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over which Milligan had no control. Because these chargebacks
were entirely unrelated to Milligan’s business activity, the
Court of Appeals held that the payments were not tied to the
quality of the taxpayer’s prior services. The Court of Appeals
in Milligan therefore concluded that the termination payments did
not derive from the “carrying on” of the taxpayer’s trade or
business and so were not subject to self-employment tax.
In Gump v. United States, 86 F.3d 1126 (Fed. Cir. 1996), the
Court of Appeals for the Federal Circuit followed Milligan in a
virtually identical factual situation involving the “extended
earnings” of a Nationwide Insurance Co. agent. As in Milligan,
the taxpayer in Gump was entitled to receive upon termination of
his agency contract a percentage of his final year’s earnings if
he had performed services under the contract for more than 5
years. The earnings were subject to reduction for policy
cancellations occurring in the 2 years after termination.
Following Milligan, the Court of Appeals for the Federal Circuit
held that the payments were not based on the “quantity or
quality” of the taxpayer’s prior services and therefore were not
subject to self-employment tax. The Court of Appeals for the
Federal Circuit explained in Gump the reason for the rule as
follows:
Thus, the extended earnings are not unpaid renewal
commissions, they are computed by reference to renewal
commissions--a reasonable indicator of the value of
Gump’s insurance business at the time he relinquished
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