Payments to the former owner of an insurance brokerage business were not disguised purchase price payments, the U.S. Tax Court held Oct. 15 (H&M Inc. v.Commissioner, T.C., No. 16612-09, T.C. Memo. 2012-290, 10/15/12).  

The owner of H&M Inc., a small corporation, sold its insurance brokerage business to a bank, then went to work for the bank, which paid wages to H&M Inc. and interest payments to Harold Schmeets.

Holmes said both parties were “genuinely interested in creating an employment relationship and were not just massaging the paperwork for its tax consequences.”  There was virtually no discussion about the tax consequences of the transaction and the parties treated the transaction as an asset sale and employment relationship. 

The Court found that the payments Schmeets received under the employment and salary-deferment agreements were not disguised purchase-price payments to H & M. H & M is therefore not liable for the section 6662(a) penalty on this issue.