Academic journal article Journal of Accountancy

Like a Good Neighbor

Academic journal article Journal of Accountancy

Like a Good Neighbor

Article excerpt

The Ninth Circuit has affirmed a district court and held that termination payments received by a retiring insurance agent were not capital gain but were taxable as ordinary income. The court thus joins the Seventh Circuit in so ruling on similar facts. See Warren L Baker Jr. v. Commissioner, 92 AFTR2d 2003-5640.

Charles Trantina retired after working 38 years as a State Farm agent in Phoenix. Under his agency's contract, the insurer provided forms, manuals and records and assisted Trantina with some advertising costs. In return, the agency solicited and serviced insurance policies, which also belonged to State Farm. State Farm paid Trantina commissions and, upon his retirement and the dissolution of the agency's corporation, termination payments.

Trantina originally reported these termination payments as ordinary income on his individual tax return but later amended his return to recharacterize them as long-term capital gain. He claimed they resulted from the sale or exchange of a capital asset--the agreement with State Farm that was held longer than one year. The IRS denied the refund, and Trantina sued in district court. The court granted summary judgment for the IRS, finding that the agreement was not a capital asset and that no exchange or sale of it had occurred. Trantina appealed.

The Ninth Circuit reasoned that to realize a capital gain, there must be ownership of a capital asset. …

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