Kenney v. Comm'r of Internal Revenue, Docket No. 87417.

• Decision Date: 29 March 1962
• Docket Number: Docket No. 87417.
• Parties: EDWARD A. KENNEY AND ESTATE OF HELEN V. KENNEY, DECEASED, EDWARD A. KENNEY, SR., ADMINISTRATOR C.T.A., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

37 T.C. 1161

EDWARD A. KENNEY AND ESTATE OF HELEN V. KENNEY, DECEASED, EDWARD A. KENNEY, SR., ADMINISTRATOR C.T.A., PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 87417.

Tax Court of the United States.

Filed March 29, 1962.

Jules I. Whitman, Esq., for the petitioners.

Malin Vanantwerp, Esq., for the respondent.

1. Husband and wife, living together, filed joint returns. Respondent's delegate had notice that wife died prior to issuance of notice of deficiency, but was not notified that separate residences had been established, as provided in section 6212(b)(2), I.R.C. 1954, or of the existence of a fiduciary relationship pursuant to section 6903, I.R.C.2954. Held, failure to mail duplicate originals of the notice of deficiency to each spouse did not invalidate the notice of deficiency under section 212(b)(2) and Court has jurisdiction.

2. Insurance agent, selling principally special risk insurance, entered into contract with insurance company to terminate his agency and sell his business, including all expiration records, goodwill etc., to the insurance company for $35,000 and at the same time entered into employment contract with the company. Held, the $35,000 was received from the sale to a capital asset and the gain realized was capital gain.

DRENNEN, Judge:

Respondent determined deficiencies in income tax due from petitioners for the years 1956, 1957, and 1958 in the respective amounts of $2,096.49, $4,984.28, and $1,626.86.

The issues for decision are:

(1) Whether this Court has jurisdiction over the proceeding, and this issue depends in turn upon whether respondent issued a valid statutory notice of deficiency to petitioners; and (2) Whether amounts received by petitioner Edward A. Kenney (hereafter sometimes called Edward) pursuant to an ‘Agency Termination and Business Purchase Agreement’ which he entered into with Educators Mutual Life Insurance Company¹ (hereafter sometimes called Educators) represent gain from the sale of a capital asset or ordinary income.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found accordingly.

Edward is an individual residing at 750 Hilltop Road, Springfield, Pennsylvania. Helen V. Kenney (hereafter called Helen), now deceased, whose estate is also a petitioner in this proceeding, was until her death on January 6, 1960, the wife of Edward and resided at 750 Hilltop Road, Springfield, Pennsylvania. Edward was appointed administrator c.t.a. of the estate of Helen on May 23, 1960.

Edward and Helen filed joint Federal income tax returns for the years 1956-1958 with the district director of internal revenue at Philadelphia, Pennsylvania.

Edward has been in the insurance business since 1919. He was with a casualty and bonding company until 1948 when he became associated with a general agency in Philadelphia. He assisted in forming a special risk department for that agency, with which he was associated until 1952 when he formed his own general agency.

On January 31, 1952, Edward and Educators entered into a contract by which Edward became a general agent for Educators. This agreement provided that Edward was not an employee of Educators but was an independent contractor; that he was to procure and transmit to Educators applications for health, accident, and hospitalization group insurance for campers' medical expense, campers' or camp proprietors' tuition refund, special trip coverage, students' medical expense, students' or school proprietors' tuition refund, and sports coverage; and that the agreement was terminable upon either party's giving 30 days' written notice (in case of notice in April, May, or June, 60 days were required) thereof. In the event of termination the contract provided as follows, this being the only provision in the contract with respect to disposition of property of the agency in such event:

(c) Upon cancellation or termination of this contract under the provisions either of this paragraph or of Paragraph 1, Agent shall immediately return to Company all policy forms, blanks, supplies and property which it has furnished for transaction of business hereunder, and which are in his or his sub-agent's possession or control.

Provisions were set forth covering the commissions that Edward was to receive from the premiums for various types of policies, and the parties agreed that, since each policy which Edward was to write was for, at most, a 1-year term, no policies written by Edward would be considered ‘renewals' and all commissions would be computed on initial premiums, there being no different commission schedule for renewals. Except for certain descriptive literature for each type of policy, Edward was to pay for all publicity material himself. Edward could not transfer, assign, or dispose of any interest in the general agency contract, except with the written consent of Educators. With certain exceptions, Edward's agency was to be exclusive as to Edward.

The policies which Edward was to procure for Educators were ‘special risk’ types, that is, they were accident and health policies for campers and students, covering short-term athletic group trips, youth activities, and the period of attendance at camps and schools. Such policies are not available from all companies which provide health and accident insurance.

From 1952 through 1956, Edward, as a general insurance agent, procured insurance policies for companies other than Educators, pertaining to fire, casualty, flood, accident, and health. He also procured special risk policies for companies other than Educators, although for 1956, premiums for Educators' special risk policies accounted for at least 98.1 percent of the total premiums collected on special risk policies by Edward.

Edward obtained ‘special risk’ business from other agents or brokers whose clients might have need for such coverage, and Edward paid such agents or brokers a portion of his commissions for business which came to him through them. Edward was well acquainted with agents and brokers in Philadelphia and through membership in professional associations and by personal contacts, he publicized the fact that he was engaged in writing special risk accident and health policies with which other agents and brokers were not familiar. Other insurance men came to know that he was specializing in special risk insurance and many brought their business directly to him. Also, Edward contacted camp and school officials, acquainting them with his specialized policies. Even though Edward's business may have come to him directly from agents or brokers, he came to know the insured clients in almost every instance, since he was often called upon to advise them about their coverage from time to time.

About 50 percent of Edward's business involved other agents and brokers.

While acting as general agent for Educators, Edward would forward a copy of each policy of insurance he issued on Educators' behalf to Educators' home office and would also retain a copy thereof in his own files.

Edward maintained files and records showing the names of agents and brokers, together with the names of their clients, in cases where business had come to him through other agents and brokers. The names of such agents and brokers were not generally given to Educators. Edward also kept memoranda of discussions and correspondence with insureds in his files which were not given to Educators, nor was Educators supplied with information as to the particular persons with whom Edward dealt at any of the insureds.

About two-thirds of Edward's business as a general agent was in special risk accident and health insurance; about one-third was in fire, theft, and casualty insurance and bond business. For the taxable year 1956, Edward reported net income of $12,339.25 from his insurance business.

In March 1956 an officer of Educators approached Edward with the idea of buying his insurance business. The officer later found that Edward had been approached by others who wanted to buy the special risk accident and health business, and this fact gave Educators some concern. In November 1956 the officer of Educators offered Edward $30,000 for his insurance business and employment with Educators with compensation of $12,000 per year plus a bonus on premium. The $30,000 figure was based on the premium income flowing from Edward's business.

Edward rejected this offer and counteroffered with a sales price of $40,000 and a salary of $15,000 plus a bonus. Educators rejected this counter offer. Educators and Edward finally agreed on a purchase price of $35,000 for the insurance business and a salary of $15,000 without a bonus arrangement. Edward expressed a willingness to enter into a 5-year employment contract but Educators was not willing to do so.

Under date of December 26, 1956, Edward and Educators entered into the following agreement:

AGENCY TERMINATION

and

BUSINESS PURCHASE AGREEMENT

WHEREAS, EDWARD A. KENNEY, of Springfield, Delaware County, Pennsylvania (hereinafter called ‘kenney’) has heretofore acted as General Agent for EDUCATORS MUTUAL INSURANCE COMPANY (which is now, by charter amended, named Educators Mutual Life Insurance Company, and which is hereinafter referred to as ‘company’) under ‘Special Risk General Agent's Contract’ dated January 31, 1952, as supplemented from time to time (which contract and supplements are herein referred to as the ‘Agent's Contract’).

AND WHEREAS, Kenney and Company have mutually agreed to terminate Agent's Contract and agency relationship between them as of December 31, 1956, and for Company's purchase, as of the same date, of Kenney's vested interests in, and good will appurtenant to, business theretofore written by or through him under the Agent's Contract.

THEREFORE, in consummation of said mutual agreement, and in order to more precisely define the terms thereof, Kenney and Company, each intending to be legally bound, agree as follows:

1. The aforementioned Agent's Contract between the...