STATE OF WISCONSIN
TAX APPEALS COMMISSION
SIGURD AND BETTY J. GUDAL
322 Elm Street Dr.
Spooner, WI 54801,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708,
DOCKET NO. 00-I-79 00-I-80
DON M. MILLIS, COMMISSIONER:
This matter comes before the Commission on stipulated facts. Petitioners are represented by Wayne E. Schroeder. Respondent was represented by Attorney Robert G. Pultz.
FINDINGS OF FACT
The Commission makes the following Findings of Fact based upon the Stipulation of Facts, omitting references to exhibits and making non-substantive changes for consistency and form:
1. Petitioners filed Wisconsin income tax returns for the years 1994, 1995, 1996, and 1997 listing income received from State Farm Insurance Company ("State Farm") as termination payments. Petitioners did not claim capital gain treatment for the termination payments.
2. On November 28, 1998, petitioners filed amended returns for 1994 through 1997 claiming refunds due in the amount of $2,840.07 for 1994, $4,071.82 for 1995, $3,022.79 for 1996, and $3,822.46 for 1997. These refunds were claimed based on petitioners' belief that compensation received from State Farm during these years qualified for capital gain treatment.
3. Petitioners filed their Wisconsin income tax return for 1998 reporting the compensation received from State Farm on Schedule WD as a long-term capital gain.
4. On July 13, 1999, respondent denied petitioners' refund claims for 1994 through 1997.
5. On July 26, 1999, respondent issued an assessment against petitioners in the amount $1,607.18 for 1998. The assessment was based on respondent's denial of petitioners' claim for capital gain treatment on the compensation received from State Farm.
6. Petitioners timely filed petitions for redetermination with respondent, appealing both respondent's denial of the claimed refunds and the 1998 assessment. Respondent denied the petitions for redetermination. Petitioners filed timely petitions for review with the Commission.
7. During 1994 through 1998, petitioners were not actively employed by State Farm.
8. Compensation received by petitioners from State Farm during 1994 through 1998 is sometimes referred to as "agency income."
The Commission makes the following additional Findings of Fact based on the exhibits stipulated by the parties:
9. At some point prior to 1994, petitioner Sigurd Gudal entered into an agency agreement with State Farm. This agreement governed Mr. Gudal's representation of State Farm as a sales agent for its various insurance policies.
10. The agreement provided that either Mr. Gudal or State Farm had the right to terminate the agreement.
11. Within ten days of termination, Mr. Gudal was required to return to State Farm all property belonging to State Farm. This included manuals, forms, and records supplied by State Farm, as well as information about policyholders, insured property, and policies that Mr. Gudal obtained in the course of his representation of State Farm.
12. The agency agreement also provided that Mr. Gudal could receive termination payments from four of State Farm's constituent insurance companies. The agency agreement provided three different formulas for these termination payments, one each for (1) automobile insurance policies, (2) fire, casualty, and general insurance policies, and (3) life insurance policies.
13. Each formula provided for payments for 60 months following termination, and based the payment amount on commissions, compensation, and other entitlements as of the date of termination.
14. The agency agreement also provided for extended termination payments for certain agents who meet age and length of service requirements as of the date of termination, except with respect to life insurance policies.
15. Under the agency agreement, extended termination payments would commence once termination payments expired, and were based upon the amount of termination payments.
16. The agency agreement did not provide that eligibility for or the amount of termination or extended termination payments were based upon, or in exchange for, the sale of any asset including goodwill.
CONCLUSION OF LAW
Payments received by petitioners from State Farm from 1994 to 1998 were not entitled to capital gain treatment.
In order for petitioners to prevail on their assertion that the termination or extended termination payments qualify for capital gain treatment, they must show that the payments were received in exchange for the sale of some asset, tangible or intangible. See, Schelble v. Commissioner, 97-2 USTC ¶50,944 at 90,881 (10th Cir. 1997); Furrer v. Commissioner, 78-1 USTC ¶9,212 at 83,357 (9th Cir. 1977); Elliott v. U.S., 70-2 USTC ¶9,581 at 84,429 (10th Cir. 1970). The record before us contains no evidence that there was a sale of an asset. Nothing in the agency agreement makes the payment of termination or extended termination payments contingent upon the sale of an asset to State Farm.(1)
Petitioners claim that Mr. Gudal is being compensated for his contributions to the assets and goodwill of State Farm. Hopefully, most employees and contractors contribute to the value and goodwill of those who pay them. That does not mean that such payments constitute capital gains. Petitioners can point to nothing in the agency agreement or the overall transaction in which State Farm is compensating Mr. Gudal for the sale of an asset.
Petitioners also allude to a provision in the Taxpayer Relief Act of 1997 (Pub. L. 105-34) which exempts from the self-employment tax certain termination payments made to former insurance salespersons for 1998 and thereafter. I.R.C. § 1402(k). While it is not clear whether payments received by Mr. Gudal in 1998 would qualify for this exemption, this statutory provision is irrelevant to the issue before us. The fact that a payment is exempt from the self-employment tax does not make it eligible for capital gain treatment.
Finally, petitioners claim that the Internal Revenue Service has agreed with their position that the termination payments at issue are capital gains. While this is beneficial for petitioners, it is not binding upon respondent or the Commission. Moreover, we do not find the IRS's determination persuasive because we do not know what representations were made to the IRS or the basis for its determination.
Respondent's actions on the petitions for redetermination are affirmed.
Dated at Madison, Wisconsin this 3rd day of April, 2001.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
May2, 2001 Appealed to Washburn County Circuit Court (01CV33)
1 While the agency agreement requires the return of property to State Farm within ten days of termination, the agreement makes it clear that all of the returned items are at all times the property of State Farm.