Verl W. and Frances M. Haderlie - Page 10

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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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