                       T.C. Memo. 1997-88



                     UNITED STATES TAX COURT



   ESTATE OF WILLIAM H. KAISER, DECEASED, WILLIAM R. KAISER AND
 ROBERT B. KAISER, CO-EXECUTORS, SUCCESSOR IN INTEREST TO KAISER
  FAMILY CORPORATION AND MARGARET G. KAISER QUALIFIED TERMINABLE
    INTEREST TRUST, WILLIAM R. KAISER AND ROBERT B. KAISER, CO-
 TRUSTEES, SUCCESSOR IN INTEREST TO ESTATE OF WILLIAM H. KAISER,
     Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

    ESTATE OF WILLIAM H. KAISER, DECEASED, MARGARET G. KAISER,
WILLIAM R. KAISER AND ROBERT B. KAISER, CO-EXECUTORS AND MARGARET
    G. KAISER QUALIFIED TERMINABLE INTEREST TRUST, MARGARET G.
  KAISER, WILLIAM R. KAISER AND ROBERT B. KAISER, CO-TRUSTEES,
    Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT



     Docket Nos. 3899-95, 3953-95.       Filed February 20, 1997.



     John Kevin Mahoney, for petitioners.

     Raymond M. Boulanger, for respondent.
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             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:      By notices dated December 22, 1994,

respondent determined deficiencies in petitioners' Federal income

taxes as follows:

Kaiser Family Corporation (formerly Kaiser Agency, Inc.), docket
No. 3899-95

                 Year                     Deficiency

                 1990                      $28,336
                 1991                       29,237
                 1992                       85,161

William H. (Deceased) and Margaret G. Kaiser, docket No. 3953-95

                 Year                     Deficiency

                 1990                         --
                 1991                         --
                 1992                      $127,954

     Unless otherwise indicated, all section references are to

the Internal Revenue Code as in effect for the years in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.   After concessions, the sole issue for decision is

whether Kaiser Agency, Inc.'s subchapter S election terminated as

a result of excess passive investment income.

                            FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.    At

the time the petitions were filed, petitioners had mailing

addresses in Rochester, New York.
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     Kaiser Agency, Inc. (Kaiser), was an independent insurance

agency and was incorporated under New York law in 1958.    William

H. Kaiser was Kaiser's sole shareholder until he died on November

8, 1992.    From that date until the corporation was dissolved on

or about September 30, 1993, Mr. Kaiser's estate was Kaiser's

sole shareholder.

     Kaiser marketed insurance policies underwritten by several

large insurance underwriters and performed three primary

services.   First, it issued new policies to insurance purchasers.

In issuing new policies, a Kaiser representative would meet with

the prospective insured to discuss his or her insurance needs.

Based on those needs and the prices offered on suitable policies,

Kaiser would recommend a policy.   Upon issuing the policy, Kaiser

would collect the initial premium from the insured and issue the

policy from its office.   Policies were printed on forms provided

by the underwriters and were subject to the underwriters'

specifications.   The issuance of a policy by Kaiser generally

bound the underwriter to the terms of the policy.

     Second, Kaiser made changes to existing policies when

required.   For example, if an insured sold his car and bought

another, the agent would review the policy on the car and make

the necessary changes.

     Third, Kaiser renewed policies for insureds.    The policies

Kaiser marketed generally expired and had to be renewed

periodically.   Between 45 and 60 days prior to a policy's renewal
                                - 4 -

date, the relevant underwriter would transmit the renewal policy

to Kaiser.   At that time, Kaiser would review the policy to

determine if it was the best policy for the particular insured.

If Kaiser determined that a change in coverage was warranted, it

would contact the insured and recommend the change.    The insured

could either accept the recommended policy change or renew the

existing policy.

     Kaiser had a separate contract with each underwriter it

represented.    Each contract delineated the terms of the agency

relationship.    The contracts provided that Kaiser would earn a

commission on each policy it issued.    The commission generally

was a percentage of the premium due under the policy, and the

percentage varied depending on the type of insurance issued.      The

agency contracts also provided that the "expirations" (i.e.,

renewal lists and all other information regarding insureds) held

by Kaiser generally remained Kaiser's property even after

termination of the agency relationship and that the underwriters

were not permitted to solicit business directly from, or discuss

policies with, prospective or existing insureds.

     The insureds paid premiums either to Kaiser (i.e., indirect

premium payments) or directly to the underwriter (i.e., direct

premium payments).    In the case of indirect premium payments,

Kaiser generally received a check from the insured payable to

Kaiser.   Kaiser would deposit the check, retain its commission,
                                - 5 -

and hold the balance for the underwriters in a separate "premium

account".    Kaiser's contracts with each underwriter required

Kaiser to hold such funds in a fiduciary capacity and prohibited

Kaiser from commingling them with Kaiser's own funds.    Kaiser

would later send these funds to the underwriter.    In the case of

direct premium payments, the underwriter would send Kaiser its

commission and retain the balance.

     Kaiser elected subchapter S status on July 1, 1987, and

filed Forms 1120S (U.S. Income Tax Return for an S Corporation)

in 1990, 1991, and 1992.    Kaiser reported its income on the

accrual method of accounting.    In calculating its gross income,

Kaiser included in its gross receipts the premiums paid on all

policies issued by it during the year and deducted as a cost of

goods sold the portion of the premiums forwarded to the

underwriters (in the case of indirect premium payments), or

retained by the underwriters (in the case of direct premium

payments).

     Respondent issued a notice of deficiency, dated December 22,

1994, to Kaiser Family Corporation (the successor in interest to

Kaiser) for years 1990, 1991, and 1992.    In the notice,

respondent determined that Kaiser was not an S corporation during

the years in issue.    As a result, respondent determined that

Kaiser owed corporate income taxes as a subchapter C corporation.

Respondent issued a second notice of deficiency, also dated

December 22, 1994, to William and Margaret Kaiser relating to
                                 - 6 -

their 1990, 1991, and 1992 joint Federal income tax returns.

Respondent determined that certain deductions and items of income

reported on the individual returns should have been reported on

Kaiser's corporate income tax returns.   The petitions in these

cases were filed on March 13, 1995.



                               OPINION

     Generally, a small business corporation may elect to be

treated as an S corporation.   Secs. 1361(a)(1), 1362(a)(1).

Section 1362(d) provides that an election to be treated as an S

corporation terminates if the corporation has:   (1) Subchapter C

earnings and profits at the close of each of 3 consecutive

taxable years; and (2) gross receipts for each of such taxable

years more than 25 percent of which are passive investment

income.   Secs. 1362(d)(3), 1375.

     The parties have stipulated that Kaiser had subchapter C

earnings and profits at the close of each of 3 relevant

consecutive years.   The only issue is whether Kaiser had passive

investment income in excess of 25 percent of its gross receipts.

Petitioners contend that Kaiser should be allowed to include all

premiums (i.e., Kaiser's commission plus amounts forwarded to, or

retained by, the underwriters) paid on policies it issued and as

a result Kaiser's passive investment income did not exceed 25

percent of its gross receipts.    Respondent contends that Kaiser

should be permitted to include only its commissions on such
                                  - 7 -

policies, and as a result Kaiser's passive investment income

exceeded 25 percent of its gross receipts.     Petitioners bear the

burden of proof.   Rule 142(a).

     The Code does not define gross receipts for purposes of

sections 1362(d)(3) and 1375.     The temporary regulations under

section 1362 in effect for the years in issue also did not define

the term.   See generally sec. 18.1362-1 and -2, Temporary Income

Tax Regs., 48 Fed. Reg. 3591 (Jan. 26, 1983), and later

amendments.

     Petitioners contend that because Kaiser determined which

underwriter would ultimately receive the premiums, and because

Kaiser owned the expirations associated with the policies it

issued, Kaiser should be permitted to accrue in its gross

receipts the premiums paid on all policies it issued.

Petitioners emphasize that Kaiser was an accrual method taxpayer

and that, in petitioners' view, all events necessary to trigger

accrual had occurred.

     Petitioners do not advance, nor do we find, any plausible

theory that would allow Kaiser to include direct premium payments

in its gross receipts.   Even assuming that accrual rules were

applicable to Kaiser in determining gross receipts, those rules

do not support petitioners' position.     An accrual method taxpayer

includes income in the year in which the amount can be determined

with reasonable accuracy and all events have occurred which

establish the right to receive the item of income.     See sec.
                                 - 8 -

1.451-1(a), Income Tax Regs.   The direct premium payments,

however, were made directly to the underwriters, and Kaiser had

no present or future claim to the funds.   Thus, there was no set

of events that would ever establish Kaiser's right to receive the

payments.   As a result, the amounts were not includable in

Kaiser's gross receipts.

     We do not reach the issue of whether the indirect premium

payments were includable in Kaiser's gross receipts, because

petitioners have not established the respective amounts of direct

and indirect premium payments.    As a result, even if Kaiser were

permitted to include indirect premium payments in its gross

receipts, petitioners have not established the amount, if any, of

such payments.   We note, however, that approximately 90 percent

of the premiums were directly billed by the insurance

underwriters.

     The parties have brought to our attention Rev. Rul. 69-192,

1969-1 C.B. 206.   That ruling allowed an insurance agent similar

to Kaiser to include in its gross receipts the indirect premium

payments on policies it issued.    In the present case, petitioners

have not established the amount, if any, of indirect premium

payments.   Consequently, the revenue ruling does not support

petitioners' contentions.

     Accordingly, we conclude that Kaiser's S corporation

election terminated by reason of excess passive investment

income, and we sustain respondent's determination.
                                 - 9 -

     We have considered all other arguments made by the parties

and found them to be either irrelevant or without merit.

     To reflect the foregoing,


                                              Decisions will be entered

                                         under Rule 155.
