Fooshe v. Commissioner , 46 B.T.A. 205 ( 1942 )

CLAUDE R. FOOSHE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Fooshe v. Commissioner

Docket No. 106640.

United States Board of Tax Appeals

46 B.T.A. 205; 1942 BTA LEXIS 897;

January 27, 1942, Promulgated

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Petitioner, the manager of an insurance agency in a noncommunity state, was induced to accept an agency in California by the agreement of the company to waive its right to collection charges upon renewal commissions earned in the noncommunity state and payable as collected to the petitioner while employed as manager. Held, that such commissions paid without deduction of the company's collection charge to the petitioner while employed by the company in California, had their inception in the noncommunity state and constituted separate property of the petitioner.

John L. Wheeler, Esq., for the petitioner.

Frank T. Horner, Esq., for the respondent.

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DISNEY

This proceeding involves income taxes for the calendar year 1938. Deficiency was determined in the amount of $1,436.37. The petitioner contends that there was error as to only a portion thereof. The question presented is whether the major portion of $21,504.80, income received during the taxable year is community income under the law of California. Upon brief the petitioner concedes that a minor part (approximately one-fifth) of the above amount was by the Commissioner properly included in income.

FINDINGS OF FACT.

The parties filed a stipulation of facts which, together with certain exhibits referred to therein and attached thereto and received in evidence, constitute all of the evidence adduced. The exhibits are extensive, and we should not merely adopt them in extenso as findings. We therefore adopt and make a part of our findings the stipulation, and summarize the exhibits, so far as pertinent, as follows:

The parties stipulate and we find:

1. The petitioner is at present, and has been since about the first of May, 1938, manager of an ordinary agency, at Los Angeles, California, of the Prudential Insurance Company of Newark, New Jersey, under certain agreements in this stipulation mentioned, entered into by and between the said Prudential Insurance Company and the petitioner. Under date of April 25, 1938, a contract was entered into by and between the petitioner and the said company, effective on or about May 1, 1938. A copy of this contract is attached as Exhibit A, and may be received in evidence.

2. On or about August 4, 1919, the Prudential Insurance Company and the petitioner entered into a contract with respect to his services as manager of an ordinary agency at St. Louis, Missouri. A copy of this contract is attached as Exhibit B, and may be received in evidence.

3. On or about May 17, 1927, the contract of August 4, 1919 (Exhibit B, paragraph 2 hereof), was amended. A copy of this amendment is attached hereto as Exhibit C, and may be received in evidence.

4. In order to provide some inducement to the petitioner to relinquish his position in St. Louis, Missouri, and assume the management of an ordinary agency in Los Angeles, California, it was agreed that the petitioner would be paid the full terminal commissions on renewal premiums under the contract of 1919 (Exhibit B, paragraph 2 hereof) without deduction by the said insurance company of the collection fee of two percent. No formal written agreement, in the form of a contract, was executed by the parties. However, the agreement just referred to was expressed in a letter written by the petitioner at St. Louis, Missouri, under date of February 23, 1928, and addressed to the Prudential Insurance Company, a copy of which is attached hereto as Exhibit D, and may be received in evidence.

5. In a letter dated February 24, 1938, the Prudential Insurance Company replied to the petitioner's letter (Exhibit D, above), confirming the understanding of the petitioner as expressed in the above-mentioned letter (Exhibit D). A copy of the said reply is attached hereto as Exhibit E, and may be received in evidence.

6. On March 14, 1938, the Prudential Insurance Company addressed the petitioner, a copy of which communication is attached hereto as Exhibit F, and may be received in evidence.

7. Pursuant to the agreements and contracts referred to in this stipulation, the petitioner came to California from St. Louis, Missouri, on or about May 1, 1938, to perform the services in Los Angeles, California, provided for under the said agreements and contracts.

8. Prior to May 1, 1938, the petitioner was the St. Louis, Missouri, manager of an ordinary agency of the Prudential Insurance Company of Newark, New Jersey, under a contract executed in 1919 and amended in 1927 (Exhibits B and C).

9. Between the time of the petitioner's arrival in Los Angeles, California, on or about May 1, 1938, to assume his new duties, and the end of the taxable year 1938, which year is involved in this proceeding, the petitioner received from the Prudential Insurance Company of Newark, New Jersey, the sum of $21,504.80, all of which has been included by the respondent in the taxable income of the petitioner for 1938. This sum of money represented the equivalent of two and one-half per cent of the premiums collected in the said St. Louis ordinary agency after April 30, 1938, and paid by policyholders on policies issued while the petitioner was manager of the ordinary agency of the said insurance company at St. Louis, Missouri, under the contracts herein mentioned (Exhibits B and C).

10. At the close of business December 31, 1937, there was in force in the ordinary agency at St. Louis, Missouri, in the territory of which the petitioner had charge, $49,122,406.00 of life insurance issued by the Prudential Insurance Company, of which amount the sum of $5,153,004.00 represented new life insurance written under the supervision of this petitioner during the year 1937.

11. At the close of business December 31, 1937, the territory in Los Angeles, California, to which the Prudential Insurance Company later transferred the petitioner as a manager of an ordinary agency had in force life insurance issued by the Prudential Insurance Company in the amount of $29,077,437.00, of which amount $846,237.00 represented new life insurance issued in said Los Angeles territory during the year 1937.

12. In 1938, the standard form of ordinary manager's contracts used by the Prudential Insurance Company was different from that in use in 1919. Acceptance by the petitioner in this case of the Los Angeles managership of an ordinary agency, solely on the basis of the said standard new form of contract in use in 1938, and without any change in the 1919 contract (Exhibits B and C), would have resulted in a substantial decrease in the petitioner's compensation immediately after his arrival in Los Angeles, California, because of the fact that less life insurance was in effect in said Los Angeles agency than had been in effect in St. Louis, and, also, on the basis of the new life insurance issued in 1937 in said Los Angeles agency, the said new insurance to be issued in the following year (1938) would probably have been less than had been written during the last year (1937) of Mr. Fooshe's managership in St. Louis, Missouri.

13. In response to a request of the petitioner for information as to the reason for the termination, by the Prudential Insurance Company, of his St. Louis, Missouri, contract of 1919 (Exhibit B), the Prudential Insurance Company advised Mr. Fooshe, the petitioner, under date of April 17, 1940, a copy of which communication is attached hereto as Exhibit G, and may be received in evidence.

14. If the Prudential Insurance Company had not waived its right to deduct the collection fee of two per cent from the terminal commissions payable to the petitioner under the St. Louis ordinary managership contract of 1919, after Mr. Fooshe assumed the new position in Los Angeles, California, the petitioner would still have been entitled to the net amount representing one-half per cent of the renewal premiums collected by the said St. Louis office, of which the petitioner was manager until about the first of May, 1938.

15. The contract between the Prudential Insurance Company and the petitioner, which was executed on August 4, 1919 (Exhibit B, paragraph 2 hereof), provided for the payment by the Prudential Insurance Company to its manager the commissions specified therein of the renewal premiums on insurance policies issued, of which percentage the manager of the ordinary agency, in this case the petitioner, was entitled to receive personally and retain for his personal use only two and one-half per cent, the balance being paid to the particular agent writing the insurance. While the amount to be retained by the manager varies in certain instances, yet for the purposes of this particular case, the parties agree that the Board may accept as a fact, as a basis for its consideration and determination of the issue in this case, that the petitioner's commissions on the collection of premiums on the policies written under his supervision while manager at St. Louis, amounted to two and one-half per cent.

16. The return of the petitioner for the year 1938 was filed with the United States Collector of Internal Revenue at Los Angeles, California.

17. Attached is a copy of an affidavit of George H. Chace, executed October 25, 1940, marked Exhibit H, and may be received in evidence.

18. That Claude R. Fooshe, petitioner, is, and was during the entire year of 1938 and for many years prior thereto, married to Lura D. Fooshe.

19. That petitioner and his wife, Lura D. Fooshe, are and have been residents of and domiciled in the State of California since May 1st, 1938.

20. That one-half the sum of $21,504.80 involved in this proceeding was returned on each of the separate income tax returns of Claude R. Fooshe and Lura D. Fooshe.

From the exhibits to which the above stipulation refers, we further find:

Exhibit A, the contract of August 4, 1919, between the petitioner and the Prudential Insurance Co. (hereinafter called the company) provided, in sum, that the manager should devote his entire time, talent, and energies to the company's business, that his compensation should be a commission on premiums collected on policies written by or through the petitioner under the contract, to be paid during the continuance of the contract and only upon condition that the manager, as such, remain continuously in the employ of the company, and that the commission should be according to a certain schedule (set forth in section 3) until and including the fifteenth policy year. As to later years, section 4 provides:

SECTION 4. That on renewal premiums for the sixteenth and subsequent policy years on Regular policies and for the seventh and subsequent policy years on Intermediate policies collected through his agency, on new business effected by or through the Manager under this contract, the Manager shall be entitled to a collection fee of two per cent. (2%) of such premiums, but the payment of such collection fees shall be subject to discontinuance at any time in the event of the Company making other arrangements for the collection of the premiums, and, if not previously discontinued, shall cease upon the termination of this contract.

Provided, however, that when premiums, either first or renewal, on policies issued under this contract are collected otherwise than by the Manager during the continuance of this contract, a collection fee of two per cent. (2%) of such premiums shall be deducted from the commission to be allowed as provided in Section 3.

Provided further, that on premiums on business not issued by or through the Manager, but transferred to him for collection, he shall be allowed a collection fee of two per cent. (2%) of the premiums, which collection fees, however, may be discontinued at any time in the event of the Company making other arrangements for the collection of the premiums.

Section 6 reads:

SECTION 6. That if this contract shall be terminated for any cause other than violation of its conditions, or the death of the Manager, and the Manager has been continuously in the service of the Company for two or more years, the Company will continue to pay to the Manager, his executors, administrators or assigns, the commissions upon renewal premiums on Regular policies as set forth in Section three (3) less a collection fee of two per cent. (2%) of such renewal premiums, until the commissions on the premiums in the tenth year of the insurance shall have been paid, subject to the conditions of Section twenty-three (23).

That if this contract shall be terminated by the death of the Manager and if he has been continuously in the service of the Company for two or more years, the Company will continue to pay to his executors, administrators or assigns, the commissions upon renewal premiums on Regular policies as set forth in Section three (3) less a collection fee of two per cent. (2%) of such renewal premiums, until the commissions on the premiums in the fifteenth year of insurance shall have been paid, subject to the conditions of Section twenty-three (23).

That if this contract shall be terminated for any cause other than violation of its conditions before the Manager shall have been continuously in the service of the Company for two years, the Company will continue to pay to the Manager, his executors, administrators or assigns, the Commissions upon renewal premiums as set forth in Section three (3) less a collection fee of two per cent. (2%) of such renewal premiums, until the commissions on the premiums in the sixth year of insurance shall have been paid, subject to the conditions of Section twenty-three (23).

That if this contract shall be terminated for any cause other than violation of its conditions, the Company will continue to pay to the Manager, his executors, administrators or assigns, the commissions upon renewal premiums on Intermediate policies as set forth in Section three (3) less a collection fee of two per cent. (2%) of such renewal premiums, until the commissions on the premiums in the sixth year of insurance shall have been paid, subject to the conditions of Section twenty-three (23).

Though an amendment of the contract, which was executed in 1927, was placed in evidence, we find nothing therein which is material herein. The parties have stipulated all pertinent facts in the contract (Exhibit A) executed April 25, 1938.

Prior to the agreement of April 25, 1938, a letter and postscript (Exhibit D), was written by the petitioner to G. H. Chace, vice president of the company, expressing the agreement as to payment to the petitioner of full terminal commissions (2 1/2% to petitioner) under the old contract, without deduction of the 2 percent collection fee by the company. In material part that letter, dated February 23, 1938, reads:

P.S. I understood I would receive the full renewals same as had I remained here only the Co. will bear expense for collecting to the 10th yr. I presume all of this is set out in a letter so will leave it all with you.

To such letter G. H. Chace responded on February 24, 1938 (Exhibit E), in material part:

Referring to your postscript, you are correct in your understanding that full renewals will be paid on the business in the St. Louis Agency after the termination of the Old Terms contract, just as though the contract remained in force. In other words, no collection fee will be imposed on the business for which you have qualified for renewal commissions. Naturally, the collection fee that you would receive if you remained in St. Louis under the Old Terms contract on business on which your renewal interest has expired would be discontinued.

In view of the petitioner's acceptance of the offer to appoint him manager at Los Angeles, the company on March 14, 1938, gave notice (Exhibit F) of cancellation of the old contract. On April 17, 1940, the company wrote the petitioner a letter (Exhibit G), stating in effect that the change to the new contract did not of necessity involve limitation of the old, but that as a change to the new form of contract was mutually felt to be best for all, the old contract was terminated without any surrender charge and the new contract put into effect. The contract entered into between the company and petitioner on April 25, 1938, provided compensation to him on the basis of $600 per month salary guaranteed to be paid, plus contingent commissions largely based on first year commissions.

The parties stipulated that an affidavit by G. H. Chace (Exhibit H) should be received in evidence. In material part it reads as follows: that early in 1938 the petitioner, in contemplating the change to the Los Angeles managership, was dubious about leaving the position at St. Louis for a salary of $600 per month and contingent commissions; that in order that his income would not suffer a reduction by the move to Los Angeles, the company agreed to waive the imposition of its 2 percent collection fee on renewal commissions payable on business issued through the St. Louis agency; that it was felt that by waiving the 2 percent collection fee, the amount accruing to Fooshe, together with guaranteed salary to be paid him, would be ample compensation for his supervision of the Los Angeles agency, and that while the collection fee would eventually cease, in the meantime Fooshe would, if successful, develop the Los Angeles agency and build up his income to approximately what it would have been had he continued at St. Louis.

OPINION.

DISNEY: It is the petitioner's position that the services for which the sum of money here involved was received were rendered in California, under the agreement by which he took over the Los Angeles agency, and therefore the money is community income; while the respondent argues that the money was received under a contract having its inception in a noncommunity state, and therefore the money is petitioner's separate property. There can be no doubt that the decline in petitioner's income which would ensue from acceptance of the Los Angeles agency was the reason for the waiver by the company of the imposition of its 2 percent collection fee; nor is there doubt that in order to secure the benefit of such waiver the petitioner must continue as a manager in the employ of the company. But does it follow therefrom that the moneys here involved constitute additional compensation for the services performed while the community existed in California? We find the question close and interesting, but after much consideration we come to the conclusion that the petitioner has not shown the income to be earnings of petitioner while a member of a marital community in California. The answer depends largely upon whether what was done in California constituted earning the income, or merely fulfillment of a condition inhering in a contract having its inception in another, noncommunity, state. Obviously, the income had a connection, not only with the original contract of 1919, but with that of 1938, resulting from the correspondence early in that year and prior to the contract of April 25, 1938, all outside the State of California.

The 2 1/2 percent to which, before deduction of collection fee by the company, the petitioner was entitled, was based upon services rendered at St. Louis. The company waived the 2 percent collection fee prior to the services in Los Angeles, subject to a condition - rendition of managerial services (in Los Angeles as it transpired). We think that the inception of the earning was the old contract and services outside of California, and that there was, in California, only performance of the condition, and not earning of compensation without base in a noncommunity state. The waiver of the collection fee was, in our opinion, mere inducement, not an addition to compensation earned in California. If the earnings have their inception in a noncommunity state, there appears to be no requirement that nothing whatever can transpire in the community state without making the income that of the community. In , the first community settled upon land and did everything required for homestead purposes, except to complete the time requirement as to possession. The wife died, the husband remarried and a second community completed the necessary occupancy and secured the patent. The property was held to have been acquired by the first community. The authority seems well settled to the effect that performance in a community state of a condition involved in a contract made in a noncommunity state leaves the property noncommunity. In , we quoted McKay on Community Property, § 517, as follows:

* * * when a right, legal or equitable, is acquired whether before or during marriage, all things of value into which the initial right develops by the performance of conditions, the running of time or the like, or into which it is converted by an assignment, or, if the initial right rests in obligation, all that which is obtained through the performance, discharge, satisfaction, enforcement or assignment of the obligation, are deemed in law to have been acquired as of the date of the acquisition of the initial right, and take the character, as separate or common, of that right.

Section 520 of the same work is quoted by us in (affd., ), as follows:

An inchoate title or pecuniary right is property in the sense of the law of separate and common property, just as truly as the most unimpeachable or perfect title. It takes its rank as separate or common property, for the same reason, and in response to the same tests, as the perfect or complete title or right, and it retains its character as separate or common so long as it can be traced; its development from an inchoate to the absolute or complete form does not shift it from one fund to another; it may be relieved of conditions and burdens but this does not change its character; it may pass from a conditional to an unconditional form, without change or legal character; it may be exchanged for other things or rights, and its character as separate or common passes to whatever was acquired by the exchange. If the property consists of an obligation, either contractual or delictual, it may be performed or enforced; and whatever is so acquired takes the same character as the obligation. [Italics supplied.]

We think that the petitioner herein had, prior to the inception of the community in California, an inchoate right which was property, albeit subject to condition, and that under the above authority the inception of the income was in the previous contract and services, and not the earnings in California. The rationale of the above quotations seems to have been consistently followed, though the circumstances differ. See ; ; (D.C.California), citing a number of cases. In our opinion, this proceeding involves, not additional compensation earned in California, but performance of a condition involved in the contract wherein the amounts involved have their inception. We therefore hold that the Commissioner did not err in including the entire amount in petitioner's income.

Decision will be entered for the respondent.