It was further emphasized by the Court of Appeals that Mr. Milligan had a contingent right to receive as termination payments an uncertain amount of money or nothing depending upon the level of his prior business activity leading to compensation in his final year as an agent. The payment amount depended in part upon the level of his commissions on personally produced policies. However, the termination payments were subject to two adjustments. The State Farm companies adjusted the termination payments to reflect the amount of income received on Mr. Milligan's book of business during the first post-termination year, and the number of his personally produced policies canceled during that year. If all of his customers had canceled their policies during the first post-termination year, Mr. Milligan would have received nothing. The Court of Appeals reasoned that in that sense the 1997 U.S. Tax Ct. LEXIS 10">*22 adjusted payment amount depended not upon Mr. Milligan's past business activity, but upon a successor agent's future business efforts to retain Mr. Milligan's customers and to generate service compensation for State Farm. The Court concluded that the disputed termination payments did not "derive" from Mr. Milligan's prior service.

We have set forth at length the reasons stated by the Ninth Circuit for reversing our Milligan opinion because we think they are persuasive. The case now before us is identical to Milligan in all material respects. Milligan cannot be distinguished, as it was in Schelble v. Commissioner, T.C. Memo. 1996-269, on appeal (10th Cir., Sept. 16, 1996), which involved "extended earnings" under a Career Agent's Agreement with American Family Insurance Companies, where this Court held that the taxpayer was subject to self-employment tax. But see, Gump v. United States, 86 F.3d 1126">86 F.3d 1126 (Fed. Cir. 1996), holding that "extended earnings" paid by Nationwide Mutual Insurance Company to a retired insurance agent were not "derived" from a trade or business carried on by him, and therefore he was not subject to self-employment tax. The Court of Appeals for the Federal Circuit1997 U.S. Tax Ct. LEXIS 10">*23 found the Ninth Circuit's reasoning in Milligan persuasive, and stated that "we do not 108 T.C. 130">*137 see any meaningful differences between Milligan and Gump that would counsel a different result". 86 F.3d 1126">Id. at 1129.

We have given further thought to our conclusion in Milligan v. Commissioner, T.C. Memo. 1992-655, that the termination payments were the equivalent of deferred compensation. Respondent, of course, urges us to adhere to that conclusion. But we are no longer inclined to do so because we now think such payments are not deferred compensation.

In a typical deferred compensation arrangement, an employee wants to postpone receiving a portion of the income to which he or she is entitled with the understanding that the income will be paid at a later time, usually upon retirement or other termination. Arizona Governing Committee v. Norris, 463 U.S. 1073">463 U.S. 1073, 463 U.S. 1073">1076 (1983); Minor v. United States, 772 F.2d 1472">772 F.2d 1472 (9th Cir. 1985). In these cases the employee chose to receive less than his or her agreed compensation when earned with the understanding that it would be paid out at some later time. The employer ordinarily contributes the amount designated by the employee to a fund established for that purpose. 1997 U.S. Tax Ct. LEXIS 10">*24

To be sure, deferred compensation arrangements often exist with respect to insurance agents operating as independent contractors. Such a plan was discussed in Petr v. Nationwide Mut. Ins. Co., 712 F. Supp. 504 (D. Md. 1989). In that case, which involved a Nationwide plan, the insurance company "credited to an account maintained over the years for * * * [the agent] a percentage of * * * [the agent's] earnings based on his original and renewal fees for insurance policies." Id. at 505. The same plan was at issue in Darden v. Nationwide Mut. Ins. Co., 922 F.2d 203">922 F.2d 203 (4th Cir. 1991), revd. on other grounds 503 U.S. 318">503 U.S. 318 (1992). In that case the deferred compensation plan was funded by the insurance company's "annual contributions based on an agent's earnings from original and renewal fees for insurance policies." 922 F.2d 203">Id. at 204.

Petitioner performed services for State Farm for 33 years. During his service he received commissions, service compensation, and renewal commissions. The record does not show that he was entitled to more compensation than he received once the termination payments were made. The Agreement contains no provisions to accumulate funds for termination payments. The language of 1997 U.S. Tax Ct. LEXIS 10">*25 Section IV of the Agreement indicates that the parties intended to create a 108 T.C. 130">*138 payment scheme separate and distinct from compensation for services rendered.

Other distinctions between the termination payments and the ordinary deferred compensation plan are apparent. Deferred compensation which becomes payable after the recipient's retirement takes into account his overall earnings and years of service. The amount ultimately to be paid to the individual is a vested property right when earned which usually cannot be cut off arbitrarily. See Phillips v. Alaska Hotel and Restaurant Employees Pension Fund, 944 F.2d 509">944 F.2d 509, 944 F.2d 509">516 (9th Cir. 1991).

In those respects petitioner's termination payments differed from the ordinary deferred compensation plan. Under the Agreement, the amount of termination payments was not dependent upon the amount petitioner earned over his career. As long as he had at least 2 years of service prior to the termination, it made no difference whether he had 2 or 33 years of service with State Farm for purposes of computing his termination payments. If he had received no commissions during the last 12 months, then he would not have been entitled to any termination payments. 1997 U.S. Tax Ct. LEXIS 10">*26

The termination payments were linked to the amount of commissions paid to petitioner during the 12 months immediately preceding the termination. The amount was unaffected by petitioner's income during any prior period, by the total number of policies written over his career with State Farm, or by the total time period he served as a State Farm agent. No matter how long he had been a State Farm agent, petitioner's termination payments would be based only on his compensation for the last 12 months. Unlike deferred compensation, petitioner had no vested right to payment of any particular funds or any specific amount until the termination and unless he complied with the conditions of the Agreement to return property to State Farm and to refrain from competition.

Consequently, we conclude that the termination payments received by petitioner were not deferred compensation derived from self-employment and that our prior conclusion in 38 F.3d 1094">Milligan v. Commissioner, supra, was incorrect. See also 922 F.2d 203">Darden v. Nationwide Mutual Insurance Co., supra, where the Court of Appeals for the Fourth Circuit held that an Extended Earnings Plan providing for similar payments was not a pension 108 T.C. 130">*139 plan subject to 1997 U.S. Tax Ct. LEXIS 10">*27 regulation under ERISA, but that the payments were in the nature of a buyout.

Respondent also maintains that the Courts of Appeals' decisions in Milligan and Gump are erroneous, based on the following arguments. First, it is argued that both decisions require that a portion of the taxpayer's compensation be set aside as earned, to provide a specific fund for the post-termination payments, else the taxpayer's business activity could not be considered the "source" of such payments. Thus, respondent construes both decisions as adding a "salary reduction agreement" or "direct tracing" requirement to the "derived from trade or business" standard that is not supported by other case law or the language of section 1402.

Second, respondent argues that the existence of post-termination conditions upon the agent's right to receive the termination payments should play no role in deciding whether such payments are subject to self-employment tax. Respondent stresses that the relevant statutory language provides no exclusion from self-employment tax liability for income which is received only after the recipient satisfies certain post-termination obligations. Respondent argues: (1) The fact that 1997 U.S. Tax Ct. LEXIS 10">*28 a post-termination obligation exists does not detract from the fact that an individual's right to receive income directly arises from his prior business activities; (2) the introduction of any such "post-termination obligation" exclusion into the statutory framework of sections 1401 and 1402 would serve to encourage tax avoidance through the use of tax-motivated or other "condition subsequent" language, thereby interfering with the administrative enforcement of these provisions; and (3) the presence of a condition subsequent would have no impact upon the "source of income" requirement imposed by the section 1402 "derived from trade or business" standard because it would relate only to the amount or existence of income and not its source.

Third, respondent argues the appropriate section 1402 "derived from trade or business" test should be based on an "ordinary sense" or "common parlance" all-inclusive definition of the term "derived from". Here again, it is contended that petitioner would not have received the termination payments "but for" his prior pursuit of his business as a State Farm insurance agent. Thus, respondent argues, the "causal nexus" between petitioner's prior business 1997 U.S. Tax Ct. LEXIS 10">*29 activity and his 108 T.C. 130">*140 receipt of a benefit from such activity is established notwithstanding the conditions subsequent that could have eliminated or substantially altered his right to receive any such benefit.

Finally, respondent argues that an overview of the employment tax provisions indicates that Congress intended to subject all payments to former workers, whether employees or independent contractors, to the imposition of employment tax on deferred compensation in the absence of a specific exception.

We have considered all of respondent's arguments, but we have not found them convincing.

In the interest of promoting uniformity, consistency, and fairness in the disposition of this issue with respect to former insurance agents who receive termination payments under similar contractual agreements, we follow the decision of the Court of Appeals for the Ninth Circuit in 38 F.3d 1094">Milligan v. Commissioner, supra . Accordingly, upon further reflection and analysis, we hold that the termination payments petitioner received in 1990 and 1991 are not subject to self-employment tax. Because we conclude that the termination payments were not "derived" from the carrying on of petitioner's insurance business, 1997 U.S. Tax Ct. LEXIS 10">*30 ⁴ we need not decide the precise nature of the payments or specifically characterize them as a particular type of income. In other words, we need not decide in this case whether the termination payments are consideration for an agreement not to compete or the purchase of petitioner's agency, including its assets and goodwill. Milligan v. Commissioner, 38 F.3d 1094">38 F.3d at 1100.

To reflect the foregoing,

Decision will be entered for petitioners.

108 T.C. 130">*141 COHEN, CHABOT, 1997 U.S. Tax Ct. LEXIS 10">*31 SWIFT, JACOBS, GERBER, WELLS, RUWE, COLVIN, LARO, FOLEY, VASQUEZ, and GALE, JJ., agree with this majority opinion.

CHIECHI, J., did not participate in the consideration of this opinion.

Finally, in Milligan v. Commissioner, 38 F.3d 1094">38 F.3d 1094, 38 F.3d 1094">1098 n.6 (9th Cir. 1994), which is identical to the instant case in all material respects, the Court of Appeals observed: "Payments derived from the cessation of Milligan's business are not subject to self-employment tax. * * * Nor does the self-employment tax apply to payments derived from noncompetition with State Farm."

BEGHE and DAWSON, JJ., agree with this concurring opinion.

Because Milligan already had been fully compensated for his services, the Ninth Circuit concluded that the termination payments were linked only to Milligan's previous status 108 T.C. 130">*144 as a 2-year plus independent contractor for State Farm, and, thus, "none of his business activity was the 'source' of the Termination Payments." 38 F.3d 1094">Id. at 1098-1099. The Ninth Circuit supported its holding that previous independent contractor status alone was not a sufficient nexus by analogizing to a wage tax situation in which employer-provided supplemental unemployment benefits were held not to be 1997 U.S. Tax Ct. LEXIS 10">*37 wages because the benefits, although the result of employment status at some previous time, were "'In no way * * * a function of the employee's providing services for his employer. Those benefits are not derived from any employment carried on.'" 38 F.3d 1094">Id. at 1099 (quoting Newberry v. Commissioner, 76 T.C. 441">76 T.C. 445).

I dissent because I am not persuaded by the reasoning of the 38 F.3d 1094">Ninth Circuit in Milligan v. Commissioner, supra. I do not agree with the quantity-or-quality-of-labor test adopted by the Ninth Circuit. I believe that the Ninth Circuit has overemphasized parallels between the wage tax acts (the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA)) and SECA, forgetting that SECA, unlike FICA and FUTA, does not impose a levy solely against labor, but, rather, imposes a levy against certain trade or business income of an individual. Compare sections 3121(a) and 3306(b) with section 1402(a). Properly, the Ninth Circuit looks for a connection (nexus) between the gross income in question and the taxpayer's business "activity". Improperly, however, the Ninth Circuit uses the word "activity" in a limited sense, a sense that encompasses only physical or mental 1997 U.S. Tax Ct. LEXIS 10">*38 exertions: e.g., "Because Milligan already had been fully compensated for his services, none of his business activity was the 'source' of the Termination Payments." 38 F.3d 1094">Milligan v. Commissioner, supra at 1099 (emphasis added). Such a restrictive interpretation may be appropriate for a wage tax analysis, in which the question is whether the payment is remuneration for employment (labor), see sections 3121(a), 3306(b), but it is too narrow a frame of reference to determine whether the taxpayer's trade or business is the source of an item of gross income.

The statutory phrase in question is "net earnings from self-employment", which is defined in section 1402(a) as "gross income derived by an individual from any trade or business carried on by such individual [less certain deductions]". The 108 T.C. 130">*145 only term that suggests that less than all of the trade or business income of an individual is subject to tax is the term "carried on". S. Rept. 1669, 81st Cong., 2d Sess. (1950), 1950-2 C.B. 302, is the report of the Committee on Finance that accompanied H.R. 6000, which was enacted as the Social Security Act Amendments of 1950, ch. 809, 64 Stat. 477, which included the Self-Employment Contributions 1997 U.S. Tax Ct. LEXIS 10">*39 Act. That report indicates that Congress used the verbal phrase "carried on" in a relational sense, to describe a business conducted or operated by the individual subject to the tax (as opposed to someone else):

The trade or business must be "carried on" by the individual either personally or through agents or employees, in order for the income to be included in his "net earnings from self-employment." Accordingly, gross income derived by an individual from a trade or business carried on by him does not include income derived by a beneficiary from an estate or trust even though such income is derived from a trade or business carried on by the estate or trust. [S. Rept. 1669, supra, 1950-2 C.B. at 354.]

See also H. Rept. 1300, 81st Cong., 1st Sess. (1949), 1950-2 C.B. 255, 294.

Clearly, the trade or business need not currently be carried on by the individual; a past carrying on will do. See Schumaker v. Commissioner, 648 F.2d 1198">648 F.2d 1198, 648 F.2d 1198">1200 (9th Cir. 1981) (affirming self-employment tax on sale proceeds from wheat that the taxpayer grew in the past: "Self-employment income is determined by the source of the income, not the taxpayer's status at the time the income is realized." (emphasis added)), 1997 U.S. Tax Ct. LEXIS 10">*40 affg. in part and revg. in part T.C. Memo. 1979-71; sec. 1.1402(a)-1(c), Income Tax Regs.

Thus, the only relevant question is whether the item of gross income in question is derived from the taxpayer's trade or business or from some other source. It seems safe to conclude that petitioner was in the business of selling insurance as an independent agent of State Farm Insurance Co. (State Farm). His relationship with State Farm, including the terms under which he would earn gross income from State Farm, were governed by his written agency agreements with State Farm. The termination payments were made pursuant to the State Farm Agent's Agreement, Form AA3 (the Agreement). The Agreement appoints petitioner an agent of State Farm 108 T.C. 130">*146 for an indefinite period. The Agreement contains a preamble and six numbered sections:

(1) Mutual Conditions and Duties

(2) Compensation

(3) Termination of Agreement

(4) Termination Payments

(5) Extended Termination Payments

(6) General Provisions

The section entitled "Termination of Agreement" provides, in pertinent part, that the Agreement terminates upon the agent's death or upon written notice by either party. That section also contains a prohibition against 1997 U.S. Tax Ct. LEXIS 10">*41 competition by the terminated agent. Termination payments are provided for in the section entitled "Termination Payments" and are as described by the majority. The Agreement provides that it is the sole and entire agreement between the parties. No part of the agreement has to do with anything other than the beginning, middle, and end of petitioner's business relationship with State Farm.

The termination payments were conditioned on petitioner's returning to State Farm all of its property and not competing with State Farm for 1 year, and those payments were a product of both petitioner's performance during his last year with State Farm and the staying power of petitioner's performance for State Farm. The payments were not otherwise identified as being in consideration for any particular contractual obligation of petitioner's under the Agreement. Some portion of the termination payments may have been in consideration for petitioner's promise not to compete for 1 year. The majority's report does not contain sufficient information from which to make an allocation. Moreover, I am not convinced that, even if such information were available, an allocation would be required. In Barrett v. Commissioner, 58 T.C. 284">58 T.C. 284, 58 T.C. 284">289 (1972)1997 U.S. Tax Ct. LEXIS 10">*42 (rejected sub silentio with respect to its focus on the "goods-and-services test" in Groetzinger v. Commissioner, 82 T.C. 793">82 T.C. 793 (1984), affd. 771 F.2d 269">771 F.2d 269 (7th Cir. 1985), affd. 480 U.S. 23">480 U.S. 23 (1987)), we accepted the parties' agreement "that noncompetition does not constitute the carrying on of a trade or business." In addition, in Ohio Farm Bureau Fedn., Inc. v. Commissioner, 106 T.C. 222">106 T.C. 222, 106 T.C. 222">236 (1996), we suggested that the rationale in Newberry v. Commissioner, 76 T.C. 441">76 T.C. 441 (1981), supported the 108 T.C. 130">*147 holding that income from a nonsponsorship and noncompetition agreement does not constitute "unrelated business income" under the definition of that term in section 512(a). Those cases, however, do not mandate the conclusion that income received from a covenant not to compete is per se excluded from the reach of SECA. I think that the law on that point still may be uncertain. Since that point is not crucial to my disagreement with the Ninth Circuit, I shall not pursue it any further. It is sufficient to me that, on the facts as I understand them, the payments were made pursuant to a business contract that served no purpose other than to define both the consideration for and other aspects of the 1997 U.S. Tax Ct. LEXIS 10">*43 business relationship between petitioner and State Farm.

Lastly, the termination payments in this case are fundamentally unlike the insurance proceeds in 76 T.C. 441">Newberry v. Commissioner, supra. The payments in Newberry were derived from an insurance policy that was purchased by the taxpayer in order to provide him with a substitute for his trade or business income in the event of a business interruption, such as the catastrophic fire in that case. The payments took the place of income from the trade or business and were not themselves income from that business. In this case, the termination payments were derived from a trade or business carried on by petitioner.