Brown v. Comm'r of Internal Revenue, Docket No. 94845.

Decision Date16 August 1963
Docket NumberDocket No. 94845.
PartiesJOSEPH W. AND SYDNEY N. BROWN PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

T. C. Fitzgerald, for the petitioners.

Winfield A. Gartner, for the respondent.

1. On March 30, 1956, petitioner entered into a contract with an insurance company wherein he was appointed an assistant director of agencies. The contract was amended on August 17, 1956. On January 11, 1957, petitioner and the insurance company entered into a contract wherein petitioner was appointed director of agencies. Under these contracts petitioner was to receive an overriding commission and a commission on renewals on all policies written by the agents under petitioner's supervision. On May 7, 1957, petitioner assigned all three of those contracts to an investment company in consideration of $43,564.15 representing the then present value of the petitioner's right to all future commissions. Held, the receipt of the consideration was taxable as ordinary income and not as a long-term capital gain.

2. On two minor issues, held, petitioner has failed to show that the respondent erred in disallowing $1,326.08 as depreciation claimed by petitioner on an automobile and in refusing to allow as a loss $343.94 expended by petitioner in having a piece of timber cruised.

ARUNDELL, Judge:

Respondent determined a deficiency in income tax for the calendar year 1957 in the amount of $9,142.84.

Petitioners assign three errors, namely, (1) the reclassification from long-term capital gain to ordinary income of the gain realized on the sale of certain contracts; (2) the disallowance of $1,326.08 depreciation claimed on a 1956 automobile owned by petitioner Joseph W. Brown for 8 months in 1957 and used by him for business purposes; and (3) the disallowance of $343.94 expended by petitioner Joseph W. Brown to have the timber cruised on a tract of land which petitioner contemplated purchasing but which contemplated transaction was subsequently abandoned by him upon its proving unprofitable.

FINDINGS OF FACT

The stipulated facts are so found and are incorporated herein by this reference.

Joseph W. Brown (hereinafter sometimes referred to as petitioner) and Sydney N. Brown are husband and wife residing in Ridgeland, S.C. They filed their joint Federal income tax return for the taxable year 1957 with the district director of internal revenue, Atlanta, Ga.

Petitioner was one of the original promoters and organizers of United American Life Insurance Co. which was organized along with a related investment company, United American Investment Co., in Atlanta, Ga., during the year 1955.

United American Life Insurance Co. and United American Investment Co. were during the year in issue under common control, both as to management and stockownership.

Petitioner was associated with United American Life Insurance Co. from its organization in 1955 until May 7, 1957, in various capacities.

On March 30, 1956, petitioner executed a contract with United American Life Insurance Co. This contract was subsequently amended by contract dated August 17, 1956.

Under the terms of the contract dated March 30, 1956, and the amended contract dated August 17, 1956, petitioner was appointed assistant director of agencies for the United American Life Insurance Co.

On January 11, 1957, petitioner executed another contract with United American Life Insurance Co. and, under the terms of this contract, petitioner was appointed director of agencies of United American Life Insurance Co. As assistant director of agencies and as director of agencies of the United American Life Insurance Co. and under the various contracts with that company dated March 30, 1956, August 17, 1956, and January 11, 1957, petitioner received as full remuneration for his services the tabulated first-year and renewal commissions shown on schedules attached to these contracts.

As full remuneration for expenses incurred in connection with company business petitioner was granted an expense allowance of $50 per week under the two contracts dated March 30, 1956, and august 17, 1956. When petitioner became director of agencies under the contract dated January 11, 1957, this expense allowance was increased to $100 per week.

United American Life Insurance Co. supplied the petitioner with contract blank forms, adequate office space, office supplies, sales materials, stenographic expenses, and any other office requirements reasonably necessary.

Petitioner's several contracts with United American Life Insurance Co. were all cancelable upon 30 days' notice by either party.

Paragraph 9 of the contracts dated March 30, 1956, and August 17, 1956, was identical and provided as follows:

Nothing herein contained shall be construed to create the relation of employer and employee between the Company and the Assistant Director of Agencies. Within the territory above described, the Assistant Director of Agencies shall be free to exercise his own judgment as to the conduct of his business, provided that the Company and the Director Of agencies may from time to time prescribe rules and regulations respecting the conduct of the business covered hereby, and the Assistant Director of Agencies agrees to be governed thereby.

Paragraph 9 of the contract dated January 11, 1957, was substantially the same as paragraph 9 of the two above-mentioned contracts except that ‘Director of Agencies' was substituted for ‘Assistant Director of Agencies.’

As director of agencies petitioner was responsible for the recruitment of subagents. These subagents were paid by the United American Life Insurance Co.

Petitioner's compensation from the United American Life Insurance Co. has been described as an overriding commission. The overriding commissions, reported by petitioner as income on his joint Federal income tax return, were measured by the gross amount of United American Life Insurance Co. under the terms of his contracts, less a stipulated amount of first-year and renewal commissions, paid out by United American Life Insurance Co. to the petitioner's subagents, based upon a percentage agreed upon between the petitioner and his subagents. The difference between the amounts paid out to the subagents and the gross first-year and renewal commissions due the petitioner under his contract thus represent the petitioner's net reportable commission income.

On May 7, 1957, petitioner, by contract, assigned all of his rights under the contracts dated march 30, 1956, August 17, 1956, and January 11, 1957, with United American Life Insurance Co. to the United American Investment Co. for a stated consideration in the amount of $45,564.15. Due to a typographical error, the stated consideration was in error by the amount of $2,000 in that the actual consideration agreed upon was $43,564.15. The May 7, 1957, contract provided in part as follows:

This contract of sale made and entered into between JOSEPH W. BROWN * * * and the UNITED AMERICAN INVESTMENT COMPANY, * * * the said Joseph W. Brown hereinafter referred to as the Seller, and the United American Investment Company hereinafter referred to as the Company,

WITNESSETH, That:

WHEREAS, the said Seller has a contract with the United American Life Insurance Company * * * dated March 30, 1956, and subsequently amended for commissions to be paid as Assistant Agency Director of United American Life Insurance Company and a certain contract dated January 12, (sic, should be January 11) 1957, for commissions to be paid as Director of Agencies for United American Life Insurance Company, and

WHEREAS, the Seller desires to make a sale of these contracts and the company desires to buy the same;

NOW THEREFORE IT IS AGREED: That the said Joseph W. Brown does hereby transfer all of his rights under said contracts including, but not limited to, any monies due him under said contracts with United American Life Insurance Company and does hereby specifically assign said contracts and all rights thereunder to the United American Investment Company and does hereby waive any right that he may have under said contract.

It is further agreed that there has been paid to the Seller, receipt of which is hereby acknowledged, the sum of $45,564.15 (sic, should be $43,564.15) * * *

It is understood that this is a complete, absolute and out-right purchase of the contracts mentioned above by the United American Investment Company and a full, complete and absolute final payment of all monies due to the Seller thereunder.

It is further agreed that the said Seller, Joseph W. Brown, by signing this agreement hereby resigns from the Board of Directors of United American Life Insurance Company and United American Investment Company, as a member of the Executive and Finance Committees of the United American Life Insurance Company and United American Investment Company, and as Vice President of both the abovementioned companies, and attached hereto his resignations addressed to the Presidents of the respective companies.

Petitioner derived income in the total amount of $68,465.06 from the United American Life Insurance Co. during the taxable years 1956 and 1957. Of the $68,465.06 received from the United American Life Insurance Co., $17,836.56 was received and reported on petitioner's Federal income tax return as ordinary income in the taxable year 1956 and $7,064.35 was received and reported on petitioner's Federal income tax return as ordinary income in the Taxable year 1957.

The balance of the $68,465.06 received by petitioner from United American Life Insurance Co. during the taxable years 1956 and 1957, or $43,564.15, represents the actual net consideration received by petitioner under the contract dated May 7, 1957, with United American Investment Co. This $43,564.15 represents the actuarially computed value of the commissions due the petitioner under his various contracts with United American Life Insurance Co.

Due to the nature of actuarial...

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