                         T.C. Memo. 1999-27



                       UNITED STATES TAX COURT



          JAMES J. AND SANDRA A. GALES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4345-97.                      Filed February 1, 1999.



          P received advance commissions on insurance
     written by him. The advance commissions were repayable
     on demand, and bore interest, and repayment was secured
     by earned commissions. Such advance commissions were
     shown as income on Forms 1099-MISC, Miscellaneous
     Income, received by P. Held, Ps have proven the amount
     of advance commissions. Held, further, the advance
     commissions were received as loans and are not gross
     income.



     S. Thomas Ullman, for petitioners.

     Thomas E. Ritter, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:    By notice of deficiency dated December 6,

1996, respondent determined deficiencies in petitioners' Federal
                                - 2 -

income taxes for 1992 and 1993 of $10,778 and $56,165,

respectively.    Petitioners assign error to some of respondent’s

determinations on the basis that respondent erred in treating

certain advance commissions as compensation rather than as loans.

Petitioners also claim that petitioner Sandra A. Gales is an

innocent spouse who should be relieved of liability on account of

that status.1

     Unless otherwise indicated, all section references are to

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

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

Procedure.

                          FINDINGS OF FACT

Introduction

     Some facts have been stipulated and are so found.   The

stipulations of facts, with attached exhibits, are incorporated

herein by this reference.

     Petitioners are husband and wife who, at the time the

petition was filed, resided in Sanibel, Florida.   Petitioners

made joint returns of income for their taxable (calendar) years

1992 and 1993.   Petitioner Sandra A. Gales is a party herein by


1
     In the petition, petitioners state that they cannot recall
whether the period for assessment and collection of taxes for
1992 had been validly extended to include the date of
respondent’s notice of a deficiency for 1992. If not,
petitioners raise an affirmative defense based on the expiration
of the period for assessment and collection of the tax for 1992.
See sec. 6501(a). The parties have since stipulated that the
notice of deficiency for 1992 was timely. Therefore, we assume
that petitioners are not pursuing their affirmative defense, and
we do not further consider it.
                               - 3 -

virtue of having made joint returns with her husband.    Hereafter,

we shall use the term “petitioner”, in the singular, to refer

only to petitioner James J. Gales.

Petitioner’s Engagement by International Marketing Agencies, Inc.

     During 1992 and 1993, petitioner was engaged as a national

marketing director by International Marketing Agencies, Inc.

(IMA), an insurance broker that sold health insurance to small

businesses.   Petitioner was responsible for IMA sales for the

territory west of the Mississippi River.    He would recruit agents

to sell insurance in various territories he established.    As well

as selling insurance directly and receiving commissions from

those sales, petitioner received an “override commission” on

insurance sold by agents he recruited.

Petitioner’s Agreement With IMA

     Petitioner’s engagement by IMA was governed by an agreement

entered into between petitioner and IMA on February 15, 1989.    As

subsequently modified, that agreement (the agreement) was in

effect in 1992 and 1993.   The agreement provides that petitioner,

as an independent contractor, is engaged for the purpose of

soliciting and obtaining applications for insurance offered by

insurance companies represented by IMA.    Among the terms and

conditions of the agreement are the following:

     COMMISSIONS WHILE UNDER CONTRACT

     1)   You [petitioner] will earn commissions, in
          the amount shown on the last page of this
          contract, on policies or certificates written
          by you as premiums are earned by the CO [the
                         - 4 -

     insurance companies] and only upon payment to
     IMA in cash by the CO.

          *    *    *    *       *   *   *

3)   You understand and agree that advances are
     considered loans and are advanced against
     commissions to be earned. As the commissions
     are actually earned on a month-to-month
     basis, they will be applied to offset the
     advance or loan. At the end of each month,
     as provided in this contract, interest will
     be applied to the ending or debit balance.
     You agree that if the actual earned
     commissions that you are entitled to are not
     sufficient to retire the debit balance, you
     will pay the debit balance upon demand. If
     the debit balance is not retired by earned
     commissions, or directly by you upon demand,
     you understand that IMA may take whatever
     legal action is necessary to collect the
     debit balance.

4)   It is understood that any earned commission
     will be paid to you only after all debts due
     IMA or its affiliates are paid in full. Such
     debts include the following:

     a)   All advance commission;

     b)   Any other amounts due IMA or its affiliates;

     c)   Any amount due IMA or its
          affiliates from any person from
          which you received override
          commission;

     d)   Interest on advance commission
          debit balance, or any other charges
          which result in a debit balance,
          will be calculated at 2.0% above
          the current prime rate, as
          determined by Citibank NY,
          calculated at the end of each
          month. In no event will the
          interest exceed the maximum amount
          permissible under applicable law.

          *    *    *    *       *   *   *

VESTING OF YOUR COMMISSIONS AFTER TERMINATION

1)   Qualifying for vesting under this contract will
     begin after one (1) year of continuous and active
     service under this contract. * * *
                         - 5 -


2)   If this contract should terminate after it has
     been in effect for one (1) vesting year, * * *
     commissions will be credited for the same number
     of years after termination as the number of full
     vesting years this contract has been in effect,
     except as provided below. If this contract is in
     effect for a period of five (5) full vesting
     years, commissions will be credited for ten (10)
     years. If this contract remains in effect for ten
     (10) full vesting years, the commissions will be
     vested for life.

3)   If you do not submit an acceptable application for
     a period of six (6) consecutive weeks without
     written permission from IMA, your vesting period
     will end at the time of the last accepted
     application before the six-week period. If this
     contract was not terminated and you submit new
     acceptable applications after six weeks, the time
     period for vesting purposes begins new at the date
     you submit your first acceptable application after
     the six-week period.

4)   If this contract is terminated for any reason and
     you are reinstated or a new contract is executed,
     a new vesting period will begin under the above
     terms after the reinstatement or new contract is
     executed. Credit will not be given for previous
     time accumulated under a terminated contract or
     before reinstatement.

5)   You will forfeit all vesting of commission if you
     violate the provisions of this contract concerning
     competing with IMA in the health and life
     insurance business during or after termination of
     this contract.

6)   No renewal commission is payable if such renewal
     commission is less than $100.00 in any one month.
     After such time there will be no additional
     commission payable and no further statement of
     account will be furnished.

ADVANCE COMMISSION

IMA will provide an advance commission on business
written by you under the following terms and
conditions:
                         - 6 -


1)   You shall devote your full time and be exclusively
     contracted with IMA, and you are to be appointed only
     with the CO represented by IMA.

2)   The amount of the advance will be determined
     by IMA and may be modified, at the option of
     IMA, at any time.

3)   You understand that IMA/CO shall have the
     right to reject applications for insurance
     without specifying cause. IMA has the right
     to determine the applications on which an
     advance commission will be paid.

          *    *    *    *       *   *   *

INDEBTEDNESS

1)   Any and all cash advanced to you by IMA
     shall, in the absence of any agreement in
     writing to the contrary, be loans payable
     upon demand. As security for any such loans,
     IMA shall have a first lien upon any
     compensation payable to you under this or any
     other contract between you and IMA, and IMA
     may, at any time, deduct from any commissions
     or other amounts payable to you any debt or
     debts owed by you to IMA or its affiliates.
     You will also be held responsible for
     indebtedness incurred by anyone on whom you
     receive override commissions.

2)   After termination of this contract, you agree
     to grant IMA a first lien security interest
     in and on all amounts payable to you by any
     other company or organization to secure
     payment of any indebtedness you have
     outstanding to IMA at the time of your
     termination. You agree that such security
     interest shall attach upon IMA giving the
     company or organization written notice of the
     lien and the amount of the lien.

          *    *    *    *       *   *   *

LIMITATIONS AND RESTRICTIONS

          *    *    *    *       *   *   *

8)   If the CO ceases to pay, or does not provide,
     funds for any reason to IMA or the affiliates, for
     the commissions or advances due IMA or affiliates
     from premiums of insurance written by you or from
                                  - 7 -

             which you receive override, then no commissions or
             advances will be due you under this contract. IMA
             is responsible for payment of earned commissions
             only if such commissions are paid to IMA in cash
             by the CO.

                  *    *      *   *       *   *   *

       18)   You understand and agree that if you fail to
             comply with any or all of the terms of this
             contract, you shall forfeit forever any commission
             that would otherwise be due under the contract,
             whether vested or not.

                  *    *      *   *       *   *   *

       STATEMENT OF ACCOUNT

       IMA will each month, or at other reasonable intervals,
       furnish you with a statement of your account and
       remittance for any amount due. Upon receipt of such
       account or remittance, you shall notify IMA in writing
       of any corrections or irregularities within ten (10)
       days of the date you receive such statement and/or
       remittance, or the statement shall be deemed correct,
       and rights to change any accounting shall be waived.

The agreement also contains a schedule of commission percentages,

setting forth the percentages of premiums earned by petitioner

for the initial year and for renewal years of policies sold by

him.    The agreement provides that it is to be construed pursuant

to the laws of the State of Texas.

Payments Received From IMA

       During 1992 and 1993, petitioner received payments from IMA

in the amounts of $222,304 and $319,765, respectively (the 1992

and 1993 payments).     IMA reported the 1992 and 1993 payments to

both respondent and petitioner as nonemployee compensation on

Forms 1099-MISC, Miscellaneous Income (the Forms 1099).

Petitioners reported the 1992 and 1993 payments as gross receipts
                              - 8 -

on Schedules C, Profit or Loss From Business, to their 1992 and

1993 Forms 1040, U.S. Individual Income Tax Returns.   Petitioners

showed as an offsetting expense (and deducted) on those

Schedules C for 1992 and 1993 the amounts of $119,488 and

$202,404, respectively (the 1992 and 1993 reported loan amounts).

Petitioners, thus, reported nonemployee compensation received

from IMA for 1992 and 1993 in the amounts of $102,816 and

$117,361, respectively (the 1992 and 1993 reported compensation).

Petitioner’s Calculations

     Petitioner calculated the 1992 and 1993 reported loan

amounts and the 1992 and 1993 reported compensation from the

Forms 1099 and statements received from IMA of commissions earned

for each of 1992 and 1993 (the IMA statements).   For each year,

petitioner subtracted the amount shown on the pertinent IMA

statement from the year’s payments (the 1992 and 1993 payments,

respectively), the difference being the year's reported loan

amounts (1992 and 1993 reported loan amounts, respectively).    On

the returns, petitioners subtracted the 1992 and 1993 reported

loan amounts from the 1992 and 1993 payments, which resulted in

the 1992 and 1993 reported compensation.

Respondent’s Adjustments

     Respondent disallowed petitioners' deductions for the 1992

and 1993 reported loan amounts.
                               - 9 -

Method of Accounting

     Petitioner computed taxable income resulting from his

engagement by IMA under the cash receipts and disbursements

method of accounting.

Petitioner’s Payments

     On occasion, when called upon to do so by IMA, petitioner

repaid to IMA a portion of the amounts advanced to petitioner

under the agreement.

Termination of Petitioner’s Engagement by IMA

     Petitioner’s engagement by IMA was terminated by letters

from IMA dated March 31 and May 1, 1995 (the March 31 and May 1

letters, respectively).   Among other things, the March 31 letter

reminded petitioner of his responsibility for any balance on his

agent statement.   In pertinent part, the May 1 letter states:

          As of your last statement(s) produced, summaries
     of which are attached, your account is shown to have an
     advanced debit balance in the amount of $521,628.69,
     upon which the company has a first lien and security
     interest. Pursuant to your Contract [the agreement],
     this indebtedness is due in full upon demand by IMA.
     However, demand will not be made until this
     indebtedness exceeds the amount of your projected
     earned commissions for the next six (6) months, as
     determined solely by IMA. Your debit account will
     increase by assessment of uncollected charge backs,
     applicable lapses, and debit balance interest charges
     and/or any other IMA related debts incurred during that
     period of time. Your debit balance will be reduced by
     your total earnings for the next six (6) months (or
     longer for your contract’s vesting term, if
     applicable). However, if you would like to avoid any
     additional interest charges, we will accept payment in
     full at this time. Please send your check to the
     address shown on this letterhead, to the attention of:
     Agent Accounting.
                                 - 10 -

                                 OPINION

I.   Advance Commissions

      A.   Introduction

      During 1992 and 1993, petitioner James J. Gales (petitioner)

was engaged as national marketing director by International

Marketing Agencies, Inc. (IMA).      IMA sold insurance as the agent

of certain insurance companies.      Petitioner both supervised the

sale of insurance by others and sold insurance himself.

Petitioner’s engagement by IMA was governed by an agreement (the

agreement) that provided, among other things, for the payment to

petitioner of commissions in advance of his earning those

commissions under the agreement.      IMA reported all payments made

to petitioner during 1992 and 1993 (the 1992 and 1993 payments,

respectively) as miscellaneous income.      Petitioners reported

those amounts on their 1992 and 1993 returns but deducted amounts

in excess of amounts stated by IMA to have been earned during

each of those years.      We must determine whether the amounts

deducted, “advance commissions” (advance commissions), constitute

gross income.    Petitioner argues that advance commissions were

amounts lent by IMA to petitioner.

      Petitioners bear the burden of proof, Rule 142(a), which

they must carry by a preponderance of the evidence; e.g., UFE,

Inc. v. Commissioner, 92 T.C. 1314, 1321 (1989).
                                 - 11 -



     B.   Discussion

           1.   Arguments of the Parties

     Respondent argues that petitioners have failed to establish

the amount of advance commissions received by petitioner.

Alternatively, respondent argues that the possibility that

petitioner would ever have to repay any advance commissions was

so remote that it must be disregarded, so that, in effect,

petitioner had no liability for repayment of advance commissions,

and the advance commissions were an item of gross income in the

nature of compensation for services.      Petitioner argues that, in

form and substance, the advance commissions were loans and should

be treated as such for Federal income tax purposes.

           2.   Substantiation

     The agreement provides for advance commissions, and the

March 31 and May 1 letters (terminating petitioner’s engagement

by IMA) are ample evidence of IMA’s practice of paying advance

commissions.    Petitioner testified that he determined the amount

of advance commissions for 1992 and 1993 (referred to in our

findings of fact as “the 1992 and 1993 reported loan amounts”) by

subtracting from the 1992 and 1993 payments the amounts appearing

on statements received from IMA showing commissions earned for

1992 and 1993 (earned commissions).       The parties agree as to the

amounts of the 1992 and 1993 payments.      The IMA statements are

not in evidence, and the only evidence we have as to their

existence and content is petitioner’s testimony, as reflected in

his tax returns.   Respondent objects to petitioners’ proposed
                              - 12 -

findings with respect to the IMA statements on the grounds that

petitioner’s testimony was self-serving and uncorroborated.      That

is true, but it does not necessarily mean that petitioner’s

testimony was false or unpersuasive.    Petitioner was a credible

witness, and his unrebutted testimony is sufficient to carry his

burden of proving advance commissions for 1992 and 1993 of

$119,488 and $202,404, respectively, and we so find.

           3.   Liability

     Gross income includes compensation for services, including

commissions on insurance premiums and compensation for services

to be performed in the future.     Beaver v. Commissioner, 55 T.C.

85, 91 (1970) (future services).    Sec. 61(a)(1); sec. 1.61-

2(a)(1), Income Tax Regs. (specific reference to commissions on

insurance premiums).   An amount received by a taxpayer as a loan,

however, does not constitute an item of gross income because of

the obligation of the taxpayer to repay the amount received.     See

James v. United States, 366 U.S. 213, 219 (1961).

     Pursuant to the agreement, petitioner earned a commission on

insurance sold by him or by others working under his supervision.

Petitioner’s commissions were a percentage of the premiums paid

on the insurance sold by him or by those others.    Petitioner

earned a commission only as the insurance company writing the

insurance earned a premium and IMA received payment from that

company.   IMA had discretion to pay advance commissions on

insurance written by petitioner.    At the time those advance

commissions were paid, the insurance had already been written
                              - 13 -

and, we assume, petitioner and those under his supervision had

performed all (or the bulk) of the services required of them for

petitioner to earn a commission.   The advance commissions were,

thus, not paid for future services.    They were paid with respect

to past services for which compensation was not yet due (i.e.,

had not yet been “earned”) under the agreement.

     The advance commissions were described as “loans payable on

demand” in the agreement, and interest accrued on any balance of

advance commissions.   Petitioner’s obligation to repay the

advance commissions was secured by, among other things,

compensation payable under the agreement (i.e., earned

commissions).   If IMA’s sole recourse for repayment of the

advance commissions were earned commissions, we would have no

difficulty concluding that the advance commissions were

compensation for services, includable in gross income.    In George

Blood Enters., Inc. v. Commissioner, T.C. Memo. 1976-102, we

stated:

          Advances of commissions to a taxpayer under an
     agreement that places no personal liability of
     repayment on him but provides that any excess of the
     advances over commissions earned are to be recovered by
     the payor only by crediting earned commission against
     the advances constitute income to the recipient when
     the advances are received. L.L. Moorman [v.
     Commissioner], 26 T.C. 666, 674 (1956); Kenneth
     Drummond [v. Commissioner], 43 B.T.A. 529, 532--533
     (1941). * * *

     Recently, in Dennis v. Commissioner, T.C. Memo. 1997-275, we

determined that an insurance agent was personally liable for the

repayment of advance commissions notwithstanding that such
                              - 14 -

repayment was secured by future earned commissions; we found that

the advance commissions were loans, whose receipt was not an item

of gross income.

     The agreement provides that it is to be construed pursuant

to the laws of the State of Texas and that repayment of advance

commissions is to be on demand.   Petitioner’s obligation to repay

the advance commissions is secured by earned commissions, but

respondent has provided no authority that, under Texas law, IMA’s

recourse upon a default by petitioner was limited to earned

commissions.   Indeed, respondent appears to concede petitioner’s

personal liability to repay the advance commissions:   “Respondent

submits that, in the instant case, there was never any current

personal liability of petitioner.   The personal liability was

merely contingent and arose only in the event the earned

commissions did not cover the advanced commissions and this was

unlikely to occur.”   (Emphasis added.)   Respondent’s argument is

not based on the absence of personal liability as a matter of

law, but on the likelihood that petitioner’s earned commissions

would always be adequate to cover his advance commissions and

payment would never be demanded of him.   In fact, petitioner

testified that, on occasion, repayment was demanded of him and he

repaid some of the advance commissions.   We believe petitioner,

and we have found accordingly.    In the May 1 letter (terminating

petitioner’s engagement by IMA), reference is made to reducing

petitioner’s debit balance to IMA by his earnings for the vesting

term of the agreement “if applicable”.    The vesting provisions in
                              - 15 -

the agreement limit petitioner’s right to commissions on renewal

premiums.   If petitioner’s right to commissions on renewal

premiums were not vested, and earned commissions were not

sufficient to liquidate his debit balance (of advance

commissions), nothing in the agreement prevents IMA from

demanding payment of that balance.

     Respondent also relies on the stipulated testimony of Max

Heinz, director of operations of IMA.   Mr. Heinz' stipulated

testimony is as follows:

          That his name is Max Heinz and that he is employed
     by International Marketing Agencies, Inc. His position
     with the company is Director of Operations. He is
     familiar with the issue presented in this case as to
     whether "advances" made to the agents of IMA were non
     taxable loans or were taxable compensation and income.
     He states that the company takes the position that the
     advances are to be treated as taxable compensation
     income at the time the advances are made, and the
     company files formed [sic] 1099 consistent with that
     position.

           He also states that the company has in the past
     advised agents when they leave employment with the
     company that the company expects that the advances be
     repaid to the company out of future insurance renewal's
     [sic] and that if those renewal's [sic] are
     insufficient to make such payment then the advances
     will be deemed a liability of the employee. The
     company typically sends out a letter reminding the
     employee of the obligation, but generally does not
     proceed further with the legal process to collect the
     debt.

We are unpersuaded by that testimony.   First, it fails to explain

the striking inconsistency between the terms of the agreement

(advance commissions are “loans payable on demand”) and IMA’s

practice of treating advance commissions as reportable income.

Second, we are unable to make much of Mr. Heinz' contradictory
                               - 16 -

statements that “advances will be deemed a liability of the

[departing] employee” but “generally IMA does not proceed further

with legal process to collect the debt.”    We assume that

Mr. Heinz had in mind IMA’s tax reporting position when he made

the statements stipulated.    Those statements alone are

insufficient to persuade us that the advance commissions were not

intended to be loans.

      C.   Conclusion

      Petitioner received advance commissions under an obligation

to repay them on demand.   IMA’s recourse on default was not

limited to earned commissions.    The advance commissions were

loans and, as such, not items of gross income.

II.   Innocent Spouse Claim

      Petitioners failed to produce any evidence supporting their

claim that petitioner Sandra A. Gales should be relieved of

liability as a so-called innocent spouse.    Petitioners also

failed to address that claim on brief.    Therefore, we conclude

that petitioners have abandoned that claim and we do not further

address it.    See Bernstein v. Commissioner, 22 T.C. 1146, 1152

(1954) (holding against the taxpayer with respect to an issue

because, among other things, the taxpayer did not press the issue

on brief), affd. per curiam 230 F.2d 603 (2d Cir. 1956);     Lime

Cola Co. v. Commissioner, 22 T.C. 593, 606 (1954) ("Petitioners

in their brief do not argue anything about * * * [the issue];

and, although they do not expressly abandon the issue * * * we

presume they no longer press it.").
                               - 17 -

III.   Conclusion

       Respondent’s adjustment disallowing the deductions of the

1992 and 1993 reported loan amounts was in error.      Respondent’s

determinations of deficiencies are not sustained to the extent

allocable to those adjustments.


                                          Decision will be entered

                                     under Rule 155.
