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Farnsworth’s agreement to allow his overwrite commissions to be
reduced by retentions and his right to recover “contract value”
upon termination creates an additional nexus between the
termination payments and his prior employment.
Because, as in Schelble v. Commissioner, 130 F.3d 1388 (10th
Cir. 1997), the contract value payments to Mr. Farnsworth were
based on the quantity (length of service) and quality (final 6
months’ earnings without reduction for post termination events)
of the services rendered by Mr. Farnsworth, and because of the
causal relationship between retentions and the right to “contract
value” payments at termination, Farmers’s contract value payments
to Mr. Farnsworth are subject to self-employment tax.
Petitioners attempt to distinguish Schelble on three
grounds. First, petitioners argue, without citation of
authority, that the holding of Schelble should not apply to the
case at hand because the taxpayer was an insurance agent, while
Mr. Farnsworth was a district manager. Petitioners fail to
explain how a difference in Mr. Farnsworth’s title or duties
would make any difference in the result. The fact remains that
there is a sufficient nexus between the payments and Mr.
Farnsworth’s self-employment services to cause the payments to be
subject to the self-employment tax.
Second, petitioners argue that the payments in Schelble were
“based on the future commissions the Agent would have earned if
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