                  T.C. Summary Opinion 2005-176



                     UNITED STATES TAX COURT



         GREGG R. AND TERESA M. GILBERT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7422-04S.               Filed December 1, 2005.


     Gregg R. and Teresa M. Gilbert, pro sese.

     Mary Ann Waters, 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.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent 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.
                              - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $2,411 and $2,512 for the taxable years 2000 and

2001, respectively.

     The issue for decision is whether the amounts of $17,067 and

$16,0011 received by petitioner Gregg Gilbert as insurance

renewal premiums during taxable years 2000 and 2001,

respectively, are subject to self-employment taxes pursuant to

sections 1401 and 1402.

                           Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

Meadows of Dan, Virginia, on the date the petition was filed in

this case.

     There is no disagreement among the parties as to the facts,

which are almost fully stipulated.    Petitioners are married and

filed timely joint Federal income tax returns, Forms 1040, U.S.

Individual Income Tax Return, for the taxable years 2000 and

2001.




     1
      In the notice of deficiency, respondent determined that the
amount of $17,775, which petitioner reported on his 2001 Federal
income tax return as insurance renewal commissions, was self-
employment income subject to self-employment tax. However, at
trial respondent conceded that $1,774 of this amount was received
by petitioner as Social Security benefits and as such the amount
of $1,774 was not subject to self-employment tax.
                                 - 3 -

     Gregg Gilbert (petitioner) worked as an insurance

salesperson/agent for Capitol American Life Insurance Company,

now known as Conseco Health Insurance Company (Conseco),

beginning in 1985.   Petitioner’s employment relationship with

Conseco was established in a Marketing Agreement.   While serving

as an agent of Conseco, petitioner’s duties included soliciting

applications for insurance, collecting payments, supervising

approved subordinates, and generally assisting Conseco

policyholders.   The original Marketing Agreement, effective July

30, 1985, between petitioner and Conseco, states, in pertinent

part:

                           C.   COMMISSIONS

          1.   CAPITOL [Conseco] agrees to pay commissions to the
     REPRESENTATIVE [petitioner] in accordance with the
     “Commission Schedule and Vesting Provisions” attached hereto
     as Exhibit A and made a part hereof. Such payment shall be
     full and complete compensation for all insurance business
     accepted by CAPITOL [Conseco], whether written personally by
     the REPRESENTATIVE [petitioner] or any of his subordinate
     representative(s), and for all services performed by or
     required of the REPRESENTATIVE [petitioner] and any
     subordinate, representative(s) he may appoint hereunder.

                      E.   PROHIBITED CONDUCT

          2.   The REPRESENTATIVE agrees for a period of one (1)
     year after the termination of this Agreement, by either
     party for any reason, he will not, without the prior written
     consent of CAPITOL [Conseco], for himself or on behalf of
     another, engage in any life, annuity, or accident and health
     insurance business, either (a) within the State or States in
     which he is licensed by CAPITOL [Conseco] and by the use of
     the Marketing Method or Marketing Methods set forth on the
     first page of this Agreement, or (b) within any other State
     or States in which he is hereafter licensed by CAPITOL
     [Conseco] and by the use of any other Marketing Methods
                              - 4 -

     which he is authorized to use on behalf of CAPITOL [Conseco]
     after the date hereof.

     The Commission Schedule and Vesting Provisions referred to

in the Marketing Agreement were amended several times throughout

the course of petitioner’s employment.    The final amendment, in

the record, to the Commission Schedule and Vesting Provisions,

effective August 15, 1988, provides, in pertinent part, as

follows:

          This Schedule is attached to and made a part of the
     Agreement by and between Gregg R. Gilbert (the
     “REPRESENTATIVE”) [petitioner] and CAPITOL AMERICAN LIFE
     INSURANCE COMPANY (CAPITOL) [Conseco], effective July 30,
     1985, which Agreement, as amended from time to time, is
     hereinafter referred to as the “Agreement.”

          In Consideration of the faithful performance of all of
     the terms of the Agreement by the REPRESENTATIVE
     [petitioner], CAPITOL [Conseco] agrees to allow and pay to
     the REPRESENTATIVE [petitioner], as full compensation,
     commissions at the following rates on “cash premiums as
     collected” (as hereinafter defined) on policies issued upon
     applications written by the REPRESENTATIVE [petitioner] and
     his subordinate representative(s), if any, less all first
     year and renewal commissions due from or payable by CAPITOL
     [Conseco] to the REPRESENTATIVE’s subordinate
     representative(s), if any, as per the attached “Schedule of
     Commissions and Fees.”

     GENERAL PROVISIONS

     1.   As used herein, “cash premiums as collected” means
     gross premiums (but not including enrollment or other fees)
     received in CAPITOL’s [Conseco’s] Executive Office for those
     policies or applications therefor specified above, less
     premiums for those policies or applications therefor
     returned to the policyholder or applicant directly or
     through the REPRESENTATIVE [petitioner].

               *    *     *   *       *   *    *
                               - 5 -

     7.   Commissions on business produced by the REPRESENTATIVE
     [petitioner] shall be vested in and paid to the
     REPRESENTATIVE [petitioner], his heirs, executors,
     administrators, successors and assigns unless and until the
     REPRESENTATIVE’s [petitioner’s] “cash premiums as collected”
     fall below $8,000.00 for a consecutive 12-month period, at
     which time no further commission will be vested in or paid
     to the REPRESENTATIVE [petitioner].

                *    *    *    *       *   *   *

     9.   All vested commissions shall be forfeited, and no
     monies otherwise payable to the REPRESENTATIVE [petitioner]
     will be paid to the REPRESENTATIVE [petitioner] if, for
     himself or on behalf of another, the REPRESENTATIVE
     [petitioner] replaces any policy written under this
     Agreement with a policy issued by another insurance company;
     or, induces or attempts to induce any CAPITOL [Conseco]
     policyholder to cancel, lapse or fail to renew any policy
     issued by CAPITOL [Conseco], or any parent, subsidiary or
     affiliate of CAPITOL [Conseco]; or, solicits, accepts or
     retains any services of any representative licensed to
     solicit applications for insurance to be issued by CAPITOL
     [Conseco], or any parent, subsidiary of affiliate of CAPITOL
     [Conseco], as long as such person is so associated or within
     one year after such person has ceased to be associated; or,
     after the termination of this Agreement between the
     REPRESENTATIVE [petitioner] and CAPITOL [Conseco], by either
     party for any reason, the REPRESENTATIVE [petitioner],
     without the written consent of CAPITOL [Conseco], for
     himself or on behalf of another, uses as stated on the first
     page of this Agreement or as subsequently amended, the
     Marketing Method to engage in any life, annuity or accident
     and health insurance business.

     The Schedule of Commissions and Fees, referred to in the

amended Commission Schedule and Vesting Provisions, was also

amended several times throughout the course of petitioner’s

employment.   The final amendment, in the record, to the Schedule

of Commissions and Fees, effective October 12, 1991, provides as

follows:
                                            - 6 -
                                SCHEDULE OF COMMISSIONS AND FEES

            This Schedule is attached to and made a part of the Agreement by and between Gregg
     R. Gilbert (the “REPRESENTATIVE”) [petitioner] and CAPITOL AMERICAN LIFE INSURANCE COMPANY
     (“CAPITOL”) [Conseco].

                                    Plan    Enrollment             COMMISSION
             Type of Policies       Code       Fee         First Year        Renewal
     Hospital Intensive Care    I- Series      100%            65%             15%
     Hospital Intensive Care    SG             --               *               *
     CancerAid                  V- Series      100%            65%             15%
                                (Except VF)
     CancerAid                  J- Series      100%            65%            15%
     HeartCare                  K- Series      100%            65%            15%
     ** Economaster             All (i.e., VF)100%             49%            15%
     Disability Income          TS             100%            55%            15%
     Disability Income          RY             100%            55%            15%
     *** Disability Income      RG             --              55%            15%
     Accident                   B              100%            55%            15%
     Accident                   BA             100%            60%            15%
      With Return of Premium
     Accident                   BA             100%            43%            15%
      Without Return of Premium
     Hospital Indemnity         HO             100%            55%            15%
     *0* Life                   L              --              75%             9%
     Additional Benefit Rider Z- Series        --               0%             0%

     Less all first year and renewal commissions due or payable to sub-agents, if any.

     * Pay “IG” First Year/Renewal on $320 Daily Benefit with no commission on $280 Daily
     Benefit.

     ** Renewals paid year 2 through 6 only.

     *** Notwithstanding any provisions in this agreement, renewal commissions on the Security
     Protector (Plan Code RG) will be paid on the full renewal premium for a period of 9
     renewal years (policy years 2 through 10 only). However, renewal commissions on said
     policies will cease at the policy anniversary date following the insured’s 65th birthday.

     *0* Renewals paid years 2 through 10 only; 3% service fee year 11 and after, if agency
     actively servicing policyholders.


     As previously stated, petitioner’s contractual agreements

with Conseco were amended throughout the course of petitioner’s

employment.      While there may have been amendments executed after

October 12, 1991, neither respondent nor petitioner has copies of

them and neither was able to obtain copies of such amendments.

     Petitioner received renewal commission compensation

throughout his employment with Conseco.                     Renewal commission

payments reflect renewed policies that were originally sold by

petitioner as a representative, or one of his subordinate

representatives, on behalf of Conseco in years dating back to
                               - 7 -

1985.   Per the contractual agreements between petitioner and

Conseco, if the Marketing Agreement were terminated after 5 years

or more, then petitioner would be vested and would receive 100%

of the renewal policy commissions based on the applicable

percentages laid out in the Marketing Agreement and amendments.

All commissions remain vested in petitioner until petitioner’s

“cash premiums as collected” fall below $8,000 for a consecutive

12-month period.   At the time of trial, petitioner was still

receiving commission compensation from renewal policies with

Conseco.

     An accident suffered by petitioner in 1999 caused him to

retire on Social Security disability.     Petitioner was effectively

terminated from his position with Conseco in January 1999

following this disabling accident.     Petitioner ceased to be a

“manager of record” on any account after January 1999.

Petitioner’s Marketing Agreement with Conseco was officially

terminated effective October 13, 2000.     Petitioner did not sign a

separate termination agreement.

     Prior to termination, petitioner would receive additional

renewal commission payments if one of his client’s policy

payments increased due to amendments or other economic changes.

However, after termination of his employment with Conseco,

petitioner did not get the benefit of the increase in these

policy payments.   Instead, after termination of petitioner’s
                                - 8 -

employment with Conseco, the amounts of his renewal commission

payments were calculated based upon the old premiums, and the new

agent assigned to this client would receive the benefit for the

increase in the premiums.    This appears to be the only

difference, as to the calculation of the amounts of the renewal

commission payments, between the renewal commission payments

received before termination of petitioner’s employment with

Conseco and the renewal commission payments received post-

termination.

     As previously stated, petitioner continues to receive

commission compensation from renewal policies with Conseco.      The

renewal commission payments are disbursed per the Marketing

Agreement without regard to whether petitioner is still employed

by Conseco.    Petitioner received the same renewal commission

payments during his employment with Conseco and paid self-

employment tax on those payments.    Also, the renewal commission

payments are based on actual renewals of policies with Conseco

during the year for which the payments are received.    The renewal

commission payments received by petitioner during the taxable

years 2000 and 2001 were in no way an annuity or estimated

payments.   Since petitioner’s termination in October 2000,

petitioner has not received renewal commission payments from any

policy that was sold after 1997.    Petitioner has never received

any renewal commission payments from his final year with Conseco,
                              - 9 -

as he was disabled during his final year with the company and he

was not actively selling or supervising the sale of any policies.

     Petitioner did receive some renewal commission payments from

January 1 through October 13, 2000.   The parties are unsure of

the exact amount of these renewal commission payments.     It is

likely that the payments made in 2000, prior to October 13, 2000,

were approximately equal in amount to two-thirds of the payments

received by petitioner for the entire 2000 tax year.

     Conseco issued petitioner a Form 1099-MISC, Miscellaneous

Income, for taxable year 2000 of $17,067.     Conseco issued

petitioner a Form 1099-MISC for taxable year 2001 of $16,001.

The Social Security Administration issued petitioner a Form SSA-

1099, Social Security Benefit Statement, for taxable year 2001 of

$1,774.

     On their Forms 1040, U.S. Individual Income Tax Return,

petitioners reported as “Other Income”, on line 21, $17,067.08

and $17,775.19 for taxable years 2000 and 2001, respectively.

Petitioners, on their 2000 and 2001 Forms 1040, labeled this

income as “Insurance Renewal Commissions”.2

     It is uncontested that petitioners reported the receipt of

renewal commission payments on their Federal income tax returns



     2
      As previously stated in note 1, $1,774 of the $17,775.19
reported as “Other Income” on petitioners’ 2001 Form 1040 was
Social Security benefits received by petitioner during taxable
year 2001.
                              - 10 -

for the taxable years 2000 and 2001.      Nevertheless, the parties

do not agree as to whether insurance renewal payments petitioners

received are subject to self-employment tax.

     Respondent issued petitioners a notice of deficiency for

taxable years 2000 and 2001, in which respondent determined that

petitioners were liable for self-employment taxes of $2,411 and

$2,512 for taxable year 2000 and 2001, respectively.

                            Discussion3

     Section 1401 imposes a tax on self-employment income of

every individual for old age, survivors, disability insurance,

and hospital insurance.   Sec. 1401(a) and (b); Schelble v.

Commissioner, 130 F.3d 1388, 1391 (10th Cir. 1997), affg. T.C.

Memo. 1996-269; sec. 1.1401-1(a), Income Tax Regs.     Self-

employment income includes the net earnings from self-employment

derived by an individual during the taxable year.     Sec. 1402(b).

For purposes of the self-employment tax, the term “net earnings

from self-employment” is the gross income derived by an

individual from any trade or business carried on by such

individual, reduced by the deductions attributable to the trade

or business.   Sec. 1402(a); sec. 1.1402(a)-1, Income Tax Regs.

It is well established that the earnings of an insurance agent



     3
      We decide the issue in this case without regard to the
burden of proof. Accordingly, we need not decide whether the
general rule of sec. 7491(a)(1) is applicable to the case at bar.
See Higbee v. Commissioner, 116 T.C. 438 (2001).
                              - 11 -

who is an independent contractor are “self-employment income”

subject to self-employment tax.   Simpson v. Commissioner, 64 T.C.

974 (1975); Erickson v. Commissioner, T.C. Memo. 1992-585, affd.

without published opinion 1 F.3d 1231 (1st Cir. 1993).

     In Newberry v. Commissioner, 76 T.C. 441, 444 (1981), this

Court held that, for income to be taxable as self-employment

income, “there must be a nexus between the income received and a

trade or business that is, or was, actually carried on.”   Under

our interpretation of the “nexus” standard, any income must arise

from some actual (whether present, past, or future) income-

producing activity of the taxpayer before such income becomes

subject to self-employment tax.   Id. at 446.   Additionally,

section 1.1402(a)-1(c), Income Tax Regs., provides that gross

income derived from an individual’s trade or business may be

subject to self-employment tax even when it is attributable in

whole or part to services rendered in a prior taxable year.     This

Court and others have repeatedly applied the “nexus” test.

     In applying the statutory definition of self-employment

income, we must decide whether the income from the renewal

commission payments satisfies three requirements:   That it was

(1) derived; (2) from a trade or business; (3) carried on by

petitioner.   In order to be derived from a trade or business the

payment received by an insurance agent after termination must be

tied to the quantity or quality of the taxpayer’s prior labor,
                                - 12 -

rather than the mere fact that the taxpayer worked or works for

the payor.    Jackson v. Commissioner, 108 T.C. 130 (1997).

     Petitioners argue that, even though the payments received by

petitioner after the termination of his employment as an

independent agent for Conseco were renewal commission payments,

such payments are exempted from self-employment tax pursuant to

section 1402(k).

     Section 1402(k) provides:

          (k) Codification of treatment of certain termination
     payments received by former insurance salesmen.--Nothing in
     subsection (a) shall be construed as including in the net
     earnings from self-employment of an individual any amount
     received during the taxable year from an insurance company
     on account of services performed by such individual as an
     insurance salesman for such company if--

                  (1) such amount is received after termination of
             such individual’s agreement to perform such services
             for such company,

                  (2) such individual performs no services for such
             company after such termination and before the close of
             such taxable year,

                  (3) such individual enters into a covenant not to
             compete against such company which applies to at least
             the 1-year period beginning on the date of such
             termination, and

                  (4) the amount of such payment--

                       (A) depends primarily on policies sold by or
                  credited to the account of such individual during
                  the last year of such agreement or the extent to
                  which such policies remain in force for some
                  period after such termination, or both, and

                       (B) does not depend to any extent on length
                  of service or overall earnings from services
                  performed for such company (without regard to
                                - 13 -

                  whether eligibility for payment depends on length
                  of service).

     A review of pertinent caselaw is helpful to explain our

decision that the renewal commission payments at issue in the

present case are not exempted from self-employment tax pursuant

to section 1402(k).

     Jackson v. Commissioner, supra, involved termination

payments to a State Farm agent under a contract providing for a

2-year qualification period, payments based on a fixed percentage

of the final-year’s compensation without regard to the length of

service, and a reduction for commission chargebacks on policies

canceled after termination.    This Court held that the termination

payments were not subject to self-employment tax because the

payments were not tied to the “quantity or quality” of the

employee’s services.    In Jackson v. Commissioner, supra at 136,

we also recognized the factual distinction identified in Schelble

v. Commissioner, 130 F.3d 1388 (10th Cir. 1997): where the

termination payments are tied to the quantity or quality of the

taxpayer’s prior services, the payments will be subject to self-

employment tax.

     In Lencke v. Commissioner, T.C. Memo. 1997-284, after

distinguishing the facts from those in Jackson, this Court held

that payments in lieu of renewal commissions to which an

insurance agent would otherwise be contractually entitled are
                             - 14 -

subject to self-employment tax because the payments retain the

character of the renewal commissions they replaced.

     Congress, in section 1402(k), codified the standard

established in Jackson with respect to termination payments made

after December 31, 1997, to an “insurance salesman”.   Taxpayer

Relief Act of 1997, Pub. L. 105-34, sec. 922(a), 111 Stat. 879.

As previously stated, section 1402(k) exempts insurance salesman

termination payments from self-employment tax if, among other

things, the amount of the payments “does not depend to any extent

on length of service or overall earnings from services performed

for such company (without regard to whether eligibility for

payment depends on length of service).”   Sec. 1402(k)(4)(B).   The

legislative history of section 1402(k) makes it clear that the

provision was intended to codify existing law.4

     The facts, as discussed below, of the present case support

the conclusion that the present renewal commission payments

should be subject to self-employment tax because the payments are

“tied to the quantity [and] quality of the taxpayer’s prior



     4
      After citing Jackson v. Commissioner, 108 T.C. 130 (1997),
Gump v. United States, 86 F.3d 1126 (Fed. Cir. 1996), and
Milligan v. Commissioner, 38 F.3d 1094 (9th Cir. 1994), revg.
T.C. Memo. 1992-655, the conference committee report states:
“The House bill codifies case law by providing that net earnings
from self-employment do not include any amount received during
the taxable year from an insurance company on account of services
performed by such individual as an insurance salesman for such
company”. H. Conf. Rept. 105-220, at 458 (1997), 1997-4 C.B.
(Vol. 2) 1457, 1927-1929.
                              - 15 -
labor”, and these commission payments derive from the “carrying

on” of petitioner’s business as an independent insurance agent

with Conseco.

     In the present case, the renewal commission payments reflect

renewed policies that were originally sold by petitioner as a

representative, or one of his subordinate representatives, on

behalf of Conseco in years dating back to 1985.   The amounts of

the renewal commission payments, received after termination of

petitioner’s marketing agreement with Conseco, are calculated

based upon the premiums received before petitioner’s termination.

Unlike in Jackson, the renewal commission payments themselves and

the amounts of such payments actually arise from petitioner’s

business activity.   See Jackson v. Commissioner, supra at 132.

Additionally, unlike in Jackson, petitioner in the present

situation had a vested right to the renewal commission payments,

which consisted of an identifiable monetary amount.   See id.

Further, the renewal commission payments are disbursed not

pursuant to a termination agreement but per the Marketing

Agreement, without regard to whether petitioner was still

employed by Conseco.   Petitioner received the same renewal

commission payments during his employment with Conseco and paid

self-employment tax on those such payments.   Like Lencke, the

renewal commission payments retain the same character of the
                             - 16 -
payments received during petitioner’s employment with Conseco.

Lencke v. Commissioner, supra.

     In the present case, the payments received by petitioner

after the termination of his employment as an independent

insurance agent with Conseco were renewal commission payments.

The legislative history of section 1402(k), the case history,

previously discussed, and the facts of the present case show that

the renewal commission payments are “tied to the quantity [and]

quality of the taxpayer’s prior labor” and that these commission

payments derive from the “carrying on” of petitioner’s business

as an independent insurance agent with Conseco.   Therefore, the

renewal commission payments in the present case are not exempted

from self-employment tax pursuant to section 1402(k).   See Lencke

v. Commissioner, supra; Erickson v. Commissioner, supra.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                   Decision will be entered

                              under Rule 155.
