Rev. Rul. 54-312

Advice is requested concerning the circumstances under which a life insurance salesman qualifies as a `full-time life insurance salesman' and, therefore, becomes an `employee' within the meaning of that term as defined in section 1426(d) of the Federal Insurance Contributions Act (subchapter A, chapter 9, Internal Revenue Code), as amended by the Social Security Act Amendments of 1950. (This applies only to services performed on or after January 1, 1951.) Advice also is requested relative to a proper determination of `wages' paid to a `full-time life insurance salesman' for purposes of computing the taxes imposed by the Federal Insurance Contributions Act.

The N Life Insurance Company engaged the services of A, a life insurance salesman, to solicit applications for life insurance, annuities, and accident and health insurance. A performs his services pursuant to the terms of a written agreement designated `Agents Contract.' The contract provides, among other things, that A shall, on a full-time basis and within a specified territory, solicit applications for contracts of insurance for the N Life Insurance Company exclusively, under such policy forms as the company may direct; that A shall be free to exercise his own judgment as to the persons from whom he will solicit applications for insurance as well as the time and place of solicitation; and that A shall collect the initial premium for each sale of insurance consummated by him. The contract further provides that the company may from time to time prescribe rules and regulations respecting the conduct of the business covered by the contract, which rules and regulations shall be observed by A. These rules and regulations may not, however, interfere with A's freedom of action in his solicitation of applications for insurance.

As compensation for the services here under consideration the contract provides that A shall receive certain commissions for each sale of insurance consummated by him; that a portion of the total commission attributable to each sales of insurance by A for the company shall be paid to him at the time the sale is consummated and the remainder shall be paid as and when the policyholder pays his periodic premiums; that both the initial commissions and the deferred or renewal commissions are to be paid in accordance with schedules set forth in the contract; and that the deferred or renewal commissions specified therein shall be payable to A on contracts of insurance sold by him for a period of x years, provided the policyholders continue to pay the periodic premium. The contract further provides that, if the contract between the parties is terminated, the company will continue to pay the deferred or renewal commissions in accordance with the provisions of the contract.

The arrangements between the N Life Insurance Company and A contemplated (1) that A would defray all expenses incurred by him in the performance of his duties and functions under the contract; (2) that all or substantially all the services to which the contract relates would be performed personally by A; (3) that A would not be required to make a substantial investment in facilities for use in connection with the performance of his services (other than in facilities for transportation); (4) that A's services would be part of a continuing relationship and not in the nature of a single transaction; (5) that the solicitation of applications for insurance pursuant to the terms of his contract would be A's entire or principal business activity; and (6) that A would be a `full-time life insurance salesman.'

Effective with respect to services performed after 1950, section 1426(d) of the Federal Insurance Contributions Act is amended by the Social Security Act Amendments of 1950 to read, in part, as follows:

EMPLOYEE.-The term `employee' means-

(1) any officer of a corporation; or

(2) any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee; or

(3) any individual (other than an individual who is an employee under paragraph (1) or (2) of this subsection) who performs services for remuneration for any person-

*

(B) as a full-time life insurance salesman;

* if the contract of service contemplates that substantially all of such services are to be performed personally by such individual; except that an individual shall not be included in the term `employee' under the provisions of this paragraph if such individual has a substantial investment in facilities used in connection with the performance of such services (other than in facilities for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed.

The initial question to be decided is whether A has such independence in his operations that, under the usual common law rules applicable in determining the employer-employee relationship, he should be classed as an independent contractor rather than an employee. Under the above circumstances, it is evident that the N Life Insurance Company does not exercise, or have the right to exercise, the degree of direction and control over the services performed by A that is prescribed by the applicable laws and regulations as necessary to establish the relationship of employer and employee under such common law rules.

A `full-time life insurance salesman' for the purposes of the Federal Insurance Contributions Act, as amended by the Social Security Act Amendments of 1950, is an individual (other than an employee under the usual common law rules) whose entire or principal business activity is devoted to the solicitation of life insurance or annuity contracts (or the solicitation of such contracts and accident and health contracts) primarily for one life insurance company.

The entire or principal business activity of a life insurance salesman is deemed to be devoted to the solicitation of life insurance or annuity contracts primarily for one life insurance company when, pursuant to the terms and conditions of his arrangement with the life insurance company or its general agent, it is mutually agreed or clearly contemplated by the parties that the salesman's entire or principal business activity is the solicitation of applications for life insurance or annuity contracts, or the solicitation of applications for such contracts and accident and health contracts for the life insurance company in accordance with the provisions of the salesman's contract of service.

A `full-time life insurance salesman' is an employee of a life insurance company or its general agent within the meaning of section 1426(d) of the Federal Insurance Contributions Act, as amended by the Social Security Act Amendments of 1950, if (a) his contract of service contemplates that substantially all of his services after December 31, 1950, are to be performed personally by him; (b) he has no substantial investment in the facilities used in connection with the performance of his services (other than investment in facilities for transportation); and (c) his services are part of a continuing relationship and not in the nature of a single transaction.

From the facts presented, it is apparent that A has been engaged by the N Life Insurance Company to solicit applications for insurance on a full-time basis and under circumstances which warrant a conclusion that he is an `employee' of the N Life Insurance Company within the meaning of that term as defined in section 1426(d)(3)(B) of the Federal Insurance Contributions Act.

With respect to the question concerning the proper determination of the wages paid by an employer to a full-time life insurance salesman in his employ, it may be stated as a general rule that initial commissions paid by or on behalf of the employer of a `full-time life insurance salesman' as compensation, or part compensation, for the consummation after December 31, 1950, of sales of life insurance contracts, annuity contracts, or accident and health insurance contracts are `wages' as and when paid. Generally, deferred or renewal commissions are deemed to be compensation for the services performed at the time of the consummation of the sales of the contracts of insurance to which they are attributable. Thus, renewal or deferred commissions attributable to the sale of life insurance, annuities, or accident and health insurance by a full-time life insurance salesman after December 31, 1950 , are `wages' subject to the taxes imposed under the Federal Insurance Contributions Act when paid. However, renewal commissions received by a salesman after December 31, 1950, which are attributable to policies sold by him prior to January 1, 1951, when he was not an employee, statutory or otherwise, do not constitute wages subject to the taxes imposed by the Federal Insurance Contributions Act, but are to be included in determining net earnings from self-employment within the meaning of section 481(a) of the Self-Employment Contributions Act (subchapter E, chapter 1, Internal Revenue Code). (Cf. I.T. 4071, C.B. 1952-1, 148.)