1960 U.S. Tax Ct. LEXIS 8">*8
Petitioner was the exclusive general insurance agent for Iowa for an insurance corporation from 1929 through 1955. In 1955 the petitioner, responding to the insurance corporation's suggestion that the exclusive agency contract be terminated, executed a new agreement with the corporation under which the old contract was canceled and petitioner obtained the right to receive payments of $ 500 a month, beginning February 1, 1956, over a period of 180 months. The insurance corporation based the total amount of consideration upon the present value, at the time of the new agreement, of the petitioner's renewal commissions that would be due after January 1, 1956. The commuted value of the petitioner's future renewal commissions was approximately $ 80,000 and the present value of the 180 monthly payments was $ 76,153.
35 T.C. 429">*430 The respondent determined a deficiency in the petitioner's income tax for the year 1956 in the amount of $ 27,009.34. The issues are:
(1) Whether the entire fair market value of a contract under which petitioner obtained the right to receive an annual fixed amount over a period of 15 years is includible1960 U.S. Tax Ct. LEXIS 8">*10 in petitioner's gross income in the year the contract was effective, and
(2) Whether the amount received by the petitioner is taxable as ordinary income or as capital gain.
FINDINGS OF FACT.
Some of the facts have been stipulated and they are herein incorporated by this reference.
The Olmsted Incorporated Life Agency, hereafter called the petitioner, is an Iowa corporation chartered in 1929 with its principal place of business in Des Moines, Iowa. It filed its corporation income tax return on a cash basis for 1956 with the district director of internal revenue at Des Moines, Iowa.
Petitioner's principal business activity from June 15, 1929, to December 31, 1955, was that of exclusive general insurance agent in the State of Iowa for the Peoples Life Insurance Company of Frankfort, Indiana (hereinafter called Peoples), pursuant to a contract which was executed on June 15, 1929, and amended from time to time. The original contract was executed by Oliver C. Miller as president of the petitioner. Oliver C. Miller, who was president and principal stockholder of the petitioner during 1956, died of a heart ailment on March 3, 1957, at the age of 81 years.
Two or three years prior to 19561960 U.S. Tax Ct. LEXIS 8">*11 Peoples indicated to Oliver C. Miller that it desired to terminate the petitioner's exclusive agency contract for Iowa. Peoples wished to develop insurance sales in Iowa by dividing the State into small territories. Under the 1929 contract, as amended, Peoples was paying commissions to the petitioner which 35 T.C. 429">*431 were more favorable than the commissions it was paying to other agencies under contracts executed since 1950.
Miller did not accept Peoples' proposal at first, but subsequently his health began to fail and in December 1955 an agreement was executed by Peoples and petitioner, and with Miller, in his capacity as petitioner's principal stockholder, as one of the parties to the agreement. The agreement provided, in part, as follows:
This Agreement made and entered into by and between Peoples Life Insurance Company of Frankfort, Indiana, First Party, hereinafter referred to as Company, and Oliver P. [C.] Miller and Rose D. Miller, his wife, and Martha Virginia Johnson, hereinafter referred to as stockholders, and Olmstead 1 Incorporated Life Agency, hereinafter referred to as Olmstead, Second Party, WITNESSETH: That
Whereas the Company has heretofore held a contract with1960 U.S. Tax Ct. LEXIS 8">*12 Olmstead, by the terms of which Olmstead was the exclusive State agent for the Company in the State of Iowa, and
* * * *
Whereas Olmstead, by the terms of a contract with the Company, has become entitled to certain renewal commissions as provided for in said contract, from which renewals Olmstead is bound by the terms of certain contracts outstanding with individual agents in the State of Iowa, to pay such individual agents renewal commissions as provided in their contracts, and
Whereas all of Second parties are desirous of having Olmstead surrender its said contract with the Company and of assigning any and all renewals which may become due and payable on and after January 1, 1956.
Now Therefore, it is hereby agreed by and between the parties, each in consideration of the promises and covenants of the other, as follows:
1. Olmstead hereby agrees to, and does hereby surrender, give up and annul its contract now in effect with the Company, such surrender to be effective as of midnight December 31, 1955. The contract hereby surrendered is that which was originally entered into between Olmstead and the Company on June 15, 1929, together with any and all amendments or changes there to1960 U.S. Tax Ct. LEXIS 8">*13 [thereto].
2. Olmstead hereby assigns to Company all of its right, title and interest in and to any and all renewals which may have heretofore been earned under the contract heretofore referred to, and becoming payable on and after January 1, 1956. It is agreed and understood that Olmstead shall receive, and the Company shall pay to Olmstead, as soon as practical, the renewals to which Olmstead has become entitled arising from premiums paid to the Company during the month of December, 1955, which renewal commissions to be so paid to Olmstead shall be computed in conformance with the customs heretofore in effect between the parties.
* * * *
5. As a further consideration for the execution of this contract, the stockholders, and each of them, and Olmstead, agree that none of them will enter into a contract with any person, firm or corporation, by the terms of which contract such stockholder or Olmstead is to sell or offer to sell in the State of Iowa, any contract of life insurance for any person, firm or corporation. It is agreed and understood this shall not prohibit the Company, and any one or more 35 T.C. 429">*432 of the stockholders, or Olmstead, from entering into a new contract with1960 U.S. Tax Ct. LEXIS 8">*14 the Company, by the terms of which such stockholders or Olmstead may sell life insurance for the Company.
6. As a further consideration for the payments herein called for by the Company, Olmstead agrees that it will immediately turn over to the Company any and all papers, documents and records having reference to the business heretofore operated by Olmstead under its contract with Company; in explanation of the items to be so turned over, but not in limitation thereof, are to be included all agent's contracts, policy holder's cards, records of commissions paid by Olmstead, and any and all other documents which may assist the Company in continuing the business of writing life insurance in the State of Iowa, or may assist the Company in conforming with the acts to be performed by it by the terms of this agreement as hereinafter set out.
7. In consideration of the promises and acts of Second parties, the Company agrees that it will issue forthwith, payable to the order of Olmstead Incorporated Life Agency, or to such person or persons as Olmstead may direct in writing, an annuity or annuities calling for a total payment of $ 500.00 per month, beginning February 1, 1956, and a like payment1960 U.S. Tax Ct. LEXIS 8">*15 on the first day of each month thereafter, until a total of 180 such payments, including the first, shall have been paid. * * *
* * * *
8. As a further consideration the Company agrees that it will pay to the agents heretofore employed by Olmstead, such renewal commissions as may be required by the contracts the agents held on or prior to December 15, 1955; it is agreed and understood that the Company shall be substituted for and on behalf of Olmstead in said contracts and that the sums required to be paid by Olmstead under such contracts shall be paid by the Company. Provided that this shall not bar nor prohibit the Company from exercising all options to cancel or otherwise end such contracts in as full and ample a manner as Olmstead might have done.
Pursuant to this agreement, Peoples executed a contract on December 31, 1955, in which it agreed to pay to "Olmsted Incorporated Life Agency, the Annuitant, a first1960 U.S. Tax Ct. LEXIS 8">*16 income payment of $ 500.00 on the first day of February, 1956, and a like payment on the first day of each month thereafter, until a total of 180 such payments, including the first, shall have been paid"; and then further provided, as follows:
Provided, no assignment of this contract shall be of any effect so far as the Company may be concerned, until the original or a duplicate thereof is filed at the Home Office of the Company, and its receipt duly acknowledged. The Company assumes no responsibility for the validity of any assignment. The Annuitant specifically shall have the right to assign its rights under this agreement, except, however, that the Company shall at no time be required to pay any one payment due hereunder to more than three persons, either legal or natural.
This contract is made in consideration of the payment of one dollar cash in hand, receipt of which is hereby acknowledged, and certain other valuable considerations, including the surrender of a certain contract by the terms of which the Annuitant has heretofore been an agent of Peoples Life Insurance Company, with certain rights and obligations more particularly set out in said contract, covering the State1960 U.S. Tax Ct. LEXIS 8">*17 of Iowa.
35 T.C. 429">*433 Peoples based the total amount of consideration it would pay to the petitioner under the December 1955 agreement upon the present value of the petitioner's renewal commissions that would be due after January 1, 1956. Using tables with a 2 1/2 per cent interest rate, Peoples computed the present value of petitioner's future renewal commissions as approximately $ 80,000, and computed the present value of the 180 monthly payments it agreed to make to petitioner under the contract as $ 76,153.
In the Federal estate tax return filed by the estate of Oliver C. Miller on December 3, 1958, there were listed 50 shares of Olmsted Incorporated Life Agency at a value of $ 53,292.72, with the explanation that the commuted value of the Peoples contract was $ 63,951.27 as of the date of decedent's death and that decedent's 50 shares were valued at five-sixths of that amount.
Petitioner reported in its 1956 corporation income tax return only the amounts actually received by it under the contract in that year, or $ 5,500. (The return shows total income of $ 6,182.79 and total deductions of $ 7,438.33; no tax is shown as due for 1956). Respondent included in petitioner's income1960 U.S. Tax Ct. LEXIS 8">*18 for 1956 the entire fair market value of the contract, or $ 67,924.47, with the explanation that it represented the consideration received by petitioner during the taxable year "from the cancellation or termination of your life insurance agency contract with Peoples Life Insurance Company, Frankfort, Indiana."
OPINION.
Respondent, on brief, expressly "disavows any reliance on the doctrine of constructive receipt as a basis of the deficiency in income tax which is here at issue." Respondent's argument is that the agreement, effective on January 1, 1956, between petitioner and Peoples was a "sale or other disposition" of the petitioner's right to renewal commissions within the meaning of
1960 U.S. Tax Ct. LEXIS 8">*19 This case is ruled by
Respondent seeks to distinguish the
Respondent also makes much of the testimony that Peoples was ready in December 1955 to pay the commuted value of the renewal commissions to petitioner in a lump-sum payment. The executive officer of Peoples testified that "We told him he could have it either way but we decided upon the annuity. We knew that Mr. Miller wanted to prolong his income." It would seem from this that
Respondent seeks to distinguish the
The contract amendment in the Oates case was virtually a new contract. We called it that in our opinion. In the affirming opinion in
It is obvious from a study of the
In the instant case it is shown that the annuity1960 U.S. Tax Ct. LEXIS 8">*23 was computed about the same as were the payments in the
The way that we arrived at that offer was to take the present value of his renewal commissions, using two and a half per cent interest and recognized lapse tables, better known as Linton's tables. And according to our figures it came out more than the present value of the annuity which we gave to Mr. Miller. The present value was approximately eighty thousand dollars. The present value of the annuity was seventy-six thousand one hundred and fifty-three dollars.
The fact that here the new contract was an annuity and in the
1960 U.S. Tax Ct. LEXIS 8">*25 Respondent's whole argument here is that in 1956 petitioner made a "sale or other disposition" of its right to renewals within the meaning of
We think the reality of the transaction should govern. The agent here was in the same situation as were the agents in the
The opinions in the
In the cases decided under
the refunding agreement to which this petitioner was a party presented a plan whereby the city of Detroit merely issued new bonds in substitution for and in continuation of outstanding evidences of its former bonded indebtedness and the result of the transaction was merely to effectuate an extension of time for payment * * *. The city assumed no additional obligation under the refunding agreement1960 U.S. Tax Ct. LEXIS 8">*28 * * * there existed the same debtor, the same principal amount of indebtedness, * * * and the same creditors. * * *
See also
What was said in
We hold there is no significant difference in the facts between this case and the
Petitioner argues the payments it receives under the annuity are entitled to capital gains treatment. We cannot quite tell whether this is being advanced by petitioner as an alternative argument. To prevail it would have to show there was a sale or exchange of a capital asset. Secs. 1221 and 1222,
1. There is no explanation for the difference in the spelling of petitioner's name in the above agreement.↩
1. (b) Amount Realized. -- The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.↩
2. On February 1, 1960, the Commissioner withdrew his 1952 nonacquiescence in this decision and substituted his acquiescence therefor.↩
3. In affirming our opinion in the
"* * * Thus in