Rev. Rul. 59-103

Advice has been requested whether an insurance salesman performing services under the circumstances set forth herein qualifies as a `full-time life insurance salesman' as contemplated by section 3121(d)(3)(B) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954).

The M life insurance company engaged the salesman to sell insurance pursuant to two separate contracts. Under one contract, he is authorized to sell accident and health insurance for the company. The second contract authorizes him to sell life insurance. Under the second contract the salesman agrees not to write life insurance for any other company without M company's consent unless it is insurance which M company has declined. Both contracts provide that the salesman shall be free in his assigned territory to exercise his own judgment as to the persons from whom he will solicit applications for insurance and the time and place of solicitation, and that he is to be paid by commissions on the insurance sold by him under such contracts according to schedules contained therein. He is not required to perform his services for the company during regular working hours, to follow a definite routine in his work, or to produce a minimum quota of business. He is, however, expected to perform the services personally. The salesman does not maintain an office for the conduct of his insurance sales activities and does not perform similar services for others.

At the time the salesman entered into the contracts with the M company it was the intent of the parties that he devote his full business time to the sale of life and accident and health insurance for the company. The arrangements between the parties further contemplated that (1) the salesman would defray all expenses incurred by him in the performance of his duties and functions under the contracts; (2) he 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); and (3) his services would be part of a continuing relationship and not in the nature of a single transaction. The salesman spends approximately seventy-five percent of his time in soliciting accident and health insurance. For two of the past four years, his commissions on life insurance contracts sold amounted to less than ten percent of his annual income from the insurance business.

Section 3121(d) of the Federal Insurance Contributions Act reads, in part, as follows:

Employee.-For purposes of this chapter, 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)) 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 first question to be decided is whether the insurance salesman has such independence in his operations that, under the usual common law rules applicable in determining the employer-employee relationship, he should be classified as an independent contractor rather than an employee. From the information set forth above, it is evident that the M life insurance company neither exercises, nor has the right to exercise, the degree of direction and control over the services performed by the salesman necessary to establish the relationship of employer and employee under such common law rules. Accordingly, it is held that the salesman is not an employee of the M insurance company under section 3121(d)(2) of the Federal Insurance Contributions Act.

In Revenue Ruling 54-312, C.B. 1954-2, 327, it was concluded that an individual engaged by the N life insurance company to solicit applications for life insurance, annuities, and accident and health insurance, performed his services under circumstances which qualified him as a `full time life insurance salesman' and as an employee under section 1426(d)(3)(B), now section 3121(d)(3)(B) of the Federal Insurance Contributions Act. In that Revenue Ruling a `full-time life insurance salesman' is defined as 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 insurance contracts) primarily for one life insurance company.

In Senate Report No. 1669, 81st Cong., C.B. 1950-2, 302, at 347, with respect to full-time life insurance salesmen, it is stated that any individual who is not an employee under the usual common-law rules and whose entire or principal business activity is devoted to the solicitation of life insurance and annuity contracts primarily for one life-insurance company is deemed to be an employee of such company or of its general agent under paragraph (3) of the predecessor of section 3121(d). It is further stated therein that an individual who is engaged in the general insurance business under a contract or contracts of service which do not contemplate that the individual's principal business activity will be the solicitation of life insurance and annuity contracts for one company, or any individual who devotes only part time to the solicitation of life insurance or annuity contracts but is principally engaged in other endeavors, is not an employee within the scope of the cited section.

In administering the provisions of section 3121(d)(3)(B) supra , the Internal Revenue Service has taken this position that Congress intended to include as employees under such statutory test only those individuals engaged primarily in the sale of life insurance and annuity contracts and not individuals engaged primarily in the sale of accident and health insurance.

In order to clarify Revenue Ruling 54-312, supra , it should be pointed out that, while the published ruling did not specifically so state, the reference to accident and health insurance was intended to relate to the incidental sale of that type of insurance.

Under the agreements entered into between the M company and the salesman in the instant case, it was neither agreed nor contemplated that the salesman's entire or principal business activity would be the solicitation of life insurance or annuity contracts. Accordingly, it is held that the insurance salesman in question does not qualify as a full-time life insurance salesman within the meaning of section 3121(d)(3)(B) of the Federal Insurance Contributions Act. Hence, he is not a statutory employee under that section of the Act.

The salesman is engaged in a `trade or business' as a full-time agent of a life insurance company. The commissions (including deferred or renewal commissions) paid to him should be taken into consideration in computing `net earnings from self-employment' for purposes of the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A, Internal Revenue Code of 1954.)

Revenue Ruling 54-312, C.B. 1954-2, 327, clarified.