Deal v. Commissioner, Docket No. 995-71.
| Decision Date | 26 February 1973 |
| Docket Number | Docket No. 995-71. |
| Citation | 1973 TC Memo 49,32 TCM (CCH) 216 |
| Parties | Homer S. Deal and Nellie M. Deal v. Commissioner. |
| Court | U.S. Tax Court |
Myron E. Anderson, Idaho Bldg., Boise, Idaho, for the petitioners. Craig D. Platz, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $1,425.38 in petitioners' Federal income tax for the year 1968.
At issue is whether the amount of $10,150.25 received in 1968 by petitioner Homer S. Deal for the cancellation of his agency management contract with Farmers Insurance Group is taxable as ordinary income or as a long-term capital gain.
Some of the facts have been stipulated by the parties and are found accordingly.
Homer S. Deal and Nellie M. Deal are husband and wife who resided in Boise, Idaho, at the time they filed their petition in this proceeding. They filed a timely joint Federal income tax return for the year 1968, reporting their income on the basis of cash receipts and disbursements. On the income tax return they included in their gross income the amount of $10,150.25 which was reported as capital gain income with 50 percent thereof included for tax purposes.
Homer S. Deal (herein referred to individually as petitioner) has been in the insurance business more than 40 years. He has had an insurance agency relationship with what is now known as Farmers Group Insurance (herein called Farmers) since July 3, 1930, when Farmers was licensed in Idaho as Farmers Automobile Inter-Insurance Exchange. The company was organized in 1928 in California by a group of Grangers and Mutual Insurance people to meet a need of writing automobile insurance at that time. The Idaho State Grange invited this company to come into Idaho. Petitioner was the first agent appointed and the first policy written by this company in Idaho was by him on his own automobile. He was then local agent and district agent for Farmers at Nampa, Idaho. As agent, he solicited insurance business and appointed and trained agents.
On June 1, 1934, petitioner was appointed "State Agent" for Farmers Automobile Inter-Insurance Exchange for what is known as Idaho-West Division and he moved to Boise. The Idaho-West Division, then and immediately prior to 1968, comprised Ada, Adams, Boise, Canyon, Elmore, Gem, Owyhee, Payette, Valley and Washington Counties. His duties were to secure and write insurance policies, appoint agents, train district agents, local agents, conduct agency schools, handle claims and every type of facility to make a good agency. Prior to 1948 the petitioner was also a local agent. After 1948 he helped in selling business with his men and did not solicit as local agent thereafter even though many sales were generated by him.
The appointment agreement beginning June 1, 1934, was for a ten year period. Similar but superseding appointment agreements were entered into every ten years until June 4, 1964, when they were entered into for periods of two years each.
On June 10, 1966, the petitioner entered into an appointment agreement, which was effective June 4, 1966, with Farmers under which he was appointed Division Agency Manager of the Idaho-West Division without any material change in his duties and responsibilities. As Division Agency Manager, and previously as State Agent, the petitioner's principal duties consisted of maintaining records pertaining to Farmers' business within the Division, and recruiting, training and assisting the district managers and agents within the Division. As consideration, petitioner received a portion of service (renewal) commissions on existing policies and membership fees and commissions on new policies. The means and methods by which petitioner carried out his activities under the contract were controlled by Farmers. Petitioner was required to submit to Farmers for approval and before use "all circulars, letters or advertising matter of any kind." He was also required to conform to all rules and regulations of Famers and submit regular reports to it. All records maintained in the Division relating to expirations and renewals of policies written by Farmers were the property of Farmers. District managers and agents within the division were appointed by and under contract with Farmers.
The appointment agreement effective June 4, 1966, also gave the petitioner the right to nominate his successor and to negotiate with such successor for reasonable compensation to him for the value of that nomination and for such goodwill as may attach to the agency. While serving as Division Agency Manager, and earlier as State Agent, the petitioner furnished his own equipment and paid his own expenses. All district and local agents did likewise.
During the period from June 4, 1934, until December 1967, primarily through petitioner's efforts, the number of district and local agents increased from less than 20 to about 80.
By a document entitled "Cancellation of Contract Right" dated December 28, 1967, and effective December 31, 1967, petitioner and Farmers agreed to the cancellation of all of petitioner's rights under the extended appointment agreement effective June 4, 1966, and the payment by Farmers to petitioner, in five equal annual installments beginning 1968, of $50,751.27. This amount was equal to the renewal commissions payable to the Division Agency Manager which would become due over a two-year period on policies then remaining on the books of Farmers in the Division, based on the rate of commissions existing at the date of cancellation of the appointment agreement and taking into consideration the then current lapse ratio in the territory.
On January 1, 1968, Farmers appointed Wesley R. Christensen as successor to petitioner as Division Agency Manager of the Idaho-West Division. Also on January 1, 1968, petitioner was named Legislative and Public Affairs Representative for Farmers. He still represents the company in that capacity as an independent contractor.
Petitioner built a brick building at 23rd and State Street, Boise, Idaho, occupying it on July 17, 1952. Since its construction and to the present time, petitioner has rented part of the building to Farmers for its use as a branch claims office and part of it to district and local agents. Petitioner also used part of the building prior to 1968 as his division manager's office and to house the books, records, data, information on policies written and expirations, copies of most of the local and district agency contracts, agency production records, claims records, loss ratio records, and other information relating to Farmers' policies in the division. Subsequent to 1967 the petitioner used part of the building as his office in carrying on his duties as Legislative and Public Affairs Representative for Farmers. The sign on the building reads "Farmers Insurance Group."
When Farmers paid the petitioner for his interest in the appointment agreement, no allocation was made to the non-competition clause contained in the cancellation agreement.
Petitioner received $10,150.25 from Farmers in 1968. He elected to use the installment method of reporting the transaction.
In his notice of deficiency dated December 2, 1970, the respondent determined that the $10,150.25 constituted ordinary income rather than a long-term capital gain.
OpinionPetitioner's position is that he should be allowed to treat the amount he received in 1968 under the cancellation agreement as a long-term gain from the sale or exchange of a capital asset. He...
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