Luna v. Comm'r of Internal Revenue, Docket No. 2702-62.

• Decision Date: 18 September 1964
• Docket Number: Docket No. 2702-62.
• Citation: 42 T.C. 1067
• Parties: HUBERT M. LUNA AND BENNIE I. LUNA, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

42 T.C. 1067

HUBERT M. LUNA AND BENNIE I. LUNA, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2702-62.

Tax Court of the United States.

Filed September 18, 1964.

Sam C. Pointer, Jr., and F. R. Ingram, for the petitioners.

Glen W. Gilson ii, for the respondent.

A lump-sum payment received by petitioner from an insurance company in 1959 in settlement of petitioner's right to receive renewal commissions on special type insurance policies, conceived by termination of petitioner's employment contract with the insurance company in 1955, was taxable to petitioners as ordinary income. The payment did not represent proceeds from the sale or exchange of a capital asset or an interest in a joint venture.

DRENNEN, Judge:

Respondent determined a deficiency in petitioner's income tax for the taxable year 1959 in the amount of $10,044.91.

The only issue for decision is whether the amount of $45,000 received by petitioner Hubert M. Luna (hereafter sometimes referred to as petitioner) from Pioneer Life & Casualty Co., Inc. (hereafter referred to as Pioneer), in 1959 as consideration for the release of rights to which petitioner was entitled under a contract with Pioneer, constituted capital gain or ordinary income.

Petitioner offered no evidence with respect to, and does not mention on brief, another issue, originally raised in the pleadings, relating to a deduction for depreciation of an automobile and that issue is deemed abandoned by petitioner.

An adjustment decreasing the deduction for medical expenses allowable to petitioners in 1959 depends solely upon the amount of petitioners' adjusted gross income which, in turn, depends upon the resolution of the principal issue here involved, as does an issue relating to petitioner's liability for self-employment tax.

FINDINGS OF FACT

Petitioners are husband and wife residing in Birmingham, Ala. They filed a joint Federal income tax return for the taxable year 1959 with the district director of internal revenue, Birmingham, Ala.

Petitioner became an insurance agent during World War ii. He was an agent for Life Insurance Society of America in Birmingham, developing unique types of life insurance policies and forms of insured investments, until 1951 when he became vice president of Columbus National Life Insurance Co., Columbus, Ga. He resigned this position and was selling insurance as an agent in 1952 when he had occasion to deal with Pioneer about a matter in which several of his friends were interested. Petitioner dealt with B. L. Carter and Earl Lebo (hereafter referred to as Carter and Lebo), president and vice president, respectively, of Pioneer, which was a stock company licensed to do business in seven States in the southeast.

In the course of petitioner's dealings with officers of Pioneer it was suggested that he become associated with Pioneer to expand its business by the promotion of a special policy conceived by petitioner. Based on his familiarity with other policies then being sold which were somewhat similar in function but different in detail, petitioner had worked out a policy combining life insurance and investment features. This policy provided that the policyholder would pay premiums for a period of 15 years. The first year's premium would be used to pay the agent's commission; thereafter 40 percent of premiums paid by the policyholder would be deposited in a fund which would be invested by the insurer. The remaining portion of premiums paid by the policyholder would pay for life insurance for the policyholder; in the event of the insured's death during the period of coverage, not only would the face amount of the insurance be paid, but amounts would be deposited to the investment fund in behalf of the policyholder for the remaining portion of the 15-year period as if the insured had lived and continued paying premiums. At the end of the 15-year period a policyholder (or his beneficiary if he had died) would be paid his share of the investment fund, less a 10-percent fee paid to the insurer for handling the fund. The insurer would guarantee that a certain percentage of the premiums paid would be paid the policyholder or his beneficiary at the end of the period from the investment fund, the percentage depending on the age of the policyholder. Petitioner worked with an actuary in developing this policy.

Pioneer was interested in writing this policy and in acquiring petitioner's services in building up a sales force to promote it. Pioneer had its actuary review and approve the computations and policy form prepared by petitioner's actuary. Petitioner began selling the policy on behalf of Pioneer on a commission basis on or about May 15, 1952. Petitioner was entitled to $1,000-a-month advance against his commissions earned. Pioneer paid some expenses of obtaining permission of State insurance commissions for sale of the policy, and also shared with petitioner other expenses such as counsel fees.

Under date of July 18, 1952, Carter wrote petitioner as follows:

Effective May 15, 1952, your first year commission on personal production in connection with the sale of the new 15 Year Fund Policy is 95%, and your renewal commission, if you qualify for renewal commissions, on personal production will be 8% of the regular premiums, paid for the second year to the fifteenth year inclusive, except that no renewal commissions will be paid on that portion of the premium deposited in the Fund each year.

Your first year override commission on the first year premiums of the 15 Year Fund Policy will be the difference in the first year commissions paid to General Agents and your first year commission of 95%.

Your override renewal commission, if you qualify for override renewal commissions, will be 3% of the regular premiums, paid for the second year to the fifteenth year inclusive, on the 15 Year Fund Policy, except that no override renewal commission will be paid on that portion of the premium deposited in the Fund each year.

Your renewal commissions herein specified shall not be paid, provided you and all other persons writing the 15 Year Fund Policy shall fail to procure for the Company in any 12 months period, as much as $3,000,000.00 of insurance delivered and paid for.

If you continue to represent the Company continuously for three years from this date, or after $7,500,000.00 of the 15 Year Fund Policy is in force on the books of the Company, whichever comes first, the renewal commissions specified shall be paid to you, if living, otherwise, to your wife, if she be living, for the term of years specified above.

$1,000.00 placing credit will be allowed for each unit of $50.00, $60.00 of (sic) $70.00 annual deposits on the 15 Year Fund Policy.

If you leave the services of the Company, by resignation or dismissal for cause before the expiration of the aforesaid three years continuous service, or before $7,500,000.00 of the 15 Year Fund Policy is in force on the books of the Company, whichever comes first, then no further renewal commissions on the 15 Year Fund Policy shall be payable to you by the Company.

Should this agreement be terminated by either party, after three years continuous service, all renewal commissions on the 15 Year Fund Policy will cease whenever the total volume of the 15 Year Fund Policy in force on the books of the Company falls below the sum of $5,000,000.00.

This agreement applies to all 15 Year Fund Policies, and any other similar profit sharing policies, placed on the market by the Company, and the sale of same is supervised by you, so long as you are actively working for the Company. This agreement may be cancelled for a just cause by either, you or the Company, by giving 30 days written notice.

By January 26, 1953, petitioner was director, Expansion Department of Pioneer, and was in charge of contacting agents to sell the 15-year policy.

On March 1, 1953, petitioner's first-year commission on sales of the 15-year policy was increased to 100 percent of the first year's premiums, which was shared with the agent selling the policy and with the general agent in whose territory the policy was sold.

Under date of June 25, 1953, petitioner and Pioneer entered into an agreement which provided:

1. The Company does hereby appoint said Manager as its Manager of the Expansion Department for said Company in all the territory which the said Company is qualified to do business or in which it may hereafter become qualified, provided however, that said territory is hereby exclusively reserved to the Manager only in the following particulars, namely: that the said Manager shall have the exclusive right on the 15 Year Fund Policy, Form 202 and 308, except certain restricted territory in Alabama, which has already been agreed upon, and any other Special Policy developed by the Manager and written by the Company.

2. It is understood and agreed by and between the Company and the Manager that the Regular Agents and General Agents will be permitted to write the 15 Year Fund Policy and the Company shall enter into Special Agents' Agreements with Special Agents secured and trained by the Manager upon agreements which are approved by the Manager. Such Special Agents so employed shall be employees or Agents of the Company.

3. The total compensation of the Manager on the 15 Year Fund Policy shall be the sum of one hundred per cent (100%) of the first year premiums less the top first year commissions and override paid to the Agent, General Agent or trainer. The Manager shall receive 3% override renewal commission on premiums received the second to fifteenth year inclusive. If an Agent to whom the Company has advanced money and the advance was guaranteed by the Manager, leaves the services of the Company, the Manager will be credited with an additional 5% renewal commission on premiums received until the indebtedness is paid in full or until the 15th policy year, which ever first occurs. No renewal commissions shall be paid on that...