Warden v. C.I.R., 042088 FEDTAX, 4450-85

Docket Nº:4450-85.
Opinion Judge:DRENNEN, JUDGE:
Attorney:Dan E. Warden, pro se. Elizabeth Girafalco Chirich and Sheri A. Wilcox, for the respondent.
Case Date:April 20, 1988
Court:United States Tax Court

55 T.C.M. (CCH) 632




No. 4450-85.

United States Tax Court

April 20, 1988

Dan E. Warden, pro se.

Elizabeth Girafalco Chirich and Sheri A. Wilcox, for the respondent.



This case was assigned to Special Trial Judge Couvillion pursuant to the provisions of section 7456(d) (redesignated as section 7443A(b) of the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) of the Code [1] and Rule 180 et seq. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.



In a notice of deficiency, respondent determined the following deficiencies and additions to petitioners' Federal income taxes:

Additions to Tax
Section Section Section Section
Year Deficiency 6651(a) 6653(a)(1) 6653(a)(2) 6661(a)
1980 $ 2,555.85 $749.21 $ 153.99* - -
1981 $17,405.52 - $ 870.27 ** -
1982 $23,560.15 - $1,178.00 *** $2,356.00

*For 1980, this addition to tax is under section 6653(a).

** 50% of the interest due on $17,405.52.

*** 50% of the interest due on $23,560.15.

In one amendment to the answer, respondent increased the deficiency for 1982 from $23,560.15 to $34,393.05. In another amendment, respondent increased the 1982 addition to tax under section 6661(a). The parties made numerous pre-trial concessions, leaving for decision: (1) Whether $5,791.80 of insurance commissions received by petitioners in 1980 constituted taxable income for that year; (2) whether $5,488 and $13,926.89, received by petitioners as insurance commissions in 1981 and 1982, respectively, but held in escrow by a third party for payment of contingent claims, was excludable from their income for said years; (3) whether insurance commissions of $8,181.05 received by petitioners in 1982 constituted taxable income where the insurance company paying the commissions failed to report the payments on information returns (Form 1099) required by law; (4) whether petitioners were entitled to certain charitable contribution deductions in 1981 and 1982; (5) whether petitioners were entitled to certain trade or business expense deductions for 1980, 1981, and 1982 in excess of amounts conceded by respondent; and (6) whether petitioners are liable for additions to tax under sections 6653(a) and 6661(a). [2] In addition, respondent filed a motion for damages under section 6673. FINDINGS OF FACT - GENERAL Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioners, husband and wife, resided at College Station, Texas, at the time they filed their petition. They filed joint Federal income tax returns for 1980, 1981, and 1982. For convenience, due to the number of issues involved, our remaining findings of fact and opinion are considered by issue. ISSUE 1. INSURANCE COMMISSION INCOME - 1980. FINDINGS OF FACT During the years in question, Dan E. Warden (petitioner) was a self-employed insurance agent. He also received income in 1980 and 1981 from the Church of Christ of Hearne, Texas (Church of Christ) as a minister. His wife, Meridon Warden, also earned income primarily from real estate commissions. During 1980, petitioner received insurance commissions from two insurance companies totaling $22,990. However, the information returns (Forms 1099) filed by the insurance companies reflected only $17,198.20 as having been paid to petitioner during 1980. Although petitioners reported $22,990 on their income tax return for 1980, at trial petitioner contended that the correct income from these two companies was $17,198.20, as shown on the Forms 1099. Petitioners explained that the $5,791.80 difference between what they received and what was shown on the Forms 1099 represented advanced yearly commissions paid by the insurance companies on policies sold in 1980, whose annual anniversary date extended into 1981. For example, if petitioner sold a policy on July 1, 1980, and the policy holder elected to pay the premium on a monthly basis, the insurance company, as a practice, would nevertheless pay petitioner up front, as the selling agent, either all or up to 75% of the annual commission due him for the sale of the policy. Thus, for the policy sold on July 1, 1980, one-half of the commission was attributable to 1980, and the other half was attributable to 1981. The information returns filed by the insurance companies only reflected commissions attributable to the year 1980 and thus accounted for the $5,791.80 difference in what petitioner received and the amounts shown on the Forms 1099. Petitioner testified that this practice of the insurance companies was followed in this manner until 1983. Petitioners, in support of their contention that $5,791.80 should be excluded from their 1980 income, argued that, in the event a policy holder terminated his policy prior to the end of the first anniversary year, petitioner was required to refund or return the advanced commissions he had received on that policy for that portion of the lapsed policy year. Thus, because of the contingency that some of his advanced premiums might have to be paid back because of lapsed policies, petitioners' commission income should be limited to what was reported by the insurance companies. OPINION Section 61 and section 1.61-2, Income Tax Regs., provide that gross income means all income from whatever source derived and that commissions received are included in determining the gross income of a taxpayer. It is petitioners' position that the $5,791.80 for the post-1980 portions of the policies did not constitute compensation when received. Petitioners argue, in essence, that the post-1980 advances were loans rather than compensation for services and, hence, should be taxable when earned. Respondent's position is that the advances represented compensation for services; that the insurance companies neither intended to loan money to petitioner, nor did petitioner intend to repay such advances except by offsetting future commissions against the advances; and that the advances constituted income in the year of receipt. Advances of commissions to a taxpayer under an agreement that places no personal liability of repayment on him constitute income to the recipient when the advances are received. Moorman v. Commissioner, 26 T.C. 666, 674 (1956); Drummond v. Commissioner, 43 B.T.A. 529, 532-533 (1941). Such advances of commissions are nothing more than advance salary or other payment for services which are includable in income by a taxpayer when received. Beaver v. Commissioner, 55 T.C. 85, 90 (1970). However, if there is an unconditional personal obligation of a taxpayer to repay an amount advanced to him, the advance may be a loan which would not be includable in income, since the concept of income excludes loans which must unconditionally be repaid. James v. United States, 366 U.S. 213, 219 (1961). Whether an advance is income or is a loan is a question of fact to be determined from a consideration of all the circumstances surrounding the making of the advances. Beaver v. Commissioner, supra at 91; New England Tank Industries of New Hampshire, Inc. v. Commissioner, 50 T.C. 771, 777 (1968), affd. 413 F.2d 1038 (1st Cir. 1969). Considering all the facts and circumstances of this case, we conclude that petitioners failed to establish that they were under an unconditional obligation to repay the advances to the insurance companies. Petitioners presented no evidence that the $5,791.80 was a loan and not compensation or that they returned any portion to the insurance companies from which it was earned. Moreover, if a policy lapsed, resulting in a debt owed by petitioner to the insurance company, in practice petitioner did not return the advanced commissions to the insurance company. Instead, the insurance company offset the debt out of future commissions. Even if we assumed that petitioner had an obligation to return a portion of the advances if policies lapsed or were canceled, petitioners still would not have been entitled to exclude these amounts from their 1980 income. Commissions are taken into income when received, even though there is a possibility that some portion of the amount might have to be refunded to the insurance company if the policy is canceled. Van Wagoner v. United States, 368 F.2d 95 (5th Cir. 1966). This conclusion is consistent with numerous cases holding that amounts received under a claim of right are includable in income when received, even though at some later date some of the amounts may have to be refunded. See North American Oil Consolidated v. Burnet, 286 U.S. 417 (1932); Van Wagoner v. United States, supra. Petitioners' claim, therefore, is denied. ISSUE 2. EXCLUSION FROM INCOME OF AMOUNTS HELD IN ESCROW - 1981 AND 1982. FINDINGS OF FACT During 1981 and 1982, petitioner sold life insurance as an agent for National Home Life Assurance Company (NHLA), Massachusetts Indemnity and Life Insurance Company (MILIC), Great American Reserve, Old Equity Mutual Life Insurance Company (Old Equity), and University Life Insurance Company of America (University Life). During the two years, petitioner was associated with other agents in a marketing organization called Creative Financial Concepts, Incorporated (CFC). CFC designed a marketing scheme in which the agents were arranged in a pyramid structure. CFC was the apex of the pyramid. Petitioner, a regional...

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