Estate of Smith v. Commissioner

Holding

Compensation earned by a decedent for services rendered but not yet received at death constitutes income in respect of a decedent under section 691 and is taxable when collected by the estate or successor.

Facts

The decedent earned commissions and bonuses through personal services before death, but the amounts were paid to the estate after death. The estate did not include them in income, arguing they were transformed into property of the estate. The Commissioner determined they were income in respect of a decedent.

Reasoning

The Tax Court applied section 691, holding that the right to receive earned but unpaid compensation passes through death without receiving a basis step-up under section 1014. The estate steps into the decedent's shoes and recognizes the items as ordinary income when received, while a corresponding estate-tax deduction may be available.