Furrer v. C. I. R., 77-1588
| Decision Date | 30 December 1977 |
| Docket Number | No. 77-1588,77-1588 |
| Citation | 566 F.2d 1115 |
| Parties | 78-1 USTC P 9212 Ralph FURRER and Rosemarie Furrer, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Preston C. Hiefield, Jr. (argued), of Williams, Stark, Hiefield, Norville & Griffin, Portland, Ore., for petitioner.
Michael Paup (argued), of Dept. of Justice, Washington, D. C., for respondent.
Appeal from the United States Tax Court.
Before HUFSTEDLER, SNEED and KENNEDY, Circuit Judges.
In this case we review the finding of the Tax Court that the damages taxpayer received for breach of his agency contract with an insurance company are taxable as ordinary income and not as capital gain. We affirm.
Ralph Furrer was a special agent for Industrial Hospital Association (IHA). His contract with IHA gave him the exclusive right to recruit agents to sell IHA's policies; he also developed new types of policies for IHA. He was paid entirely on a commission basis, computed as a percentage of gross premiums paid on policies. The agreement provided for termination without notice, but IHA was prohibited from terminating during any year in which net premiums exceeded a certain amount. Furrer maintained files containing the agency agreements between the IHA and the individual agents he recruited, renewal agreements, and correspondence about claim disputes.
In violation of its agreement, IHA terminated Furrer's contract in 1968. In subsequent declaratory judgment and breach of contract actions, Oregon state courts found that the contract was wrongfully terminated and awarded Furrer damages of $213,000.
The characterization of the damages awarded depends upon both the nature of the claims asserted and the actual basis of the recovery. Thomson v. Commissioner of Internal Revenue, 406 F.2d 1006 (9th Cir. 1969); Spangler v. Commissioner of Internal Revenue, 323 F.2d 913 (9th Cir. 1963). Thus, where there is a final judgment (in contrast to a settlement before judgment), the Court must examine both the claims set out in the pleadings and the proof at trial, and the characterization of the judgment by the awarding court. Whether the claims presented and the characterization of the award fit that award into the categories of "capital gain" or "ordinary income" is a question of federal tax law. See Gray v. Commissioner of Internal Revenue, 561 F.2d 753 (9th Cir. 1977).
Appellant Furrer presents two arguments for characterizing the judgment as capital gain. The first argument assumes that the judgment was compensation solely for the loss of contract rights but asserts that those rights were in themselves capital assets. Rather than a right to earn commissions, the agreement is viewed as giving appellant "substantial intangible property rights," including a nonterminable monopolistic right to "develop" sales territories in states where IHA was licensed to do business.
Appellant seeks to support his characterization of the judgment with the statement of the state trial judge who testified before the Tax Court that:
the judgment which I awarded was intended to reflect the value of his business efforts based upon his exclusive business rights under the agreement . . . and it was not intended to reflect payment for loss of prospective profits. I intended that an entire insurance business be valued . . . . (capitalization of earnings) was just one method available to me to determine the value of the contract rights. It was no different than valuing any other asset.
Without deciding what weight may be accorded to a judge's post hoc testimony about a judgment he has rendered, we find this testimony affords appellant little comfort. Our holding does not rest upon the fact that the trial court arrived at the award through capitalization of earnings, a method equally applicable to determining the value of a capital asset. 1 The pleadings, proof or judgment simply contain no evidence that the "entire insurance business" amounted to anything more than the right to earn commissions.
If all contracts granting rights could be considered capital assets, without inquiry into the nature of the rights granted, almost all ordinary income from salaries, wages or commissions could be transformed into capital gain. Furrer's right was the right to earn commission income. A long line of authority, some dealing with insurance agents, supports the conclusion that a lump sum payment...
To continue reading
Request your trial
-
Walter Page v. USA
...512 F.3d at 571-72. Rather, the court must examine the “the nature of the rights granted” by the contract. Furrer v. Comm'r, 566 F.2d 1115, 1117 (9th Cir.1977) (per curiam). In a similar vein, payments “made pursuant to, not in exchange for” a contract are not capital gains. Trantina, 512 F......
-
U.S. v. Maginnis
...too broadly, taxpayers might use simple accounting devices to convert all ordinary income into capital gains. See Furrer v. Comm'r, 566 F.2d 1115, 1117 (9th Cir.1977). To avoid this problem, in a series of cases that have established what is commonly known as the "substitute for ordinary in......
-
KELLER STREET DEVELOPMENT COMPANY v. Commissioner, Docket No. 8666-72
...F. 2d at 916. Such a determination must be made by examining the whole record. As stated by the Ninth Circuit in Furrer v. Commissioner, 566 F. 2d 1115, 1116 (9th Cir. 1977), affg. a Memorandum Opinion of this Court Dec. Thus, where there is a final judgment * * * the Court must examine bot......
-
Alexander v. I.R.S.
...298 F.2d 192, 194 (8th Cir.1962)), cert. denied, 439 U.S. 1046, 99 S.Ct. 720, 58 L.Ed.2d 704 (1978); see Furrer v. Commissioner, 566 F.2d 1115, 1116 (9th Cir.1977), cert. denied, 437 U.S. 903, 98 S.Ct. 3088, 57 L.Ed.2d 1132 (1978); Clark v. Commissioner, 67 T.C.M. (CCH) 3105, 1994 WL 263688......