[The taxpayer] received his part of this $10,500 not as a result of any sale or exchange of his interest in the Parkerson fee but as a collection or settlement of it. That sort of a situation does not bring the gain which he realized * * * within the capital gains provision of section 117 [of the 1939 Code]. 16 T.C. at 109. Similarly, in Cotlow v. Commissioner of Internal Revenue, 2 Cir. 1955, 228 F.2d 186, the court held that a taxpayer's receipt of renewal insurance commissions he had purchased from insurance agents was not a sale or exchange. The Supreme Court has declined to find a sale or exchange in the redemption of bonds before maturity by the issuing corporation.
Renewal insurance commissions received by reason of bona fide assignments for value from various insurance agents who had written the policies to which the renewal commissions related constitute ordinary income taxable to the assignee to the extent which the aggregate amount thereof exceeded the total consideration paid by him for such assignments. Lewis N. Cotlow, 22 T.C. 1019, affd. 228 F.2d 186 (C.A. 2). Had Frank received any renewal commissions pursuant to the A Agency Renewal Contract during his lifetime, such proceeds would have constituted ordinary income taxable to him in the year received.
Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935).Wilkinson v. United States, 304 F.2d 469, 472-73, 157 Ct.Cl. 847, 855-56 (1962); Cotlow v. Commissioner of Internal Revenue, 228 F.2d 186 (2d Cir. 1955). In determining whether the instant transaction was a bona fide sale, we have concentrated on the economic substance of the transaction rather than the mere form in which it was cast.
See Roy W. Johnson, 53 T.C. 414, 425 (1969). Given that the right to renewal commissions remained at all times in Farmers, such cases as H. B. Hill, 3 B.T.A. 761 (1926); Lewis N. Cotlow, 22 T.C. 1019 (1954), aff'd 228 F.2d 186 (2d Cir., 1955); and Francis E. Latendresse, 26 T.C. 318 (1956), aff'd 243 F.2d 577 (7th Cir., 1957), which have been cited by Taxpayer, are inapposite. They involve an assignment by life insurance agents of their rights to receive, over a definite period of time, a percentage of the renewal premiums paid by existing policyholders — at issue being the manner in which the total purchase price would be amortized over the known period during which such commissions would be received. In the instant case, Taxpayer's position appears most nearly analogous to that before the court in Millard H. Hall, 50 T.C. 186 (1968), aff'd 406 F.2d 706 (5th Cir., 1969).
Taxpayer alleges he did make this assignment to Zorovich and consequently the remaining sum of 27,500 dollars was eventually paid to him. Taxpayers now claim that this assignment was for a valuable consideration and thus comes within the rule of Cotlow v. Commissioner of Internal Revenue, 228 F.2d 186 (2d Cir. 1955): "Where there is an arm's length assignment of income rights for a valuable consideration, it is clear that the assignor realizes only the [true net] amount of the consideration received * * *." Section 7422(a) provides that no suit shall be maintained in any court for the recovery of any internal revenue tax until a claim for refund has been filed with the Secretary of the Treasury.
On the other hand, Drilling has assumed the obligation to pay "* * * any and all of the income tax obligations, together with all interest and penalties thereon, for each of the calendar years 1948, 1949 and 1950 of A. Raymond Jones and Mary Lou Jones * * *". We agree with the conclusion reached in Rhodes' Estate v. C.I.R., 131 F.2d 50, 6 Cir. 1942, and with Cotlow v. C.I.R., (2 Cir., 1955) 228 F.2d 186, wherein it is stated: See Item 2, Page 3, Exhibit 5E which is the Assignment Contract.
In an arm's-length transaction the assignor of a personal services contract right is taxed on the consideration received, and the assignee is taxed on any amount ultimately collected under the assignment in excess of his cost. Cotlow v. Commissioner, 2 Cir., 228 F.2d 186. Since, absent the gift to charity, taxpayer would be taxed on this excess upon receipt either as ordinary income or capital gain, we are concerned here with determining which treatment is applicable. If taxpayer's economic gain is "property" it qualifies for the favorable tax consequences on gifts of "property" provided for under the Treasury regulations. In our opinion, save for the fact our problem involves a charitable deduction, other courts would reach the same conclusion by approaching the issue on the basis that the transaction did not involve a sale or exchange.
In Wilkinson the Court considered the question whether the assignment of the right to receive income (amounts payable under a contract for personal services) intervenes to alter the inherent characteristics of the income so as to remove it from the realm of ordinary income when ultimately received. The Court held that what was income to the assignor remains income when received by the assignee, citing Cotlow v. Commissioner of Internal Revenue, 22 T.C. 1019 (1954) (affirmed 228 F.2d 186, 2d Cir. 1955) (involving similar assignment of rights to receive future insurance commissions [clearly income] and that the contract in the hands of the assignee, although "property" did not constitute a "capital asset" within the meaning of Section 1221.) See also, Grinnell v. United States, 390 F.2d 932, 949, 182 Ct.Cl. 702 (1968).
In the view of the Court it is not necessary to determine whether the 1936 agreement between the British company and the American company constituted a sale or exchange of patents or patent rights or a license since plaintiffs, as purchasers of the rights of the British company, acquired no such identity of interest under § 113 of the 1939 Int.Rev.Code, 26 U.S.C.A. § 113 which could warrant a 'vicarious substitution' for their vendor. See Cotlow v. Commissioner, 2 Cir., 1955, 228 F.2d 186; Nelson Trottman, 1944, 3 T.C.M. 316; Joseph A. Guthrie, 1940, 42 B.T.A. 696. The Court stated in part at page 411: 'We think it abundantly clear that Congress intended the taxpayer of 117 to be the person who actually or constructively received the proceeds of the sale, either by virtue of the contract of sale or of an assignment of it whenever that person, though not the actual seller, is one who would have taken the adjusted basis of the seller under § 113(a)(3), and consequently the holding period of § 117(c)(2), had the property been received and sold by such person to realize capital gain. * * * A seller of capital assets on the installment plan who contemplates the making of a gift of the proceeds might well be deterred from making the sale with its consequent realization of capital gains to be taxed if his donee were taxed on such gains as on ordinary income.
It has been recognized in numerous cases that where a taxpayer purchases insurance renewal commissions, such taxpayer is entitled to recover the cost of such commissions in determining the income he receives from such commissions. See H. B. Hill, 3 B.T.A. 761 (1926); Lewis N. Cotlow, 22 T.C. 1019 (1954), afd. 228 F.2d 186 (C.A. 2, 1955); and Frances E. Latendresse, supra. In each of these cases the renewal commissions which had been purchased were to be received over a stated period of years.