Insurance agency termination payments were ordinary income.

• Author: O'Driscoll, David

IN THIS DEPARTMENT

Gross Income

* Insurance agency termination payments were ordinary income: Baker, 7th Cir.; p.639.

Individuals

* Owners of multiple residences lose principal residence exclusion: Guinan, DCAZ; p.640.

Insurance Agency Termination Payments Were Ordinary Income

I worked as an insurance agent for O Insurance Company for 34 years, conducting business as the I Insurance Agency. He started the agency from scratch, had no assigned customers, was responsible for developing a customer base and selected his office location with O's approval. He was also responsible for office expenses and for hiring and paying employees. For over 34 years, I generated a customer base of approximately 1,800 households, with more than 4,000 policies in force.

I's relationship with O was governed by an agent's agreement; O considered all policyholder informaion to be its property, as specified in the agreement. The agreement also provided for termination payments for agents discontinuing their work with O. The payments' value depended on the number of policies in force during the last 12 months of the agent's affiliation with the company. Under a covenant not to compete, an agent forfeited his or her right to termination payments if he or she solicited policyholders within one year after terminating the affiliation.

I terminated his relationship with O on Feb. 28, 1997, and under the terms of the agreements, he returned policy and policyholder descriptions, claim draft books, rate books, agent's service texts and a computer containing much of the policy information. Approximately 90% of I's 4,000 existing policies were as signed to his successor. The successor agent, appointed by O, hired I's two employees and assumed his telephone number The successor agent also opened an office in the vicinity of I's office.

Because I had fully complied with the agreement, O made termination payments of $38,622 in 1997, which I reported as long-term capital gain on his 1997 Schedule D. He noted on the return that the payments were made pursuant to contacts that "contain specific provisions for the purchase and sale of business intangible assets" and that the money would be paid "in the form of a five-year certain annuity designated as termination payments."

Analysis

The sole contention on appeal is whether O's termination payments were consideration for the sale of a capital asset. I must establish that he: (1) owned a capital asset that he held for more than one...