                  T.C. Summary Opinion 2007-133



                      UNITED STATES TAX COURT



          NANCY L. AND GERALD L. HARPER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17561-05S.            Filed July 30, 2007.



     Nancy L. Harper and Gerald L. Harper, pro sese.

     Vicki L. Miller, for respondent.



     GOLDBERG, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Pursuant to section

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.   Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code in effect for
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the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     Respondent determined a deficiency in petitioners’ Federal

income tax for the year 2003 of $421.   The issues for decision

are whether petitioners failed to report nonemployee compensation

of $1,125 on their 2003 Federal income tax return, whether

petitioners are liable for self-employment tax on that amount,

and whether petitioners are entitled to a corresponding deduction

for one-half of the self-employment tax to be paid.

                           Background

     The stipulation of facts and the attached exhibits are

incorporated herein by reference.   At the time the petition was

filed, petitioners resided in Paola, Kansas.

     Petitioner wife (Mrs. Harper) worked as an independent

insurance agent selling life and mortgage refinancing insurance

policies with Primerica Financial Services, Inc. (Primerica) from

February 25, 2002, through July 18, 2003.   Until her affiliation

with Primerica, Mrs. Harper had no prior experience as an

insurance agent.

     During the course of its affiliation with Mrs. Harper,

Primerica paid her cash in two forms.   First, upon receipt of an

application for insurance, Primerica would advance Mrs. Harper a

portion of the commissions that were expected to become earned,

assuming that a policy would be issued and remain in force for 1
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year.   The second form of payment was in the form of net earned

commissions.   These earned commissions were calculated on a

policy-by-policy basis as premiums were paid by policyholders.

Earned commissions were applied in the following order:   (1) To

recover outstanding debits in the form of advance commissions;

(2) to reimburse Primerica for advanced business expenses such as

license fees, etc.; and (3) to cover any outstanding amounts that

had been charged to a sales representative’s account (Chargeback

Recovery).   Primerica would report any net earned commissions

credited during the taxable year to a sales representative’s

account to the IRS on Form 1099-MISC, Miscellaneous Income.

     Upon selling an insurance policy, Mrs. Harper received an

immediate advance equal to a percentage of the premiums due on

the policy and was entitled to keep this amount if, and only if,

the policy was held by the insured for 1 year.   These advances

were not reported to the IRS as income until the 1-year mark

elapsed, and Mrs. Harper had an unconditional right to the funds

or their equivalent.

     Primerica recorded monthly commission account statements for

Mrs. Harper for each month of 2003.    Consistent with the dates of

her affiliation with Primerica, the last monthly statement

showing policy sales was dated July 31, 2003.    The final monthly

summary is dated December 31, 2003, and reports the following:
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                      Tax Reporting Summary

                                       Year to Date

           Personal sales                 $990.85
           Base shop override              122.28
           ICA/Escrow contribution         (95.94)
           ICA/Escrow used/released         95.98
           Gross earned commissions       1113.17
           Imputed interest                 12.76
             Total reportable income      1125.93

                    Accounting Activity Summary

           Advance recovery balance       (723.89)
           Chargeback recovery
             balance                      (334.88)
     `     Business expenses               (55.00)
           Other adjustments               (95.98)
           Intercompany recovery           158.70
           Previous earns owed             (62.12)
             Total                      (1,113.17)

     Primerica issued two Forms 1099-MISC to Mrs. Harper for the

taxable year 2003; the first reflecting nonemployee compensation

in the amount of $1,125.93 ($1,113.17 in Gross Earned Commissions

and $12.76 in Imputed Interest) and the second, reflecting

nonemployee compensation in the amount of $158.70 (Intercompany

Recovery).   Although respondent has not raised the latter amount,

$158.70, as an issue in this case, as detailed above, this amount

was applied to Mrs. Harper’s outstanding commission account

balance.

     Petitioners did not report either amount reflected on the

aforementioned Forms 1099-MISC on their 2003 income tax return.

Mrs. Harper did, however, attach a letter to petitioners’ 2003

return in which she contested the inclusion of these amounts in
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petitioners’ 2003 gross income on the grounds that they never

received any payments (“checks”) from Primerica during the year

at issue, and because she ended her affiliation with Primerica

“in late 2002,” the monthly figures for 2003 submitted to her and

respondent by Primerica had to have been falsified.

                           Discussion

     The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden is on the

taxpayer to prove that the determinations are in error.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     As the

issue in this case is legal, that is, whether income generated by

petitioner wife’s commission account is includable in

petitioners’ gross income, we decide this case without

consideration of the burden of proof.   Sec. 7491.

     The first issue presented in this case is whether Mrs.

Harper earned income based on commissions that were not paid

directly to her “in a check” but, rather, were diverted or

applied to offset a negative balance in her commission account.

     Section 61(a)(1) provides that gross income includes “all

income from whatever source derived, including (but not limited

to) * * * Compensation for services, including fees, commissions,

fringe benefits, and similar items”, unless otherwise provided.

The Supreme Court has consistently given this definition of gross

income a liberal construction “in recognition of the intention of
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Congress to tax all gains except those specifically exempted.”

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955).

Moreover, section 1.61-2(a)(1), Income Tax Regs., provides that

“Wages, salaries, commissions paid salesmen, * * *, commissions

on insurance premiums, * * * are income to the recipients unless

excluded by law.”

     In the context of insurance agents who receive advances

based on future commission income, whether those advances

constitute income depends on whether, at the time of the making

of the payment, the agent had unfettered use of the funds and

whether there was a bona fide obligation on the part of the agent

to make repayment.   Dennis v. Commissioner, T.C. Memo. 1997-275.

In many instances, repayment is simply made out of future earned

commissions.   Where the repayments will be taken only from future

commissions earned, and the agent will not become personally

liable in the event that the future income does not cover the

repayment schedule, the payments will constitute income to the

agent for each year to the extent he received them.    Moorman v.

Commissioner, 26 T.C. 666, 673-674 (1956).   These payments are

nothing more than disguised salary.    Beaver v. Commissioner, 55

T.C. 85, 91-92 (1970).   However, in the situation where the

advances are actually loans, when the repayments are offset

directly by the future earned commissions, then the agent will

have either commission income or cancellation of indebtedness
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income at the time of the offsets.     Cox v. Commissioner, T.C.

Memo. 1996-241; cf. Warden v. Commissioner, T.C. Memo. 1988-165.

     In this case, Mrs. Harper continued to earn commissions on

policies that she had sold during her affiliation with Primerica

through August of 2003.   However, instead of paying these

commissions to Mrs. Harper “by check”, Primerica diverted the

commissions to accounts showing balances owed by Mrs. Harper for

the advances and expenses payments previously described.       We

believe that based on all of the evidence presented, that when

Primerica previously made advances to Mrs. Harper, she was not

taxed on those advances because the advances were loans secured

and payable through future earned commissions.     Beaver v.

Commissioner, supra; Diers v. Commissioner, T.C. Memo. 2003-229.

     Although the record before us is devoid of any contract that

may have existed between Mrs. Harper and Primerica, we are

convinced from our review of the detailed monthly statements of

accounting maintained by Primerica, and illustrated at Exhibit 5-

J, that under the system that Primerica used to account for its

agents’ commissions, advances Primerica paid to Mrs. Harper were

actually loans to be offset directly by future earned income.

     As evidence for this conclusion, we point to the fact that

Mrs. Harper carried over a negative balance in her commission

account from 2002 and had a negative balance in her chargeback

recovery account for each month of 2003.    For each month of 2003,
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Primerica would apply Mrs. Harper’s accumulated earnings for that

month to her negative balance.    This process was repeated through

November of 2003, when Primerica applied the remaining amount of

Mrs. Harper’s earnings to zero out her commission account.    At

the end of 2003, Mrs. Harper’s commission account (including

recovery of advances made and chargeback amounts owed) had a

negative yearend balance of ($1,113.17).   The monthly records

show that Primerica applied $1,113.17 from Mrs. Harper’s earnings

recorded throughout that year to essentially pay back the

negative balance in her account.

     We believe, despite the lack of any contract stating

otherwise, that this accounting shows that Mrs. Harper was under

an obligation according to her affiliation with Primerica to

rectify any outstanding balance in her commission account and, to

that end, her advances were not taxed upon receipt, but her

actual earnings were taxed.   In this case, those earnings were

used to pay back a deficit accumulated in her commission account.

     At the end of 2003, Mrs. Harper’s commission account was

credited with $1,113.17.   Primerica, however, did not pay Mrs.

Harper this amount by check but rather applied it to a then-

existing deficiency in her commission account.   Before applying

the funds, Mrs. Harper’s commission account had a total negative

balance of ($1,271.87).    After crediting the account with $158.70

in “institutional recovery” and applying the $1,137.17 credit
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from earnings to Mrs. Harper’s commission account, the result was

that her existing account deficiency was eliminated, and her

obligation to pay back this amount was settled.   This reduction,

referred to in income tax parlance as cancellation of

indebtedness, resulted in Mrs. Harper’s receipt of gross income

irrespective of the fact that, in her words, “she never received

an actual check for $1,113.17.”   Diers v. Commissioner, supra.

     At trial, petitioners stated that they refused to include

the amounts as listed on the aforementioned Form 1099 on their

return as they had not received any check for that amount from

Primerica during 2003.   While we are sympathetic to petitioners’

confusion as to why they must include in their gross income

moneys that they actually did not “get a check for,” our review

of the entire record in this case, including the copious

statements of tax and accounting submitted by respondent as a

result of a subpoena served on Primerica, show that the amount in

issue was, in fact, applied to a then-existing deficiency in Mrs.

Harper’s chargeback account and when received was, based on the

reasons previously discussed, taxable.

     This conclusion also comports with the explanation provided

in a letter sent by Primerica to respondent that is included as

part of the record.   In that letter, Primerica explained that,

“In Mrs. Harper’s case, since income was applied to both negative
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advance recovery and chargeback recovery balances, a check was

not issued to the agent.”

       Based on the foregoing, and under the relevant tax law, Mrs.

Harper would have had cancellation of indebtedness income at the

time that monthly premiums were reclassified as earned income

and/or any preexisting deficiency in her commission account was

offset.    See Diers v. Commissioner, supra; Cox v. Commissioner,

T.C. Memo. 1996-241; cf. Warden v. Commissioner, T.C. Memo. 1988-

165.    Therefore, the Court holds that petitioners received

commission income in the amount of $1,125.93 in 2003.

       Petitioners also contest inclusion of the amounts listed on

the Form 1099 at issue on the grounds that Mrs. Harper had

stopped selling policies for Primerica sometime in the fall of

2002, and, accordingly, she could not have made any sales from

which commissions could be generated in 2003.    Petitioners

testified that despite their repeated requests to Primerica

regarding the exact circumstances by which the figures reflected

in the 2003 monthly statements were derived, they had not been

able to ascertain the exact nature of these amounts.

       Based on the entire record before us, we are not convinced

either that Mrs. Harper ended her affiliation with Primerica in

November of 2002, or that (assuming that she did not actually

sell any policies in 2003) Primerica did not account for policies

that she sold in 2002 on its 2003 monthly reports.    First, Mrs.
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Harper could not provide the Court with an exact date on which

she terminated her affiliation with Primerica.   She testified

that she told her regional director in person that she “was

quitting” sometime in November of 2002.   Mrs. Harper claimed that

she had not put her intentions in writing to Primerica or any of

its employees at any time because “it was her regional director’s

responsibility to do that.”   Second, Mrs. Harper confirmed at

trial the figures contained in the records provided by Primerica

showing that she received commissions on policy sales in December

2002.   Since Mrs. Harper also testified that she had sold her

last policy in September 2002, we conclude that it was possible

that Primerica did not make the initial advances to its agents,

including Mrs. Harper, until several months after the date on

which the policy was actually sold.

     Finally, because agents were required to repay advanced

amounts if policies were terminated before a 1-year period

elapsed, it is possible, assuming that the last contract sold by

Mrs. Harper was received by Primerica in December 2002, that

there would be activity on her commission account through the end

of 2003.   All of these reasons lead us to the reasonable

conclusion that Mrs. Harper could have been credited commissions

in taxable year 2003 for policies sold in that year, as well as

policies sold in 2002.
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     The last issues before us concern whether petitioners are

liable for the self-employment tax and whether petitioners are

entitled to a corresponding deduction for one-half of the self-

employment tax to be paid.

     Section 1401(a) imposes a tax upon the self-employment

income of every individual.    In general, self-employment income

consists of the net earnings derived from an individual (other

than a nonresident alien) from a trade or business carried on by

such an individual.    Sec. 1402(a) and (b); sec. 1.1401-1(c),

Income Tax Regs.    An individual is subject to self-employment tax

if his or her net earnings from self-employment exceed $400 for

the taxable year.    Sec. 1402(b)(2).

     In this case, although petitioners dispute that Mrs. Harper

was an independent insurance agent with Primerica during the

taxable year in issue, they do not disagree that Mrs. Harper was

at one time an agent for Primerica.1    Moreover, and based on our

foregoing discussion, we believe that the income received by Mrs.

Harper in 2003 was derived directly from her work as an

independent insurance agent with Primerica, either in 2002 or

2003.    Accordingly, the Court holds that Mrs. Harper earned

income in 2003, and is, therefore, both liable for self-



     1
       We note that no argument or evidence was presented as to
whether Mrs. Harper was an employee or statutory employee under
sec. 3121(d).
                             - 13 -

employment tax on that income and entitled to a corresponding

deduction for one-half of the self-employment tax to be paid.

     Accordingly, and based on the foregoing facts and

discussion, we hold that petitioners failed to report nonemployee

compensation in the amount of $1,125 on their 2003 Federal income

tax return, are liable for self-employment tax on that amount,

and are entitled to a corresponding deduction for one-half of the

self-employment tax to be paid.


                                          Decision will be entered

                                      for respondent.
