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It is somewhat ironic that if Royal had offered and/or
authorized its agent (Schwab) to offer petitioner 1 year of
insurance coverage at no cost as an inducement to continue the
coverage in the future, the tax consequences might have been
different. In that type of circumstance, courts have held that
the "reduced" price or rebate is not taxable to the consumer.
See, e.g., Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707
(1956). Here, however, the insurance company was not offering a
price reduction or rebate. Instead, the agent, without the
insurer's approval or agreement, devised an illegal scheme to
take advantage of his contractual relationship with the insurer.
The agreement between the insurer and the agent was for the agent
to receive about 118 percent of the first year’s premium as a
commission for selling the policy. In turn, the agent paid
petitioner the amount of the premium, in exchange for
petitioner’s applying for the insurance coverage. As a result,
the agent received about 118 percent of 1 year's premium, and
petitioner received the benefit of 1 year's insurance coverage.
Although petitioner may not have understood the technical
distinction between a rebate and a kickback, he was aware that
his payment to the insurance company was repaid to him by the
agent in exchange for his performance.
We can empathize with petitioners to the extent they relied
on Schwab, did not wish to do anything improper, and never
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