Ralph Furrer and Rosemarie Furrer v. Commissioner of Internal Revenue

In this case we review the finding of the Tax Court that the damages taxpayer received for breach of his agency contract with an insurance company are taxable as ordinary income and not as capital gain. We affirm.

Ralph Furrer was a special agent for Industrial Hospital Association (IHA). His contract with IHA gave him the exclusive right to recruit agents to sell IHA’s policies; he also developed new types of policies for IHA. He was paid entirely on a commission basis, computed as a percentage of gross premiums paid on policies. The agreement provided for termination without notice, but IHA was prohibited from terminating during any year in which net premiums exceeded a certain amount. Furrer maintained files containing the agency agreements between the IHA and the individual agents he recruited, renewal agreements, and correspondence about claim disputes.

In violation of its agreement, IHA terminated Furrer’s contract in 1968. In subsequent declaratory judgment and breach of contract actions, Oregon state courts found that the contract was wrongfully terminated and awarded Furrer damages of $213,-000.

The characterization of the damages awarded depends upon both the nature…