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Recently, in Farnsworth v. Commissioner, T.C. Memo. 2002-29,
we addressed cancellation payments made to a former district
manager of Farmers Insurance Group (a group of insurance
companies consisting of many of the same insurance companies that
constitute the companies). The district manager’s agreement in
that case provided for the payment of “contract value” similar to
the payment of contract value at issue here, except that, during
the taxpayer’s tenure as a district manager, “retention amounts”
were retained from commissions to reimburse Farmers Insurance
Group for payments of “Contract Value” to the district manager’s
predecessor. In Farnsworth, as in Schelble, we determined that
the payment in question was subject to self-employment tax
because it was based on the quantity (length of service) and
quality (final 6 months’ earnings without reduction for post-
termination events) of the services rendered by the taxpayer. We
found that the retention amount device provided an “additional
nexus” between the cancellation payments and the taxpayer’s prior
position as a district manager. We analyzed the provision of the
agreement in question that dealt with business property used by
the taxpayer (identical to a provision in the agreement), and
found: “The payments Mr. Farnsworth received were expressly in
consideration for the termination of the * * * contract, the
payments were not made in return for the transfer of specific
property owned by him. Neither in form nor substance was the
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Last modified: May 25, 2011