agrees that for a period of ten years beginning on the date of the death of said Hatch or the date on which he shall cease to act in the capacity assigned to him (whichever shall first occur), it will pay to Frederic H. Hatch or to his estate, as the case may be, the following amounts:

(a) The annual salary provided for in paragraph FIRST hereof, and

(b) The annual share of net earnings computed according to para

graph SECOND hereof;

provided, however, that no payments shall be made to Frederic H. Hatch or to his estate under this paragraph THIRD after the total amounts paid to said Hatch or his estate under this paragraph THIRD plus the total amounts previously paid to said Hatch under the foregoing paragraph SECOND shall aggregate $400,000.

The agreement also contained a provision respecting the employment of the decedent by the corporation at the expiration of the tenyear period covered by paragraph first and provided that the decedent was not to engage in any other business or occupation whatsoever during the period of his employment or any extension thereof.

For Federal estate tax purposes the value of the agreement at the time of the decedent's death was determined to be $243,326.70, computed in accordance with the factor contained in table B of Regulations 105 for a ten-year term certain.

By mutual consent of the petitioner and the corporation the annual payments required to be made by the corporation under the agreement were varied from time to time and such payments were made in sums less than $30,000 per year. As sole legatee of decedent's will, the petitioner from time to time received payments from the corporation pursuant to the provisions of the agreement as modified by mutual consent of the petitioner and the corporation. However, at no time has she received any amount from the corporation pursuant to the provisions of the agreement relating to payments from net earnings of the corporation available for dividends on its common stock.

As of December 31, 1940, the petitioner had received from the corporation pursuant to the agreement payments totaling $235,500. In 1941 she received $15,750, so that as of December 31, 1941, she had received a total of $251,250, which was $7,923.30 in excess of the $243,326.70 determined to be the value for estate tax purposes of the amounts to be paid under the agreement. In each of the years 1942 and 1943 she received a payment of $12,000, which likewise was in excess of the value determined for estate tax purposes.

In determining the deficiencies here involved, the respondent determined that amounts received by the petitioner pursuant to the agreement in excess of the value determined for the agreement for estate tax purposes constituted taxable income and accordingly included the above mentioned amounts of $7,923.30, $12,000, and $12,000 in the petitioner's taxable income for the years 1941, 1942, and 1943, respectively. The petitioner's 1941 income tax return was filed on March 6, 1942.

On that return she showed dividends received in the amount of $9,651.60, interest of $1,906.27, short term gain on capital assets of $210.04, a long term loss on capital assets of $935.67, and a total income of $10,832.24. The long term loss of $935.67 represented 50 per cent of $1,871.35, which was the difference between long term losses totaling $2,811.12 and long term gains of $939.77. She omitted from her gross income the $7,923.30 heretofore mentioned which she received in 1941 pursuant to the above mentioned agreement.

On November 29, 1946, the petitioner and the respondent entered into an agreement extending to June 30, 1948, the time for making assessment of 1941 income tax against petitioner, as provided in section 275 (c) of the Internal Revenue Code. The notice of deficiency was mailed to the petitioner on February 3, 1948.

OPINION.

TURNER, Judge: It is the contention of the petitioner that the $7,923.30 received by her in 1941 and the $12,000 received in each of the years 1942 and 1943 under the contract between Frederic H. Hatch and Frederic H. Hatch & Co., which contract was acquired by her as legatee under the will of Frederic H. Hatch, were not income to her as determined by the respondent. It is her contention that the amounts in question constituted bequests, devises, or inheritances and are therefore specifically excluded from gross income by the provisions of section 22 (b) (3) of the Internal Revenue Code.1 It is the claim of the respondent that, inasmuch as the amounts in question represent amounts received by petitioner in excess of $243,326.70, the amount at which the said contract was included in the estate of Frederic H. Hatch for Federal estate tax purposes, they represent income to petitioner within the meaning of the Internal Revenue Code.

It is provided in section 22 (a) of the code that ""Gross income' includes gains, profits, and income derived from sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or gains or profits and income

*

*

(b) EXCLUSIONS FROM GROSS INCOME.-The following items shall not be included in gross income and shall be exempt from taxation under this chapter:

(3) GIFTS, BEQUESTS, DEVISES, AND INHERITANCES.-The value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph, the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift bequest, devise, or inheritance of income from property;

derived from any source whatever." In the instant case the petitioner acquired the contract between Frederic H. Hatch and Frederic H. Hatch & Co., as sole legatee under the will of Frederic H. Hatch. As such legatee she was entitled to receive under the agreement for a period of ten years, beginning on the date of Hatch's death, $30,000 per year, plus 10 per cent of the net earnings of Frederic H. Hatch & Co., available for common stock dividends in excess of $270,000 per year. For the purpose of determining Federal estate tax due and owing by the estate of Frederic H. Hatch, the value of the agreement was determined to be $243,326.70 and the petitioner does not here take issue with the value so determined. She also admits that if she had at any time sold the contract for an amount in excess of $243,326.70, such excess would have constituted taxable gain to her. Relying on United States v. Carter, 19 Fed. (2d) 121, however, she contends that there was no realization of gain by her in that she has not at any time made any sale, converted, or otherwise disposed of the asset and that in such circumstances the full amount received, including the amounts here in question, represent property acquired by her by "bequest, devise, or inheritance."

According to the scheme of the Internal Revenue Code, there is realization of gain from the sale or other disposition of property where the amount received is in excess of the cost or other basis therein provided, and in the case of property received by bequest, devise, or inheritance it is provided that the basis for determining gain or loss shall be the fair market value of such property at the time of acquisition. In this case what the petitioner received as sole legatee under the will of her deceased husband was not money, but a contract between her husband and Frederic H. Hatch & Co. At the time of acquisition that contract had a value not here disputed of $243,326.70. By reason of the payments over the years the petitioner herein has realized in excess of that basis the amounts involved in this case. As stated by the court in Helvering v. Roth, 115 Fed. (2d) 239, a case quite comparable to the case here, there can be no doubt that such a transaction, namely, the collection of moneys under rights or contracts acquired as in this case, which moneys are in excess of the value of those rights or contracts as of the date of inheritance, results in a gain to some one, and under section 22 (a) of the code gross income Lcludes "gains, of whatever kind." In this instance the realization of gain could have been by no one other than this petitioner. The amounts in question were not received by bequest, but rather the bequest consisted of the contract and the rights thereunder. The payments received over the years represent the realizations by the petitioner on that contract and by reason of her ownership thereof

Sec. 113 (a) (5), I. R. C.

On that return she showed dividends received in the amount of $9,651.60, interest of $1,906.27, short term gain on capital assets of $210.04, a long term loss on capital assets of $935.67, and a total income of $10,832.24. The long term loss of $935.67 represented 50 per cent of $1,871.35, which was the difference between long term losses totaling $2,811.12 and long term gains of $939.77. She omitted from her gross income the $7,923.30 heretofore mentioned which she received in 1941 pursuant to the above mentioned agreement.

On November 29, 1946, the petitioner and the respondent entered into an agreement extending to June 30, 1948, the time for making assessment of 1941 income tax against petitioner, as provided in section 275 (c) of the Internal Revenue Code. The notice of deficiency was mailed to the petitioner on February 3, 1948.

OPINION.

TURNER, Judge: It is the contention of the petitioner that the $7,923.30 received by her in 1941 and the $12,000 received in each of the years 1942 and 1943 under the contract between Frederic H. Hatch and Frederic H. Hatch & Co., which contract was acquired by her as legatee under the will of Frederic H. Hatch, were not income to her as determined by the respondent. It is her contention that the amounts in question constituted bequests, devises, or inheritances and are therefore specifically excluded from gross income by the provisions of section 22 (b) (3) of the Internal Revenue Code. It is the claim of the respondent that, inasmuch as the amounts in question represent amounts received by petitioner in excess of $243,326.70, the amount at which the said contract was included in the estate of Frederic H. Hatch for Federal estate tax purposes, they represent income to petitioner within the meaning of the Internal Revenue Code.

It is provided in section 22 (a) of the code that "Gross income' in* * sales, or cludes gains, profits, and income derived from dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities,

1 SEC. 22. GROSS INCOME.

* * *

or gains or profits and income

(b) EXCLUSIONS FROM GROSS INCOME.-The following items shall not be included in

gross income and shall be exempt from taxation under this chapter:

under (3) GIFTS, BEQUESTS, DEVISES, AND INHERITANCES.-The value of property acquired by this paragraph, the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of such income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift

bequest, devise, or inheritance of income from property;

derived from any source whatever." In the instant case the petitioner acquired the contract between Frederic H. Hatch and Frederic H. Hatch & Co., as sole legatee under the will of Frederic H. Hatch. As such legatee she was entitled to receive under the agreement for a period of ten years, beginning on the date of Hatch's death, $30,000 per year, plus 10 per cent of the net earnings of Frederic H. Hatch &Co., available for common stock dividends in excess of $270,000 per year. For the purpose of determining Federal estate tax due and wing by the estate of Frederic H. Hatch, the value of the agreement was determined to be $243,326.70 and the petitioner does not here take issue with the value so determined. She also admits that if she had at any time sold the contract for an amount in excess of $243,326.70, such excess would have constituted taxable gain to her. Relying on United States v. Carter, 19 Fed. (2d) 121, however, she contends that there was Do realization of gain by her in that she has not at any time made any sale, converted, or otherwise disposed of the asset and that in such cir cumstances the full amount received, including the amounts here in question, represent property acquired by her by "bequest, devise, or inheritance."

According to the scheme of the Internal Revenue Code, there is realization of gain from the sale or other disposition of property where the amount received is in excess of the cost or other basis therein provided, and in the case of property received by bequest, devise, or inheritance it is provided that the basis for determining gain or Joss shall be the fair market value of such property at the time of acquisition. In this case what the petitioner received as sole legatee under the will of her deceased husband was not money, but a contract between her husband and Frederic H. Hatch & Co. At the time of acquisition that contract had a value not here disputed of $243,326.70. By reason of the payments over the years the petitioner herein has realized in excess of that basis the amounts involved in this case. As stated by the court in Helvering v. Roth, 115 Fed. (2d) 239, a case quite comparable to the case here, there can be no doubt that such a transaction, namely, the collection of moneys under rights or contracts acquired as in this case, which moneys are in excess of the value of those rights or contracts as of the date of inheritance, results in a in to some one, and under section 22 (a) of the code gross income includes "gains, of whatever kind." In this instance the realization of gain could have been by no one other than this petioner. The amounts in question were not received by bequest, but ther the bequest consisted of the contract and the rights thereunder.

gain

The

payments received over the years represent the realizations by the petitioner on that contract and by reason of her ownership thereof

Sec. 113 (a) (5), I. R. C.