Court Opinion

ID: 4472798
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:34:55.609535+00
Date Added: 2024-06-11T07:54:32.181145
License: Public Domain

Parr, J., concurring: I concur in the result reached by the majority. I would conclude that the termination payments received by petitioner are not subject to self-employment tax, because in my judgment the payments are in the nature of a buyout of petitioner’s business by State Farm. Thus, they should be treated as a sale of a capital asset and are excluded from the definition of self-employment income under section 1402(a)(3)(A). The payments are in reality either for the goodwill of petitioner’s former insurance business (his books of customer accounts) or for a covenant not to compete. If the termination payments are for goodwill, then they are attributable to the sale of a capital asset. Goodwill has been characterized as the expectation that old customers will resort to the old place of business. Goodwill is acquired by the purchaser of a going concern where the transfer enables the purchaser to step into the shoes of the seller. See Decker v. Commissioner, 864 F.2d 51, 54 (7th Cir. 1988), affg. T.C. Memo. 1987-388; Winn-Dixie Montgomery, Inc. v. United States, 444 F.2d 677, 681 (5th Cir. 1971). Here the terms of the agreement between petitioner and State Farm allowed petitioner’s successor agent to step into his shoes. The successor agent continued the same business and sold insurance to the same customers. Petitioner’s goodwill, built up over a 33-year period, passed to the successor agent. State Farm served as the conduit by making payments to petitioner under the termination arrangement but deducted the payments from the commissions payable to the successor agent, and, if there was any shortfall, the balance was paid from State Farm’s general operating funds. If the termination payments are for a covenant not to compete, they are not self-employment income. Payments attributable to a covenant not to compete are not “earned” income, Furman v. United States, 602 F. Supp. 444, 451 (D.S.C. 1984), affd. without published opinion 767 F.2d 911 (4th Cir. 1985), and they are not subject to self-employment tax, Barrett v. Commissioner, 58 T.C. 284 (1972); see also Ohio Farm Bureau Fedn., Inc. v. Commissioner, 106 T.C. 222, 236 n.8 (1996). The purpose of the termination payments under the agreement was to compel petitioner to refrain from entering into an insurance business as a competitor of State Farm. Clearly, State Farm wanted to protect the customer base for its products that had been developed by petitioner during the course of his active affiliation with the company. It is significant that other courts in analogous agreements involving extended earnings arrangements have concluded that similar payments were in the nature of a buyout. See Darden v. Nationwide Mut. Ins. Co., 922 F.2d 203, 208 (4th Cir. 1991) (quoting Fraver v. North Carolina Farm Bureau Mut. Ins. Co., 801 F.2d 675, 678 (4th Cir. 1986)), revd. on other grounds 503 U.S. 318 (1992), as follows: The amount of the payment is tied to only one factor, the amount of business in the last year prior to termination. Finally, the payments are recouped from the individual’s successor. In sum, the benefits are in the nature of a buy-out in which the departing agent receives payments based on what he leaves behind in the way of business for his successor. If the departing agent goes into competition with his successor, he is destroying the resource that would be used to pay him. See also Petr v. Nationwide Mut. Ins. Co., 712 F. Supp. 504, 506 (D. Md. 1989); Wolcott v. Nationwide Mut. Ins. Co., 664 F. Supp. 1533, 1538 (S.D. Ohio 1987), affd. in part and revd. in part 884 F.2d 245 (6th Cir. 1989). Finally, in Milligan v. Commissioner, 38 F.3d 1094, 1098 n.6 (9th Cir. 1994), which is identical to the instant case in all material respects, the Court of Appeals observed: “Payments derived from the cessation of Milligan’s business are not subject to self-employment tax. * * * Nor does the self-employment tax apply to payments derived from noncompetition with State Farm.” Beghe and Dawson, JJ., agree with this concurring opinion.