Olmsted Inc. Life Agency v. Comm'r of Internal Revenue, Docket No. 78887.

• Decision Date: 22 December 1960
• Docket Number: Docket No. 78887.
• Parties: OLMSTED INCORPORATED LIFE AGENCY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

35 T.C. 429

OLMSTED INCORPORATED LIFE AGENCY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 78887.

Tax Court of the United States.

Filed December 22, 1960.

Petitioner was the exclusive general insurance agent for Iowa for an insurance corporation from 1929 through 1955. In 1955 the petitioner, responding to the insurance corporation's suggestion that the exclusive agency contract be terminated, executed a new agreement with the corporation under which the old contract was canceled and petitioner obtained the right to receive payments of $500 a month, beginning February 1, 1956, over a period of 180 months. The insurance corporation based the total amount of consideration upon the present value, at the time of the new agreement, of the petitioner's renewal commissions that would be due after January 1, 1956. The commuted value of the petitioner's future renewal commissions was approximately $80,000, and the present value of the 180 monthly payments was $76,153. Held: There was no ‘sale or other disposition’ within the meaning of section 1001(b), I.R.C. 1954, in 1956 of the petitioner's rights to future renewal commissions, and consequently the petitioner did not realize in that year the entire commuted value of the periodic payments. The payments actually received by the petitioner in 1956 under the new agreement are taxable to it as ordinary income. James P. Irish, Esq., and John T. Haughey, Esq., for the petitioner.

Arthur B. Bleecher, Esq., for the respondent.

MULRONEY, Judge:

The respondent determined a deficiency in the petitioner's income tax for the year 1956 in the amount of $27,009.34. The issues are:

(1) Whether the entire fair market value of a contract under which petitioner obtained the right to receive an annual fixed amount over a period of 15 years is includible in petitioner's gross income in the year the contract was effective, and

(2) Whether the amount received by the petitioner is taxable as ordinary income or as capital gain.

FINDINGS OF FACT.

Some of the facts have been stipulated and they are herein incorporated by this reference.

The Olmsted Incorporated Life Agency, hereinafter called the petitioner, is an Iowa corporation chartered in 1929 with its principal place of business in Des Moines, Iowa. It filed its corporation income tax return on a cash basis for 1956 with the district director of internal revenue at Des Moines, Iowa.

Petitioner's principal business activity from June 15, 1929, to December 31, 1955, was that of exclusive general insurance agent in the State of Iowa for the Peoples Life Insurance Company of Frankfort, Indiana (hereinafter called Peoples), pursuant to a contract which was executed on June 15, 1929, and amended from time to time. The original contract was executed by Oliver C. Miller as president of the petitioner. Oliver C. Miller, who was president and principal stockholder of the petitioner during 1956, died of a heart ailment on March 3, 1957, at the age of 81 years.

Two or three years prior to 1956 Peoples indicated to Oliver C. Miller that it desired to terminate the petitioner's exclusive agency contract for Iowa. Peoples wished to develop insurance sales in Iowa by dividing the State into small territories. Under the 1929 contract, as amended, Peoples was paying commissions to the petitioner which were more favorable than the commissions it was paying to other agencies under contracts executed since 1950.

Miller did not accept People's proposal at first, but subsequently his health began to fail and in December 1955 an agreement was executed by Peoples and petitioner, and with Miller, in his capacity as petitioner's principal stockholder, as one of the parties to the agreement. The agreement provided, in part, as follows:

THIS AGREEMENT made and entered into by and between Peoples Life Insurance Company of Frankfort, Indiana, First Party, hereinafter referred to as Company, and Oliver P. (C.) Miller and Rose D. Miller, his wife, and Martha Virginia Johnson, hereinafter referred to as stockholders, and Olmstead[F N2] Incorporated Life Agency, hereinafter referred to as Olmstead, Second Party, WITNESSETH: That

WHEREAS the Company has heretofore held a contract with Olmstead, by the terms of which Olmstead was the exclusive State agent for the Company in the State of Iowa, and

WHEREAS OLMSTEAD, by the terms of a contract with the Company, has become entitled to certain renewal commissions as provided for in said contract, from which renewals Olmstead is bound by the terms of certain contracts outstanding with individual agents in the State of Iowa, to pay such individual agents renewal commissions as provided in their contracts, and

WHEREAS all of Second parties are desirous of having Olmstead surrender its said contract with the Company and of assigning any and all renewals which may become due and payable on and after January 1, 1956.

NOW THEREFORE, it is hereby agreed by and between the parties, each in consideration of the promises and covenants of the other, as follows:

1. Olmstead hereby agrees to, and does hereby surrender, give up and annul its contract now in effect with the Company, such surrender to be effective as of midnight December 31, 1955. The contract hereby surrendered is that which was originally entered into between Olmstead and the Company on June 15, 1929, together with any and all amendments or changes there to (thereto).

2. Olmstead hereby assigns to Company all of its right, title and interest in and to any and all renewals which may have heretofore been earned under the contract heretofore referred to, and becoming payable on and after January 1, 1956. It is agreed and understood that Olmstead shall receive, and the Company shall pay to Olmstead, as soon as practical, the renewals to which Olmstead has become entitled arising from premiums paid to the Company during the month of December 1955, which renewal commissions to be so paid to Olmstead shall be computed in conformance with the customs heretofore in effect between the parties.

5. As a further consideration for the execution of this contract, the stockholders, and each of them, and Olmstead, agree that none of them will enter into a contract with any person, firm, or corporation, by the terms of which contract such stockholder or Olmstead is to sell or offer to sell in the State of Iowa, any contract of life insurance for any person, firm, or corporation. It is agreed and understood this shall not prohibit the Company, and any one or more of the stockholders, or Olmstead, from entering into a new contract with the Company, by the terms of which such stockholders or Olmstead may sell life insurance for the Company.

6. As a further consideration for the payments herein called for by the Company, Olmstead agrees that it will immediately turn over to the Company any and all papers, documents and records having reference to the business heretofore operated by Olmstead under its contract with Company; in explanation of the items to be so turned over, but not in limitation thereof, are to be included all agent's contracts, policy holder's cards, records of commissions paid by Olmstead, and any and all other documents which may assist the Company in continuing the business of writing life insurance in the State of Iowa, or may assist the Company in conforming with the acts to be performed by it by the terms of this agreement as hereinafter set out.

7. In consideration of the promises and acts of Second parties, the Company agrees that it will issue forthwith, payable to the order of Olmstead Incorporated Life Agency, or to such person or persons as Olmstead may direct in writing, an annuity or annuities calling for a total payment of $500.00 per month, beginning February 1, 1956, and a like payment on the first day of each month thereafter, until a total of 180 such payments, including the first, shall have been paid. * * *

8. As a further consideration the Company agrees that it will pay to the agents heretofore employed by Olmstead, such renewal commissions as may be required by the contracts the agents held on or prior to December 15, 1955; it is agreed and understood that the Company shall be substituted for and on behalf of Olmstead in said contracts and that the sums required to be paid by Olmstead under such contracts shall be paid by the Company. Provided that this shall not bar nor prohibit the Company from exercising all options to cancel or otherwise end such contracts in as full and ample a manner as Olmstead might have done.

Pursuant to this agreement, Peoples executed a contract on December 31, 1955, in which it agreed to pay to ‘OLMSTEAD INCORPORATED LIFE AGENCY, the Amendment, a first income payment of $500.00 on the first day of February, 1956, and a like payment on the first day of each month thereafter, until a total of 180 such payments, including the first, shall have been paid’; and then further provided, as follows:

PROVIDED, no assignment of this contract shall be of any effect so far as the Company may be concerned, until the original or a duplicate thereof is filed at the Home Office of the Company, and its receipt duly acknowledged. The company assumes no responsibility for the validity of any assignment. The Annuitant specifically shall have the right to assign its rights under this agreement, except however, that the Company shall at no time be required to pay any one payment due hereunder to more than three persons, either legal or natural.

This contract is made in consideration of the payment of one dollar cash in hand, receipt of which is hereby acknowledged, and certain other valuable considerations, including the surrender of a certain contract by the terms of which the Annuitant has heretofore been an agent of Peoples Life Insurance Company, with certain rights and obligations more particularly set out in said contract, covering the State of Iowa.

Peoples based the total amount of consideration...