Agency termination compensation treated as income where monthly payments created a recurring stream for nominated individuals.

Termination of a chief agency may ordinarily produce capital compensation where it destroys the profit-making apparatus, and consideration for a restrictive covenant against carrying on life assurance business would likewise ordinarily be capital. Here, however, the payments were structured as monthly sums to nominated individuals, including a stranger, for varying periods and in one case for life, rather than as a fixed capital payment to the company followed by distribution. The arrangement showed a recurring income stream created for selected nominees, and the payments were not referable to any direct surrender of rights by the nominees themselves. On that basis, the receipts were treated as income receipts, not capital receipts.

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Issues: Whether the monthly payments received by the assessee under the agreement for termination of the chief agency were capital receipts or income receipts.

Analysis: The termination of the chief agency destroyed the profit-making apparatus of the principal company and the compensation paid to the chief agents for that loss was capital in character. The agreement also contained a restrictive covenant against carrying on life assurance business, and consideration for such restraint would ordinarily be capital. But the payments received by the assessee were not paid to the company as a fixed capital sum and then merely distributed; they were stipulated as monthly payments to nominated individuals, including a stranger, for varying periods and for life in one case. The arrangement showed that the company was using the compensation to provide recurring income for selected nominees, and the payments were not referable to any direct surrender of rights by the nominees themselves.

Conclusion: The payments received by the assessee were income receipts and not capital receipts.

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