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NASFA
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Background Data on Post
Termination/ Retirement Payments to Independent
Contractor Insurance Agents
by Gabriel A. Nazziola, CLU,
LUTCF
Most insurance agents serve
one or more insurance companies under an employment
contract as an “independent contractor”. In that
capacity, they are essentially self-employed persons
creating, operating, and financing their own business at
their own expense.
Usually, over a long period of years of personal
services provided in conjunction with the insurance
products being sold, personal relationships are
developed between the agent and his or her customers,
which in turn result in repeat sales and sales of other
insurance lines products to those customers.
In traditionally well-accepted business language the
aforementioned would characterize or describe the
development of “business goodwill” and “business
going-concern value”.
When an independent contractor terminates or retires
from his business most insurance company unilaterally
drafted contracts call for the return of all the
documents involved in the business developed with the
sale of their insurance products, and incorporate some
type of restrictive language, legally enforceable as a
“covenant-not-to compete” or “covenant-not-to-solicit”
the customers of the agent in the business he or she
developed over his or her career.
In exchange for the cessation/termination of the agent’s
business and his or her agreement not to compete or
solicit with the customers of that business the
insurance companies agree to pay a series of
post-termination payments.
Clearly, the insurance company is acquiring a “going
concern business” and the “business goodwill” associated
with it. Most of the insurance company unilaterally
prepared employment contracts purposefully DO NOT
identify within the contract that this “acquisition” is
actually “a purchase and sale” of the “intangible
assets” of “goodwill” and “going concern value”.
Insurance company management persons have ‘testified’
that there was no “goodwill” established in the agent’s
business, hence there was none for them to “acquire” or
“purchase”. Further, the insurance company unilaterally
drafted employment contracts avoid defining or
characterized these post retirement payments or the
reason for which they are paid.
Obviously, independent contractor insurance agents
disagree, as do most persons in the business and
accounting world. There is no business that could be
operated for 20, 25, 30, or 40 years and NOT CREATE SOME
“GOODWILL” AND GOING CONCERN VALUE.
The motivation for the insurance companies to not
recognize THE CREATION OF GOODWILL in these agencies, or
to define the nature of the post retirement payments, or
why they are paid, is based in economics.
When a retired insurance agent files his or her taxes on
the receipt of these payments, he or she does so using
IRS Form 8594, declaring these payments as payments
received in respect of the disposition of the capital
asset “goodwill”. This IRS Form 8594, requires the
reciprocal completion of the same from by the insurance
company.
For reasons that have gone unexplained to date the IRS
has not pursued the reciprocal completion of Form 8594
by the insurance companies.
Hence the insurance companies are being allowed to take
a dollar for dollar tax deduction for these post
retirement payments to agents. It is our position that
were these payments defined as to basis and purpose in
the employment contracts of these independent contractor
insurance agents, the insurance companies, as the
defacto purchasers of the insurance agency’s “goodwill”
and “going concern value”, should only be deducting 7
and a half (7-1/2) cents on the dollar of these
payments, thereby amortizing the acquisition of this
capital asset over a 15 year period, in line with
existing regulations applicable thereto.
Clearly, there is significant motivation for insurance
companies to deny the existence of “goodwill”.
From a revenue point of view, instead of the IRS
attempting to collect the difference between the
ordinary income tax rate and the capital gains tax rate
on these post retirement payments from literally tens of
thousands of retired agent entrepreneurs, which on
average would be about 8 cents on the dollar, they could
be collecting the difference between 7-1/2 cents on the
dollar of these payments and 100 cents on the dollar
(currently being deducted by the insurance companies),
and collect these monies from a considerably lesser
number of taxpayers, the insurance companies. |
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