Discussion:Sale of Book of Business - Insurance Company

2/3's will be paid upfront, with the remaining third paid in installments.

Any suggestions on how to record this for tax purposes?

What is "economic interest"?

I guess it could be assumed an intagible assets but nothing is (or should be in my opinion) on his books.

So you've got a capital gain to report on the installment method with receiving 75% in the first year.

That is what I'm worried about. Actually virtually the same situation. He's an independent agent selling his customer list (i.e., policy's he's written on behalf of the insurance company) to another individual.

Have another situation coming up with another agent that is doing the exact same thing except selling it back to isurance carrier (though I think they both should be treated the same way).

This last SF client passed away in 2002, while still working for the company, but from what I can recall, he also had no option to incorporate his business or form another entity, such as to become an LLC with his son. In a way, these salesmen were almost indentured servants, but very well paid. This man was earned 250K after expenses in his final years.

So I am not sure Baker is a fair test, but the principles of the case do tell us that you need to show how your people differ from that case.

This is probably most clear in section IV. Foxe vs. Commissioner "The taxpayer claimed that in the course of his business he built up “something of value, an organization” that the insurance company acquired. Id. Moreover, his personal contacts with customers, which were important to the insurance company, were “something of real value”. Id. We concluded that even if the taxpayer had “built up an organization of value, it was not his to sell since * * * [the insurance company] under the contract owned all the property comprising such organization. As to the customer contacts * * *. They were not his to sell.”''

In my clients case as well all computers & equipment are leased to him and are deducted from his monthly commission. The only legit assets for him might be some office furniture.

Also most telling in section V.

"Petitioner also argues that State Farm purchased goodwill. To qualify as the sale of goodwill, the taxpayer must demonstrate that he sold “‘the business or a part of it, to which the goodwill attaches’”. Schelble v. Commissioner, 130 F.3d at 1394(quoting Elliott v. United States, 431 F.2d 1149, 1154 (10th Cir.1970)). Goodwill is “the expectancy of continued patronage, for whatever reason.” Boe v. Commissioner, 307 F.2d 339, 343 (9thCir. 1962), affg. 35 T.C. 720 (1961); see also VGS Corp. v. Commissioner, 68 T.C. 563, 590 (1977). Nevertheless, because petitioner, for the reasons already explained, did not own and sell capital assets in his agency to State Farm, we conclude that petitioner did not sell goodwill."

Based on these facts Death&Taxes (or anyone else) would you agree that this is really ordinary income and not a sale of intangibles. I will however get a copy of his Allstate agreement and draft of the sale agreement to see in any language in it would lead to a different conculsion.

Thanks all

In these conditions it is clearly ordinary income. I wonder in Wayne's example whether the company knows about the arrangement and what their position would be.

The sale of an intangible asset is a capital asset. Example, when an accounting practice is sold, we get cap gain treatment using the residual value method. i.e. Value the hard assets first, then a non compete covenant etc... Any consideration in excess of the identifiable/hard assets is capital in nature. This is where the engagement letter states, any areas of uncertainty will be settled in the taxpayers favor.

I would treat as Capital in heart beat. If you believe I am wrong , please tell me.

Proceeds from the sale of the right to receive commissions for past sales are a substitute for ordinary income and therefore should be ordinary income themselves.

In the case of an agent selling to another agent, I'm leaning towards ordinary income too. I don't see a transfer of assets happening since the agent didn't own the BOB in the first place.

It'd be like auctioning off a Friday night shift at a restaurant. I don't have any right to the shift since it's provided at the deference of the manager. If I sold the shift to another server it would be ordinary income to me.

To the extent that the consideration is payment for future income that has not yet been collected, it is ordinary income. The excess is like a customer list. It has been built by the selling agent, as the facts have been presented, the agent is the owner of the list (ie has indices of ownership: right to hold, right to transfer, right to let languish (waste). The excess is a capital asset. The new agent-owner will have to curry these customers to generate new premiums from them and they may decide to not continue business with the new agent. In this respect it is like goodwill or customer lists.

Since the selling and purchasing parties are at arms-length and have opposite tax incentives (seller will want the maximum value allocated to capital asset, buyer the minimum), an allocation as part of the sales agreement, as would be required if this sale fell under Section 1060, would hard for the service to overcome and re-cast.

The point in Baker is that goodwill can only attach to other assets of the TOB. In Baker, the agent didn't own anything - including the client list. Therefore, the Court found that instead the agent was being paid not to compete with insurance company. Payment for a convenant not to compete is subject to ordinary income.

1) These discussions have been about AllState book of business which the company owns. What about independent broker's BoB in which he has right to sell to anyone? 2) Does it matter if owner of BoB is incorporated, or he is sole proprietor? 3) I am thinking that the Lump Sum would be Capital Gain sale of Zero Basis intangible asset, and the future payments tied to production would be 1099 Ordinary Income

Any Ideas?