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upon retirement. Under the State Farm agreement, the taxpayer
was entitled to 5 years of termination payments based on a fixed
percentage of his final year’s commissions. The taxpayer was
eligible for termination payments only if the termination
occurred more than 2 years after the contract was entered into.
The termination payments were also subject to reduction for
refundable commissions that had already been earned by the
taxpayer on policies that were canceled during the year following
termination. The reductions were called “chargebacks”.
This Court held, in a Memorandum Opinion, that the
termination payments were subject to self-employment tax because
the payments were “derived”, in the dictionary meaning of the
word, from petitioner’s prior employment. The termination
payments were found to be analogous to the payment of future
commissions on policies written during the term of the contract,
which had been held subject to self-employment tax in Becker v.
Tomlinson, 9 AFTR 2d 1408, 62-1 USTC par. 9446 (S.D. Fla. 1962):
We find that Termination Payments are the
equivalent of the deferred compensation which a State
Farm agent, active or retired, would receive from
policies sold in prior years. On this basis, we hold
that Termination Payments are derived from self-
employment, even though they are received in years
subsequent to the activity which generated them.
[Milligan v. Commissioner, T.C. Memo. 1992-655.]
In reversing the Tax Court’s decision in Milligan, the Court
of Appeals for the Ninth Circuit held that “to be taxable as
self-employment income, earnings must be tied to the quantity or
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