CIR v. Olmsted Incorporated Life Agency

Citation304 F.2d 16
Decision Date04 June 1962
Docket NumberNo. 16850.,16850.
PartiesCOMMISSIONER OF INTERNAL REVENUE, Petitioner, v. OLMSTED INCORPORATED LIFE AGENCY, Respondent.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Burt J. Abrams, Dept. of Justice, Washington, D. C., for petitioner, and Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., and Lee A. Jackson, Robert N. Anderson, Tax Div., Dept. of Justice, Washington, D. C., on the brief.

James P. Irish, Altoona, Iowa, for respondent and J. T. Haughey, Altoona, Iowa, on the brief.

Before VOGEL and RIDGE, Circuit Judges, and DEVITT, District Judge.

VOGEL, Circuit Judge.

The Commissioner of Internal Revenue, petitioner herein, seeks review and reversal of a decision by the Tax Court of the United States holding that Olmsted Incorporated Life Agency, respondent, did not realize taxable income upon the receipt by it in 1956 of a contract whereby it was to be paid monthly payments for a period of fifteen years in consideration for its surrender of all rights to future renewal commissions on previously written life insurance policies.

The facts, mainly stipulated, are not in dispute. Respondent is an Iowa corporation having its principal place of business in Des Moines, its main activity, beginning June 15, 1929, being that of exclusive general insurance agent in the State of Iowa for the Peoples Life Insurance Company of Frankfort, Indiana (hereinafter Peoples). The original agency contract between respondent and Peoples was signed on respondent's behalf by Oliver C. Miller, its president and principal stockholder who died in 1957. Two or three years prior to 1956, Peoples, because of its desire to develop insurance sales in Iowa by dividing the state into smaller territories, indicated its wish to terminate its exclusive contract with respondent. Under that contract Peoples was paying more favorable commissions to respondent than it was paying to other agencies under contracts executed subsequent to 1950. Miller did not at first accept Peoples' proposal, but subsequently, because of failing health, he did enter into a new agreement whereby the old agency agreement between respondent and Peoples was cancelled as of midnight December 31, 1955. Under the terms of the new agreement, respondent assigned to Peoples all of its rights in and to renewal commissions earned and payable after January 1, 1956. Respondent and its three stockholders agreed not to sell life insurance contracts for any other than Peoples within the State of Iowa. Respondent agreed to turn over to Peoples all papers, documents and records pertaining to its business, and Peoples agreed to issue, payable to the order of respondent or to such person or persons as respondent might direct, an annuity or annuities calling for a total payment of $500 per month beginning February 1, 1956, for a total of 180 months. Peoples based the total amount of consideration it would pay to respondent under the new agreement upon the present value of respondent's renewal commissions that would be due after January 1, 1956. As a further consideration, Peoples agreed to pay the agents theretofore employed by the respondent such renewal commissions as might be required by their contracts with respondent.

In its 1956 corporate income tax return respondent reported $5,500, being the total of payments actually received that year pursuant to the new contract. The Commissioner determined a deficiency in the respondent's return for 1956 in the amount of $27,009.34, taking the position that the entire fair market value ($67,924.47)1 of the new contract, whereby respondent gave up its rights to future renewal commissions and received in place thereof a fixed income over a period of fifteen years, should have been included in respondent's gross income for the year 1956. The Tax Court, in 35 T.C. 429, rejected the Commissioner's contention, holding that the case was ruled by James F. Oates, 18 T.C. 570, affirmed in Commissioner of Internal Revenue v. Oates, 7 Cir., 1953, 207 F.2d 711.

In seeking review, the Commissioner claims:

"The Tax Court Erred in Holding That Taxpayer\'s Assignment of Its Right to Future Renewal Commissions Did Not Constitute a `Sale or Other Disposition\' of Property Within the Meaning of Section 1001 (a) and (b), Internal Revenue Code of 1954."

26 U.S.C.A. § 1001(a) defines the term "gain" as meaning the "amount realized" from the "sale or other disposition of property", less the adjusted basis in the property. The Commissioner argues that respondent here has "disposed" of its rights to renewal commissions, with a basis of zero, in exchange for an annuity contract, with an undisputed fair market value of $67,924.47, and that this amount was taxable in the year the transaction was completed.

The Commissioner relies on Bueltermann v. United States, 8 Cir., 1946, 155 F.2d 597, and Herbert's Estate v. Commissioner, 3 Cir., 1943, 139 F.2d 756, certiorari denied 322 U.S. 752, 64 S.Ct. 1263, 88 L.Ed. 1582, as support for his contention that there was a "sale or other disposition" within the meaning of Section 1001, supra. However, it should be noted that in both of the cases cited there was a transfer of property involved. In Bueltermann, a lease required the lessee to erect a building. The lessor died and devised the rights and land to the taxpayer. The lessee breached the contract, and the taxpayer, in accordance with provisions therein, took over the land including the building that the lessee had erected thereon. It was stated there that the phrase "sale or other disposition of property" was sufficiently broad to include such transaction within the meaning of 26 U.S.C.A. §§ 22(f) and 111(a), Internal Revenue Code of 1939, the predecessors to the statute involved herein. However, the factual situation there involved has no applicability here.

In Herbert's Estate, where the decedent had a claim for $531,817.75, though the fair market value of said claim at the time of decedent's demise was $200,191.90, and where recovery on the claim to the extent of $295,803.61 was made, it was held there was a gain of some $95,000. In that case, the court said the issue was whether there was "a disposition" under Section 1001 where one receives payment for a claim he has against another. The court answered in the affirmative. However, there the money was received. That is not the situation before us. Payment here (other than the $5,500 received in 1956 and included in respondent's report) is absent. All that has occurred is the exchange of one contract for another, the principal change therein being the rate of payment.

The Commissioner next relies upon this court's decision in Ruth Iron Co. v. Commissioner, 8 Cir., 1928, 26 F.2d 30, to substantiate his position that there was a sale or other disposition. In that case, taxpayer leased mineral rights to a third party at 35 ¢ royalty per ton of ore. In 1913 there was a sale of the property from taxpayer to the lessee at a price determined by multiplying the estimated number of tons of ore by 35 ¢, deducting therefrom royalties that had already been paid. Payments were to be made over a period of 41 years. The only question involved was whether any part of the payments that were made constituted gain. This turned upon whether the notes, at the time they were redeemed in 1919, 1920 and 1921, were worth more in value than they had been at the time of the 1913 transaction. The court said they were and, therefore, a portion of the payments made were held to constitute taxable gain. But, it is not without significance to note that the only taxes claimed were upon money that had been received by the taxpayer. There was no attempt to tax for the entire 41 years — the position the Commissioner is taking here. If anything, the Ruth case supports the respondent's contention that it is liable for taxes only on the amount of money it receives each year. The Commissioner has cited Ruth only for the proposition that there was a "sale or other disposition". In that case there was. A mine was exchanged for notes which enhanced in value as they approached maturity dates. The case is not controlling here.

Guaranty Trust Co. of New York, Executor v. Commissioner, 1929, 15 B. T.A. 20, which relies upon Ruth, can similarly be disposed of. Therein the taxpayer had exchanged his interests in leaseholds for a $100,000 a year annuity which would continue so long as he lived. In that case the only taxes considered were on annuity payments that had already been made. Obviously, in that the payments were for an uncertain period, that is all that could be determined. The case is not supportive of the Commissioner's position here.

Inasmuch as the Tax Court held this case to be controlled by Oates, supra, and the Commissioner seeks to distinguish that case,2 detailed consideration is indicated to determine its applicability.

In Oates, the taxpayers were general insurance agents who, at retirement, amended their agency agreement with the insurance company by providing that future renewal commissions should be paid to them in specified equal monthly amounts over a fifteen-year period irrespective of when and in what amounts the renewal commissions would have become due and payable under the original agency contract. The obvious reason was that under the taxpayers' old contracts, the bulk of their renewal commissions would be collected by them in the first years after retirement and toward the end of the ninth year collections would dwindle off to little or nothing. Thereafter, and in accordance with the election given by the amended contract, the taxpayers elected to receive their payments in equal amounts over a fifteen-year period with a provision for a lump sum final payment if anything remained in the agents' renewal commission account. The Commissioner determined that the taxpayers there were taxable on the renewal commissions as they accrued under the terms of the original agency contract prior to its amendm...

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5 cases
  • Reed v. C.I.R.
    • United States
    • U.S. Court of Appeals — First Circuit
    • December 5, 1983
    ...Oates, 18 T.C. at 585; 207 F.2d 712-14. Goldsmith v. United States, 586 F.2d 810, 817, 218 Ct.Cl. 387 (1978); Commissioner v. Olmstead, Inc., 304 F.2d 16, 21-2 (8th Cir.1962). This is true even though: 1) the purchaser was initially willing to contract for immediate payment; and 2) the taxp......
  • Rutland v. Commissioner
    • United States
    • U.S. Tax Court
    • January 17, 1977
    ... ... He also had correspondence with Equitable Life Assurance Society of the United States with respect to the abstract on the ... 6), reversing Dec. 23,604 32 T.C. 378; Commissioner v. Olmsted Incorporated Life Agency 62-2 USTC ¶ 9511, 304 F. 2d 16 (C.A. 8), ... ...
  • Goldsmith v. United States, 52-75.
    • United States
    • U.S. Claims Court
    • November 15, 1978
    ...long as the amendment is prior to the time the taxpayer has a right to receive the deferred sums. Commissioner of Internal Revenue v. Olmsted Inc. Life Agency, 304 F.2d 16, 22 (8th Cir. 1962); Oates v. Commissioner of Internal Revenue, 18 T.C. 570, 584-85 (1952), aff'd, 207 F.2d 711 (7th Ci......
  • Willits v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • July 24, 1968
    ...1960-1 C.B. 5; Drysdale v. Commissioner, 277 F.2d 413 (C.A. 6), reversing 32 T.C. 378; Commissioner v. Olmsted Incorporated Life Agency, 304 F.2d 16 (C.A. 8), affirming 35 T.C. 429; Kay Kimbell, 41 B.T.A. 940, acq. 1940-2 C.B. 5. The issue before us is whether the 1960 and 1961 corpus commi......
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1 books & journal articles
  • A fringe benefit primer for the closely held C corporation.
    • United States
    • The Tax Adviser Vol. 35 No. 11, November 2004
    • November 1, 2004
    ...Rev. Rul. 60-31, 1960-1 CB 174, and Rev. Proc. 71-19, 1971-1 CB 698. (46) See George C. Martin, 96 TC 814 (1991); Olmsted Inc. Life Agency, 304 F2d 16 (8th Cir. 1962); Howard Veit, 8 TC 809 (1947); and James F. Oates, 207 F2d 711 (7th Cir. (47) Problems develop under the Employee Retirement......

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