Warren L. Baker, Jr. and Dorris J. Baker - Page 11




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          folders that he purchased, claim draft books, rate books, agent’s           
          service texts, and a computer.  He maintained much of the                   
          information regarding the policies and policyholders on the                 
          computer.  He fully complied with the provision in the agreement            
          for return of property to State Farm.                                       
               The successor agent hired the two employees previously                 
          employed by petitioner and assumed petitioner’s telephone number.           
          The successor agent also worked with petitioner on occasion prior           
          to petitioner’s retirement to meet policyholders and to ask                 
          questions.  The successor agent opened an office in the vicinity            
          of petitioner’s office.  When the termination was completed,                
          petitioner had returned all of the assets used in the agency to             
          State Farm and the successor agent.                                         
          III.  Tax Return and Notice of Deficiency                                   
               Petitioners timely filed their 1997 Federal income tax                 
          return.  They reported the income of $38,622 from the termination           
          payment which petitioner received in 1997 as long-term capital              
          gain on Schedule D, Capital Gains and Losses.  Petitioners                  
          attached a two-page statement to Schedule D on which the                    
          termination payment was described as an annuity payable over 5              
          years.5  The annuity was described as a sale of assets to State             



               5  Timing of the recognition of income is not at issue.  The           
          record does not indicate how State Farm treated the termination             
          payment on its return.                                                      





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