Court Opinion

ID: 9442705
Source: CourtListenerOpinion
Date Created: 2023-08-03 18:56:18.395358+00
Date Added: 2024-06-11T17:29:11.592482
License: Public Domain

PHILLIPS, Chief Judge
(dissenting).
Prior to May 14, 1934, Marmaduke Cor-byn, Sr. had built up a large general agency in Oklahoma for the Central States Life Insurance Company. On that date, Mar-maduke Corbyn, Sr. entered into a contract with Occidental Life Insurance Company1 to act as its exclusive agent in the State of Oklahoma for the purpose of soliciting insurance and collecting and remitting first-year premiums, and with power to appoint subagents with Occidental’s approval. The contract provided for a scale of commissions, varying with the type of policy written, on first-year premiums; for a bonus on second-year premiums, depending on the percentage of business renewed during such second year; and for renewal commissions of 7%% of renewal premiums for the second to the twentieth policy years. By a supplemental contract entered into on August 28, 1936, it was provided that on August 24, 1936, the original agreement should be amended by substituting for Marmaduke Corbyn, Sr., the Marmaduke Corbyn Agency, a co« *454partnership consisting of Marmaduke Cor-byn, Sr. and Marmaduke Corbyn, Jr.,2 and that when George Scaling Corbyn should attain his majority on July 31, 1938, he should become a member of such co-partnership. The contract and supplemental contract provided for the renewal of the contract, subj ect to stated conditions, at the end of each contract year. Such renewal provision was to remain in force during the life of the last surviving member of the partnership. The contract was again amended by a supplemental agreement entered into on June 15, 1938. It provided for an allowance to the general agent of $500 per month, and in addition amounts incurred by the general agent for rental for the Oklahoma City office, for advertising, postage, telephone and telegraph expense, and for necessary replacement of furniture and equipment.
Controversies arose between Occidental and the partnership, as a result of which the partnership, on October 2, 1942, commenced an action against Occidental in the United States District Court for the Western District of Oklahoma.
On January 20, 1944, Occidental and the partnership entered into an agreement which recited the original contract on May 14, 1934, and the supplemental and amend-atory agreements, and that the parties desired to terminate the relations theretofore existing between them and compromise and settle the action referred to above. It provided that the agency contract should be terminated; that the partnership should resign as general agent or agents of Occidental; that neither the partnership nor its members should solicit applications for insurance on behalf of Occidental; and that pending applications for insurance should be considered and acted upon by Occidental. It further provided for the payment of any unpaid balance of commissions on first-year premiums, and that the rights of the parties with respect to renewal premiums under the contracts should be governed by the terms and provisions of such contracts, and released any claim or claims the agency had against Occidental for alleged breach of the agency contracts. In consideration thereof, Occidental agreed to pay the partnership $46,500, $45,000 of which was paid for the termination of the agency contract, except as to commissions referred to above. The partnership and the individual partners returned the $46,500 as a long-term capital gain. The Commissioner of Internal Revenue assessed deficiencies, treating such gain as ordinary income. The appellees paid the deficiencies under protest and brought this action against the 'Collector to recover.
The question involved is whether the $46,500 received by the partnership in 1944 was taxable as a long-term capital gain under § 117 of the Internal Revenue Code, or taxable as ordinary income.
The contracts gave the partners an exclusive agency in the State of Oklahoma. Under it they were entitled to receive as compensation for services rendered commissions on first-year premiums for business currently written, bonuses on second-year premiums, and renewal commissions on renewal premium payments from the second to twentieth policy year, inclusive.
The compromise agreement left undisturbed commissions earned and renewal commissions. The partnership did not sell or transfer the agency contract. What it did was release the principal, Occidental, from such contract by terminating it, except as to commissions on business already written. The only thing that the partnership surrendered was the right thereafter to act as agents of Occidental, to solicit applications for insurance, and to earn commissions on first-year premiums and renewal premiums. The partnership did not transfer to Occidental tangible assets of any consequence. On the termination of the contract, of course Occidental was entitled to occupy the leased premises for which it was advancing the rental. Occidental did not acquire the right to use the name of the partnership, or to otherwise receive benefit from the good will built up by the partnership. Of course, any good will which inured to Occidental as a life insurance company, as a re-*455suit of the agent’s services belonged to Occidental, the principal. Occidental did not by virtue of the compromise agreement take over a going business. It had to build or acquire a new agency and subagency personnel. In other words, what the partnership relinquished was the right to continue to render services of a personal nature, as the agent of Occidental — the agency contract not being transferable without the consent of Occidental — and to earn commissions as compensation for such services. Such commissions, had they been earned, would have constituted ordinary income. A lump sum paid for the surrender of the right to render such services and earn such commissions likewise, it seems to me, constituted ordinary income.
The case is distinguishable from Smoak v. Commissioner of Internal Revenue, 43 B.T.A. 907. There, the taxpayer acquired an exclusive agency for leasing and licensing machines used in distributing milk and other dairy products in paper containers, under which he was to receive a portion of the royalties paid by the lessees or licensees in his territory. He also entered into contracts for the installation and minor maintenance of the machines. Thereafter, after he had established a business and had a large number of existing contracts in which he would currently receive portions of the royalties paid by the lessees and licensees, he transferred his contract to the successor to the other party to the contract, in consideration of $26,000 in cash and $19,200 to be paid in installments over a period of time. The Tax Court held that the transaction was a sale of capital assets. The court said: “By the agreement of April 23, 1936, the petitioner transferred to the Ex-Cell-O Aircraft and Tool Corporation all of the rights inuring to him from the original contract with the American Paper Bottle Co. He relinquished his exclusive right to develop the sales territory allotted to him, the right to all royalties from future sales within that territory, and his right to the future royalties to be paid by existing licensees. He transferred also his office files and records and the good will which he had built up over the course of two years. This was much more than the assignment of a mere contractual right to receive royalties in the future. The petitioner had a going agency business. He sold off all of the assets of that business, with all of his rights under the agency contract to the Ex-Cell-0 Aircraft & Tool Corporation.”
I think the case is more analogous to McFall v. Commissioner of Internal Revenue, 34 B.T.A. 108 and Gann v. Commissioner of Internal Revenue, 41 B.T.A. 388.
For the reasons indicated, I respectfully dissent.

. Hereinafter called Occidental.

. Hereinafter called the partnership.