T.C. Memo. 1998-222

UNITED STATES TAX COURT

IVAN ANDRE ZAAL, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10758-97. Filed June 24, 1998.

Ivan Andre Zaal, pro se.

Candace M. Williams, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Chief Judge: Respondent determined a deficiency in

petitioner's Federal individual income tax for 1994 in the amount

of $37,364 and an accuracy-related penalty under section 6662(a)

in the amount of $7,472.80.

Unless indicated otherwise, all section references are to 

the Internal Revenue Code in effect for the year in issue.
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After concessions by petitioner, the issues for decision are

(1) whether petitioner is liable for taxes on $113,081 in

insurance renewal commissions that petitioner assigned to

American Keystone Group, Inc., and (2) whether petitioner is

liable for the substantial understatement penalty under section

6662(a) for 1994.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. 

Petitioner resided in Plano, Texas, at the time this petition was

filed.

Petitioner was an independent contractor at Pennsylvania

Life Insurance Co. (Penn Life) from June 1974 through January

1994. Petitioner earned commissions on the insurance policies he

sold on behalf of Penn Life. Petitioner and Penn Life

contractually agreed that petitioner would receive commissions on

certain policies petitioner personally sold while an independent

contractor at Penn Life, when and if those policies renewed.

Petitioner and Penn Life also contractually agreed that,

after petitioner's employment with Penn Life was terminated,

petitioner would continue to participate in the profits of Penn

Life pursuant to a schedule to which petitioner and Penn Life

agreed. During 1994, pursuant to the contractual agreements
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between petitioner and Penn Life, petitioner earned commissions

in the amount of $225,319.

Petitioner founded American Keystone Group, Inc. (AKG), on

May 23, 1994. During 1994, petitioner transferred AKG to his

brothers, Michael Zaal and Chris Zaal. On or about August 1,

1994, petitioner assigned his rights under the contract with Penn

Life to AKG. In total, during 1994, petitioner assigned $113,081

of Penn Life commissions to AKG.

On his 1994 Federal income tax return, petitioner included

$113,835 of the $225,319 in Penn Life commissions in his gross

income. Petitioner also earned commissions of $1,582 from Time

Insurance Co., and he received $6,878 from the sale of

stocks/bonds and dividend income of $32 both from Smith Barney,

Inc.

OPINION

Renewal Commissions

Petitioner contends that $113,081 in renewal commissions

paid by Penn Life in 1994 is not taxable to him because he sold

them to AKG, which actually received the payments. Respondent

contends that the payment of the commissions to AKG instead of to

petitioner was an anticipatory assignment of income, and

petitioner is liable for taxes on the commissions.

We agree with respondent. The applicable legal principles

are well established, although stated in various ways:
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[An] entity earning the income--whether a

partnership or an individual taxpayer--cannot avoid

taxation by entering into a contractual arrangement

whereby that income is diverted to some other person or

entity. Such arrangements, known to the tax law as

"anticipatory assignments of income," have frequently

been held ineffective as means of avoiding tax

liability. * * *

United States v. Basye, 410 U.S. 441, 449-450 (1973); Caruth

Corp. v. United States, 865 F.2d 644, 648 (5th Cir. 1989) (one

who earns income cannot escape tax upon the income by assigning

it to another).

 "[I]f one, entitled to receive at a future date * * *

compensation for services, makes a grant of it by anticipatory

assignment, he realizes taxable income as if he had * * *

received the salary and then paid it over." Commissioner v. P.G.

Lake, Inc., 356 U.S. 260, 267 (1958). "One need not personally

receive the taxable benefits provided one has the power to

determine the recipient. United States v. Basye, 410 U.S. 441."

Saunders v. Commissioner, 720 F.2d 871, 873 (5th Cir. 1983),

affg. T.C. Memo. 1992-655.

An individual cannot escape tax on income to which he is

entitled by "turning his back" upon that income. If he has

received the income or had a right to receive the income, he is

taxable thereon. See Teschner v. Commissioner, 38 T.C. 1003,

1009 (1962).

Petitioner argues that he sold property to AKG and is no

longer liable for tax on the income from that property. State
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law creates legal interests, but Federal law determines when and

how they are taxed. Burnet v. Harmel, 287 U.S. 103, 110 (1932);

Brown v. United States, 890 F.2d 1329, 1337 n.9 (5th Cir. 1989). 

Although the assignment of the right to receive income may be the

transfer of a property right under State law, it may also be an

anticipatory assignment of income under Federal income tax law. 

C.M. Thibodaux Co. v. United States, 915 F.2d 992, 996 (5th Cir.

1990).

In order to support his argument, petitioner relies on the

dissent in Helvering v. Eubank, 311 U.S. 122 (1940). The Eubank

majority, however, held that the assignment of renewal contracts

for insurance commissions was an assignment of income rather than

an assignment of property, id. at 125, and that the commissions

were taxable to the assignor. Id. at 124.

We hold that the $113,081 in renewal commissions is taxable

to petitioner.

Substantial Understatement Penalty

Section 6662(a) imposes an accuracy-related penalty of

20 percent on any portion of an underpayment of tax that is

attributable to items set forth in section 6662(b)(2). Section

6662(b) specifies as one of those items "Any substantial

understatement of income tax."

An "understatement" is the amount by which the tax required

to be shown on the return for the taxable year exceeds the tax
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that is actually shown on the return. Sec. 6662(d)(2)(A). An

understatement is "substantial" if the amount exceeds the greater

of 10 percent of the tax required to be shown on the return or

$5,000. Sec. 6662(d)(1)(A). Petitioner's omission from his tax

return of insurance renewal commissions in the amount of $113,081

results in a substantial understatement.

Petitioner may avoid liability for the accuracy-related

penalty in either of two ways. First, if there is or was

substantial authority for petitioner's tax treatment of any

portion of the understatement, that portion would be excluded

from the penalty computation. Sec. 6662(d)(2)(B)(i).

To determine whether the treatment is supported by

substantial authority, the weight of the authorities in support

of petitioner's position must be substantial in relation to the

weight of the authorities supporting contrary positions. 

Antonides v. Commissioner, 91 T.C. 686, 700-704 (1988), affd. 893

F.2d 656 (4th Cir. 1990); sec. 1.6662-4(d)(3), Income Tax Regs.

There are no authorities that support petitioner's treatment.

Indeed, the weight of the authorities, discussed supra, clearly

rejects petitioner's treatment of the renewal commissions. Thus,

petitioner does not qualify under this exception.

Second, petitioner's liability could be reduced if

petitioner had adequately disclosed the relevant facts on his tax

return and there was a reasonable basis for the treatment of the
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item by petitioner. Sec. 6662(d)(2)(B)(ii). Here, petitioner

neither disclosed the omitted $113,081 renewal commissions on his

tax return nor did he have a reasonable basis for their omission.

We hold that petitioner is liable for the penalty under

section 6662(a) for 1994.

To reflect the foregoing,

Decision will be entered

for respondent.