Court Opinion

ID: 4595403
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:14:59.463215+00
Date Added: 2024-06-11T07:51:26.065051
License: Public Domain

FRED C. SANBORN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Sanborn v. CommissionerDocket No. 40963.United States Board of Tax Appeals19 B.T.A. 495; 1930 BTA LEXIS 2379; April 8, 1930, Promulgated *2379  An insurance agent's contract with his company allowed him all commissions on policies written in territory assigned him, but required him to organize such territory, write insurance, employ, train and supervise the work of subagents therein, whose commissions were paid by him, all of which he did.  His net commissions were in each taxable year in excess of $20,000.  Held, petitioner was entitled to claim in each taxable year $20,000 as earned net income for personal services actually rendered.  Harry Friedman, Esq., for the petitioner.  W. F. Gibbs, Esq., for the respondent.  SEAWELL*495  The Commissioner determined a deficiency in income tax of $179.39 for the year 1925 and $87.04 for 1926.  Petitioner received in the years 1925 and 1926, $36,499.95 and $37,457.52, respectively, as net commissions for his services as general agent for an insurance company.  In computing his tax for those years, he took the maximum deduction of $20,000 allowed by the *496  Revenue Act of 1926 for earned net income.  The Commissioner disallowed such deduction and allowed only 20 per cent of the net commissions for each year as earned income, which*2380  action produced the deficiencies asserted.  The case is submitted on the pleadings, the testimony of petitioner, and exhibits.  FINDINGS OF FACT.  Petitioner is a resident of Brookline, Mass., and the general agent in Boston, Mass., of the Massachusetts Mutual Life Insurance Co. of Springfield in said State.  After serving the company 22 years a cashier, petitioner was in 1895 appointed its general agent as stated.  He was given certain territory to organize in the interest of the company and it was expected of him that he would within such territory employ subagents and train, supervise, and assist them in securing and retaining business for the company, which he did.  The bulk of such business was done in and around Boston and the headquarters of such subagents so employed and paid by him were in his Boston office.  During the years in question petitioner employed 25 or 30 subagents in the interest of the insurance company; 12 or 15 of them so employed had desks in the Boston office.  All the subagents employed by eptitioner in his territory were paid by him out of his commissions.  During said taxable years there were 10 or 11 clerks and a cashier employed in the Boston*2381  office, all of whom were paid by the insurance company.  In 1925 petitioner's gross commissions from his company were $143,365.27, and his payments of commissions to his subagents and agency expenses for the same period amounted to $106,865.32.  In 1926 petitioner's gross commissions from his company were $144,141.93, and his payments of commissions to his subagents and agency expenses for the same period amounted to $106,648.41.  No person in the Boston office except himself had any contract with his company to write insurance in his territory.  All commissions on insurance written for his company in petitioner's territory were first paid to him.  The petitioner's subagents writing insurance for he company were then paid by him the entire amount of the first year's commission on insurance so written by them.  Renewal commissions were 7 1/2 per cent, of which petitioner as general agent retained 2 1/2 per cent and paid to his subagents 5 per cent for a period of 9 years if they remained in the service so long.  Except on new business or old business on which for a time renewal commissions were allowed, the general agent's commissions ceased after a limited time.  *497 *2382  About 98 or 99 per cent of the expenses charged against petitioner's commissions were paid to his subagents as their commissions.  Where an agent of another insurance company procured a client who took a policy with petitioner's company, petitioner allowed such agent the first year's commission and retained only his customary 2 1/2 per cent commission where the policy was renewed.  Petitioner always paid his own expenses and the traveling expenses of his subagents when they were sent out by him on business for the company, but when they went of their own volition in their own cars they bore their own expenses.  Expenses incident to closing out insurance in case of death of the insured were borne by the petitioner.  Petitioner's duties and services during the years in issue were as heretofore indicated and his commissions received were paid for such services and for nothing else.  OPINION.  SEAWELL: The deficiencies in question are for the years 1925 and 1926 and the applicable law is found in the Revenue Act of 1926 (which by section 286 thereof is made effective as of January 1, 1925), as follows: SEC. 209. (a) For the purposes of this section - (1) The term "earned*2383  income" means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, * * *.  In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income.  (2) The term "earned income deductions" means such deductions as are allowed by section 214 for the purpose of computing net income, and are properly allocable to or chargeable against earned income.  (3) The term "earned net income" means the excess of the amount of the earned income over the sum of the earned income deductions.  If the taxpayer's net income is not more than $5,000, his entire net income shall be considered to be earned net income, and if his net income is more than $5,000, his earned net income shall not be considered to be less than $5,000.  In no case shall the earned net income be considered to be more than $20,000.  The contention of the petitioner is*2384  that he had no income-producing capital invested in his insurance agency business and that his commissions were all received "as compensation for personal services actually rendered," and therefore he was entitled to have as much as $20,000 of his net commissions considered and treated as "earned net income" in each of said years.  *498  In behalf of the respondent it is insisted that the commissions received by the petitioner were not compensation "for personal services actually rendered" by him alone but were in large part the return from the personal services actually rendered by numerous subagents of his, who wrote insurance and produced much of the commissions which he received.  Furthermore, that capital was employed in the insurance business of petitioner and was a material income-producing factor therein.  The contract of petitioner with the insurance company which he represented as general agent at Boston, Mass., is not in evidence but the evidence - his testimony, not objected to, indicates that all the commissions he received were for personal services he agreed to render and did actually render under his contract.  His contract was with the company.  The subagents' *2385  contracts were with him.  His commissions, in addition to commissions received when he wrote insurance, came from the company by reason of his personal services in employing his subagents, instructing them, supervising their work, assisting them in securing and retaining insurance, etc.  What he received, whether much or little, depended on his personal ability, skill, success, and services in organizing his territory, securing capable and efficient subagents, all of which required his active and constant personal service and attention.  It was, as he testified, for that and nothing else that his commissions were paid.  For the services which his subagents rendered him, he paid in accordance with the terms of his contract with them and reported the same as expenses in his income-tax returns.  In the circumstances of the instant case, we are of the opinion that the Commissioner was in error in not allowing the petitioner earned net income in the maximum amount of $20,000 for each of the taxable years in issue.  Judgment will be entered for the petitioner.