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deducted the payments from the commissions payable to the
successor agent, and, if there was any shortfall, the balance was
paid from State Farm's general operating funds.
If the termination payments are for a covenant not to
compete, they are not self-employment income. Payments
attributable to a covenant not to compete are not "earned"
income, Furman v. United States, 602 F.Supp. 444, 451 (D.S.C.
1984), affd. without published opinion 767 F.2d 911 (4th Cir.
1985), and they are not subject to self-employment tax. Barrett
v. Commissioner, 58 T.C. 284 (1972); see also Ohio Farm Bureau
Federation, Inc. v. Commissioner, 106 T.C. 222, 236 n.8 (1996).
The purpose of the termination payments under the Agreement was
to compel petitioner to refrain from entering into an insurance
business as a competitor of State Farm. Clearly, State Farm
wanted to protect the customer base for its products that had
been developed by petitioner during the course of his active
affiliation with the company.
It is significant that other courts in analogous agreements
involving extended earnings arrangements have concluded that
similar payments were in the nature of a buyout. See Darden v.
Nationwide Mut. Ins. Co., 922 F.2d 203, 208 (4th Cir. 1991),
revd. on other grounds 503 U.S. 318 (1992) (quoting Fraver v.
North Carolina Farm Bureau Mut. Ins. Co., 801 F.2d 675, 678 (4th
Cir. 1986)), as follows:
The amount of the payment is tied to only one factor,
the amount of business in the last year prior to
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