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In order to reimburse itself for the cost of paying
“contract value” to retiring district managers (rather than
requiring the retiring managers to sell their interests to the
replacement managers), Farmers began in 1965 to impose retention
amounts on its new district managers. The retention amounts
withheld by Farmers from the compensation it paid to a new
district manager were not used to fund deferred compensation to
the new district manager upon retirement. Instead Farmers used
the retention amounts to reimburse itself for the cost of paying
“contract value” retirement benefits to the retiring manager.
Farmers conditioned the new district manager’s right to receive
“contract value” benefits from Farmers at retirement on his
agreement to have retention amounts withheld.
In issuing a Form 1099 reporting income to a district
manager, Farmers would take the commission overwrite earned by
the district manager and then deduct any “retention amount”
withheld from the district manager’s earnings to arrive at the
gross income of the district manager. During the entire time
3(...continued)
and we so find. See Cal-Maine Foods, Inc. v. Commissioner, 93
T.C. 181, 195 (1989). The total payments under both addenda
would have been approximately equal. The first addendum called
for retentions of $935 per month for 120 months, totaling
approximately $112,200. Assuming the retentions called for under
the first addendum were withheld until the effective date of the
second addendum, there would have been retentions of $935 per
month for 17 months, followed by retentions of $605 per month for
the remaining 160 months, totaling $112,695.
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