Eubank v. Commissioner , 39 B.T.A. 583 ( 1939 )

GERALD A. EUBANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Eubank v. Commissioner

Docket No. 86200.

United States Board of Tax Appeals

39 B.T.A. 583; 1939 BTA LEXIS 1010;

March 14, 1939, Promulgated

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Petitioner assigned the contingent ritht to receive future commissions on insurance renewal premiums to a trust company in 1924 and 1928. In 1933 commissions were paid to the assignee and respondent taxed petitioner thereon because he was the earner of the income. Held, the assignment was of future compensation for personal services and, since petitioner was the earner of the income, it is taxable to him regardless of the anticipatory assignments. Lucas v. Earl,281 U.S. 111">281 U.S. 111, and Van Meter v. Commissioner, 61 Fed.(2d) 817, followed.

Harry J. Rudick, Esq., for the petitioner.

Albert E. Arent, Esq., for the respondent.

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HARRON

The respondent determined a deficiency in the petitioner's income tax for the calendar year 1933 in the amount of $943.34. The petitioner alleges the respondent erred in including in his taxable income certain renewal insurance commissions which were paid in the taxable year to petitioner's assignee.

FINDINGS OF FACT.

Petitioner has an office at 40 Wall St., New York, New York, and notice of deficiency was mailed to that address.

From January 1 to September 1, 1924, petitioner was branch manager for the State of Michigan of the Canada Life Assurance Co., under a contract with that company. After termination of this contract, on September 1, 1924, petitioner became entitled to renewal commissions thereunder with respect to life insurance premiums collected thereafter on policies written prior to the termination of the contract.

On November 24, 1924, petitioner executed and delivered the following assignment to the Union Trust Co., Detroit, Michigan (subsequently the Union Guardian Trust Co.):

FOR A VALUABLE CONSIDERATION, the undersigned, GERALD A. EUBANK, hereby sells, assigns and transfers to the Union Trust Company, of Detroit, Michigan, all his right, title and interest in and to a certain agreement bearing date the 22nd day of January, 1924, between Canada Life Assurance Company, of the first part, and said Gerald A. Eubank, party of the second part, made in connection with the employment by the said Assurance Company of the said Eubank as a branch manager for said Company, together with all moneys payable or to become payable to the said Eubank under and by virtue of the terms of the said contract.

IN WITNESS WHEREOF, said Gerald A. Eubank has hereunto set his hand and seal this 24th day of November, 1924.

The Canada Life Assurance Co. acknowledged receipt of the instrument of assignment.

From September 1, 1924, to June 30, 1927, the petitioner and one Hart, a partner, were general agents in New York City for the Aetna Life Insurance Co., under a contract with that company dated August 20, 1924. This contract was terminated on June 30, 1927, whereupon petitioner individually became general agent in New York City for the Aetna Life Insurance Co., under a contract effective July 1, 1927. Petitioner became entitled to receive one-half of whatever renewal commissions became payable subsequent to June 30, 1927, without obligation to perform any further services.

Petitioner on July 19, 1927, resigned the general agency granted by the last mentioned contract, such resignation to take effect September 30, 1927. However, in consideration of $12,000 received from his successor appointed by the insurance company, petitioner agreed to make his resignation effective August 31, 1927, i.e., one month earlier, without, however, affecting his right to renewal commissions. After August 31, 1927, petitioner was not required to render any further services in order to become entitled to the renewal commissions provided for by the agency contract.

In each agency contract between petitioner and the Aetna Life Insurance Co. the insurance company reserves the right to change the rates of commissions payable to the agent. In these contracts it is agreed that in the event of termination of the contracts the company will pay at the end of each three months after termination "commissions" on the premiums actually collected on business secured under the contracts prior to such termination on which the agent would have been entitled to renewal commissions in event of continuance of the contract, in stated percentages for a certain number of years, less any commissions payable to subagents and less any indebtedness of the agent to the insurance company. Then the following appears:

Said party of the second part [petitioner] hereby agrees that the above described settlement shall be accepted in full compensation for his interest in the agency hereby conveyed.

The contract with the Canada Life Assurance Co. describes compensation of the branch manager under the contract as first year commissions and renewal commissions, payable at certain rates.

Each of the two contracts with Aetna provides that no assignment, transfer, or disposal of the agency or business, or any interest whatever therein, can be made without the consent and approval of the insurance company in writing. The contract with Canada Life provides that "any rights of the Branch Manager under this agreement shall not be sold or assigned by him without the consent of the Company in writing."

Under all of the contracts, petitioner was an agent of the insurance companies.

On March 28, 1928, petitioner executed and delivered the following assignment to the Union Trust Co., Detroit, Michigan (subsequently, Union Guardian Trust Co.):

KNOW ALL MEN BY THESE PRESENTS, That I, Gerald A. Eubank, of South Orange, County of Essex, State of New Jersey, am the same person who with Hugh D. Hart under the firm name of HART & EUBANK was appointed by the Aetna Life Insurance Company of Hartford, Connecticut, as General Agent for said Company in New York City under written appointment which was executed at Hartford, State of Connecticut, the 20th day of August, A.D. 1924, and which took effect on the 1st day of September, A.D. 1924; and I am the same person who was appointed General Agent by said Company as successor to said HART & EUBANK to represent said Company as General Agent in New York City, under written appointment which was executed at Hartford, State of Connecticut, the 28th day of June, A.D. 1927, and which took effect on the 1st day of July, A.D. 1927.

Now, IN CONSIDERATION of the sum of One Dollar ($1.00) and other good and valuable considerations, the receipt whereof is hereby acknowledged, I do hereby sell, transfer and set over unto the UNION TRUST COMPANY, Detroit, Michigan, Trustee, all commissions now due me or to become due me under or on account of and subject to the terms and conditions of said appointments or amendments thereto and all right, title and interest therein which I now have or may have at any future time, hereby waiving all right or title to and interest in said appointments or amendments thereto and authorizing and requesting said company to pay all said commissions to the said UNION TRUST COMPANY, Trustee, which is hereby authorized to receipt and discharge the same in full.

I do also hereby sell, assign, transfer and set over unto the said UNION TRUST COMPANY, Trustee, all my interest in commissions on Group and Wholesale business as covered by individual agreements under each policy placed through the General Agencies of HART & EUBANK and/or G. A. EUBANK, that may be now due or to become due me from said AETNA LIFE INSURANCE COMPANY and all right, title and interest therein which I now have or may have at any future time, hereby waiving all right or title to and interest in said commissions and authorizing and requesting said Company to pay all said commissions to the said UNION TRUST COMPANY, Trustee, which is hereby authorized to receipt and discharge the same in full.

IN WITNESS WHEREOF, I have hereunto executed this assignment, release and waiver in triplicate, under seal, at New York, State of New York, this 28th day of March, A.D. 1928.

The Aetna Life Insurance Co. acknowledged receipt of the instrument of assignment as follows:

Union Trust Company

Detroit, Michigan.

Gentlemen:

We have received from Mr. Gerald A. Eubank and placed on file copy of an assignment executed by him in favor of the Union Trust Company, trustee, covering all of Mr. Eubank's commission interests under said contracts and amendments thereto with this Company as named in the assignment.

The Aetna Life Insurance Company does not guarantee the sufficiency or validity of any assignment and in placing this assignment on file it must be understood that the Company does not waive any of its rights under the contracts or amendments thereto.

Checks will be forwarded from the Home Office to the Union Trust Company covering commissions as they accrue according to the terms of the contracts. There will also be checks from time to time sent the Union Trust Company from the Company's cashier in New York City covering various items which are being collected by him.

During the year 1933 petitioner's assignee, the Union Guardian Trust Co., received renewal commissions payable under the provisions of the agency contracts referred to above, as follows:

From Aetna Life Insurance Co., Hart & Eubank contract	$12,354.16
From Aetna Life Insurance Co., Eubank contract	591.47
From Canada Life Assurance Co	2,667.16
	15,612.79

In computing the deficiency here in question the respondent added to petitioner's taxable income the renewal commissions received by petitioner's assignee in 1933 in the amount of $17,207.94. This amount was incorrect. It is agreed that the amount of such commissions was $15,612.79. Respondent stated, in the explanation of the adjustments made in determining the deficiency, as follows:

Relative to the inclusion in taxable income of $17,207.94 [sic], representing life insurance renewal commissions received by a trust established by you, the Bureau holds that the income is taxable to you. Information on file in the Bureau indicates that on March 28, 1928, you made a conveyance in trust of certain insurance renewal commissions then due or to become due in the near future, arising out of a contract with the Aetna Life Insurance Co. for the uses and benefits set forth in another instrument dated June 18, 1928. After that date the Aetna Life Insurance Co. paid all renewal commissions to the trustee, who accounted for the income in returns filed for the trust. * * * Life insurance renewal commissions are held to be taxable to you rather than to the trust established by you.

The Commissioner disallowed other deductions claimed as business expenses and petitioner concedes the disallowance to be correct.

OPINION.

HARRON: The sole question presented in this proceeding is whether petitioner is taxable upon commissions paid in the taxable year to an assignee. The commissions are of a particular type, i.e., commissions payable by insurance companies upon insurance renewal premiums paid by policyholders to them. Respondent contends that such commissions constitute earned income, "compensation for personal service", within the definition of gross income as defined in section 22(a) of the Revenue Act of 1932, set forth below in part, ^{*1020 Respondent urges that the question be considered in its broad aspects rather than upon any possible distinctions between the form of the assignment made in 1924, of the interest in the contract, and of the one made in 1928, of the commissions. Respondent argues that the principle expressed in Lucas v. Earl,281 U.S. 111">281 U.S. 111, is controlling.}

Petitioner contends that he is not taxable on the commissions paid in 1933 upon either or both of the following arguments: (a) He contends that the commissions were fully earned prior to the assignments, his services having been performed fully, so that the assignment was of "past earnings" and, therefore, the tax liability is on the assignee. Petitioner argues that the principle of the Lucas v. Earl case is limited to assignment of earnings only where future services are required. (b) The right to receive future commissions was a type of property in praesenti at the time of the assignments, which may be assigned, and the commissions, when paid, vest in the assignee and are taxable to him. Petitioner relies on Hall v. Burnet, 54 Fed.(2d) 443. Other cases relied on by petitioner for either or both propositions are Matchette v. Helvering, 81 Fed.(2d) 73; certiorari denied, 298 U.S. 677">298 U.S. 677; Shanley v. Bowers, 81 Fed.(2d) 13; Walter L. Ross,30 B.T.A. 496">30 B.T.A. 496; affd., 83 Fed.(2d) 18; Julius E. Lilienfeld,35 B.T.A. 391">35 B.T.A. 391; Louis Boehm,35 B.T.A. 1106">35 B.T.A. 1106; Blair v. Commissioner,300 U.S. 5">300 U.S. 5. These cases are not controlling and are distinguishable.

The notice of deficiency refers to a separate instrument said to relate to a trust and to have been executed by petitioner June 18, 1928. The record does not contain any explanation of this reference, nor any denial of such, and the pleadings raise no question about the use of the commissions in question, so that this is not a case of income attributable to an assignor or settlor by reason of application of the income for his use or benefit. Cf. Old Colony Trust Co. v. Commissioner,279 U.S. 716">279 U.S. 716; United States v. Boston & Maine Railroad Co.,279 U.S. 732">279 U.S. 732; Burnet v. Wells,289 U.S. 670">289 U.S. 670; Couglas v. Willcuts,296 U.S. 1">296 U.S. 1, 9; Luch A. Blumenthal,30 B.T.A. 591">30 B.T.A. 591; affd., 296 U.S. 552">296 U.S. 552; United States v. L. Manuel Hendler,303 U.S. 564">303 U.S. 564; Helvering v. Coxey,297 U.S. 694">297 U.S. 694. And, in the way the question is presented, the burden of proof on petitioner does not extend to proving that the commissions were not under petitioner's control or were not applied to his use or benefit. Cf. Commissioner v. Grosvenor, 85 Fed.(2d) 2, 3; Bishop v. Commissioner, 54 Fed.(2d) 298; Hall v. Helvering, 68 Fed.(2d) 399. If the question involved is one which should be decided on the principle that earned income is taxable to the earner and that his tax liability may not be escaped by anticipatory arrangements, it will become immaterial, in cases like this, what use is made of the commissions by the assignee. On the other hand, if it should be finally decided by the courts that an effective assignment for income tax purposes can be made of such commissions, relieving the earner-assignor from tax liability, then it will become important, in later cases, to prove that the commissions are not applied to the benefit of the assignor or used according to his control. Cf. Burnet v. Wells, supra, where it was pointed out that tax liability may rest upon the enjoyment of privileges and benefits by the taxpayer so as to require consideration of the ends in the mind of the assignor in combination with assignment of bare legal title.

Taxation of commissions on renewal commissions has been considered in a few cases by this Board and in several cases by the Circuit Courts of Appeal, and the present unsettled state of the law on the question is to be found by reference to these particular cases, set forth in a schedule below for convenience. ^{Edwards and Woods cases, the courts have held the commissions taxable to the earner-assignor, except in the Hall v. Burnet case. The Edwards and Woods cases did not involve any question of tax liability of an earner-assignor, for no assignment of commissions was involved in those cases. In all the other insurance commissions cases, the question was essentially the same, although there appear to be some differences in the terms of assignments. It is difficult to find any essential differences in the question before the courts in the cases where assignment of the commissions was made and there is a conflict between the Hall v. Burnet case and the others.}

In this proceeding, the assignments executed by petitioner adopted different phraseology. In the 1924 assignment all interest in an agency contract is assigned. In the 1928 assignment all commissions due or to become due and all right to them is assigned. We regard these differences as immaterial in this proceeding because it is evident that in both instances petitioner intended to assign future commissions. No evidence is present to the contrary. The question presented here does not relate to any question arising between the assignor and assignee under the assignments. The question arises out of a conflict between petitioner and the Commissioner over taxation of commissions paid in 1933. It is clear that petitioner in executing the assignments anticipated that commissions might be paid in the future, and he attempted to assign them to another in advance of payment of the commissions. The commissions were paid. It comes to the same thing so far as the tax question is concerned, whether one or the other phrases was used in the assignment as will be shown.

The contracts under which petitioner was an agent of the insurance companies were contracts of employment, in a broad sense. Compensation for services of petitioner consisted, in part, of commissions on renewal premiums which the companies agreed to pay over periods of ten years, more or less, from and after the time the first premium was paid on a policy. While the agency contracts under which petitioner obtained the business giving rise to the commissions were terminated, nevertheless, the contingent obligations of the companies to pay future commissions continued. The companies retained certain rights, among them the right to offset any debt of petitioner against any commissions payable and the right to change the percentage at which commissions should be payable. It is provided that petitioner can not dispose of any interest in the contracts without the consent and approval of the insurance companies.

As for the right to commissions arising out of said contracts and payable after their termination, it is clear that in 1942 and 1928, when the assignments were made, the rights were future rights. No present rights had matured when the assignments were made. The obligations of the insurance companies to pay the premiums could not arise until at a future time when, as, and if policyholders should pay renewal premiums on business obtained by petitioner. His rights to commissions at the dates of the assignments were contingent, unmatured, uncertain, and unascertained. The amounts of future commissions were uncertain. The insurance companies did not accept in writing the assignments of future commissions made by petitioner. They paid the commissions in 1933 to the assignee, but, as far as we know, they were not legally obliged to do so. It appears that, even after making the assignments, petitioner might have collected the future commissions. Cf. Wood v. Commissioner, 74 Fed.(2d) 78. Therefore, it is clear that petitioner had no present matured rights to assign and divest himself of, in 1924 and 1928, and, at best, the assignments were of money not yet due or of a contingent future debt of the insurance companies. No legal title to the future commissions was conveyed in 1924 and 1928, because all that was assigned was a chose in action. Rather, petitioner gave his assignee a power to collect and keep the commissions when they should be paid. Petitioner's assignee obtained, under the assignments when made, only an equitable interest in contingent, future commissions. "The assignment of future earnings cannot be regarded as an immediate transfer of any property, but the assignee has an authority or power to collect, and an implied agreement on the assignor's part not to revoke the power." Williston on Contracts, vol. 1, sec. 414. See also, section 447. From the above, we believe it follows that it comes to the same thing whether one or the other phrases of assignment is used, i.e., all interest in the agency contracts, or the right to receive commissions. It is not enough to describe the assignments as relating to an interest in an existing contract, but it is necessary to consider what present interest the assignments could cover.

From the above, it is difficult to agree with the premise upon which the court in the Hall v. Burnet case arrived at its conclusion. The court in that case found that what was assigned was a species of property that gave rise to future income. The court recognized that if what was sought to be conveyed was personal earnings, such would be taxable to the assignor though he never received it. The line drawn is fine. Commissions on renewal premiums are compensation for personal service and are income within the statutory definition thereof. Woods v. Lewellyn,252 Fed. 106. When the commissions are paid, they represent compensation for past services, earned income. So do salary and wages. Where salary is payable under a contract of ordinary employment, the right to salary under such contract is a future right that does not mature until salary becomes payable. A right to future salary under a contract of ordinary employment may be validly assigned. So it would seem to follow, from the doctrine of the Hall v. Burnet case, that if an earner should assign all interest in a contract of ordinary employment, consisting of a future right to future salary, it would be said that the assignment was of a property right and not of salary. But, if this were correct, it would not follow that the earner-assignor of the future salary would not be liable for income tax on such salary when it was paid. This would be contra to the rule of the Lucas v. Earl case. That case involved a question of taxation of salary and the problem here is whether to apply the rule of that case to such facts and compensation as is involved in this proceeding. It is worth while to compare the facts briefly.

In 1901 Earl agreed with his wife that any property either had or should acquire in the future should be treated as owned by them as joint tenants, and such property was to comprise earnings, salary, fees, or any rights in contracts and all the proceeds of such property. In 1920 and 1921 Earl received certain salary and fees and he claimed to be liable for income tax upon only one-half thereof. As for earnings, salary, and fees, such were Earl's property. They were the fruits of his work. The Supreme Court refused to separate the right he had to receive salary from the salary itself or from his work, i.e., to treat the salary as growing out of the contract between Earl and his wife. The Supreme Court did not regard the salary as money produced by the contractual right Earl's wife had obtained, but viewed it as growing out of Earl's services.

In this case the assignments were made in 1924 and 1928. The commissions in question were paid in 1933. The commissions were the fruits of petitioner's past work. We find no grounds here for treating the commissions as growing out of an interest in a contract of employment instead of out of petitioner's personal service that could not have been found in the Lucas v. Earl case. But why not consider the similarities between this case and the Earl case? The subject there was salary; here, commissions. Both are compensation for personal services. Insurance commissions make up a large part of the compensation of an insurance agent, in addition to whatever salary he may receive. In a sense, the agent does not "earn" the commissions until third parties pay renewal premiums. No doubt the insurance companies regard the value of an agent's work in obtaining a new policy as dependent upon how long the policy is maintained. The insurance company elects to pay its agent for his work in obtaining the policy, on a commission basis, over a period of, usually, ten years, or for so long as the policy is maintained, up to ten years. Whether or not the commissions are ever paid depends on the ability of the insurance company to pay them, which in turn depends on whether policyholders pay renewal commissions. Likewise, whether future salary is ever to be paid depends upon the ability of the employer to pay the salary. Therefore, it seems reasonable to regard such commissions as we have here as in the same class with salary, Each is a form of compensation for personal service. Also, to resume the comparison between this case and the Earl case, the assignments made by petitioner in 1924 and 1928 were just as much an "anticipatory arrangement" as was the 1901 contract made by Earl. Here, petitioner anticipated that the commissions would be paid. They were paid. He gave to another the right to collect and keep the premiums. In effect, Earl gave his wife the right to collect and keep one-half of his future salary. We think it should be concluded here that the commissions in question grew out of petitioner's services and not out of assigned interests in a chose in action, keeping in mind the fact that we are dealing with an income tax question. We believe the doctrine of Lucas v. Earl is applicable here and that the rule of that case extends to commissions that are compensation for personal service and that tax on such commissions can not be escaped by anticipatory arrangements devised to prevent such compensation from vesting in the person who earned them.

If it appears to be a troublesome factor in applying the doctrine of Lucas v. Earl that no further services of petitioner were required to entitle him to receive the commissions, it is nevertheless true that the commissions represented future compensation at the date of the assignments and they were, in a sense, not "earned" until they became payable. Further, where payments are for personal services, it need not be a determining factor, in deciding upon whom tax liability falls, that services have been fully performed. The rule, as we understand it, is that earned income is taxable to the earner. See Blair v. Commissioner, supra; cf. Daugherty v. Commissioner, 63 Fed.(2d) 77; Rossmoore v. Commissioner, 76 Fed.(2d) 520; Chicago Title & Trust Co., Executor,33 B.T.A. 65">33 B.T.A. 65; James M. Stokes, Jr.,22 B.T.A. 1386">22 B.T.A. 1386. The definition of gross income is broad and is to be considered in the light of the evident intent of Congress "to use its power to tax to the full extent." Douglas v. Willcuts, supra.If an earner of income may divest himself of earned income before it is payable, the intent of Congress to tax the earner of income is defeated at the start. Such assignments of future income in the guise of assigning some type of contractual right or an interest in a chose in action may become a device for withdrawing from the Government the benefit of graduated taxes and surtaxes applicable to income when concentrated in a single ownership. Cf. Burnet v. Wells, supra.For purposes of income tax, we believe that earnings are in a separate class from other types of income, cf. Matchette v. Helvering supra, and insurance commissions are a type of earnings.

It has been a guiding principle in the consideration of tax questions that taxation is not so much concerned with refinements of title as it is with the actual benefit for which the tax is paid. Corliss v. Bowers,281 U.S. 376">281 U.S. 376. And if the rule is made certain that earned income is taxable to the earner, no confusion need arise because in one case an earner assigns his right under a contract to future income and in another he assigns the bare, future income. The rule is bottomed upon the distinction between the source of income earned by the performance of personal services and income produced by interests that clearly are property, separate from the person. Cf. Blair v. Commissioner, supra, where the Court points to a distinction between a beneficial interest and a chose in action. We agree with the conclusion reached in the Van Meter case, supra, that the rules of the Lucas v. Earl and the Corliss cases are opposed to the view expressed in the Hall v. Burnet case and it is concluded here that, while the earner of such commissions as we have here may in a legally binding way dispose of his future earnings, whether they are earned or are to be earned, he does not thereby affect his status as earner, or "his resulting liability for taxation thereon as income."

It is held that petitioner is taxable upon the commissions paid in the stipulated sum of $15,612.79. Respondent is sustained.

Reviewed by the Board.

Decision will be entered under Rule 50.

MURDOCK concurs only in the result.

ARUNDELL, LEECH, and ARNOLD dissent.

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Footnotes

• 1. SEC. 22. GROSS INCOME.

  (a) GENERAL DEFINITION. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * * ↩

• 2. Board cases: Arthur F. Hall,17 B.T.A. 752">17 B.T.A. 752; reversed, Hall v. Burnet, supra;James M. Stokes, Jr.,22 B.T.A. 1386">22 B.T.A. 1386. Court cases: Edwards v. Keith,231 Fed. 110 (C.C.A., 2d Cir.); Woods v. Lewellyn,252 Fed. 106 (C.C.A., 3d Cir.); Hall v. Burnet, 54 Fed.(2d) 443 (App. D.C.); Bishop v. Commissioner, 54 Fed.(2d) 298 (C.C.A., 10th Cir.); Parker v. Routzahn, 56 Fed.(2d) 730 (C.C.A., 6th Cir.); Van Meter v. Commissioner, 61 Fed.(2d) 817 (C.C.A., 8th Cir.); Hall v. Helvering,↩ 68 Fed.(2d) 399 (App. D.C.).