Commissioner of Internal Revenue v. Oates

• Decision Date: 04 November 1953
• Docket Number: No. 10822.,10822.
• Citation: 207 F.2d 711
• Parties: COMMISSIONER OF INTERNAL REVENUE v. OATES.
• Court: U.S. Court of Appeals — Seventh Circuit

207 F.2d 711 (1953)

COMMISSIONER OF INTERNAL REVENUE v. OATES.

No. 10822.

United States Court of Appeals Seventh Circuit.

November 4, 1953.

H. Brian Holland, Asst. Atty. Gen., George F. Lynch, Asst. to Atty. Gen., U. S. Dept. of Justice, Washington, D. C., Ellis N. Slack and Helen Goodner, Sp. Assts. to Atty. Gen., Washington, D. C., for petitioner.

J. Gilmer Korner, Jr., Stanley Worth, Washington, D. C., Ray Garrett, Robert H. Kinderman, Chicago, Ill., Blair, Korner, Doyle & Appel, Washington, D. C., Sidley, Austin, Burgess & Smith, Chicago, Ill., of counsel, for respondent.

Before DUFFY, LINDLEY and SWAIM, Circuit Judges.

LINDLEY, Circuit Judge.

The Commissioner of Internal Revenue seeks to reverse the decision of the Tax Court reported in 18 T.C. 570. In view of the fact that the findings of the trial court are full and complete and are, as we believe, fully sustained by the evidence, we shall try to avoid needless reiteration.

As appears more fully in the reported decision, the amount of the compensation of a general agent of the Northwestern Life Insurance Company, such as the taxpayer, depends not only on the amount paid as initial premium on a policy but also, in a lesser degree, upon the renewal premiums collected thereon during the next succeeding nine years. The original agency contract with the company provided that upon retirement, a general agent would receive commissions on renewal premiums as they were collected by the company during the nine-year period following the date of his retirement. Under the provisions of the contract as it then read, a retiring agent received a comparatively large amount as commissions during the first year. This sum decreased to less and less each year thereafter until, at the end of the ninth year, he received no further payments. Thus his income from renewal commissions progressively decreased as he grew older. The agents having become discontented with this unfortunate result, negotiations between them and the company were entered into in 1943 looking to a revision of the contract, culminating in March 1944, in an amendment which provided in short that commissions accruing after retirement of the agent would be paid in fixed monthly installments, irrespective of the time when the company collected them. The installments were to be paid over a period of not more than 180 months, but the agent might elect to receive them in fewer months, and was also given the option of remaining under the old contract or of accepting the new one.

This taxpayer, on April 27, 1944, accepted the amendment and elected to be bound by the Evans' Table C and to receive a monthly payment of $1000. He retired April 30, 1944. At that time there was no amount due or owing him from the company and no credit to him on the latter's books. The company began in June, 1944, to make payments to him of $1000 per month, continuing them through the years 1945 and 1946. The taxpayer included in his several income tax returns for those years the exact amounts he received.

As the accruing commissions came in, Northwestern entered them to the credit of the agent on its books but made payment not of the amounts thus accruing but of the stipulated monthly payments. Renewal commissions accrued to the credit of the taxpayer for the year 1944 in the sum of $47,174.98 and in even larger amounts for 1945 and 1946. By 1949, however, they had decreased to $26,313.77. They were collected by the company and deposited in its bank account. It made available to the taxpayer no amount in excess of $1000 per month and the latter did not receive income from Northwestern on account of commissions subsequent to his retirement in any amount in excess of those reported by him.

The Commissioner assessed a deficiency in the sum representing the excess of the accrued commissions over and above $1000 per month. The Tax Court held that the taxpayer should account only for the commissions actually received, that is, $1000 per month, holding that the issue turned on the recognition to be given the second agreement; that it was by giving recognition only to the first one that the commissioner had "any semblance of reason for his determination"; that, inasmuch as the parties had a right to make the first agreement, they had a right to make the second; that the court's only concern was whether the contract actually existed and was intended as a "real, genuine, bona fide agreement," and that the record disclosed no reason why full legal effect should not be accorded the second agreement, which the taxpayer had entered into prior to the date when any of the payments in question were to begin.

Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a), provides that gross income shall include all gains of whatever kind and in whatever form "paid"; Section 42, that all items of gross income shall be included in the income for the taxable year "in which received by the taxpayer," unless other methods of accounting under Section 41 control. Section 41 permits income to be computed in accord with the method of accounting regularly employed in keeping the books of the taxpayer. Under Treasury...