James Alex and Betty Jean Alex v. Commissioner of Internal Revenue

Mr. Alex, a life insurance agent, noticed that by selling a large amount of insurance on behalf of his company he could receive in commissions, office allowances, and bonuses an amount greater than the insureds’ first-year premiums. To build his volume, he “sold” insurance in 1972 in violation of California law by reimbursing some insureds’ premium payments and by paying other insureds’ premiums himself. The Tax Court held that Alex could not deduct or exclude from his gross income the amounts he paid to and on behalf of the insureds. 70 T.C. 322 (1978) (8-7 decision), overruling Schiffman v. Commissioner, 47 T.C. 537 (1967). We affirm.

In Max Sobel Wholesale Liquors v. Commissioner, 630 F.2d 670 (9th Cir. 1980), we held that under the doctrine of Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), a seller’s payment of cash or extra merchandise to a customer as an added consideration for a sale is a price adjustment, an exclusion from gross income; that I.R.C. § 162(c)(2) disallows potential deductions which are based on illegal payments, but does not disallow exclusions; and that tax regulations are invalid to the extent they indicate otherwise. Alex concedes that because…