8734 / How is the sale of a life insurance agent’s renewal commissions taxed?
Generally, a bona fide, arm’s length sale of a right to receive renewal commissions can successfully transfer the federal income tax liability on an insurance agent’s renewal commissions to the purchaser. If an agent sells the right to renewal commissions, the agent must report the entire sale price as ordinary income in the year the sale is made.1
Renewals cannot be converted to capital gain by sale to a third party.2 In addition, the Tax Court has held that amounts received by a district manager upon the termination of his agency contract are treated as ordinary income and not capital gain resulting from the sale of a capital asset, if the money received was compensation for the termination of the right to receive future income in the form of commissions.3
Apparently, the buyer must amortize his cost. In other words, the buyer can exclude from gross income in any year only that portion of the purchase price which the renewals received in that year bear to the total amount of anticipated renewals. The issue of whether the amount of deductible amortization is correctly determined requires consideration only of the contracts under which the buyer purchased the right to be general agent or purchased rights to renewal commissions.4
1. See Cotlov v. Commissioner, 228 F.2d 186 (2d Cir. 1955); Turner v. Commissioner, 38 TC 304 (1962).