Insurance Agency Sold

[Randall]

Client sold insurance agency. Seems like cap gains and installment sale. Buyer issued 1099-MISC Box 7 for payments in 2012. Said it was just buying the commissions and they should be reported by seller. I seem to recall something in the past about this but it seems that pertained to an agent retiring and continuing to receive commissions from the insurance company. I think a 8594 needs to be prepared allocating the assets between tangible and intangible. Any comments or references?

[SFA]

When a business is sold, we sort it out using Form 8594. Not sure of the details in your situation, but the 1099-Misc Box 7 approach doesn't appear to fit the situation, unless the previous owner is continuing to provide some type of ongoing service such as consulting?

Even so, if the agency is sold, refer to Form 8594 to determine what assets, tangible and intangible have been transferred to the new owners.

and oh yes, good luck and have fun!

[Randall]

My thoughts too SFA. No, seller is not staying on as a consultant. Buyer's wife is a CPA working for P&G's tax department. Talk about name dropping credentials. Said she researched, mentioned a State Farm case. But I think that case had to do with an agent retiring and continuing to receive payments from State Farm. Ruled SE income. I don't think that fits my situation.

[SFA]

Great. She has credentials. So do we. Trust what you know. This should be straight forward. Sometimes the answer is obvious: Form 8594. Why ignore that and look for some "case."

The question becomes: What is their motive to avoid Form 8594?

Perhaps it is to the buyers advantage to classify the payments as "box 7"?

[Randall]

Definitely buyers' advantage. But I can't help that.

[jainen]

>>Client sold insurance agency.... Said it was just buying the commissions and they should be reported by seller<<

There seems to be some disagreement on this important point, so find out what the contract actually says. I'm not much impressed with the credentials because taxation for a major corporation is just a tad bit different. Still, she's probably right--and residuals are almost certainly SE income.

[SFA]

Yes it is just a tad bit different.

I'm not much impressed with the credentials because taxation for a major corporation is just a tad bit different.

[Randall]

Jainen, the contract reads Asset Purchase Agreement, includes the standard language, even has a list of tangible assets included (office furn, equip, etc). One larger payment received in Dec, another in Jan 2013, 42 monthly payments (the first received in Dec 2012). Promissory note also included. I think the 8594 is necessary and that the buyer is stuck with some intangibles to be amortized. Contract also states that a 8594 shall be prepared. Says consultation of buyer for a period stated shall be compensated at $25/hr above and beyond the purchase price previously stated.

Buyer's wife admitted she hasn't read the contract and seemed annoyed that husband did this without her seeing the contract.

[Randall]

And yes, residuals are SE income. But the residuals are now going to the buyer, not the seller. And I think that's what they're attempting to do, transfer the SE obligation to the seller.