Baker v. Commissioner

Facts

Petitioner was an insurance salesman who sold policies exclusively for State Farm Insurance Co. (State Farm) as an independent contractor beginning in 1977. During the course of this relationship, Petitioner was not assigned customers by State Farm but developed his own book of business. Petitioner also acquired his own office space, with State Farm’s approval, and hired two employees to help run the office. As part of this arrangement, Petitioner signed an agreement with State Farm explicitly stating that any property furnished by State Farm to Petitioner remained in the ownership of State Farm, and that any and all information regarding State Farm policyholders was deemed property of the company. The agreement also provided for a termination payment to be paid out to Petitioner at the end of the business relationship, if Petitioner met certain requirements. To receive the termination payment, Petitioner was required to work at least two or more consecutive years as an agent, to return all property belonging to State Farm within 10 days of termination, and sign a noncompete clause. In 1997, Petitioner complied with the requirements and began receiving the termination payment in installments, which he characterized as a buyout of his insurance selling business by State Farm and thus subject to capital gains treatment. The Commissioner of Internal Revenue asserted a deficiency, finding that the payment constituted ordinary income.