i'd like to i guess trying to summarize what happened in these in this particular transaction we do know that state farm paid money to trend keno over a number of years and the question seems to be what did state farm receive in return for paying tran teena money we know that state farm did not receive any current efforts from mr tran tina we know that state farm did not receive any long term insurance contract from mr transfer or his his efforts because property and casualty insurance contracts typically only run for six months to a year at most so elimination that leaves us with the only possible item state farm could have received from mr francine or were one of the items was his relationship with approximately seven eighteen thousand insurance and customers are kind of slow realistically here isn't just a garden variety state farm agency relationship one that is enjoyed by thousands of people across the country virtually identical wording and indeed i think this very contract was dealt with by the baker case in the seventh circuit how do you distinguish the baker case from this  is that effectively when an agent signs on so to speak with state farm they receive virtually the exclusive right to operate within a specific area  if they are the first in line their area is huge and one of the points that state farm tries to make is that state farm does not want its agents competing with each other it once its agents competing with agents from other insurance companies so the objective is to assign an area of territory that one agent can reasonably be expected to handle in this particular case since mr trent teena had his area territory for sixty years and he was literally the first person on the block so to speak his area was huge and when it was reassigned it was reassigned to a number of state farm agents which allowed state farm to build by multiplying because now it has the efforts of a number of agents where before had only one serving effort secular area and in this particular case the factual difference between this case and baker is that certain of these agents actually occupy the determine it yes it it had to make some payments to your client but it could terminate the agreement at any time right as could be agent yes indeed so i'm like a stock around like a piece of property like a house or something like that were your client owns something that can't be terminated by the if you will the issuer or something like that  there was an arrangement made where your client and i if the contract gets terminated then you get certain payments to a long term commission kind of arrangement that is just ordinary income that's just a contract for services basically and your client knew that when he entered into this agreement why is this a capital asset excuse me but it's not really long term commissions because part if we look at it from the other side i'm speaking in terms of the payments the payments get paid out over a period of time that's true but they're not related to renewal i understand if they're related to determination of the agreement correct and your client signed it let's say your client had had had the agreement for two days and then it gets terminated would you contend that this was a capital asset then well in no i would not in today about a week well a week income to capital income in delivery did it changes its nature by virtue of its longevity in some respects yes in the end that argument is relying upon gillette motor transport which which describes in the us supreme court has essentially said that as something becomes more valuable as time goes on it's a capital asset and that that's part of the argument that that has been made and is being made here but in addition  bit of the point that you just raised there is nothing to prevent the agent once the agency agreement is terminated from sending out notices to t insurers or two thousand or two hundred thousand however many of the agent may be in contact with which said i am no longer associated with state farm you have you know you do what you wish as an insured but when the agents do not notify the insured that they're no longer with state farm the issue here is if we look at this as a stripper as a typical or strict principle agent relationship the question arises who is the insurance agent the agent for is the is that the agent for the company or is it the heat in for the insurer pretty much every insured out there refers to my insurance agent they pay their insurance agent when they have a problem they call their insurance agent if there's a problem with the insurance company they expect their insurance agent to interface on their behalf with the company underwriting insurance trenching it was free to go out and  up with allstate he just was free to go back and contact anybody that had been that had had an insurance policy that he will surface that you mean after the terminate after the terminated agreement is no compete will compete clause for him from contacting people see in agency continue but they want to know they want to have total control as to where it goes and how it continues so when you retire or terminate your agreement they will pay  effect a mathematical calculation based upon the value of the size of what you're doing and i think the point in favor of your clients i think a good point in favor of your client is the fact that mr trent you know by working hard and over a long period time for state historically though that's not true and there was a well it's first may not be true but that's that seems to be the current reality well no excuse me a second but there was a an incident one of the other retired large agencies in missouri large state farm agent last name of kelly retired went through this exact same scenario his son became a state farm agent state farm only wanted to assign his son approximately ten percent  insured slash customers what mr kelley and his son did was they contacted each one of those customers and those customers then went to state farm and said it's our insurance policy we have the right to have a placed with any state farm agent we want and we demand that it be placed with mr kelley joining us all initiated by the insured but there's no property right that the father can pass on to his son he can't say son i'm giving you the business because that's not permitted under his agreement with state farm that your client's problem is you haven't got the property right that you can't an asset that you can't that you can build up such can claim capital gains here well affectively though the a said the facts in this case indicate that what was sold was mr trent in his business it stayed in the exact same place the people who took it over had the same address the same physical location because and the same and the same for farmers because numbers they belong to him he sold them could he have sold them directly to the agents he possibly could and he couldn't walk across the street work for allstate and kept onto those phone numbers and sort of start phoning those folks so he couldn't have contacted the phone right that's correct but he could have retained the the telephone number the same way that he could have have kept as agency going by literally doing almost nothing himself and bringing in younger and younger opinion baker is wrong on the law i i don't have a response re the facts are somewhat different the arguments that we're making are different than the arguments that were made in baker in baker they were they were making the argument that this person had worked for a number of years retired received a lump sum payment or came in over a period of years rather and that should be a capital asset here what we're arguing is that effectively what happens is that mr tran tina sells his business to state farm because that's the arrangement they both entered into because that gives state farm various rights it gives state farm the rights to divide up this territory amongst a number of agents which would otherwise wouldn't have if you didn't get the territory back it by in effect m continued cooperation by not going to the insurers and telling them i'm gone do what you want if you relied on me as your state farm person you're on your own now and you may want to look at a different sheriff company so the clients once there's a terminations so it's almost a washington d c sort of thing where you can you can communicate but you can't talk to anybody he could answer either washington insurance agency would have retained those phone numbers because according to the phone company records they belong to him return a member but not call them correct he could have just answered the calls when they had questions they would have called the number if they were used to calling for forty fifty or sixty years and the same person would have answered that answer after forty fifty or sixty i have to say in the big scheme of property rights that's not law that's not a law it's not a very big bundle of rights you may be correct but it's a bigger bundle original agreement had the right to divide it up for their own benefit so they could make more money off more agents than in the past and when you're dealing with a business under gillette motor transport we are dealing with  situation a bundle of rights that qualifies as a capital asset capital asset and under internal revenue code section twelve twenty one we don't need any exceptions the code says it's a capital asset except if it meets any of these requirements you know under twelve twenty one we don't need any of the exceptions so by definition we must be a capital asset you know i just find we get back to baker here because i think as baker says insurance agency the tools to use were on loan from state farm state farms terminations payments were not for the sale of the business for a buyer was able to step into the seller shoes which is the very point the judge like you made baker owns nothing best he could sell no assets including goodwill we agree that good will was developed during baker's tenure however it was not his to sell i don't see how you distinguish this case from that it's really on all fours whether or not your client has his own phone numbers retirement payment a larger termination payment so there is a direct correlation between the amount of goodwill the agent has developed over the years any amount of money that agent receives from state farm was kind of  it involved a state farm agent under a from a reading a close reading of the opinion was identical to the agreement in this case similar sort of situation mr baker worked for many years for terminations part payments pursuant to that agreement of the seventh circuit and baker found that that was ordinary income a decision that of course we completely agree with and which the district court get terminations payments based on how successful he wasn't building up that building in accruing policies but under the terms of the agreement he couldn't he couldn't buy or he couldn't sell should think there we would argue that that would be a substitution for income kind of situation where what the taxpayer is trying to do use coalesce future a future income stream between the option to strike price in the market price is ordinary income to the individual and that's a benefit of compensation now for a while the service treated covenants not to compete in a different way than the them it was actually quite uncommon when people would sell or businesses that they would divide up the have a purchase price and then they'd have somebody allegedly they were going to contact the former customers and they for a long time were created  nothing in the contract would provide for that no your honor and because he is no longer performing services for them he would have no particular claim to he he would have no claim to charge state farm realistically if mr trentino was able to confer this into your capital gain a good lawyer could draft a contract for employment and almost inevitably convert it into a capital gain wouldn't just say obligations the lease for the premises the lease for certain business assets and properties that were in the premises so he actually did what the what does work at least from my state farm are they weren't they were the landlord and he bought the furniture from a b c furniture company and he owned them yes so that's a whole separate issue isn't it well but but what happens here factually in this particular case is that the person who took over so to speak his territory and i believe there were four of them actually i keep i had the same premises that he had so they went to the landlord and said we want you to terminate mr well take on the landlord says well you don't have any history of credit etc etc state farm says will guarantee the lease sure but i again as judged by be pointed out here you're really talking about the assets of mr trentino had i mean every almost every insurance agent has his or her own quarters of they have a corporation they have they have a lease and maybe they lease a car that's a little business they run and that's great but what we're talking about here is the relationship between state farm and mr trying to and i believe your allegation is that the contract itself is the capital a talk about the others i wanted to kind of distinguish i think other judges perhaps did too what if anything did he get out of the contract and the reality is that he didn't get anything out of the contract he had certain things that he owned personally but they had nothing to do per with state farm is that correct what he got out of the contract with money extend that yes so that was that was an agency contract he hadn't they decided right from the get go that they were going to reward is a good as they do every other agent throughout the united states maybe the contracts not the sweet now as it used to be but it's the same concept and what you're saying is that any any insurance agent for that matter why not every automobile dealer went on almost anybody that has an agency relationship can convert it it's a contract is terminated you've got a capital asset well i think automobile dealerships are different but in this particular case with their age es because they are transferable you can sell your agency if you don't have to tender it back to general motors or ford in this particular case what happens is that mr trentino tendered his agency