Illegally Waived or Rebated Commissions Not Taxable to Agent

Journal of Accountancy, November 1993 | Go to article overview

Illegally Waived or Rebated Commissions Not Taxable to Agent


In 1982, insurance agent Mickey Worden sold six life insurance policies through the Federal Home Life Insurance Co. Worden's contracts with the cleints who brought Federal Home Life insurance provided that he would act as their "insurance consultant." In return for a fee, Worden would, among othher things, search the market for the "most reasonable rates available."

Worden provided his cleints with their first year's coverage at cost by waiving his first-year commission--chargingX the clients a "consulting fee" equal to the net first-year premium due the insurance company (after deducting the "basic commission" to which he normally would have been entitled). Worden then remitted the net premium to the company. Worden's contract with Federal Home Life allowed him to remit only the net premium (that is, the gross premium normally paid by the client, less the basic commission allowed to the agent).

Such rebating of insurance commissions was and is illegal in Worden's home state, Oklahoma. (The practice is illegal in all states with the exception of California and Florida. Further, even where rebating is legal, many insurance companies do not allow it.)

orden did not report the basic ccommissions as gross income, since he had not received them. However, Federal Home Life, assuming he had kept the difference between the net premium and the usual retail cost to the client, reported to the Internal Revenue Service that he had received basic commissions on the sixx contracts, and a tax dispute ensued. …

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