Cotlow v. Commissioner

Lewis N. Cotlow, Petitioner, v. Commissioner of Internal Revenue, Respondent Cotlow v. Commissioner Docket No. 44827 United States Tax Court 22 T.C. 1019; 1954 U.S. Tax Ct. LEXIS 129; August 9, 1954, Filed August 9, 1954, Filed *129 Decision will be entered under Rule 50. 1. Held, renewal insurance commissions received by petitioner in the taxable year by reason of bona fide assignments for value from various insurance agents constituted taxable income to petitioner to the extent which the aggregate amount thereof exceeded the total consideration paid by him for such assignments. 2. Held, the income so realized by petitioner is taxable as ordinary income. Stanley B. Haber, Esq., for the petitioner. Charles N. Greenspan, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *1019 Respondent determined a deficiency in income tax of petitioner for the taxable year 1948 in the amount of $ 10,192.30. By stipulation petitioner has abandoned certain allegations of error contained in his petition. *130 The sole remaining issue involves the proper treatment to be accorded receipts by petitioner in 1948 as assignee of certain insurance renewal commissions. FINDINGS OF FACT. The stipulation of facts filed by the parties with exhibits attached is adopted and by this reference made a part hereof. Lewis N. Cotlow is a resident of New York, New York, and maintains a place of business in that city. He filed his individual income tax return for the year 1948 on the cash receipts and disbursements basis with the collector of internal revenue for the second district of New York. Petitioner has been a life insurance agent since 1923, and since 1927, has been purchasing from other agents their rights to renewal commissions on life insurance premiums. In his return for 1948, petitioner reported no income on account of renewal commissions received by him during such year. In the normal course of the insurance business a life insurance agent sells a life insurance policy to an insured. Under the terms of the usual commission arrangement with the insurance company which issues the policy, the life insurance agent is entitled to receive a certain percentage of the first year's premium paid by*131 the insured, plus commissions on the premiums paid by the insured in each of the next 9 years. These commissions paid during each of the 9 years are known as renewal commissions. Certain life insurance agents absolutely assign their rights to the renewal commissions to the petitioner for a consideration equal to their market value. The assignment is usually made for a price approximately equal to one-third of the face value of the renewal commissions, face value meaning *1020 the full amount to be collected if the insured's policy remains in force for the entire 9 years. The assignments to the petitioner here involved by the life insurance agents who are in no way related to the petitioner are bona fide arm's-length transactions. The transfer of title in the renewal commissions to the petitioner was effected by the original insurance agent's executing to the petitioner an assignment form, a copy of which assignment was filed with the issuing insurance company. Thereafter, the insurance company paid to the petitioner renewal commissions due on each policy when the insured paid his premium to the company on each of such policies. The petitioner's secretary maintains a card*132 system with respect to renewal commissions. After assigning the renewal commissions to the petitioner, the insurance agent-assignor has nothing further to do. Prior thereto he had performed all necessary services incident to the earning of such commissions. The insurance agent's arrangements with the insurance company are such that the agent is entitled to the commissions contingent only upon the insured's payments of the premiums to the insurance company in the subsequent years. No services of any kind were left to be performed by petitioner or any one acting in his behalf in order to receive the renewal commissions. The petitioner performed no services nor was he required to do so at any time in order to receive the renewal commissions. During the calendar year 1948, the petitioner received as renewal commissions the total sum of $ 45,500.70 on 1,648 policies. Of such sum, $ 23,563.33 1 represents receipts over and above the aggregate cost of the assignments to the petitioner of the rights to the renewal commissions involved, the cost of which assignments had already been fully recovered by the petitioner in the form of prior receipts. In 1948, 44 life insurance policies, *133 renewal commissions on which had previously been assigned to the petitioner, either lapsed for nonpayment of the premiums by the insured, were surrendered by the insured to obtain the cash surrender value of the policies, or terminated by reason of the death of the insured. As of December 31, 1948, the petitioner's unrecovered cost for the assignments of these policies was $ 868.83. Also during the calendar year 1948 the petitioner by assignment purchased the rights to other renewal commissions upon at least 1,648 policies, paying therefor the sum of $ 44,568.90. The petitioner is known among the general agents of insurance companies as an individual who purchases rights to renewal commissions. In every year since 1927 through and including the taxable year 1948, the petitioner has either received some renewal commissions as a result of prior assignments or purchased additional*134 assignments. All *1021 sums of money received by the taxpayer on renewal commissions during the year 1948 in excess of the original cost to the taxpayer were derived from the assignments of renewal commissions purchased by the petitioner at least 1 year prior to January 1, 1948. The petitioner has never sold any of the rights to renewal commissions which he purchased by assignment. OPINION. The sole issue involves the proper treatment for tax purposes to be accorded the receipt of insurance renewal premiums in the taxable year by petitioner as the assignee for valuable consideration of various insurance agents. Respondent has determined and here maintains that such receipts represent ordinary income to petitioner under section 22 (a), Internal Revenue Code, to the extent they exceed the aggregate of the amounts paid to the assignors by petitioner in consideration of the assignments. It is petitioner's position that he realized no taxable income from the receipts by him of commissions on assigned renewals; that if such receipts in excess of the original costs do, in fact, constitute taxable income they should be treated as long-term capital gains; and that, in such event, since*135 he is on a cash receipts and disbursements basis, the proper method to be employed in determining taxable income is to offset the cash disbursements made by him during the taxable year to acquire further assignments of renewal commissions against the renewal commissions received by him in such year. With regard to the proposition first advanced by petitioner, namely, that the receipt of assigned renewals does not constitute taxable income to him, petitioner argues that under the rationale of Helvering v. Eubank, 311 U.S. 122, the commissions in controversy are taxable to the individual assignors who were the earners thereof. He concludes, therefore, that this being true, no portion of such commissions constitutes taxable income to him. With such conclusion we disagree. Whether or not petitioner's assignors are taxable upon the commissions earned by them and assigned to petitioner, as to which we express no opinion, is not the question. However, even if they be liable to tax despite the assignment, it does not necessarily follow that petitioner here is relieved from taxation on the amount received by him in excess of the amount paid to them for*136 the assignments. In the Eubank case, the Supreme Court, based upon the reasoning applied by it in Helvering v. Horst, 311 U.S. 112, handed down the same day, held that the earner (donor) of the income represented by insurance renewal commissions could not avoid taxation thereon by the anticipatory gift and assignment thereof to a trust where no purpose *1022 appeared other than to confer upon such donee the power to collect the commissions. The tax liability of the assignee was not there involved. The Eubank case, as indicated above, was concerned with the tax consequences following the gift to a trust of insurance renewal commissions. Specifically, the question was whether the donor was taxable on the income represented by such commissions. The situation presently under consideration is basically different. Here we are dealing with the consequence of an arm's-length purchase at fair value of property rights. The present assignors for full, adequate, and valuable consideration, parted with all right, title, and interest in their several pieces of property, i. e., the right from which the renewal commissions arose. The assignor *137 sold to the assignee everything he had in an outright sale of valuable property. After the assignment the assignors who had sold their property, just as if they had sold a piece of income producing land, had no remaining title or interest in such property or in the income therefrom. They had realized on the satisfactions that flowed from ownership by the complete alienation for valuable consideration of their title to the property. Thereafter their satisfactions and enjoyment must be found in the cash received or the accretions thereto. There is nothing in the Eubank case which is controlling here. The Supreme Court in that case did not rewrite the law as to sales of property. We find our authority in the present case in such cases as Blair v. Commissioner, 300 U.S. 5, rather than in Eubank. Here the compelling motive of the assignor was the immediate realization of the fair value of the property by sale thereof. The new owners of the property had not only title to the income, they had title to the intangible property from which it flowed. We hold that the income from the insurance renewal commissions is taxable to the assignee, petitioner*138 here. Nor do we agree that the profits realized by petitioner are taxable as capital gains. After petitioner acquired the assignments for a consideration, the amount received by him thereafter over and above such cost, was not directly attributable to the sale or exchange of a capital asset. Petitioner has, in fact, never sold any of the renewal commissions purchased by him. We, therefore, hold that the income in question is taxable as ordinary income. Cf. Joseph A. Guthrie, 42 B. T. A. 696. There remains petitioner's contention that the method used by respondent in determining the deficiency herein was arbitrary and disregarded the consistent accounting practice employed by him. During the year involved, petitioner received $ 45,500.70 as renewal commissions previously acquired by him by assignment. Within the same year, he disbursed $ 44,568.90 to purchase additional assignments of renewal commissions. Petitioner would offset the latter against the *1023 former and use the difference of $ 931.80 in determining his taxable income from renewal commissions. Petitioner cites no authority for such proposition and we have been unable to find*139 any. Moreover, such method would certainly not clearly reflect petitioner's income from assigned renewal commissions in 1948. Respondent is, therefore, sustained on this item. Petitioner observes that the amount of the unrecovered cost of the policies which lapsed or terminated during the taxable year should be reflected in computing the amount of taxable income he received from the commissions in question. Such contention was raised in the pleadings; but from the record before us, we are unable to ascertain whether respondent concedes the point. In any case, we agree with petitioner that his gain should be reduced by such amount. Decision will be entered under Rule 50. Footnotes 1. This figure was erroneously stated in the notice of deficiency as $ 24,010.72, which error was recognized and corrected by stipulation.↩