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Because of the advance payment of commissions and loans made
to petitioner, American regularly carried a debt on its books for
petitioner. In 1994, when petitioner left employment with
American, he had an obligation to repay American for commission
advances and loans.
After petitioner resigned from American, he worked for
Capitol American Group of Companies (Capitol) and Life USA
Insurance Co. (Life USA). During the year in issue, petitioner
received income of $175 and $797 from Capitol and Life USA,
respectively.
B. Lawsuit and Settlement Agreement
In 1994, American sued petitioner in the 74th Judicial
District Court of McLennan County, Texas, for allegedly taking
policyholders from American and for advances and loans American
had made to petitioner during his employment. Petitioner
threatened to countersue.
On April 25, 1995, petitioner entered a settlement agreement
with American (settlement agreement). The settlement agreement
provided that American would look exclusively to renewal
commissions due or to become due to petitioner to satisfy the
outstanding loan balance. In exchange, petitioner released all
claims and rights to renewal commissions attributable to past
services rendered for American that were due to petitioner or to
become due in the future.
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