Court Opinion

ID: 4597518
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:19:23.23001+00
Date Added: 2024-06-11T07:51:48.504775
License: Public Domain

George J. Aitken and Elizabeth M. Aitken, Petitioners, v. Commissioner of Internal Revenue, RespondentAitken v. CommissionerDocket No. 78599United States Tax Court35 T.C. 227; 1960 U.S. Tax Ct. LEXIS 29; November 8, 1960, Filed *29 Decision will be entered under Rule 50.  Where a subagent owned insurance "expirations" which, in the insurance field, are valuable property, and the subagent sold the "expirations" for $ 10,000 by contract to an agent, held, the consideration received was a capital gain. John C. Graham, Esq., for the petitioners.Vernon R. Balmes, Esq., for the respondent.  Van Fossan, Judge.  VAN FOSSAN *227  Respondent determined a deficiency in petitioners' income tax in the amount of $ 1,443.02 for the taxable year 1956.The issue is whether receipt of $ 10,000 by petitioners was in consideration for either (a) the relinquishment of previously earned *228  insurance commissions, or (b) the sale of insurance "expirations," and, if the latter, whether petitioners were correct in reporting the sum as a capital gain.FINDINGS OF FACT.Petitioners, *30  George J. Aitken and Elizabeth M. Aitken, are husband and wife, residing in Zanesville, Ohio.  They filed a joint income tax return for the taxable year 1956 with the district director of internal revenue, Columbus, Ohio.  Since Elizabeth M. Aitken is a petitioner here only by virtue of having filed a joint return with her husband, the latter will hereinafter sometimes be referred to as petitioner.Petitioner was employed in 1928 as a fire and casualty insurance solicitor, or agent, by the T. M. Lynn Insurance Company (incorporated in 1930 under the name Thomas M. Lynn, Inc.), hereinafter sometimes referred to as Lynn.  He remained an employee, in one capacity or another, from 1928 through 1958.From the date of his employment through 1956 the employment contract between petitioner and Lynn provided that petitioner, in writing new insurance, was to receive one-half of the total commissions on the new insurance which he had written during the time that the insurance remained in effect.  Petitioner also received a small salary in addition to the commissions.  The other one-half of the commissions was received by Lynn.  The policies were written in the name of Lynn, although both petitioner*31  and Lynn deducted their commissions before remitting the proceeds to the insurance companies.The contract of employment also provided that petitioner owned all "expirations" from insurance written by him.In the fire and casualty business, insurance "expirations" are information contained in records pertaining to those policies which have been previously sold.  This information consists, in part, of such items as the beginning and expiration date of the policy sold, the type of insurance, and coverage of the policy.Lynn kept such information in its file, but the records were labeled with petitioner's name.These "expirations" are considered property in the nature of goodwill, deriving their value from the fact that (a) expirations enable the agent to control the renewal of the policies, and (b) the information is not available to any of the competitors of the agent.In the fire and casualty field of insurance in Ohio, at least 80 per cent of the policies are renewed with the person or agent owning the expirations.In 1956 petitioner entered into a contract with Lynn which provided, inter alia, that:Whereas, the subject matter of this sale is all the insurance that the SELLER*32  [petitioner] solicited and sold as agent and solicitor while employed by the *229  PURCHASER [Lynn], and its predecessor, Thomas M. Lynn, from Nov. 1929, to the 1st day of January 1956.  The aforesaid insurance is commonly referred to in the insurance business as "insurance expirations." * * *The contract also provided that petitioner was not to compete with Lynn in the insurance business for 3 years.  Petitioner received no compensation for this provision of the agreement.  Because of his ill health at the time of entry into this contract, petitioner would not have been physically able to compete with Lynn.Respondent determined that the consideration received under the above-mentioned contract was for the sale or relinquishment of future commissions and was, therefore, subject to ordinary income treatment.Petitioner received $ 10,000 in consideration for his transfer of his ownership of insurance "expirations."OPINION.The issue is whether $ 10,000 received by petitioner was in consideration for the transfer of future insurance commissions or for the sale of fire and casualty insurance "expirations," and, if the latter, whether such sum was subject to capital gains treatment. *33  These expirations included no rights to commissions.The deficiency arose in part from respondent's action in disallowing certain deductions for legal expenses and depreciation.  Petitioner has not contested these adjustments.  Accordingly, a Rule 50 determination is necessary.Respondent argues, first, that the contract was in reality an assignment of an accrued right to future compensation for personal services rendered in the past, and that as such, the $ 10,000 was ordinary income.  Secondly, assuming that the right to receive future compensation under the employment contract constituted a capital asset, respondent argues that the disposition of the "expirations" was neither a "sale" nor an "exchange" of a capital asset.Petitioner, on the other hand, argues that the contract constituted a transfer of a valuable property right, i.e., insurance expirations, and that the receipt of $ 10,000 for that right was a capital gain.In our opinion, respondent overlooked the subject matter of the contract in issue.  The essential nature and definition of "expirations" was set forth in V.  L. Phillips & Co. v. Pennsylvania Threshermen, etc., 199 F. 2d 244*34  (C.A. 4), as follows (p. 246):"Expirations" in the insurance field has a definite and well recognized meaning; it embodies the records of an insurance agency by which the agent has available a copy of the policy issued to the insured or records containing the date of the insurance policy, the name of the insured, the date of its expiration, the amount of insurance, premiums, property covered and terms of insurance.  This information enables the agent to contact the insured before the existing contract expires and arms him with the information essential to secure another policy and to present to the insured a solution for his insurance requirements.  *230  It has been determined that this information is of vital assistance to the agency in carrying on the insurance business and it has become, in the insurance field, recognized as a valuable asset in the nature of good will.There is ample authority for the rule which is generally recognized that a fire or casualty insurance agent has a property right to the expirations on business produced by him.  Kelly v. American Mine Owners' Casualty Corporation, 161 Va. 206">161 Va. 206, 170 S.E. 580">170 S.E. 580; *35 Port Investment Co. v. Oregon Mutual Fire Insurance Company, 163 Or. 1">163 Or. 1, 94 P. 2d 734, 124 A.L.R. 1342">124 A.L.R. 1342.See, also, Northwest Underwriters v. Hamilton, 151 F. 2d 389 (C.A. 8), and Heyl v. Emery & Kaufman, Limited, 204 F. 2d 137 (C.A. 5).Similarly, in Holsinger Theis & Co. v. Holsinger, 329 Ill. App. 460">329 Ill. App. 460, 69 N.E.2d 360">69 N.E. 2d 360, 365, it was stated:A confidential record of an insurance agency showing the names and addresses of the policyholders, detailed information concerning the policies, together with the date of expiration and the like, are assets and trade secrets of such agency which a court of equity will protect against wrongful appropriation and use.  * * *See, also, Woodruff v. Auto Owners Ins. Co., 300 Mich. 54">300 Mich. 54, 1 N.W. 2d 450; J. Alfred Mouton, Inc. v. Hebert, 199 So. 172">199 So. 172; and Kerr & Elliott v. Green Mountain Mut. Fire Ins. Co., 111 Vt. 502, 18 A.2d 164">18 A. 2d 164.Considering*36  the nature of expirations, we entertain no doubt that whether we refer to the expirations as trade secrets or confidences, customer lists, goodwill, or just intangibles in the nature of goodwill, they constituted capital assets.  Sec. 1221, I.R.C. 1954.  Cf.  Aaron Michaels, 12 T.C. 17">12 T.C. 17; Elliott B. Smoak, 43 B.T.A. 907">43 B.T.A. 907.While the cases referred to above concerned the right to "expirations" as between the agent and insurer, we think their observations apply equally to define the rights of the agent and subagent. The 1956 sales contract recited that petitioner owned the expirations, and he so testified.  Although Lynn had access to the information, petitioner owned it and could have protected his right as against Lynn.  Cf.  Morrison v. Woodbury, 105 Kan. 617">105 Kan. 617, 185 Pac. 735; and Holsinger Theis & Co. v. Holsinger, supra.It follows that when petitioner sold his property interests in the expirations to Lynn, the entire proceeds of the sale represented capital gain. Cf.  Aaron Michaels, supra;Elliott B. Smoak, supra.*37 Respondent stresses what he calls petitioner's contract right to one-half the renewal commissions and reasons that these commissions were what was sold.  The respondent has not established that such was the case.  Instead, there is a recitation in the sales contract concerning the previous employment arrangement as constituting an agreement entitling petitioner to 50 per cent of the commissions on all new insurance he sold, and petitioner's undisputed testimony that he bargained for and sold "expirations." We are unaware of what arrangement had been made for the renewal commissions.*231  We have found as a fact, based on the undisputed evidence produced by petitioner, that the $ 10,000 represented payment for "expirations" and not for previously earned commissions.  The case of Estate of Thomas F. Remington, 9 T.C. 99">9 T.C. 99, is distinguishable since in that case the decedent's widow sold a preexisting right to be paid commissions for services rendered by her husband on the Statler account in the past.Respondent argues that there was no "sale" or "exchange" of a capital asset. We pause only to comment that here we have the transfer of valuable property*38  rights which do not terminate or vanish.  The "expirations" existed after the contract, they having become the exclusive property of Lynn.  The cases cited by respondent, e.g., Leh v. Commissioner, 260 F. 2d 489 (C.A. 9), affirming 27 T.C. 892">27 T.C. 892, are distinguishable on that ground.Remaining only is the question raised by respondent concerning the agreement not to compete. We have found as a fact that petitioner received no consideration for this agreement.  Even if it were not so, the agreement was an integral part of the sales contract, giving meaning to the transfer, and as such it must be regarded "as being in effect a contributing element to the assets transferred." Aaron Michaels, supra.Decision will be entered under Rule 50.