Schelble v. C.I.R., 96-9010

• Citation: 130 F.3d 1388
• Decision Date: 26 November 1997
• Docket Number: No. 96-9010,96-9010
• Parties: -8226, 97-2 USTC P 50,944, Unempl.Ins.Rep. (CCH) P 15808B Robert SCHELBLE and Susan Schelble, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. The Coalition of Exclusive Agent Associations, Inc., Amicus Curiae.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1388

130 F.3d 1388

80 A.F.T.R.2d 97-8226, 97-2 USTC P 50,944,

Unempl.Ins.Rep. (CCH) P 15808B

Robert SCHELBLE and Susan Schelble, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee The Coalition of Exclusive Agent Associations, Inc., Amicus Curiae.

No. 96-9010.

United States Court of Appeals Tenth Circuit.

Nov. 26, 1997.

Richard Clark, Fort Collins, CO, for Petitioners-Appellants.

Regina S. Moriarty (Bruce R. Ellisen with her on the brief), Department of Justice, Washington, DC, for Respondent-Appellee.

Oren L. Connaway, Austin, TX, filed briefs for amicus curiae Coalition of Exclusive Agent Associations, Inc.

Before BRORBY, McWILLIAMS and KELLY, Circuit Judges.

BRORBY, Circuit Judge.

The sole issue in this case is whether "extended earnings" payments received by Mr. Schelble are subject to self-employment tax under 26 U.S.C. § 1401. The Tax Court concluded the payments were subject to self-employment tax. Robert Schelble and Susan Schelble ¹ appeal the Tax Court's order upholding the Commissioner of Internal Revenue's determination of deficiencies in the Schelble's Federal income tax for the taxable years 1989, 1990 and 1991 in the amounts of $4,334, $4,489 and $1,362, respectively. We have jurisdiction under 26 U.S.C. § 7482(a)(1). We affirm.

BACKGROUND

Mr. Schelble was an independent insurance agent for American Family Life Insurance Co., American Family Mutual Insurance Co., and American Standard Insurance Co. of Wisconsin (collectively "the Companies") from 1973 to 1988. On March 13, 1973, Mr. Schelble executed a Career Agent's Agreement ("the Agreement") with each of the Companies. The Agreement defined the relationship between and obligations of Mr. Schelble and the Companies. Pursuant to the Agreement, Mr. Schelble sold and serviced insurance policies on behalf of the Companies. The Agreement specified Mr. Schelble was an independent contractor for the Companies. The Companies agreed to pay insurance commissions ² to Mr. Schelble based on percentages of premiums on new and renewal policies sold by him. The commissions were "to be in full payment for all services rendered by the agent and to be made as soon as practicable." Either party could terminate the Agreement by giving written notice.

The Agreement provided, when terminated, the agent became entitled to "extended On March 31, 1988, Mr. Schelble terminated his Agreement with the Companies. Mr. Schelble met the extended earnings' requirements and elected to receive his extended earnings over thirty-six months. Because he worked for the Companies for over fifteen years, Mr. Schelble was entitled to 150% of his renewal service fees paid to him by American Family Mutual during the twelve-month period preceding the month the Agreement was terminated, and 100% of his renewal service fees paid to him by American Standard during the six-month period preceding the month of termination. Thus, Mr. Schelble was entitled to receive $93,345.89, payable in thirty-five monthly installments of $2,592.95 and a last installment of $2,592.64. Mr. Schelble received extended earnings payments from the Companies as follows:

                earnings" payments if all of the following conditions were met:  (1) the agent represented the Companies for not less than five consecutive years immediately preceding termination;  (2) the agent had no less than 400 American Family Mutual Casualty Fire and Health policies in force at termination, and no less than fifty American Standard policies in force at termination;  (3) within ten days of termination, the agent returned to the Companies all policies and policy records, manuals, materials, advertising, supplies or other property of the Companies;  and (4) the agent did not associate himself in "any sales or sales management capacity with another insurer engaged in writing any of the kinds of insurance written by the company...."  The formula used to compute extended earnings payments varied slightly among each of the Companies. 3  In general, the extended earnings payments were calculated based on a percentage of the renewal service fees paid to the agent during the six- or twelve-month period preceding the month the Agreement terminated.  The percentage was based upon the agent's length of consecutive service for the Companies immediately preceding termination of the Agreement.  The extended earnings were to be paid in equal monthly installments over twelve to sixty months depending on the total extended earnings
                

                                        1988        $20,743.60
                                        1989         31,115.40
                                        1990         31,115.40
                                        1991         10,371.49
                                                    ----------
                                        Total       $93,345.89
                

Mr. Schelble reported the extended earnings on Schedule D, Capital Gains and Losses, as proceeds from the sale of an insurance agency in his Federal income tax returns for 1989, 1990 and 1991.

The Commissioner of Internal Revenue (the Commissioner) determined the extended earnings were self-employment income subject to self-employment tax under § 1401 of the Internal Revenue Code. On March 17, 1993, the Commissioner issued a notice of deficiency for the Schelble's Federal income tax for the taxable years 1989, 1990 and 1991. ⁴

On June 21, 1993, the Schelbles filed a petition in the Tax Court seeking a redetermination of deficiencies issued by the Commissioner for taxable years 1989, 1990 and 1991. The case was submitted with the facts fully stipulated.

Mr. Schelble contended his extended earnings payments were not subject to self-employment tax because: (1) the payments were not sufficiently derived from his prior insurance business to constitute self-employment income; and (2) the payments were proceeds from the sale of his insurance business, a capital asset not subject to self-employment tax.

On June 12, 1996, the Tax Court issued its decision holding the extended earnings payments were self-employment income subject to self-employment tax. See Schelble v. Commissioner, 71 T.C.M. (CCH) 3166 (1996). The court reasoned the extended earnings payments were sufficiently connected with Mr. Schelble's prior insurance business to constitute income "derived from a trade or business" within the meaning self-employment income under 26 U.S.C. § 1402. Id. In addition, the court rejected Mr. Schelble's argument that the termination payments were payments for the sale of his insurance business because there was no express sales agreement nor evidence of vendible business assets. Id. Mr. Schelble appeals.

STANDARD OF REVIEW

We review Tax Court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. § 7482(a)(1). We review purely factual questions for clear error and purely legal questions de novo. See Hawkins v. Commissioner, 86 F.3d 982, 986 (10th Cir.1996). In the present case, the parties dispute the Tax Court's conclusions after applying the law to the undisputed facts. Therefore, we review the Tax Court's application of the law de novo, since we are " 'equally as able as the tax court to draw conclusions from the undisputed facts presented.' " Anderson v. Commissioner, 62 F.3d 1266, 1270 (10th Cir.1995) (citations omitted). The Schelbles have the burden of proving the Commissioner's determination is incorrect. See Tax Ct. R. Prac. & Proc. 142(a); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933).

DISCUSSION

Section 1401 of the Internal Revenue Code imposes a tax on self-employment income of every individual, in addition to income tax. 26 U.S.C. § 1401. ⁵ Self-employment tax is designed to finance social security benefits paid to self-employed individuals. See Patterson v. Commissioner, 740 F.2d 927, 929 (11th Cir.1984); S.REP. NO. 81-1669, at 153-163 (1950), reprinted in 1950 U.S.C.C.A.N. 3287. An independent insurance agent generally is subject to self-employment tax on self-employment income. See Erickson v. Commissioner, 64 T.C.M. (CCH) 963 (1992), aff'd 1 F.3d 1231 (1st Cir.1993) (unpublished table opinion) (independent insurance agent subject to self-employment tax on commission income); Simpson v. Commissioner, 64 T.C. 974, 983, 989, 1975 WL 3150 (1975) (insurance agent was independent contractor subject to self-employment tax).

The issue is whether Mr. Schelble's extended earnings constitute "self-employment income." "Self-employment income" means "net earnings from self-employment." 26 U.S.C. § 1402(b). "Net earnings from self-employment" is "gross income derived ... from any trade or business carried on by such individual," less allowable deductions. 26 U.S.C. § 1402(a). ⁶ For income to be self-employment income, "there must be a nexus Mr. Schelble makes two alternative arguments why his extended earnings payments are not self-employment income: (1) the payments are not sufficiently derived from his prior insurance business because he received the payments for terminating his relationship with the Companies; or (2) the payments are for sale of his insurance business, generating capital gain excluded from self-employment income. These are the same arguments Mr. Schelble made to the Tax Court. We review each argument in turn.

between the income received and a trade or business that is, or was, actually carried on." Newberry v. Commissioner, 76 T.C. 441, 444, 1981 WL 11375 (1981). The "income must arise from some actual (whether present, past or future) income-producing activity." Id. at 446. "[S]elf-employment income is determined by the source of the income, not the taxpayer's status at the time the income is realized." Shumaker v. Commissioner, 648 F.2d 1198, 1200 (9th Cir.1981); see Treas. Reg. § 1.1402(a)-1(c) (self-employment income may include payments received from services provided in a prior taxable year). Capital gains or losses are excluded from self-employment income. See 26...