Baker v. Commissioner

118 T.C. 452 (2002)

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Nature of the Case

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Facts

Baker (P) was a State Farm Insurance Cos. (State Farm) agent. P conducted his business as the Warren L. Baker Insurance Agency (the agency). P developed a customer base, selected the location of his office with State Farm’s approval and hired and paid employees. He was responsible for paying the expenses of an office such as rent, utilities, telephones, and other equipment. He was obligated to establish a trust fund into which he deposited premiums collected on behalf of State Farm. His agency agreement provided that all property including information about policyholders belonged to State Farm. P’s compensation was based on a percentage of net premiums. The agreement also contained detailed provisions for termination. P was entitled to a termination payment based on the percentage of policies that either (1) remained in force after termination or (2) were in force for the 12 months preceding termination. D retired after 34 years of operating as an independent agent for State Farm. P returned account information, computers and the like to State Farm and the successor agent. When P retired and terminated his relationship on February 28, 1997, he held approximately 4,000 existing policies generated from 1,800 households. Approximately 90 percent of the policies were assigned to one successor agent. The successor agent received reduced compensation (that is, a lower percentage) for the assigned policies. P received a payment of $38,622 in 1997 from State Farm pursuant to the termination agreement. P reported the payment as a long-term capital gain. The IRS was not amused and held that P did not own a capital asset or sell a capital asset to State Farm, nor did the termination payment P received from State Farm represent payment for transfer of a capital asset to State Farm or the successor agent. D argues that P did not sell any property to State Farm because all of the property was owned by State Farm and reverted to State Farm when petitioner terminated his relationship with State Farm. P contends that the agreement does not evidence a sale because the contract does not list a seller or purchaser. D also argues that P failed to establish that the termination payment represents proceeds from the sale of a business, business assets, or goodwill. D also suggests that the termination payment is in the nature of income from self-employment, but hedges that position in arguing that the payment is “similar to an annuity” and a “retirement benefit.” D did not determine that P was liable for self-employment tax with respect to the termination payment.