Sch C vs Other Income

[skdoorn12]

I have read other posts on this topic but would like to get some opinions regarding this case I have at the moment.

Client had been Self-Employed Financial Planner (Registered Rep) with broker dealer until January 15, 2010.

Resigned at that time and turned over client files to another Reg Rep with same broker dealer.

Signed agreement with other rep that he would receive 50% of all commissions from his old clients for 1 year. In essence, whatever that amount turned out to be, would be the selling price of the business to the other rep.

The 50% was paid directly from the broker dealer each commission run. It was not paid by the rep who bought out the client base.

At the end of the year, the retired rep receives a 1099-misc just like previous years, however, he did not actively work to earn these "commissions".

Because he was no longer in the business, would this now be considered Other Income (Line 21) or still SE Income on Sch C.?

I lean towards Other Income as he was no longer in the business or doing any work to earn these commissions. It was the sale of the client base. Any other input would be appreciated.

[AZ-Tax]

Does your client hold an insurance license?

I have read other posts on this topic but would like to get some opinions regarding this case I have at the moment.

Client had been Self-Employed Financial Planner (Registered Rep) with broker dealer until January 15, 2010.

Resigned at that time and turned over client files to another Reg Rep with same broker dealer.

Signed agreement with other rep that he would receive 50% of all commissions from his old clients for 1 year. In essence, whatever that amount turned out to be, would be the selling price of the business to the other rep.

The 50% was paid directly from the broker dealer each commission run. It was not paid by the rep who bought out the client base.

At the end of the year, the retired rep receives a 1099-misc just like previous years, however, he did not actively work to earn these "commissions".

Because he was no longer in the business, would this now be considered Other Income (Line 21) or still SE Income on Sch C.?

I lean towards Other Income as he was no longer in the business or doing any work to earn these commissions. It was the sale of the client base. Any other input would be appreciated.

Interesting one

Your client could still hold an insurance license and be actively marketing insurance. When you place your securities license in the domant status, that has no affect on the insurance license. Example: an agent may have sold his medicare supplement insurance business under an agreement where the selling agent still receives some of the commissions but still actively markets Life insurance therefore the agent is still in the insurance marketing business. Your client may have sold variable insurance and still receiving commissions. If your client never kept track of any business related exps, then probably Ln 21 income but I would think your client should have at least have a SE business from 1/1/2010 thru 1/15/2010.

[Bees Knees]

TTB, page 5-24 says:

Insurance agent (selfemployed): Subject to SE tax on regular, renewal, and deferred commissions, if earned prior to retirement. Exception: Covenant not to compete.

TTB, page 27-2 says:

Payments received in exchange for a covenant not to compete
are considered ordinary income. The court in Milligan (9th Cir.
1994) said payments derived from the cessation of a business
activity are not subject to self-employment tax.

I don’t see your situation as a covenant not to compete. It is more like the retired insurance agent who continues to receive commissions on prior clients. It may depend on how the sales contract reads, but if it says nothing about a covenant not to compete, I would say it is subject to SE tax.

The “no longer in business of doing any work” is not a good argument. SE tax has been ruled to not apply in cases where the taxpayer was found not to be in a trade or business. Your client was clearly at one time in a trade or business and the payments are clearly a result of that activity. If it isn’t solely based on paying someone not to work, as in a covenant not to compete, it is more likely related to a payment for prior services rendered as a trade or business.

[JohnH]

There was a case several years ago involving State Farm Insurance agents who retired and turned over their "book" of business to the company. I think the company's objective was to bring independent agencies in-house.

They received continuing payments for several years afterward and all of it was not subject to S/E tax. (May have had a lot to do with the "retired" status - my memory is a little fuzzy).

But you might try a Google search on the subject.

[Nashville]

Sale

I don't see this as anything other than a sale. Seller is not the recipient of renewal commissions, and the new agent should be receiving the 1099s for same. Renewal commissions may affect the selling price, but in no way is the seller responsible for SE tax on these. He is not even entitled to receive them.

Having said that, the sale still should have its character broken out in the same fashion as what would be reported on Form 8594. This breaks the business down to seven "classes" of potential income items, outlining the distinction mostly between ordinary income and capital gains.

Seller may, at his option, also report on installment method if the payments span more than one calendar year.

[luke]

my 2 cents

This is NOT a sale - in order for seller to receive ANY commissions he would have to remain "licensed" and he is now merely splitting future commssions and IMHO would need to report as Sch C WITH SE tax....

[AZ-Tax]

This one is kind of gray area

This is NOT a sale - in order for seller to receive ANY commissions he would have to remain "licensed" and he is now merely splitting future commssions and IMHO would need to report as Sch C WITH SE tax....

For those of you that are familiar with FINRA regulations, a Securities rep has 2 yrs to place their license with another Broker Dealer or loss their license. If the license falls into the 2 yrs "dormant", the Securities rep cannot market any Securities products so did the Rep terminated his association with the Broker Dealer on 1/15/2010 and currently now in the dormant status?