Brief for the Respondent in Opposition — Commissioner v. Guardian Agency, Inc.

Sete.

- INDEX

| Page

Opinions-below and jurisdiction 0... 2. 1

* Question: presbnted ee acissecccceccecceneccomerrciee 1

Statutes and regulations involved ...............--.--- a

III ioe eren eee olin 2

See IE SO oe | a)

Conclusion. .:..........-.-------- cae ionniadeaaiitelnaieaniane —- “aa

CITATIONS

Cases:

’ Advance Machinéry Exch. v. Conimission-.

C0, POG Fl . Bi OT ann cco sevceninmwesnnce 6

Alabama-Georgia Syrup Co. v. Commis-

sioner, 36 T.C. 747, reversed on another

~ issue’ ‘sub nom. Whitfield v. Commis-

- gtoner, 311 F. 2d 640 ...........................: -, 1

~ Alinco: Life. Insurance Co. v. United

States, STB F.2d SOG 5... cieccicisce. cS scenes | =

Biddle v. Commissioner, 302 U.S. 573. md ie

* Burnet v. Harmel, 287 U.S. 103 -.......-...... ou oP

Campbell County State Bank, Inc. of Her-

- reid, S.D. v: eat aac, 311 F. 2d.

Seeds ectackintediaanehllertiisteneaduataagams 13

_. Central Cuba Sugar Co. v. Commissioner, .

a Lf Fone 6

Comstock v. Group of Investors, 335 Ua. ;

I ea a a a + i

Corliss v. Bowers, 281 US. ee on 11

Crowley v. Commissioner, 34 T.C. 333....: 13

First Security Bank v. United States, 213.

F’. Supp. 362, affirmed, 334 F. 2d 120... 13

ETT TE PETER a AEF

*

Paps eH OO,

‘

YLT TIGR LIF preamp ant nq 7 lie i “or e var

en

Il

Cases—Continued a Page

First State Bank v. United States, de-

cided June 25, 1962 (62-2 U.S.T.C.,

SE SHED citosiesictnencitunscensesnitengenpsnnapepatiiiions 13

Gaddy Motor Co., Inc. v. Commissioner, :

decided October 31, 1958 (27 T.C.M.

SIIED ‘sccineastsitcscebecubiestatdeeinaiciiiaaaslladacataaasiioniiel 13

\ Gregory v. Helvering, 293 U.S. 466 -........ 14

Grenada Industries, Inc. vy. Commissioner,

‘17 T.C. 281, affirmed, 202 F. 2d 873,

certiorari denied, 346 U.S. 819..............

Hall vy. Commissioner; 294 F.2d 82.........

Jaeger Motor Car Co. v.. Commissioner,

284 F. 2d 127, certiorari denied, 365

EA EE LN 13

Kimbrell v. Commissioner, 371 F, 2d 897.. = 11

Lilly, Eli, and-Co. v. United States, 372 —

as

Br: SEE WE itch seisrebicaliecigetetihariocinendibiiagnleienisnins 6

Lucas v. Earl, 281 U.S. SEE . ll»

_Lyeth v. Hoey, 005 UA. 108..................... 9

~ - Moke Epstein, Ine. v. Commissioner, 29 a

| ge ER TR TRE oe: 13

Moline Properties, Inc. v. Commissioner, ‘ee

eI cecercorsnninfevetignniicnbastonenmncvore 14

Morgan v. Commissioner, 309 US. 78 ...... 9

Murphy, Simow J., Co. v. Commissioner, |

££ ay) f |e ae 6

National Carbide Corp. v. Commissioner,

ern ; 14

National Securities Corp. v. Commissioner,

es Re I iwieesictcinaniennvescitenivcnnetnenvniie 10.

Nichols Loan Corp. of Terre Haute v. .

Commissioner, 321 F. 2d 905, revers-

SE SE ERIS EEE tnciecovtapsscessdnsaceenbsesnane 13

Oil Base, Inc. v. Commissioner, 362 F, 2d

212, certiorari denied, _ U. S. 928..... 6

0M a tee tae

Ill

Cases—Continued .

Poe.v. Seaborn, 282 U.S. 101......... beatae

Rooney v. United States, 305 F. 2d 681...

Rudolph v. United States, 370 U.S. 269...

Shunk, L. E., Latex Products, Inc. v.

‘Commissioner, 18 T.C. 940 ........ caaacaaies

Spicer Theatre, Inc. v. Commissioner, 346

ls. Se 7 WEE sahsivsisenisaceacetencseciba aiatanauaatilbonetsen

Teschner v. Commissioner, 38 T.C. 1003...

Waits, Ray, Motors v. United States, 145

F, Supp. I ss cxadsisobbictinieebelaianntonstin tices de

Statutes:

Internal Revenue Code of 1954:

13

Sec, 485 (26 U.S.C, 482) ...... 2, 5, 6, 7, 8, 9,

' 10, 11, 12, 13, 14

Sec. 802(a) (26 U.S.C. 802(a)) .....

Sec, 804 (26 U.S.C. 804) ...................

Sec. 809 (26 U.S.C. 809) ...................

Sec. 815 (26 U.S.C. 815) ...................

5 Burns Indiana Statutes Annotated, Sec.

BPE sschiiaicchedsien:tipcileiptelceiciiideaeiatied Me esas

Life. Insurance Company Tax Act of

" + AGG, © GB, TO Stat, 96 asc cccnccecnnes

Miscellaneous:

H. Rep. No. 1098, 84th Cong., 1st Sess., p.

7 (1956-1 Cum. Bull. 954, 958) ...........

Rules of the Supreme Court of the United

PN + IRE SP nveccrosssscnbonipninithasnabternaides

S. Rep-No. 1571, 84th Cong., od Sess., p.

8 (1956-1 um. Bull. 967, 971-972) _.

_ Treasury Regulations on Income Tax, Sec.

1.482-1(b)(1) (26 C.F.R. 1 482-1 (b)

» CEFF cecesatcinnesagdeioensaubensaieiaiaain

ovr co Oo

Oo ane oe = oe reg tt oe ee See ee ew

. Serer g te pees

y

‘deed

fritins

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aac Fer Miata et aly Re Mat lit LE

Iu the Supreme Court of the United States -

OCTOBER TERM, 1969

No. 561

LOCAL FINANCE CORPORATION, ET AL., PETITIONERS

Vv. .

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION —

OPINIONS —- AND JURISDICTION

The opinions below ona ‘the basis for this .Court’s

jurisdiction are as set forth in the petition and in

the Commissioner’s protective petition in Commis-

sioner v. Guardian Agency, Inc. and Beneficial In-

surance Agency, No. 390, pending this Term.

QUESTION PRESEN TED

“=

Whether, in the particular circumstances of this

case, the Commissioner’s allocation to Local Finance

Corporation and its subsidiaries, pursuant to Section

482 of the Internal Revenue Code of 1954, of one-

.

mee

2 ,

half of the income from credit life insurance pre-

miums paid by their borrowers to corporations con-

trolled by their shareholders, was correctly sustained

by both courts ‘below as neither arbitrary nor un-

~ reasonable.

STATUTES AND REGULATIONS INVOLVED

The pertinent statutes and regulations are set

forth in the petition at pp. 3-5. |

eo \\ STATEMENT

This is a consolidated income tax case for the

years 1958 through 1962 involving Section 482 of the

Internal Revenue Code. Section’ 482 empowers the

Commissioner of Internal Revenue to allocate income

among business enterprises controlled by the same

interests “if he determines that such * * * alloca-

tion is necessary in order to prevent evasion of taxes

or clearly to reflect the income of any of such * * *

businesses.” Petitioners are a parent corporation and

its wholly-owned subsidiaries all of which operated

as finance companies in Indiana. Stockholders who

owned in excess of 70 percent of the stock of peti-

tioner Local Finance Corporation (the parent finance

‘company), owned 100 percent of Guardian Agency,

Inc. (“Guardian”), a general insurance broker. Ben-

eficial Insurance Agency, Inc. (“Beneficial”) is the

wholly-owned subsidiary of Guardian. (Pet. (No.

+ 890) App. A 8-9.)?

“Pet, (No. 390)” references are to the Commissioner’s

protective petition for certiorari in Commissioner v. Guardian

Agency, Inc. and Beneficial Insurance Agency, Inc., No. 390,

pending this Term.

3

In connection with the.loans made by petitioners,

_single premium credit life insurance was offered to

‘their borrowers. The insurance was sold by peti-

tioners’ employees who prepared the necessary papers.

Before 1954, the insurance was issued by an inde-

pendent life insurance company which retained (after

payment of death claims and expenses) 9.5 percent

of the premiums and paid Guardian a commission -

roughly equal to one-half of the premiums. Begin-

ning in January, 1954, the commissions were paid

to an officer of Guardian who assigned the commis-.

sion income to Guardian which, together with Bene- -

ficial and Local Finance, performed most of the ac-

counting duties incident to the sale of the insurance.

After adjustments for contingent commissions, Guar-

dian retained approximately 56 percent of the pre-

-miums. (Pet. (No. 390) App. A. 9-10).

After June 30, 1958, a new arrangement was de-

vised whereby Grand National Life Insurance Com-

pany (“Grand National”) was organized under the

laws of Arizona. Ninety-nine percent of the stock

-of Grand National was: owned | by shareholders of

Guardian. Grand National thereupon entered into a

_ reinsurance agreement with’ the independent insur-

ance company which had previously issued the credit

life insurance for borrowers from Local Finance.

This reinsurance agreement provided that Grand

National was to pay death claims out of the 90.5

percent of the premiums it was to receive; the inde-

pendent insurer was to receive the remaining 9. 5

percent of the premiums. Under the new arrange-.

‘ment, there was little or no change in the procedures

bi la i Me wi er 4

>

ALOT, LESLEY EO LE AON YE NEY ABE A ARR. PTE I SIO EE IIE NAT EER re SEEM RSME opine : oy

y a4

Ste eee Eomerans

a

4 *

followed in the sale of credit life insurance by the |

petitioner finance companies. Employees of Local

Finance and \its subsidiaries continued to sell the in-

surance and prepare the necessary papers, and em-

ployees of Guardian -anY Beneficial continued to

perform certain-of the aceounting duties incident to

the sale of the insurance. Grand National conducted

no ‘activity other than contracting for reinsurance

of the credit life insurance. It had no salaried em-

ployees other than an attorney who served as office

- manager for.$20 per month. Its. office consisted of -

space in a room in the law offices of its office man-

ager. As under the previous arrangement, the super-

vision and payment of all claims were handled by

the independent insurance company. - During the

period July 1, 1958, to December 31, 1962, Grand

National ret:ined about 58 percent of "the total pre-

miums after the payment of death claims and ex- «

penses. A substantial portion of the retained amounts —

were paid as dividends to its shareholders, who owned |

~in excess of 70 percent of the stock of petitioner fi-

nance companies. (Pet. (No. 390) App. A 10; App.

. C 36, 39.) ~

rs)

Acting under Section 482,.the Commissioner allo- _

cated one-half of the premium income to petitioner

and its subsidiaries for the period January 1, 1958,

to December 31, 1962, and determined deficiencies

accordingly. This allocation was premised on the

theory that this portion of the premiums constituted

compensation actually earned by petitioner finance

-ecompanies for selling and processing thé credit* life

insurance. (Pet. (No. 390) App. A 10-11.) For

protective purposes, the Commissioner alternatively

', asserted deficiencies against Guardian and Benefi-

cial by means of a similar allocation of premium

income, for the period July 1, 1958, to December 31,

1962 (Pet. (No. 390) App. C 40- 41),?

Both the Tax Court (Pet. (No. 390) App. C 20-

63) and the court of appeals (Pet. (No. 390) App.

A 7-18) upheld the Commissioner’s primary deter-

_Mination that .one-half of the premium income was

allocable to petitioner finance companies, Accord- .

ingly, they had no occasion to consider the Commis-

sioner’s alternative allocation to Guardian and Bene-

ficial.*

" ARGUMENT. oe

_The issue presented was correctly decided by both

- courts below. There is no conflict of decisions or any

other basis for further review by this Court. _

1. Section 482 of the 1954 Code provides that the

Commissioner may “allocate gross income” between

““two or more organizations, trades, or businesses

* * *

? No allocation to Guardian and Beneficial was made with

respect to the period January 1 to June 30, 1958, since those

corporations had already included in their i income the commis-

sions received during that period (Pet. (No. 390) App. C 40-

41).

petition for a writ of certiorari in Commissioner Vv. Guardian

owned or controlled directly or indirectly by -

8 The alternative allocation is the subject of the protective |

Agency, Inc. and Beneficial Agency, Inc., No. 390, pending a

this Term. If the instant petition for certiorari is denied, —

the Commissioner will seek to have his protective petition dis- -

missed pursuant to.Rule 60

6

the same interests,” “if he determines that such * * *

allocation is necessary in order to prevent evasion

of taxes or clearly to reflect the income of any such

organizations, trades, or businesses.” The purpose of

this provision is “to deny [taxpayers] the power to

shift income * * * among controlled corporations, and.

to place such corporations rather on a parity with un-

controlled concerns.” Central Cuba Sugar Co. v. |

Commissioner, 198 F. 2d 214, 216 (C.A. 2). In ap-

plying Section 482, the applicable standard is “that

of an uncontrolled taxpayer dealing at arm’s length

with another uncontrolled taxpayer.” Treasury Reg-

ulations Section 1.482-1(b)(1). (Pet. 4). -Accord-

ingly, the statute empowers the Commissioner to

examine transactions between controlled taxable en-

tities in order to determine whether they would. have

been consummated in arm’s length negotiations be-

tween strangers and to make an allocation when they

fail to meet that standard. Eli Lilly and Co. v.

United States, 372 F. 2d 990,.1000 (Ct. Cl.); Oil

Base, Inc. v. Commissioner, 362 F. 2d 212, 214 (C.A.

9), certiorari denied, 385 U.S. 928; Hall v. Com-'

missioner, 294 F. 2d 82 (C.A. 5); Simon J. Murphy

Co. v. Commissioner, 231 F; 2d 639 (C.A. 6).

- dence.” Advance Machinery Exch. v. Commissioner, |

Because the Commissioner has been given broad dis-_ -

cretion to: allocate income under Section 482, such a

determination “is essentially one of fact and * * *

must be affirmed if supported by. substantial evi-

196 F. 2d 1006, 1007-1008 (C.A. 2). Given the

broad power accorded the Commissioner under the —

statute, the courts have uniformly held that a Sec-

i

j

~~

7

tion 432 allocation should not be set: aside ‘teens

clearly shown. to be unreasonable, arbitrary and ca- _

pricious. Spicer Theatre, Inc. v. Commissioner, 346

F, 2d 704 (C.A. 6); Rooney v. United States, 305 -

F, 2d 681 (C.A. 9); Grenada Industries, Inc. v.

Commissioner, 17 T.C. 231, 255, affirmed, 202 F, 2d

873 (C.A. 5), certiorari denied, 346 U.S. 819. Fur-

ther review of the factual question: decided adversely

to petitioners by the two courts below consequently

_ is unwarranted. Comstock v. Group of Investors, 335

US. 211, 214; Rudolph v. United eae 370 US.

269, 271.

The evidence in this case amply supports the Tax

—Court’s conclusion and the court of appeals’ af-

firmance that, under. the circumstances, “the Com-

missioner’s allocation of only 50 percent of the net

premiums to the * * *.[petitioners was] reasonable”

(Pet. (No. 390) App. (A 13).* Common to the peri- -

ods before and after July 1, 1958, is the undisputed

fact that employees of the petitioners performed all

of the services incident to the sale of the insurance.

They wrote the policies, collected the premiums and

‘deposited ‘them in bank accounts of Guardian. and

Beneficial, made refunds, prepared the necessary

papers in the event of the death of an insured debtor,

and made weekly reports to Guardian and Beneficial,

which collated and transmitted information and pre-. —

* Because of the interlocking relationship among petitioners,

Guardian and Grand National, there is no doubt, and _.peti-

tioners do not contest the.fact, that these corporations were

controlled by the same interests within the en of Sec-

tion 482.

YLT Ee poeta

8 ee

miums to the independent insurer. Since it is com-

mon ,industry practice for life insurance companies

. to pay commissions to a lender which performs such

services, petitioners would ‘have received commission

income in any arm’s length arrangement.’ The

formal diversion of this commission income to Guar-

dian and Grand National, first by the assignment

and then by the reinsurance arrangement, scarcely.

can mask the fact that petitioners earned this in-

come, controlled its disposition, and continued to

benefit from it:through the interlocking shareholder

relationship of the various corporate entities.” Indeed,

the use of Section 482 in a so-called “captive insur-

~~. anee company” case like this one was specifically ap- .

proved by Congress in connection. with the Life. In-

surance Company Tax Act of 1955, c. 83, 70 Stat. 36,

Both of the Congressional Committees observed that

Section 482 provided the Commissioner with. “ample

regulative authority to deal with this problem.” S. Rep.

No. 1571, 84th. Cong., 2d Sess., . 8 (1956-1 Cum.

. Petitioners’ atiebtion (Pet. 15) that their income would

not have been any. greater if Guardyan and Grand National ~

were unrelated corporate entities dealing with them: at arm’s

length and that the Tax Court made no finding to the contrary

cannot stand analysis. The Tax Court specifically found that

a portion of the reinsurance premiums received by. Grand

National (Pet. (No..390) App. C 49) “in. reality~constituted

‘commission income which the finance ronipahien an earned

-and which they gratuitously iverted to [Grand] National.”

This finding was supported by the testimony’ of-an officer of -

the independent insurer who stated that (Pet. (No. 390)

App. C 49 n. 15) “one of the purposes [of the reinsurance

‘ arrangement] was to create a legal vehicle to enable us to

pay compensation }n connection with the procurement of the

insurance

|

. 9 | a

Bull. 967, 971- a Rep No, 1098, Sith Cone. ,

d Grand N coud: ®

8.4 percent of the eneiuieg (of which 8.4 f

percent was found to constitute adequate compensa- _—

tion for the reinsurance risk) for the subsequent

period, the Commissioner’s allocation of 50 percent

of the premiums to petitioners was in accord with

the substance of the transaction and was ee

_ reasonable.° eaaes

a Petitioners’ principal contention (Pet, 11-14)

is that because Indiana law appears to have precluded

them from —ee commission income from credit

life insurance,’ the Commissioner’s allocation under

Section 482 was unreasonable. It is firmly estab-

dished, however, that unless a federal-taxing statute

_ 1s dependent upon state law, federal criteria are to

be applied in determining tax consequenecs under

that statute. Burnet v. Harmel; 287 U.S. 103,.110;

Lyeth v. Hoey, 305 U.S. 188, 194; Morgan v. Com-

* Considerable tax savings were realized by having this

commission element of the net premiums reported as the

income of Grand National because it enjoyed the favorable

tax treatment granted insurance companies. See . Sections:

802(a), 804, 809, and 815, Internal Revenue Code of 1954.

The findings of the Tax Court indicate (Pet. (No. 390) App.

C 39) that Grand National’s effective tax rate on the gioss

premiums received during the years involved averaged ap-

pr oximately 20 percent.

7 Indiana law apparently forbids finance companies from

receiving any income other than interest from loans “(see 5

“Burns Indiana Statu Annotated, Sec. 18-3002), but there

sae been no judicial ihterpretation of this statute. -

4

e ; c

l , , =

10

missioner; 309 U.S. 78, 80; cf. Biddle v. Commis-

sioner, 302 U.S. 573, 578-579. The crucial question

under Section 482 has nothing whatever to do with

state law. . It is whether petitioners, Guardian, and

Grand National would have entered into the same

arrangements had they been uncontrolled corporatioris

dealing at arm’s length. Clearly, as both courts below

held (Pet. (No. 320) App. A 12-14, App. C 46-50),

petitioners wouldgjiot have allowed an .independent

. third party to in approximately 58 percent of

the premium income, as did Guardian and Grand

National. The only reason that such an arrangement

was countenanced by petitioners was because Guar-

dian and Grand National were commonly controlled

corporate entities. The fact that the arrangements

devised by petitioners might have satisfied the re-

quirements of Indiana law by circumventing the pro-

hibition against direct ipt by petitioners -of com-

mission ‘income does not prevent the Commissioner

from exercising his prerogative under Section 482

and allocating income to the corporate entities which

in fact earned it to reflect income clearly. Cf. Na-

tional Securities Corp. v, Commissioner, 137 F. 2d

600, 602 (CA. 3). ) |

. Contrary to petitioners’ suggestion (Pet. 13), there _

_ is no analogy between this case and Poe v.-Seaborn,

282 U.S. 101. First, Seaborn did not involve the

plenary power granted the Commissioner under Sec-

tion 482, Second,. the state laws applicable in the

two cases are wholly different, In Seaborn, Wash-

‘ington’s community property law provided that a

wife was the owner of one-half of her husband’s

ee ate \ il Pig 7

income; whether or not her efforts contributed to the

earning of that income. The Indiana statute upon

which petitioners rely did not, as the community

property law did in Seaborn, affirmatively vest the,

commission income in Guardian and Grand National.

' The latter received this income not as a matter of

law but only as a result of petitioners’ contractual

arrangements which diverted such income to them.”

Cf. Lucas v. Earl, 281 U.S. 111; Kimbrell v. Com-

missioner, 371 F. 2d 897, 902 (C.A. 5). The possi-

bility that petitioners may not have been able to as-

sert valid title to the income under state law should

_ not control the tax consequences of the transactions,

since “taxation is not so much concerned with the

refinements of title as it is with actual command over

the property taxed—the actual benefit for which the

tax is paid.” Corliss v. Bowers, 281 U.S. 376, 378.

Whatever, success the parties may have achieved in

satisfying the formal requirements of local law, the

commission element of the premiums was earned by

and was, in substance, under the control of petition-

*L. E. Shunk Latex Products, Inc. v. Commissioner, 18 T.C.

940 (Pet. 16-17), also.is distinguishable. In that case, the Tax

Court held that an allocation under the predecessor provisions

of Section 482 was improper because the price charged by the

taxpayer to a controlled buyer was fixed by O.P.A. limits.

Unlike the situation in Shunk, where the taxpayer charged its

controlled buyer the same price it would have charged an un-

related buyer, the courts below found on the facts of this

case that the arrangements made by petitioners with respect

to premium income would ‘not have been made with inde-

‘pendent third parties. In short, it was the fact that the O.P.A.

price in Shunk was the de jure arm’s length price that

rendered Section 4&2 inapplicable. -

12

ers because shareholders owning in excess of 70 per-

cent of the stock of Local Finance owned 99 and 100

percent of the stock of Grand National and Guard-

ian, respectively.’ ,

The significance of this common control is graphi-

cally underscored by the fact that substantial divi-

dends ($267,044) were paid by Grand National to its

shareholders (essentially the shareholders of Local

Finance) during the years involved (Pet. (No. 390)

App. C 39). While the interlocking relationship de-

vised might have been necessary and sufficient to pass

muster under the Indiana statute, the very fact of

common control of the corporate parties caused the

arrangements in question to be scrutinized under

Section 482—-the purpose of which is to insure that

transactiong among controlled businesses are treated

in accordance with their substance and not with their

- form. To permit Indiana law to dictate the outcome

of this case, as petitioners urge, would compel the

Commissioner to accord substantive tax reality to ar-

rangements which petitioners devised only to comply

with state law requirements based on policy consid- °

erations wholly different from those of Section 482.

Both courts below thus were. correct in refusing to

hold such state law considerations controlling.

° Petitioners claim (Pet. 21-22) that Section 482 is inap-

plicable. because they were in a position to earn commissions

and simply chose not to do so. The courts below specifically |

found, however, that petitioners did indeed earn the income

allocated to them by the Commissioner because their employees

sold and processed“the policies (Pet. (No. 390) App. A 14,

App. C 46-47).

13°

8. None of the authorities cited by petitioners

(Pet. 16-22) are in conflict with the decision below.

In many of those cases, an individual: corporate offi-

cer, rather than the corporation itself, was found to

have earned commission income.” In others, the

Commissioner’s. determination was not premised

upon'a Section 482 allocation." While both Nichols

Loan Corp. of Terre Hauté v. Commissioner, 321 F.

2d 905 (C.A. 7), reversing decision of June 22, 1962

(21 T.C.M.: 805), and Campbell County State Bank,

Inc. of Herreid, S.D. v. Commissioner, 311 F. 2d 874

(C.A. 8) (Pet. 20), involved similar sales of credit

life insurance; there was no finding in Nichols that

the controlled insurance company had not earned the

commissions and no reference to Section 482 in the

opinion of the Tax Court or that of the Seventh Cir-

‘cuit. Similarly, there was no finding in Campbell -

that the finance companies earned commission income

1” Moke Epstein, Inc. v. Commissioner, 29 T.C. 1005; Ray

‘Waits Motors v. United States, 145 F. Supp. 269 (E.D. 8.C.);

Gaddy Moter Go., Inc. v. Commissioner, decided October 31,

P 195827 F.C 815); Jaegar Motor Car Co. v. Commissioner,

284 Fwu2d 127 (C.A. 7), certiorari denied, 365 U.S. 860;

Crowley v. Commissioner, 34 T.C. 333; and Alabama-Georgia

Syrup Co. v. Commissioner, 36 T.C. 747, reversed on another

issue sub nom. Whitfield v. Commissioner, 311 F. 2d 640 (C.A.

5). (Pet. 20, 22.)

11 Teschner Vv. Commissioner, 38 T.C. 1003; Alinco Life

Insurance Co: v. United States, 373 F. 2d 336 (Ct. Cl.); .

First Security’ Bank v. United States, 213: F. Supp. 362

(Mont.), affirmed, 334 F. 2d 120. (C.A. 9); and First State

Bank v. United States (S.D.), decided June 25, 1962 (62-2

U.S.T.C., par. 9613). (Pet. 13, 20, 21.) , :

ae

- by performing the services of ‘selling and processing |

_ credit insurance.”

4. With respect to the administrative import-

ance of this case, it is significant that petitioners, in

their generalized assertion: (Pet. 18-19)’ that a vast

number of cases are pending in the courts concerning

allocations.of income among insurance companies, fi-

nance companies, and their shareholders, do not.haz-—

ard any statement as to how those allocatioris relate

to the decision below. Indeed, petitioners have pre-

sented an inflated and misleading list of pending

cases. By citing docket numbers instead of cases

(Pet. 24-36), petitioners show a pending “case” for:

each of the multiple parties for each taxable year.

The amounts alleged to be in issue are similarly ex-

aggerated since, by their own admission (Pet. 19), ©

petitioners’ figures include the alternative allocations

made by the Commissioner to protect the revenues in

the event that his primary allocation is not sustained.

Moreover, petitioners’ figures fail to reflect that the

deficiencies arising from the Commissioner’s .alloca-

tions of commission income to finance companies:

12 There is also no basis for petitioners’ contention (Pet.

19, n. 3, 4) that the decision below is in conflict with Moline

Properties, Inc. v. Commissioner, 319 U.S. 436; National

_ Carbide Corp. v. Commissioner, 336 U.S. 422; or Gregory V.

Helvering, 293 U.S. 465. We do not quarrel with the general

proposition that taxpayers are free to structure their busi-

ness affairs in order to minimize their tax-liability. But the

transactions at issue could have been arranged so that Grand

National’s and Guardian’s employees .performed sufficient

services to warrant payment of the commissions to those

entities. The fact that they did not do so’ provides ample

justification for the Commissioner’s Section 482 allocation.

15

would be offset. in part by reductions in the com-

mission income of “captive insurance companies.” In

any event, measurement of the“@dministrative im-

portance ends, as it begins, not with petitioners’ as-

sertion (Pet. 22) that this case raises “some of the

most difficult and fundamental issues in federal tax

law,” but rather with recognition that an essentially

factual question ‘is presented, Further review by this

Court consequently is unwarranted. :

sae ab “' i

i

;

CONCLUSION reer nere q

The seitida for a writ of certiorari. should be. |

. denied.

TENNER TIER PNY

‘

Respectfully submitted,

:

BDO RPT ees ene ONL R eye TI TN

. .

ERWIN N. GRISWOLD,

, Solicitor General. |

JOHNNIE M. WALTERS, mot ae

Assistant Attorney General. >

GILBERT E. ANDREWS,

STUART A. SMITH,

Attorneys.

NOVEMBER 1969.

WU. S. GOVERNMENT PRINTING OFFICE; 1969 367897 292