Charles Trantina was an independent insurance agent employed by State Farm Insurance Co. In 1978 he incorporated his business as Trantina Insurance Agency Inc. The corporation executed a corporation agency agreement with State Farm that replaced Trantina’s individual agent agreement. In 1996 Trantina notified State Farm he was retiring and the corporation, therefore, was entitled to termination payments; in 1997 the corporation’s assets were liquidated and Trantina received the right to the termination payments. On his 1997 and 1998 tax returns, he reported the termination payments as ordinary income. Later, he filed amended returns for those two years that reclassified the income as capital gains, saying the payments were from the sale of the agency back to State Farm. The IRS refunded the amount requested.
In 2003 Trantina filed an amended return for 1999 again reclassifying the termination payments as capital gains from the sale of his agency. When the IRS rejected his refund claim, he filed suit in district court.
Result. For the IRS. The court first had to decide whether it had jurisdiction over the case. Because the case introduced new issues, the IRS argued, the court could not hear it. The court agreed: It determined the taxpayer should have notified the IRS of all the grounds for a refund on the original claim for refund. Therefore, the court would consider only the initial argument, that the payments were received for a capital asset, contained in the amended return. Thus, to ensure a court will consider all of the relevant issues, taxpayers must carefully identify all reasons for a requested refund.
The court rejected Trantina’s one remaining issue, concluding that he did not own a capital asset and, therefore, there could be no sale or exchange. Previous courts have held that an insurance agency’s books and records belong to the insurance company, not the agency.
Trantina argued that the agreement itself was the capital asset, but the district court disagreed. It said the agreement could not be a capital asset because it did not contain assets or provide rights over the assets or the actions of another party. Even if it were to consider the agreement a capital asset, the court went on, Trantina would not be entitled to a refund because his receipt of payments pursuant to a contract did not constitute a sale; therefore, he was not entitled to receive capital gains.
Taxpayers must own an identifiable asset that was disposed of in a sale or exchange if they want to report a capital gain. In addition, they must list all the reasons for filing an amended return on the refund claim if they want the opportunity for a court to consider those reasons.
Charles E. Trantina v. United States, 2005 US Dist. Lexis 12487 (DC Ariz.).
Prepared by Edward J. Schnee, CPA, PhD, Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.