Shaw v. Comm'r of Internal Revenue

• Decision Date: 11 December 1972
• Docket Number: Docket No. 2175-68.
• Citation: 59 T.C. 375
• Parties: R. W. SHAW III AND INEZ SHAW, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

59 T.C. 375

R. W. SHAW III AND INEZ SHAW, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2175-68.

United States Tax Court

Filed December 11, 1972.

Sam J. Day and Fred A. Sanders, for the petitioners.

W. John Howard, Jr., and Bernard Nelson, for the respondent.

1. Petitioner was sole shareholder and president of American and Shaw Ford, was individually licensed as an insurance agent, and individually entered into agency contracts with insurance companies and received payments of commissions therefrom. Held, the commission income is gross income taxable to petitioner under sec. 61, I.R.C. 1954.

2. Petitioner made payments to American and Shaw Ford in amounts equal to commission income received by him. Petitioner did not participate directly in the sale of insurance, but rather, substantially all insurance activity was carried on by employees of the corporations other than petitioner. Held: An allocation of such expenses is made between petitioner and Shaw Ford. Respondent having failed to sustain his burden as to the expenses of American, the entire amount of such payments constitutes deductible business expense.

WITHEY, Judge:

Respondent determined deficiencies in Federal income tax for the joint returns of R. W. Shaw III, hereinafter petitioner, and Inez Shaw, hereinafter Inez, for the calendar years 1964 and 1965 in the amounts of $16,727 and $26,486.84, respectively. By amended answer, respondent has increased the deficiency for the years 1964 and 1965 to the total amounts of $39,064.94 and $36,663.24, respectively.

Petitioner has not put the disallowance of interest deducted in 1965 into issue; consequently the only remaining issue is the taxability to petitioner of insurance commissions received during the years 1964 and 1965, and petitioner's alternative claim of a deduction to the extent that certain payments represent expenses in the production of the commission income.

FINDINGS OF FACT

Certain facts have been stipulated; the stipulations of fact and the exhibits attached thereto are incorporated herein by reference. Petitioner and Inez, husband and wife, were legal residents of Fort Worth, Tex., at the time the petition was filed; joint Federal income tax returns were filed for the calendar years 1964 and 1965 with the district director of internal revenue, Dallas, Tex.

At various times prior to February 1964, petitioner owned, solely or as controlling shareholder, Grady Helm Moto Co., hereinafter called Grady, Dub Shaw Motor Sales, hereinafter called Motor Sales, and American National Automobile Association, formerly American National Loan Co., and hereinafter called American. American was incorporated in 1956 and was in the automobile loan business. During or before February 1964, Grady, Motor Sales, and American ceased actively carrying on their auto sales and auto loan businesses. American was not liquidated until December 1966.

In February 1964, petitioner acquired from unrelated parties all of the capital stock in Beck-Bolin Ford Sales, Inc., a Texas corporation doing business in Fort Worth, Tex. From its inception in 1961 to the time of petitioner's acquisition in 1964, Beck-Bolin Ford operated at a loss. Following the acquisition petitioner caused the name of the corporation to be changed to Dub Shaw Ford, Inc., and hereafter the corporation will be referred to as Shaw Ford. During the years at issue, petitioner was president of Shaw Ford and Inez Shaw was secretary-treasurer.

On January 16, 1959, petitioner executed a contract, hereinafter called the Lloyds contract, with South Texas Lloyds, hereinafter called Lloyds; an amendment to the Lloyds contract was executed by petitioner on February 7, 1964. The Lloyds contract was addressed to ‘Mr. R. W. Shaw, III, American National Auto Loan, 810 W. 2nd Street, Fort Worth, Texas.’ The amendment was addressed to ‘Mr. R. W. ‘Dub’ Shaw, Dub Shaw Ford, Incorporated, 605 East Berry Street, Fort Worth, Texas.' The Lloyds contracts was a printed form contract and stated in part that Lloyds:

has this day executed and delivered to you a power of attorney, in which you are designated as Attorney-in-Fact for South Texas Lloyds, nd such a power of attorney is by reference incorporated herein and made a part hereof for all purposes. * * *

For the services that you are to render under and by virtue of the power of attorney aforesaid, the underwriters at South Texas Lloyds agree to pay you a commission equal to that portion of 80% of the total earned premiums on Automobile Insurance policies written in South Texas Lloyds by you which may remain after paying out of such total earned premiums all claims for losses under all policies written or ordered by you, and all charges and costs of every nature incident to the settlement of all such claims. * * *

You shall not be obligated to write any insurance on behalf of the underwriters at South Texas Lloyds, and the said underwriters shall not be obligated to issue any insurance policies upon your orders; but this contract is intended only to prescribe the manner and amounts of payments, to each party hereto by the other on such policies as you may issue or order and South Texas Lloyds may accept.

This agreement cannot be altered or varied by any prior, contemporaneous, or subsequent oral agreement, and attempted oral modification thereof shall be void.

At some time during 1964, petitioner entered into an informal arrangement with the Keystone Agency which was the general agent for Keystone Life Insurance Co., hereinafter referred to as Keystone, whereby personal insurance would be sold to debtors of Shaw Ford. On February 10, 1965, petitioner entered into a formal agreement, hereinafter referred to as the Keystone agreement, with Keystone Agency. The Keystone agreement named petitioner agent and granted ‘authority to the Agent to solicit credit life, accident, and health insurance on the debtors of Dub Shaw Ford, Inc. (and) The Continental National Bank’ and could not be altered or amended except in writing. The Keystone agreement further stated that:

The agent, by accepting the Agreement, hereby agrees to perform all the covenants and conditions by him to be performed hereunder and will faithfully account for and pay to the General Agent the amounts of premium on such policies written by the Agent.

At or before the time of the execution of the Lloyds contract on January 16, 1959, petitioner was individually licensed as an insurance agent under the laws of Texas and has remained licensed throughout the years in question.

From the date of the Lloyds contract through the years in question, all policies of insurance issued by Lloyds or Keystone for which petitioner was used as attorney-in-fact or agent were issued to customers of either Grady, Motor Sales, American, or Shaw Ford, and insured either vehicles sold to or obligations entered into by those customers. During the same period, all commission payment checks arising from the sale of insurance pursuant to the Lloyds and Keystone contracts were deposited directly to the account of, and reported as taxable income by, the corporation most directly connected with the sale of the policy, each check first having been endorsed by petitioner or upon his order. Petitioner has consistently believed the respective corporations to be entitled to the amounts represented by such checks for the services rendered in the sale of such insurance policies.

Each of the commission checks received from Lloyds and Keystone was made payable to the order of petitioner or petitioner and Continental National Bank, hereinafter called Continental. (Commission checks payable to the order of both petitioner and Continental were the result of notification to Lloyds or Keystone that the commission income had been assigned or pledged to the bank as collateral for debts entered into by Shaw Ford in the ordinary course of its business as an automobile dealership.) Upon the receipt of the commission check, Continental would hold the check until payment of the secured obligation by Shaw Ford, and thereafter released the check either to petitioner or to an employee of Shaw Ford.

Shaw Ford from its inception was advertised as an auto dealer offering a complete range of services, including sales, service, finance, and insurance. The persons directly involved with the insurance business were all employed by Shaw Ford. They were the floor salesmen, the ‘closers,‘ and various clerical persons. The floor salesman would suggest to a prospective customer that insurance was available and that the customer discuss insurance with the ‘closer.’ The persons entitled ‘closers' employed by Shaw Ford were not personally licensed to sell insurance but would, in the course of the sale of a vehicle, adjust the vehicle price downward by all or a portion of the commission to be derived from the sale of an insurance policy if the prospective customer expressed an intent to purchase both the vehicle and the insurance. A firm-price quotation regarding the vehicle was not made to the prospective customer by either the floor salesman or the ‘closer’ until the customer had expressed an acceptance or rejection of the vehicle-insurance combination. It was the closer's duty to evaluate the insurance risks connected with each customer and in high-risk situations withhold the offer of insurance. The insurance application forms were prepared by the ‘closers,’ with petitioner's name as authorized representative being entered to complete the form by one of several clerical personnel employed by Shaw Ford. The customer purchasing insurance paid the premium to Shaw Ford who forwarded it to either Lloyds or Keystone. petitioner's spouse, a full- time employee of Shaw Ford, handled virtually all of the claims against policies. Petitioner was president of Shaw Ford, performed management functions and occasionally performed the function of the ‘closer’ but was paid no salary as compensation for his...