § 275(c).
Taxpayer is the widow and sole beneficiary under the will of Frank J. Latendresse who died July 3, 1944. Until 1941 when decedent moved to Indianapolis, he lived in Marion, Indiana, where he and his wife were partners in the S & L Gravel Company. Decedent became connected with the insurance business of Standard through several contracts hereinafter described.
Standard was organized in 1934 by Arthur H. Wyatt and George F. Flagg for the purpose of carrying on a life insurance business. Wyatt was designated as Standard's 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 employed Flagg to assist him in the performance of these contracts. Under date of February 28, 1939 Wyatt entered into a contract with Frank J. Latendresse hereinafter somtimes called Frank, and the contract is hereinafter referred to as the A Agency Contract. Wyatt sold Frank the unperformed part of the former's contract with Standard. The consideration to Wyatt was $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. Frank was substituted for Wyatt as the general agent of Standard to sell the remainder of the $15,000,000 of life insurance.
On April 22, 1940, Frank and Wyatt made another contract which is referred to as the A Agency Renewal Contract. The Tax Court found that under this contract Frank purchased from Wyatt for a total consideration of $12,500 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 had been impressed with a trust pursuant to the A Agency Contract.
On April 19, 1939 Standard entered into a contract with Frank's brother, James. This contract is referred to as the B Agency Contract. Under this contract 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. This 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% of the net proceeds of such business in addition to repayment of the amounts advanced. Flagg was employed to assist in the sale of these policies for which he was to receive 32% of the net proceeds 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 was then substituted as general agent. On December 31, 1941 Flagg sold his interest in the B Agency Contract to Frank for $7,400.43. 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.
On May 29, 1941 Frank entered into a new contract with Standard which is referred to as the C Agency Contract. Under this contract Frank was to act as its general agent in the sale of certain life insurance policies known as "Profitsharing Participating Thirty-Payment Life" policies. He was to receive as consideration for the sale of the insurance policies 85% of the first year's premiums, 121/2% of the premiums for the next five years, 71/2% of the premiums for the next four years, and 5% of the premiums for the next five 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 to finance the operation of the general agency during the first year.
Standard had advanced $10,235 up to the date of Frank's death. 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 upon renewal commissions due taxpayer in repayment of its advances.
Frank entered into an agreement with John M. 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% 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 Frank's widow, the taxpayer here, 50% of the net profits less one-half of the bookkeeping and disbursement expenses for all insurance sold up to the date of succession. Brown succeeded to this general agency on July 3, 1944.
The duties of Frank as general agent for the C Agency were "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."
Each of the agency contracts provided that upon the happening of certain events (which were not susceptible of ascertainment) the contract could be canceled 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 insurance business. All agents engaged in selling the life insurance policies were to be ...