T.C. Memo. 1996-241
UNITED STATES TAX COURT
BEN COX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18559-93. Filed May 23, 1996.
Ben Cox, pro se.
Reginald R. Corlew and Stephen R. Takeuchi, for respondent.
MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: This case was heard pursuant
to section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent
determined a deficiency in petitioner's Federal income tax for
1990 in the amount of $2,047. The sole issue for consideration
1
All section references are to the Internal Revenue Code in
effect for the year in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
2
is whether petitioner failed to report commissions earned from
prior sales of life insurance policies in the amount of $7,266.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein. Petitioner resided in Jasper, Florida,
at the time he filed his petition.
Petitioner has been employed as a mechanic for Occidental
Chemical Phosphate Co. for more than 22 years. In 1988, he was
hired by Massachusetts Indemnity and Life Insurance Co. (MILICO)
as an independent contractor sales representative to sell life
insurance policies. Petitioner worked for MILICO from 1988 until
the end of 1989.
Karen Wilson (Ms. Wilson) is vice president of Primerica
Life Insurance Co., formerly known as MILICO prior to a corporate
name change effective July 1, 1992. In this capacity, Ms. Wilson
executed an affidavit that was received into evidence wherein she
detailed the compensation procedure for MILICO's independent
contractor sales representatives:
3.
Cash payments are made to sales representatives in two
forms. First, upon receipt of an application for insurance,
Primerica Life advances a portion of the commissions that
are expected to become earned, assuming a policy is issued
and remains in force. The money advanced on each
application is a loan and, as such, is not reported as
income for the sales representative unless and until the
commission income actually becomes earned by virtue of the
policyholder continuing to pay premiums.
3
4.
The second form of payment to sales representatives is
net earned commissions. Earned commissions are calculated
on a policy-by-policy basis as premiums are paid by
policyholders. Earned commissions are applied in the
following order: (1) to recover outstanding loans in the
form of advance commissions; (2) to reimburse Primerica Life
for advanced business expenses such as license fees, etc.;
and (3) to cover outstanding loans that have been charged to
the sales representative's account ("chargebacks"). Net
earned commissions credited during any calendar year to a
sales representative's account are reported to the IRS as
income on Form 1099-MISC.
Ms. Wilson further stated that "the obligation to pay commissions
attributable to the sale of MILICO insurance products was the
responsibility of MapleLeaf Insurance Services" (MapleLeaf).
Petitioner testified that upon selling an insurance policy,
he received an immediate advance equal to a percentage of the
premiums due on the policy and was entitled to keep this amount
if and only if the policy was held by the insured for a minimum
of 7 months. According to Ms. Wilson's affidavit, the advances
were intended as loans, and there was an unconditional personal
obligation on the part of petitioner to repay the advances either
with the future commission, credited to his account after the
relevant 7 months elapsed, or out of his personal funds. The
advances were not reported by MapleLeaf to the IRS as income on
Form 1099-MISC until the 7 months elapsed, and petitioner had an
unconditional right to the funds or their equivalent.
4
A financial analysis schedule for petitioner, generated by
MILICO on December 30, 1992, and received into evidence, reflects
the following information:
Life Insurance1 Earnings2 Net
Year Checks Issued Rep. on 1099 Difference
1988 $12,232.64 $6,098.68 ($6,133.96)
1989 11,113.71 11,210.23 96.52
1990 128.44 7,266.75 7,138.31
1991 333.06 210.22 (122.84)
1992 360.84 -0- (360.84)
Total 24,168.69 24,785.88 617.19
1
Represents advances made to petitioner during year.
2
Represents commissions credited to petitioner's account
after right to funds became unconditional.
On his 1988 and 1989 Federal income tax returns, petitioner
reported as commission income only the amounts reported on the
Forms 1099 issued by MapleLeaf. Petitioner did not report any
commission income received from MapleLeaf on his 1990 return. In
the notice of deficiency, respondent determined that petitioner
failed to report income in 1990 of $7,266.75. Respondent further
determined that petitioner was entitled to a deduction for self-
employment tax in the amount of $517. Respondent concedes that
if we find petitioner failed to report income as determined, he
is entitled to deductions for chargeback expenses of $1,526 and
miscellaneous expenses of $115.
Petitioner concedes that he received the amounts reflected
in the second column of the above schedule for the corresponding
5
years, and that he paid tax only on the amounts reflected in the
third column. Nevertheless, he contends that only $128.44 of the
amount reported on the Form 1099 for 1990 is taxable income in
1990 because he received the remainder thereof in prior years;
namely, 1988 and 1989.
Section 61(a)(1) specifically provides that gross income
includes income from whatever source, including commissions from
the sale of life insurance. Commissioner v. Glenshaw Glass Co.,
348 U.S. 426, 431 (1955). In general, proceeds of a loan do not
constitute income because the benefit is offset by an obligation
to repay. United States v. Rochelle, 384 F.2d 748, 751 (5th Cir.
1967); Milenbach v. Commissioner, 106 T.C. 184 (1996).
Although petitioner's employment with MILICO terminated in
1989, he continued to earn commissions on policies sold by him
prior to his departure. Instead of paying these commissions to
petitioner, MapleLeaf credited his outstanding advances account
in accordance with its agreement with MILICO. When the advances
were made to petitioner, he was not taxable on them because they
were in effect loans. See Beaver v. Commissioner, 55 T.C. 85, 91
(1970). However, when the commissions earned by him in 1988 and
1989 were credited to his account, petitioner's obligation to
repay the loans was reduced by that amount, and the reduction of
that obligation did constitute the receipt of taxable income.
6
Newmark v. Commissioner, 311 F.2d 913, 915 (2d Cir. 1962), affg.
T.C. Memo. 1961-285.
Moreover, it is well settled that gross income includes
income from the discharge of indebtedness. Sec. 61(a)(12);
Commissioner v. Jacobson, 336 U.S. 28 (1949); Helvering v.
American Chicle Co., 291 U.S. 426 (1934); United States v. Kirby
Lumber Co., 284 U.S. 1 (1931). The evidence in this case makes
it clear that petitioner owed money to MILICO on account of the
advances he received in 1988 and 1989, and that a portion of such
debt was discharged in the taxable year at issue. Therefore, the
amount of debt discharged in favor of petitioner constitutes
income to him for 1990 as determined by respondent. Petitioner
was not taxed on the advances when received, but he is taxable on
the discharge of the obligation to repay them.
Based on the foregoing, we hold that petitioner failed to
report commission income in the amount determined by respondent.
In order to account for chargeback expenses of $1,526, and
miscellaneous expenses of $115, as conceded by respondent,
Decision will be entered
under Rule 155.