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Old 11-06-2007, 11:39 AM
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Transfer of insurance "Book" of business

Agent owns 100% of sub-s "A" and wishes to transfer his "Book" of business to 100% owned sub-s "B". Transfer of the book means that B would be able to receive substantial future commissions on renewals, etc. The agent would be required to sign new contracts with all insurance providers at the same time, and any commission rights would transfer to B at that time. Questions: 1. Would the transfer of the book be a taxable event subject to ordinary or capital gain taxes?
2. If it is a taxable event, how would the transaction be valued?
3. Could the book be transferred for something as small as $1?



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Old 11-25-2007, 05:02 PM
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The Transfer of a Book of business is a Taxable Event!

Question: 1. Would the transfer of the book be a taxable event subject to ordinary or capital gain taxes?
The Transfer of the book of business would be a taxable event.

Question: 2. If it is a taxable event, how would the transaction be valued?
Now, the question that is even more important is whether or not the transaction is subject to Ordinary or Capital Gains Taxes! It would seem that based on your situation, the receivables from the book of business would be taxed at Ordinary rates, whereas any goodwill on the sale of business would be taxed at a Capital Gains tax rate.

Question: 3. Could the book be transferred for something as small as $1?
I don't think this method of valuing the business is going to somehow circumvent the ordinary income characterization of the receivables (commissions receivable) from the existing book of business. I stongly urge you to seek their professional advise so that you can provide the best options for your clients.

The IRS has tightened the reporting aspect of both parties involved in the sale of a business in an effort to stem abusive transactions that attempt to avoid paying the appropriate taxes (ie Taxpayers attempting to classify all sales proceeds as capital gain). So, I would be careful not to mischaracterize the transactions. On one hand, the seller might get respite from the higher taxes, but the buyer has to deduct the goodwill over a longer period of time!

Now there are some CPA's who specialise in sales of Book of Businesses, these firms basically are very familar with this unique industry and can price the book of business based on industry standards and best practices. Clearly, they would provide you with the best advise in terms of allocating the sales price among Ordinary and Goodwill components.

I would strongly urge you to seek advise from these professional firms specialising in this industry so that you can provide the best options and advise to your client.

Good Luck.

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