Appendix — Commissioner v. First Security Bank of Utah, NA

Supreme Court brief1972

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ed ne | 4 | . if : Supreme Court, U.S.

LL! ARDY. o FILED

a are ENDIX 4d. yy 26, |

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; — = [ERSTE CLERK oth

re :

the Supreme Court oi the ‘Gniter Stated

Ooronsr ‘Term, 1971 . ; 3 ~ .

No. 70-305

CoMMISSIONER OF INTERNAL ‘RevENvE, Petitioner

. : 6 Vv. .

r Bank or Uran, N.A., et al.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE TENTH CIRCUIT | a

PETITION FOR A WRIT OF CERTIORARI

FILED JUNE 18, 1971

CERTIORARI GRANTED OCTOBER 12, 1971 Seo:

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. the Supreme Court af the United States,

OcropER Tana, 1971"

No. 70-305

_ CoMMISSIONER ox INTERNAL REvENvE, Petitioner.

°. Firsr SEcuRITY. Bax OF. Uran, N.A., et al, st

™

_ ON WRIT OF CERTIORARI TO THE UNITED STATES

‘COURT OF. APPEALS FOR:THE TENTH CIRCUIT

ens

—*

Relevant Docket ntries in- Tax’ Court Docket N No, 11 1190. 63.

——Relevant Docket Entries in Tax Court Docket. No. 1216-63. .

‘Relévant. Docket Entries in the United States*Court of ‘Ap.

peas for the Tenth Cireels.... oof ew ale oe

Petition—Docket ‘No. 1190-63... ...

- Petition—-Docket ‘No. 1216-68... 00.0. .00 00. Teen

_ Answer—Docket No. 1190-63:......... Ap hear e Cae ae

- Answer—Docket No. 1216-63......°......%. Po aie

‘Stipulation of Facts. : 3

__ ‘Transcript of Proceeding ings: j = :

Excerpts from Opening Statemerits. put ire oa Wea te

Excerpts from Colloquy between Court and Counsel. .

J estimony OE eR AO cS esa ews wee xs

Yreatimony of George S. Eccles....... OLE hp Oe a

Testimony of Thomas F. Hawkes..s.................. =

Testimony of Phil J. Hermansen.................:...:

Testimony of Arthur Crooks Eddy. i Se eer eee

-Testimony of Clarence H. Tookey.:.../...............

Testimony of W. Larry -Harlan

Respondent’s Exhibits:

a's § 4 6 0 a0 oo 8 es 8 6 oe 6 09 € 8

AQ—Letter to Harlan from Hawkes.:....:..... at ie

-AR—Letter to Eecles from Harlan

Page -)

: see i

> 2 ‘ ‘ : :

ey Index Continued :

: : Page

ee AS—Letter t to Harlan from sive ae ee Pee eerie. |

a” .BE-37—Minutes of ‘Executive Conimittee Meeting... .. . 133

/ BV-45—Schedule of Commissions Paid. bee ticadey cas «0°

Petitioners’ Exhibits: a a

/ 53—Examiner’s Comment ...............0 000000000. 137

eae hc on OE, eee ee eee eee ee 139

i 56—Letter'to Harlan from Steffensen. .2.....0..... wee. 141:

i ee 58—Chart—Gross Premium Elements. a er eee 145 2S

59—Graph ......:. N ee ate ied FLW EEE Po oe oa 1471

WI no sci nce ncincsatewn deste vane Sie ves ses fee «|

61—Chart ee . ain

_ Bor vain shin Wein Ad) aes Pegeengs erste uataxss4 157

| 68—Organizational Chart | Pree oee e Sete cok n ae Phys 159.

*. Joint Exhibit: ~ - Be on

ee CH-51—Comparison of Stock Ovnerehi. la neveatecens 161 -

- Findings of fact and opinion of: Tax So eT aE o- 163°

=~ Decision of Tax Court—Docket No. 1190-98......00 0.00... 177

PY Decision of Tax CourtDocket No. 1191-63.....0.......... 178

-*\Deeision of Tax Court—Docket No. 1216-68......... elated 178

Notice of Appeal—Docket,No. 1190-63:.............. 00000. 179

Notieé of Appeal—Docket No. 1191-63. /...... Leelee eiuie £180

Notice of Appeal—Docket’No. 1216-63./-... 00.0.2... 2 ” 181

. Opinionof Court of Appeals... 2.2.6.6. .0 yee 182 J

_ ndgmé Court of Appeals.......-. sss veke 198

—_ of Supreme Court Granting Certiorari. ne ebeSeaS eee 194 °

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go. ax Court or THE ‘Unstan States

DocxmrN No. “1190. 63

Fin ws-SCUMITY Bax OF Uran, N.A., Petitioner

3 77

2: se . " . A de

~ : Vv. ° . o bad

Commissioner or InTERNAL Revenve, :-Respondent_

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Date —

“Mar. 20, 1963

May 3/1968 |

8,9, 1967

Feb.8, 9, 1967 |

Mar. 3, 1967"

Dee. 27, 1967 _

; . 3 — t —

Retevant Docker EntTRrIigEs

“Filings and Proceedings

PETITION FILED: FEE PAID, Served

March 20, 1963 .

“ANSWER FILED by Respondent Served

May 6, 1963

TRIAL, at San Ficanoibeg, California by

Judge Fay . .

Pett. oral motion: to compel diction by

‘'resp. between alternative remedies—

_ DENIED. Petrs. motion to exclude issue

' of, in the alternative, to-shift burden of - ”"

proof—Filed, Denied and Served Feb. 9,

1967. (In-1190-63 & 1216-63 Only:). Petr,

~ motion to exclude issue or, in the alterna-.

| tive to shift burden of proof—Filed,

Denied and Served Feb. 9, 1967.::(In

1190-63, 1191-63 & 1216-63)

- STIPULATION Filed. STIPULATION

OF FACTS Filed. SECOND SUPPLE- .

~ MENTAL STIPULATION OF FACTS

filed.

ORDER, that , (Dits. asda, 119163 &

| 4216-63) are hereby consolidated for

purposes of trial, briefs and opinion. °

- MEMORANDUM FINDINGS OF FACT

AND OPINION filed Judge Fay.

- @ -

. » Date

_ Jan, 26, 1968:

_ May 7, 1969

"July 28,1969. NOTICE of appeal to U.S.C-A, 10th Cir,”

Nae. . eee _, filed by Petrs, Served tely 29, 1969 :

e :

‘ ° Pax Court OF THE Unrrep Srates _ eo Y ;

First Srouriry Bank o¥ Ipaxio, N.A,, Petitioner - '

Lk } 9

Filings. and Proceedings | —s

| MOTION by petr: to alter and amend ind-

. * . ings and: for proqneteratnn. DENIED: ae

March 19, 1968.

DECISION entered, Judge Fay. Setved

_. May 7, 1969

Docker No. 1216-63

-ComMMISSIONER oF INTERNAL Revenvuz, Respondent |.

Date |

May 2, 1963

Feb. 8, 9, 1967,

Feb. 8,9, 1967 -

Mar. 21; 1963

4 ~ - eo i:

Bo, ° A

-. RELEVANT Docket Ties .

Filings and Proceedings.

"PETITION FILED: FEE PAID Mar. 21,

1963; Served Mar. 21, 1963

_ ANSWER filed by: Resp. Served May 6 6, *.

1963.

_ -DENTED. Petrs. motion to exclude issue

or, in the alternative, to shift the. burden

* of proof—Filed, Denied and Served Feb. _

“9.196% (In 1190-63 & 1216-63 only). Petr.

~ a motion to exclude issue or, in the alterna-:

tive to shift the burden of proof—Filed;

, 63, 1191-63 & 1216-63).

TRIAL at San. ae ‘California by

Judge WO 1 a 7

Petr. oral motion to siiapal ‘election: by.

resp. between. alternative _remedies— :

Denied and Served Feb. 9, 1967. (In 1190-..

Fae De

Dee. 27, 1967 |

Jan. 26, 1968 |

"Oct. 8, 1969

» ~~. Mareh 3, oe

> May 7,1968

J uly 31,1969 ‘

Aug. 6, 1969

i 7 Filings and Proceedings | ;

of “STIPULATION FILED. STIPULATION :

OF FACTS filed. SECOND SUPPLE-

MENTAL STIPULATION OF * FACTS” ‘

_* filed. —

“ORDER; that (Dkts. -1190- 63, 1191-63 &

1216-63) are. hereby: consdlidated soe

purposes of trial, hriefs‘and opinidh.

AND. OPINION filed J udge Fay.

MOTION by Setr. to alter snd aménd find-

ing and for feconsideration. saison .

‘March 49, 1968." °°. ae

Se eget entered, Judge. Fay. Served ’

May 7, 169.

- NOTICE OF Appeal to U.8.C.A.,.10th Cir.

‘filed by Petr. Served Aug. A 1969,

“NOTICE of ‘Appeal to. US. C,A., 9th Cir.

filed by’ Petr. Served Aug. i 1969.

STIPULATION OF VENUE. ». U. S. C og 2

FAO Cir. filed: . ;

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ea) ers gs : o a

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MEMORANDUM FINDINGS OF FACT .:

Unrtep States Court or ‘APPEALS.

For toe: Tents Circuit

~ ." Docket Nos. 611/69 and 612/69

g - [Caption Omitted]

coed “Beavarr’ Docker Entries”

| Date 2. | Filings—Proceedings

1/8/69 Cause docketed ; leave granted to ‘cocker out

_. Zot time—WLW" .

| ss 11/4/69 “ Assigned to General Calendar - | -

a 12/15/69 ._ Appellant’s brief a \.

3/3/70 ‘Brisf of Appellee oN

4/14/70 Appellant? s ‘Reply brief ~

: 9/21/70 , . ‘Argued and submitted\-Breites ein, a y

Le Templar .

. 1/21/71 - Opinion, Breitensteip; Seth; Templar, Dist.

Judge ; Judgment: eversed.

2/12/71 | Mandate and original record on appeal : to

, Clerk:

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In Tae Tax Court or tHe Unrrep Srarss -

[Caption Omitted]

os oo ' Prrrrion

| Docket No, 1190-63

ee (Filed March 20, 1963) |

The aboys named petitioner hereby. petitions: for a re-. |

_ determination of the deficiency set forth. by the Commis-

sioner of Internal Revenue in his notice of deficiency (Form

“L.21A Ap:SLC:WBH-90D:BLG) dated December 21, 1962, .

_ and as a basis for its petition alleges as. follows:

1, Petitioner is a°national bank, with its principal office

at 79 South Main Street, Salt Laké City, Utah. The federal

income tax returns for the taxable years here involved were |

filed with the District Director for the Utah’ District at

_ Salt Lake City, Ut

2. The notice of de tency, a copy of with in attached

hereto-and marked Exhibit A, was mailed ta the petitioner

- on Décember 21, 1962.

4, The sidsietiatian of deffGiencies in. tax se .fortk“in

the. said notice of deficiency i is baned a the ollowing

' errors,

Ye * *.

Sy) The ‘Commissioner; erred “in Pane for the -

8. The. deficiencies, as detérmined by the Cosnminsionef,

‘are-in income taxes for the taxable years ending December

_ 31, 1954, to and incliding December 31, 1959, in the total —

5 aggregate amount of $497,953.34, all of which said amount |

“ -is in dispute. The following table shows the amount of .

- the deficiency determined for each.of the taxable years:

~ Ygar ' : z Deficiency . |

1955 ae ae 98,775.81

196-4286

~,, 1957 77,862.91

1958. 159,371.46 -

\ | 19599 .. ° - 109,166.60 ©

ae ee fe ' $497,953.34 +5 *

i © A

income by the\ First Security

‘Verified -

. . a.

taxable years 1955, 1 1955 6, 1957, 195 8 € and 1959 that the j in-

surance premiums and/or Srouaeean Income reported as *

Life Insurance Company of . —

— Texas, a corporation, or any part of it, sliould have’ been ~

7 reported by ‘petitioner and that therefore petitioner’s. tax-

able incomé and its tax liability for eaeh of the taxable

years’ 1955 to and ineluding 1959 should be increased as

~ set forth in thefollowing table: OE =

Veer. Oo. Taxable Tpeome | ax Liability

" 4955-°. $55,338.08 — $ 28,775.81

1956. ~+ 104,858.79 ss 54,526.56 |

“9987 -" 149,736.36: 8.78 862.91

“32958. . 306,483.59 — STL 46

1959 = ~~ 209,935. 7 BEA 109, 166.60 .

5, The facts upon which petitioner relies as a basis of .

this ¢ case are as 8 follows :

‘* 7 * .— *

(6). The said a notice completely fails to set forth

any of the factual or legal grounds upon which the Com-

missioner has based his determination that petitioner should

report as its own the indicated income of First Security.

Life Insurance. Company ‘of “Texas for, the taxable years :

1955 through 1959. The Conimissioney’ ~ determination is

therefore arbitrary and-capricious. Moreover, it is impos-

' sible for petitioner, without: indulging’ in ‘speculation; to

make responsive factual -allegations except to state. that

petitioner is not, was not and cannot be‘jn the insurance -

. - business, and does not and did not have any contract, or -

- agreement or understanding with any insurance. company

which entitled’ it in the taxable years involved to receive ©

any insurance premiums and/or commission income that.

was paid to the Fiyat Beourity. Life Insurance Company of

Texas.

Wherefore, patitinner: prays that this Court determine

that there is no deficiency in income tax for any of ‘the

taxable years nai, 1556, 1956, 1957, 1958 and 1959.

Respectfully submitted, -

_ C. Preston ALLEN | .

7 ' Atonzo W. Watson, JR. -

oo oe 2 Attorneys for. Petitioner -

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7 c/o Ray, ev. & Nebeker

. 7 .

Exhibit A.

U.S. Treasury Départment, Internal Revenue Service,

Office Of Regional Commissioner. rk Sea

Appellate Division 400 Tribune Building, Salt Lake City

11,Utah-. . | ae te a

In Reply, Refer to Form .L-21A4 Ap:SLC :WBH-90D :BLG

Certified Mail Dec2t 962 7 cee :

First Security Bank’of Utah, N. A. c/o Mr. C. Preston

Allen, c/o Ray, Quinney & Nebeker, 300 Deseret Building,

Salt Lake City 11, Utah. - Son ot tart

“Gentlemen: Taxable Year Ended Deficiency a

12-31-54 + . $ 68,250.00

12-31-55 . —, 28,775.81

12-31-56 . ' 54,526.56

| 12-31-57 ‘77,862.91

- ps —, 2 12-81-58 + *, 159,371.46 ©

= | wD. - 12-31-59. “ 109,166.60

a Ae 4g $497,953.34.

In accordance with the provisions of ‘existing internal

revenue laws, notice is given that the determinatién of your

income tax liability forthe above-noted taxable yeaz{s)

discloses a deficiency (or deficiencies) ‘in the amount(s) |

shown above. The.attached statement shows. the computa- .

. &

—-

tion of the deficiency or deficiencies. . are

If You: Agree to this determination, please sign the en- .. 8

» Closed agreement, Form 870, and return it promptly. to this

"Office. An addressed envelope-is enclosed for this purpose.

The signing and filing of this agreement will permit an. -

early assessment of the. defieiéncy or deficiencies and will - |

limit the accumulation of interest. = as ok oe eee 7

If You Dé Not Agree, and do not sign and return the. ~~ °

enclosed form, the deficiency or deficiencies will be assessed

for collection, as required by law, ‘upon ‘the expiration of” eS,

ninety days-from the date of.this letter, unless within that. ‘\ ~

time you contest this determination in the -Tax Court of.

the United States by filing a petition with that Court in

accordance with its riles, a copy of which may be obtained

. by writing to its Clerk, Box 70, Washington a cis aa

eae Very truly yours, ~~ hue

| .+ “Mortmer M. Capiin

=. | . - Commissioner. — ; o

| _, .. By Denver E. Watson | aie

_ Associate Chief, Appellate Division .

Enclosures: Statement; Agreement, Form 870; Ad-

dressed envelope. s* &-

Feat)

SS _ -+

_ 8 4 Statement r

“Ap: SLC:WBH

90-D :BL@

First Security Bank of Utah, N. A,, 0/0 Mr. C. Preston

. Allen, Ray, Quinney & Nebeker, 300 Deseret Building, Salt —

Lake City il, Utah. |

Tax Liability for the Taxable Years Ended December 31,

1954 to December 31, 1959, Inclusive. |

Year oe, ‘Defigioncy

. 1954 |. Income ‘Tax $ 68,250.00 »

1955 = ~~ «*Income Tax + © , 28,775.81

1956 - Income Tax — 54,526.56

(1957 . > Income Tax . 77,862.

1958 7 Income Tax - 159,371. 46

1959 = Tneome Tax 109,166. 60°

| . ~ $497,953.34.

In making this determination of your income-tax lability,

careful consideration has been given to your protests dated

October 1, 1959, and June 12, 1961, and to the statements

made at the -ggnferences | held on. September 26, 1962, and

prior dates. =

‘A copy of this letter and. secant has been mailed to .

your. representatives, S: J. Quinney,’ Paul H. Ray, ©.

~ Preston ;Allen, Lynn E. Baxter,»Gordon L. Barney, and

Alonzo W. Watson, Jr., c/o Ray, Quinney & Nebeker, 300

Deseret . Building, . Salt. ‘Lake City 11, Utah, in accordance ~

with the sauthority - ‘contained in: the’ " Power of ome

| executed by you, © .

In Tue Tax Court or THE Unitep States

[Caption Omitted]

. Petition | |

‘Docket No. 1216-63.

| ( Filed March 21, 1963) a

i | | The above named petitioner hereby petitions for a re: 7

ze determination. of. the deficiency set forth by the Commis- —

sioner of Internal Revenue in his notice of deficiency

_ (Form L-21A Ap:SLC :WBH-90D:BLG).dated December _

21, 1962, and as a basis for its: petition alleges as follows: —

1. Petitioner is a national bank, with its principal office

at 905 Idaho Street, Boise, Idaho. The federal income tax.

returns for the taxable years here involved were filed with -

| the District Director for the Idafo Districttat Boise, Idaho.

| “2. The notice of deficiency, a copy of which is attached :

. hereto and marked Exhibit A, was mailed to the petitioner

. on December_21, 1962,--_———_—__** . oo ge

_ 3. Phe deficiencies as determined by the Commissioner

are in income taxes for.the taxable years ending December

31,1954, 1955, 1957 and 1958, in the total aggregate amount

of $337,535.08, all of which said amount is in dispute. In

addition, the Commissioner on page 2:of the Statement

attached to his said notice of deficiency has détermined as

an adjustment to income for the taxable year 1959 that

petitioner had. insurance premium receipts. of $135,353.32,

and reduced the operating loss ‘of $1,143,485.81 reported by -

. petitioner on its.income tax return for 1959 by said amotnt

of $135,353.32. Petitioner contends. that thé -said .adjust-

ment to income for the taxable year 1959 is also erroneous

‘and that‘its operating loss for said year should be increased

by the said $135,353.32. Furthermore, on said page 2 of

said deficiency notice, the Commissioner: determined as an

adjustment to income for the taxable year 1956 that peti-

-tioner had insurance premium receipts of $79,751.75, which’

increased the amount of taxable income against Which ‘part _

of petitioner’s net: operating loss -deduction for 1959. was

applied. Petitioner contends that the said adjustment for -—

. the said ‘taxable year 1956 is also erroneous Te there- .

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| ’ fore it should have a larger net pberntine loss to apply

against its tax liability for the year 1957,. The following _

table shows the amount of the deficiency determined for

“euch of the taxable years:

Your Deficiensy

1954 =. $68,250.00.

1955 26,189.85

1957 160,392.56

e195 108,752.08

: an “$357,5: 35. 08 -

4, The determination of deficiencies: in tax set forth in

the said notice of deficiency. is dased upon the following . :

” errors: : a gs aan

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oY . > fa

e° | * * &

‘(b) ‘The Golumiasiohsr erred j in determining that for the —

~_ taxable years 1955, 1956, 1957, 1958 ‘and 1959 that the-in- —

surance premiums,and/or commission income reported as

income by First Security ife Insurance Company of Texas,.

-or any part of it, should have been reported by petitioner,

‘and that therefore petitioner’s ‘taxable income for each of

the taxable years 1955 to and including 1959 should be in-

creased as set forth in the following table:

,, Year Bee es Taxable Income

19557. .® $ 50,268.95 .

TORO 79,751.75

19597. ° > ° =, ~~ 98,842.14

1958 197,601.26

. 1959 a 135,353.32 ©

es ‘The facts upon which petitioner relies as a basis of .

this case ‘are as follows: . . :

(b) The said. deficiency. notice. sdmplately fails to set

pein any of the factual or legal grounds upon which the

- Commissioner has based his determination that, petitidner ©

should report as its own the indicated income of First

Security Life Insurance Company of Texas for the taxable

tion is therefore arbitrary and capricious. Moreover, it ‘is.

“ impossible for petitioner, without indulging in speculation, .

‘to make responsive factual allegations except to state that

petitioner. is not, was not and -cannot be in the insurance

bustness, sind does not and did not have any contract or

4ugreement or understanding with any insurance company

~ ” which entitled it in the tanahde pours involved to receive

_ any insurante premiutns and/or commission income that: .

was paid to the First Security Life Insurance Company of

} A eee ae eC MeN eto Sp ee ta

. Wherefore, petitioner prays that this Court determine A

_ 1. That there is. no deficiency in income+ or any of the:

‘taxable yéars 1954, 1955, 195 58; and ee

2. That petiti s operating loss for 1959 be increased .

in ount of $135,353.32 and its net aperating loss

~~ available for the taxable year 1957 be increased in the

amount of $215,105.07. = s a?

Verified = ad ae coe

a se . a2 Respectfully submitted =

| C. Preston ALLEN |

- Ss Atoxzo W. Warsox; Jk.

Attorneys for Peétitioner |

ho Ray, Quinney & Nebeker

| - Exhibit A | |

US. Treasury \Departmentt, Internal Revenue Service,

Office Of Regional Commissioner. ee a.

Appellate Division 400 Tribune Building, Salt Lake City —

11, Utah. - att, po eg ee) ee

_ In Reply Refer to Form L-21A Ap:SLC:WBH-90D:BLG. —

Certified Mail Dee 21 1962 "2° 3 Ape

___ First Security Bank of Idaho, N. A., c/o Mr. C. Preston ©

‘Allen, Ray, Quinney & N ebeker, 300 Deseret Building, Salt

‘Lake City, Utah. a | vo ha. 83

Genthemer: _ Taxable Year Ended Deficiency _

te 123154. ° §¢ 68,250.00 °

12-31-55 26,139.85

oo 49-81-57 * 160,392.56

+ + 1231-58" - . 102,752.67

} : 7 $357,535.08

In ‘accordante with the provisions of existing internal - |

9 revenue laws, notice is given that the determination of your °

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: * ,

° . ; Gs Se

. ;

Ap:SLC:WBH

- ineome tax liability ier the above- ited: taxable year(s)

eae a deficiency .(or deficiencies). in the amount(s)

= shown above... The attached statement shows the computa-

tion of the deficiency or deficiencies.

If You Agree to this determination; please sign the eri-

closed agreement, Form 870, and return it promptly to this -

_ Office... An. addressed envelope i is enclosed for this purpose.

_ The ‘signing and filing of this agreement. will permit an

early assessment of the deficiency or deficiencies and: ‘will

limit the accuniulation of interest.

If You Do Not Agree, and do not sign and return the -

enclosed form, the deficiency or deficiencies. will be assessed

for collection, as required by Jaw, upon the‘expiration of

~ ninety days from the date of this letter, unless within that _

' time you contest this determination in the Tax Court of the. .

- United States by filing a petition with that Court in accord-

ance with its rules, a copy of which may be obtained by’

aii to its Clerk, Box 70, Washington 4, D. C.

7 ' Very truly yours,

MT Ne a Mortimer M. Carin

Commissioner é:

— By Denver FE. Wiirson

Associate Chief, A ppellate Division

Enclosures : Statement ; Agreement, Form 810; _ Ad-

dressed envelope.

: %

° Lee

dibeaaat 7

ODBLG -. - ae 7 .

First Security Bank of Idaho, N. A., ¢/o Mr. C. ‘Preston

- Allen, Ray, Quinney & Nebeker, 300 Deseret Building, Salt

' Lake City 11, Utah. —

Tax Liability for the Taxable Years Ended December 31,

1954, December 31, = December 31, 1957, and December

31, 1958. : |

Year - fg : . Deficiensy

1954 . ~- ‘Income Tax '. $68,250.00

oe: - . kitome Tax | zp 26,139.85

1957. ~~. :~“Income Tax _ 860,392.56

BMRB 0s 2 Epcome Taxes <: 102,752.67 e

. Dotal oro: a) $357,535.08 .

In making this determination of your income tax liability, .

_ careful consideration has been given to your protest dated... -.

June 8, 1961; to |the stafements made at the conferences .__

' held on August 11, 1961, February 16, 1962, March 22,1962,

August 14, 1962, August 28, 1962, and September 26, 1962;

~+and to your claim for refund, Form 1139, filed on March

81960. 2 mo, a er

_. A copy of this letter and statement has-been mailed to —

your representatives, S.'°J.° Quinney, Paul H. Ray, C.-

Preston. Allen, Lynn BE, Baxter, Gordon L, Barney, and’ .° ..

- + Alonzo. W. Watson, Jr., c/o Ray, Quinney & Nebeker, 300,

Deseret Building, Salt- Lake City, Utah, in accordance with

_ the authority contained in the power of attorney executed |

' by you, mat a | ee

“* e ~~ +. *

5 (a) and (b) ‘of the petition.

os i Tax Court Or Tue’ Unrrep Stars gh ee

f : [Caption Omitted]. rt

3 ANSWER. ie?

Docket No. 1190-63

(Pilea May 2, 1963) |

° ‘The Bipusienk; in answer to the petition filed’ in’ the

’ pboveaatitie’ case, admits and. denies as follows: |

1; 2; and 3. Admits-the allegations of ‘paragraphs: 1, 4,

| and 3 of the petition. “

_ .,* (a) and (b). Denies’ the allegations of érror in sub-

og paragraphs 4 (a) and-b) p f the petition...

5 {a) and (b). Denies! the allegations in subparagraphs

' 6..Denies generally, each and avery allegation of the peti-- —

ge rely not. hereinbefore specifically admitted, qualified or.

- denied. 3 eae os

os , Wherefore, itis prayéd that the deficiency determined by re

the respondent bei in all ‘respects approved. _

— Of°Counsel: — aye -Cnaxn Chinn

Mewwwn L..Searns ., Chief Counsel’ ———— ..

Regional Cement re Internal Revenue Service,

hfe Attorney ees -/ Served May 6 1963 apie!

3 ipecrrsny “Revenue Service heaps Dende ie eee ®

ie ee

x >=

, . a 15 : : 3 ; < | Se .

a 3 sae 3 ae Wee ee

pees Ay Tax sti Or Tue Unrrep States

es prea Caption Omitted] ,

‘ above-entitled case, adniits and denies as follows: —

_ Commission@® are in. income taxes for the taxable years ,

_ ending December'31, ‘1954, 1955, 1957.:and 1958; in the total

.- years: =>

. - ANSWER.

See! No, 1216-63 ©

Oe ira this (Filed May » 1963). np haiaa

The Respondent, in answer to the petition filed in the .

2 and 2.,Admits the allegations of paragraphs 1 and 2:of /

the petition. ‘eee Ig tes

3.. Admits: that the deficienties as determined by ‘the -

_ aggregate amount of $357,535.08, all of which said amount |

_is in dispute ; that the Commissioner made adjustments to —

_petitioner’4xeported income as set forth in. the statutory

nptice of deficiency and that the following table shows the

. amount of the deficiency determined foreach: of the taxable:

Pes , -Year- ‘Deficiency He pte.

Oo. . 1964) ggg m2 8

ere. jee >See ne |

he MOST sig vo page

1958. .) 102,752.08

‘Denies the remaining allegations of’ paraggaph 3 of the .

‘

petition. +‘ - shee ae, . <a

_ 4a) and (b). Denies the allegations of error in subpara- —

"_. graphs 4 (a)gnd (b)-of the-petition. |

5 (a) and»{b). Denies the allegations. in subparagraphs’ < |

5 (a) and (b) of the petition... - bie ca.

_ 5. Denies generally each and évery allegation of the peti-

tion not hereinbefore spetifically admitted, qualifiedor —

oo CMU a ApS Ee ai,

Wherefore, it is prayed that the deficiency determined.

by the respondent be in all respects apyftoved. 1:

. fd ‘ . Internal Revenue Service |

“Counsel ; James :

Of Counsél: Melvin L. Sears, Regic ndf0

. Booher, Attorney, Internal Revenue,Service.”

6 . Pata * Be oi” ‘¢ pte , . ® .

* . 3 ” F ‘

: . ; OE see .e e tes i 7

. P . ‘

. «@e i

ps v ; - .

F sain’ ~ ; * s ». ; i * as ‘ = %

“yr . te : . e ‘

. ° ; ? / Py

es sia + Smeutation oF Faons ro

"-[Caplion Omitted) .

Iti is iii: stipuliited that, for the purposes of these

cases, the following statements may be-accepted as facts

and all exhibits referred to herein and attached hereto are ©

. incorporatdd in this stipulation and made a part hereof.

_ “provided, however, that:either party may. introduce other

' and further evidence not inconsistent with the facts herein

‘stipulated, and that either party may object to the rele-.

vancy or materiality of these statements or exhibits.

‘1, On December 21, 1962, .respondent thailed’ a notice of

deficiency to each of the petitioners. Correct copies of the’ |

deficiency notices mailed fo each of the petitioners are.

attached hereto'as Exhibit CC-48 and made a part hereof. |

2. The petitions filed by the respective petitioners herein = -

were timely filed according to law, and-these consolidated _

actions are in all respects properly before the Court.

3. Petitioners filed income tax returns with the District

Director of Internal Revenue Service, at Salt Lake oy,

Stan or Boise, Idaho, asfollows: . - . a

Petitioner -_ Years for Which ‘Filed with Dis-

iS, _...+ Returns Filed _ trict Director.of. -

: ~~ Internal Reve-.

‘ Fe des 7 nue at:

-. Kirst Security’ Bank =... |. -°

of Utah, N. A. 1954-1959 Salt Lake City

. First Security Bank a 4

ae Idako, N, A. - 1954-1958 Boise

First, Security Com- 7: a |

: pany iesah, 1956-1959 4 Salt Lake City

Bach petitioner’ 8 principal place of business, when its

: Petition was filed, was asfollows:' = -—..

- Petitioner -— Principal Place ‘of Business

Fisst Security Bank .

of Utah, N. A _ “Salt Lake City, Utah

pany... ‘Salt Lake City, Utah - 43°

First. Seourity Bank Meh gers Nhe ight *

2 oar emaain _ Boise, Idaho

wee ,

> MS

4. From 1954 theptgh ‘Gideon 1980, petitiinet were

wholly-owned subsidiaries of thé First Security Corpora-

_ tion, a publicly-owned bank holding company, During these -

years, First Security Corporation had approximately 1,044,-

963 shares of common voting stock outstanding and from |

2,000 to 3,000 shareholders residing # in various states and

foreign « countries.

5. Petitioner First Security ‘Bank of’ Viah, N. A., is a

-national bank incorporated in 1882. It is subject to super:

- vision, inspéction and control by the Board of Governors,

Federal Reserve System, the Federal Deposit Insurance

Corporation,. and: the . Comptroller of Currency, and is >

regularly examined by these agencies. During the years in ~

_ issue, this bank had numerous branghes, approximately.

_. 141,000 to 192,000 depositors, and approximately $217, 008,-

. 000 to $292,000,000 in deposits. |

6. Petitioner First Securit? Bank of Idaho i is a national

bank, incorporated as such in 1941, after operating since

1865 as a state bank. {It is subject to supervision, inspection”

_. -- and control: by the Board of Governors, Federal Reserve:

System, the Federal Deposit Insurance Corporation, and -

the Comptroller of Currency, and is regularly examined by.

these agencies.. During the years ip“issue, this bank had

numerous branchés, approximately 113,000 to 131,000. dée-

¥ positors, and approximately, $183,000,000 to. 206,000,000

in deposits. |

7. Petitioner First: Security Company i is a management

company organized under the laws of the state.of Utah i in.

1929. This corporation is subject to control, supervision

and inspection by the Board of. Governors of the Federal

Reserve System and regularly inspected by. this agency.

This company provides see 4 nee and related services .

* (e.g. accounting,’ auditing and’supervisory assistance) to

. Telated b peta of the First Security Gorpyre-

tion.”

§. From 1954 shvolaah: October, 1959, First’ Security

Corporation’s wholly-owned subsidiaries, in addition to

- petitioners, included : |

(a) The first Security Sate Senboaban: Sunday of Texas

(hereinafter called Security Life), a corporation organized

and licensed as an insurance company pursuant to the laws ©

of. Texas on or about June 15, 1954.. At incorporation,

we Socks Uh eh ee

sane

oy bo6 t ea ‘ =. pie - |

18 |

par value common stock and &. paid-in surplus of $12,500.

Ttg capital was incréased in.1956 to $100,000.

b). Ed D. Smith & Sons (hereinafter called Smith), &

Utah corporation. First Security Corporation acquired

Smith in 1948, During the years in issue Smith had ap-

' proximately twefity employees, sold life and casualty in-

surance, and reported for federal income tax purposes a

gtoss i income of. between $152,000 and $303,000. Its yearly:

premium volume was approximately $800,000. :

~ (ce) First Security Insurance“Agency, Inc. (hereinafter

called Agency, Inc,), an Idaho corporation. First Security

Corporation ‘acquired Agency, Inc. on or about: August 10,

1946. During the years in issué, this corporation sold in-

surance and had yearly premium volume of approximately

$175,000. =: « ‘

(a): First Security State Bank, a Utah state bank, with .

approximately 9,500 to 11,000 depositors and $9,000,000 in 7

deposits. First Security Corporation acquired this bank on -

- or about October 21, 1957. This bank is subject to super-

vision, inspection, and control by the Utah State Banking

| Department and Federal Deposit Insurance Corporation

and is regularly examined by these agencies.

(e) First Security Bank, Rock Springs, ‘Wyoming, an

Wyoming state bank with deposits of approximately. $3,-

- 000,000 to $5,000,000 and approximately Me angerets

First ‘Security Corporation acquired this bank in 1928.

This bank is subject to supervision, inspection and-control

by the Wyoming State Board of Banking Examiners and

.- Federal Deposit Insurance Corporation, and is regularly . :

| examined by these agencies.

-* .(f) Western Investment Corporation, an Idaho corpora-. .

tion holding various assets. The First Security Corpora=..

tion acquired this company in 1931. 7

(gy Security Savings and Loan Association, a; “Utah

- state savings and loan association, with approximately 3

$30,000,000 to $46,000,000 in deposits. The First Security —

'. Corporation organized this savings and loan association -in

1954. This association. is supervised by the Utah State

Banking - ‘Department and peared examined by. this

agency.

_. (h) First Security Savings’ and Ladin Association, an

Idaho state: savings and loan association, with approxi-

— — 000 to $10,500,000 i in deposits. . This associa-

ONG LP EO OO ORM hen fos HP

companies.

19 A *

‘tion is sevaevised! ‘and controlted by the Home 5 Loan E Bank

Board and the Idaho State Commission of Finance, and |

regularly examined-by these ageuicies.

9, From 1948 throtigh 1992, First Security. Banks liad

available for their customers group credit, life, health, and

accident insuratice. written; by. the: Credit Life Insurance

~ Company of Springfield,. Ohio. Smith was designated as

agent for Credit Life pursuant to’ an agency agreement

between Smith and Credit Lifg, and eommilsions were need

‘ by Credit Life during this time..

- 10. From January. 1, 1953, through April 1, 1954, First

Security Banks had available for, those borrowing frem

‘them group credit life and. group health and accident in-

surance written by the American Bankers Life “Insurance —

Company of Florida. Smith was designated as agent for

* Bankers Life pursvant to ar agency. agreement nobwend: .

- Smith and Bankers Life.

11.. Before 1953, Credit Life paid commissions pursuant

to its agency ‘agreement with Smith. During 1953 and early —

1954, the net premium, after deducting the commission, was — 7

remitted each month to Bankers Life.

12, Petitioner First Security Company reported the com-

missions and expense reimbursement paya able to Smith |

from Credit Life and Bankers Life as income on its federal

income tax returns. .

13. From January 1, 1955; to December 31,. 1959, mith

and Agericy, Inc. were designated as agents for ANICO-

with respect to excess line insurance (i.e., insurance pur-

chased: by _-bank ‘customers in excess of the coverage au-

thorized by the group policies identified below).

. 14. Prior to and during the years in suit, the First

Security Company, which provided a uniform systeni of © | :

accounting and performed similar services for the First

Security Banks and other subsidiaries of the First Security -_

Corporation, collected and transmitted life imsurance —

premiums and reports to ANICO and other imsurance

23. Attached hereto are. ‘copies of the following docu-

‘ments:

° ~

" Highibital 9.5.00 Ree 8 aA ed WER S

_ Av1 Income tax returns filed by First Security Bank of

Uter for the poate: 1954 i Pampa 1959 ;

pee:

- 1-6-53;

20 .

B-2 Income tax returns fled by the First Security Bank ;

of Idaho for the years 1954 through 1959 ; ;

C-3 Income tax returns filed by the Firs Security Com-

pany for the years 195 [5] through 1959;

D-4 Credit Life Fnsurance Company ‘policy No. 517

E-5 Credit Lifé Insurance Company . ‘aad No. 5t é1;

, F-6 Agency agreement 1472;

G7 Agency agreement 1472-A; |

H-8 Specimen of Credit Life Insurance Co. application

for credit life insurance ;

1-9 Bankers Life group life insurance application dated

ev 10. American Bankers Life Assurance group life policy |

~ No. 1002; |

* . K-11 Agency agreement between Smith and‘ “American

Bat&ers Life dated 8:30-52;

- * M-13 Bankers Life Insurance Agency Agreement (with

Kirk Landon) dated April 6, 1950;

N-14 American National group life paling No. 3405, and

riders;

0-15 American National group life policy No. 4.3406, and

riders;

P-16 Reinsurance Treaty effective April 1, 1954, with

Amendments effective April 1; 1956 and August i, 1955; : °

Q-17 Reinsurance Treaty No. 1 with Amendments effeo- |

tive Sept. 18, 1959,and January 1, 1960;~ 2

R-18 Reinsurance Treaty No. 2, effective Dec. 1, 1958,

with Amendments effective Sept. 18, 1959 and Jan. 1, 1960;

8-19 American National group policy No. 8-5038; .

- "20 Reinsurance T aty effective Feb. 1, 1955, together” .

_with Amendments #1 aid #2; and reinsurance tréaty

- executed on. April 22, 1957, and amendments dated Sept.

18, 1959;

U-21 American National group policy No. 1-3405,- to-

: gether with riders effective st 15, 1958, and January 1,

| V2 American National group policy No. 1-3406, to-.

- gether with riders; | . ai

'- "W-23 Reinsurance Treaty effective J anuary 1,1956;,.

. X-24 American National Insurance Co. group life ‘poli- . |

cies No. 1-1956-003-004 ; and No. 1-1956-003-003; ,

_ ¥-25 Reinsurance Treaty effective March 20, 1959, with, oo |

Amendment effective Sept. 1] 1959; eo »

Z-26 aeeais Agreements dated January 1, 1955 pees

American National and Agency, Inc. ;

- AA-27 Agent’s Agreement dated J anuary 1, 1955, “be-

tween American National and Smith;

AC-28 Sample of insurance certificate issued by Afneri-

- gam National on policy No. 1-1956-003 ; o

'- AD-29.Sample of American National Insurance Kis

cate issued with respect to Insured Savings: ‘Account ;

. AE-30 Sample of American. National Ins. Co.. ‘Excess

‘Coverage certificate; —

AF-31 Sample of American National emneuass Co. Life

& Disability certificate (Idaho); - :

AG-32 Sample of American National Ins. Co. Life &

Disability certificate (Utah); -

AH-33 Sample of American. National Ins.. Co. Excess .

Coverage-Lif e & Disability ;

. AW-36 Minutes of the Regular Meeting Boarg of. Direc-

tors, First Security Corp., 7/28/48 ;

_ BE-37 First page of Minutes of. Meeting of Executive | -

Committee First Security Corp.,4/1/54; - «

' _BG-39 Minutes of Meeting of Executive Committee,

- First Seeurity Corp., June 8, 1956; ~ Cas

BO-40- Annual statements, or- portions thereof, of First

Security Life Insurance Co. ‘of Texas; ,

BR-41 Income tax returns filed with the District Difector,

- Internal Reveaue Service, Dallas, Texas, by First Reourity |

- Life Ins. Co. of fexas;

BS-42 A schedule showing the officers ae decsies of

First Security Corporation and subsidiary corporations |

- during the years 1954 through 1959;

_ BT-43 Articles of. incorporation of Security Life, Smith

and Agency, Inc. .

‘+ 44 Schedule setting forth the pe rgentage of petitioner

bank customers purchasing ‘credit insurance | ‘during’ the

years in issue;

_ BV-45 Schedule showing amount of commissions paid on

sales of credit insurarice by petitioner banks before 1954,

and. reported(¢ income by the First-Security Company; .

-BW-46 Copies of custodial arrangements sear Secu-

. Yity Life and petitioner, banks ; .

. (BX-47 Cepy of Security Life’s 1957 state of California :

_ fragchise tax-return, bank statements, andi vena and

_ stationery ; ms mee:

: ey

Ff . . ;

7 oe att AD

CC-48 Copies of the . statutory riotions issued to each

petitioner;

_ OR-49 Copy of siverauét Bond Letter No. 406, dated

ory Maro 81,1948: pn cre .

CG-50 Copy of extract from: minutes of the meeting of.

_the Investment Committee of: the First . Security System |

‘ \of Banks, dated April.20, 1953;

BZ-51 Schedules setting forth the following information |

taken from the books and records of AN ICO and Security

Life concerning the sales of credit i insurance > pursuant to.

the group policiés listed above... |

(1) Premiums ceded, claims and claims’ expenses with )

respect to sales of credit life, accident and health, mortgage,

twin dollaf savings and borrow- by-check insurance, .

(2) Total'gross written premium, gross written premium

attributable to sales of credit insurance to customers of each

petitioner-bank; gross earned premium retention by Ameri-

_ can National net. premiums ceded; claims attributable to

insurance sold to customers of each ‘petitioner bank.

—(8))°

en! C. _ Preston Aan |

Counsel for Petitioners

| ‘Laster R. Urerz [MLS] |

aes > Chief Counsel —

ES -. Internal Revenue Service _

ee |

_ [*arther and more expanded financial data relative to |

| subjects scribed in (1) and i above. an a0) B] —

‘Filed February 8, 1967...”

Tax Covet oy THe Unrrep Srares

| (Caption Omitted] |

-— e °) Tiawscrrer or Procifbrxos

: . oe @ de o

APPEARANCES : :

[5] Atonzo W. Warsow, Jn., C. Preston ALLEN a ri

Srepuen H. Anpenson, Esgs., (Ray, Quinngy & Nepexzn),

appearing on behalf of P8titioners ; :

James Boones, Esg., Internal Revenue Service, appear-° .

ing-on behalt of Respondent.

* * - *- . *

[22] Orznine ScaTemEnt on Bawaur or Respoxvent |

| By Mr. Booner ot

* * . a os :

[26] Respondent’s position is that ‘hie: reinsurance pre-

miums paid by Amerie National to Security Life were .

excessive. They were more than the amount needed to —

' defray expected mortality costs or other expenses, attrib- —

uted toi the business, and allow a reasonable profit for

underwriting and carrying the insurance risks. ye oe

'- The excess part of the reinsurance premiums is a com-

mission or rebate earned by Petitioner banks whose lending -

business generated the sale of insurance, and who controlled:

_. the. pan of this insurance with American National. Ee

Ot AB

| [28] Petitioner beiks, as I understand it, contend that the :

- provisions of Title 12, USCA 92. prohibit the receipt of

any income from the sales of credit insurance, ‘In’ several

prior cases we realize that the courts have refused to’.

attribute income from the sales of credit or other forms of

insurance to a lending entity where a State law generally

prohibited the lending entity from acting as an insurance

abies ok

‘ . 1g io ages? es Ladi:

[Oonz0gey ‘BErwkex Court AND Counset] ©

” [48] ‘Tue Court: I don’t think there is any question about

the fact that thé corporation or individual. has a right to—

| ” -

‘they would be foolish siok to look at the tax consequences of

everything they do.

So I think that perhaps Petitioner would admit that

: -every action they take, they look to: see what the tax effect 7

. Of his corporation fe

| .

is. |

Mr. Booumn: They haven’t ene 80 thus far. +g

Mr. Anpgrson: We stipulate that it would be a mis-

feasance of a corporate officernot to be aware of tax effects

[49] Tue Court: J should. certainly think hi I know if

I were on the Boafd of Directors of a corporation, every

action we do I would have counsel in there to tell me what

the tax effect would be. -

[54] Tue Court: I am going to admit them in evidence,

but I don’t think you can. prove your case through these at

all. Iam not going to give them any weight.

' At the present time I don’t see that I can give any weight . i

\ to this kind of argument: However, they are received into

| | evidence, both of those letters, A-Q and A-R, A-Q ‘Baving

| mare for ideritification.

179) acne, The Petitioner calls Larry Harlan to

the stand. _

Ww. ‘Laney Histar

was called as a altaheall on behalf of the petitioners saat

having been first duly sworn, testified as follows: |

‘Tue Cierx: For the record, may we have your name?

*. re Wreness:. W. Larry Harlan, H-a-r-l-a-n.

-. "Bae Ciefx: Your address, please, sir?

‘Tae Wrreess: 9963 Rockbrook Drive, Dallas, ‘Wiens rae

bere Dainor sxannwaTion 55 |

| By Mr. Anperson : i gs ae 7 &

Q. What is your business, sit? |

' A. Insurance. —

2. What company are you associated with! as

A. American National peso y sete

a5 (

Q& Would you. review for the Court. the years that you

have been in the insurance business and generally ‘what you

did in the insurance business? ~

~ ” A. Talmost have to tell my age. __

| I started in the insurance business i in 1921 with the rate

j;- book at Salina, Kansas, — .

7 Two years later I ‘was State Aide of Midwest Life,

. Lincoln, Nebraska;

[80] In 1927, I beeame pupertntendeaé of agencies of the

National Insurance Company. Now they call this job’agency

vic®president. -

; -In- 1938, I took over the credit life of the division of the

Reserve Long Life Insurance Company .of Dallas, Texas.

On Qctober 1, 1949, the Reserve Long Life Insurance

Company sold this division to the American National In-

surance Company of Galveston, Texas, and: since that time”

I have been manager of the credit life division of the Amer-

ican N ational Insurance Company, and « our operation and

headquarters are at Dallas, Texas. -

Q. For 30 years now you have been. manager of the credit ~

. life division of American National; is that right? Is that

. ' . what you said justnow? | oy

1. _ A. Or the division before American National was with

3°. - Reserve Long Life. | —_

: Q. How bigts American National? \ | ars

oN A? American National Insurance Company\is I believe x.

. , the seventh largest stock life insurance Zompany .in the .

United States, with insurance in: force in excess ‘of $9 bil- ’-

lion, and with total assets in excess of one. billion’ three

hundred million, and: with -eapital and ‘surplus funds in nok

excess of $250 million. ;

The credit insuranceé€division of hindiivints Nati neat

_ of December 31st has $1,681 million of credit life i

(81]inforce. = AN

We operate in every ato with the exception of the \

- Btateof NewYork... ig: |

Q. That was my next question.

Does an operation lke this take considerable personnel.

' ornot? © fs

A. Yes, it’ does. - ‘And stiaybe: this is we

shouldn’t talk about. We have very definite ideas as to bie

credit insurance ‘should be operated i in the i interest.

Q@ TR" mba to cut you off.

26°

i to finish your qualifications out, are you a

member of any committees?

‘A. Yes, I have been a/member of the credit insurance

. committee of the Health Insurance Association of America

for a‘ynumber of years. i

. I am alsg a member of the. cfedit insurance committee

‘ of the American Investment Bankers of America, ..—.

‘ae formerly had other assignments whicli I now delegated

of our division of the company. ~

| Incidentally, he is co-chairman of a morbidity study right .

at the. present time/ with Yates of fhe Metropolitan, work-

. ing in epnjunction with the National Association of Insur- a

, ange Commissioners. _ . ;

. Q. Are you sw rvising your counsel!

. [82] &. Yes. ©) ce

Q: For the last 20 years ‘Baye you been on various com-

mittees working with the National Association of Instirance

- Commissioners? —

A. I started with the original meetings. of the NAIC,

‘studying proposals for the present so-called model credit “tp

life insurance bill saat is now in force in I*believe 38 states

and have been yery“active in helping getting this bill im-

plemented in all the ‘states of the United States, and as a

_ gesult, for the past’ 20 years I have been working in some ,

capacity with committees, working i in conjunction with vari-

ous segments of the National Association of Insurance

_ ' Commissioners.

- Q.Is there anything about he credit life insurance

3 bosiaies, any material element of it, that you haven t made

yourself familiar with in the last 30 years? ,

A. Credit life insurance business has’ grown very fast.

1: his oome «Jong ways in the last ton ty 12 years. ‘There :

are new problems coming up all the time. :

Q.. Are you generally acquainted with the various aspects

of credit life? I don’t mean to spend too. much of the

- Court’s time on your qualifications. I just want the Court

to be aware of your expertise in general. 103

; A. At times we do mistakes, were Honor, and I

have a. r that I in the state of California that

- [83] cost . rican National. Insurance Company money. -

. We research. this business very thorongily, but-we can- -

not be right all the time. ,

Q. During the years 1954 through 1959, was, inn sineie 3

* or directors - the Fics aici Corporation, the « ‘First’

he o.

A Security Bank of Utah, 1 the First Security isaee of white, ,

‘or the First Security Company, of those gréups, were any - ss

| o7

officers or directors of those corporations officers or direc-

tors of the American National Life. Insurance Company?

A. No, sir.* '

Q. Was this: company an indeperidenit, eompletély inde-

pendent and separate ‘om the Piret Security Corporation?

A. Yer, sir.

y "Ma, ‘Apunsow : Your Honor, to* save time, in the “i

. finance case to which we have. alluded previously at the

a pre-trial “eonference, the Government. stipulated to 4 num-. - .

ber-of genéral background facts, non-controversial I am — 2

sure, which ¥ we. ‘sage t really had time to stipalate together i

“ BOM “4

- So,. to give Mr. Booher“ a chance to cross-examine on

3 this, and yet to save time, I would like to-read what. | ee

consider to be necessary background information for the -

record, arid ask Mr. Harlan if this is bat and: then

_ ;Mr. Booher can. cross-examine if he so-desires.

Would that be acceptable to the Court? whew Ay" 3

Tue Court: Any objection? “ ss, I

_ [84] Mz. Boonznr: No.

a Tes Court: You may proceed, Mr. Anderson. ap

By Mz. ANDERSON :

Q. «Credit Life Insurance, tanebies as piirtinont hovain, te

means single premium term insurance on the life of a deb-

‘tor with his ereditor designated as first beneficiary ixi an

amount at least sufficient to’ ae his indebtedness in

case of the debtor’ death i

- “The growth 'o > credit life insuranée has ivalléled

the growth of t er credit, and in the United -

‘States most consumer credit is now covered by some form

- of credit life insurancg, -

' Tt ig estimated. that about 50 millign people i he

.. United States are covered by some form of eredit j

insurance, and the total face amount of such insurance now

_ ° 4n force isin excess of $49 billion. .

_ “Credit life insurance is sold ‘usually 4 as an incident to ,

__ more. prominent transaction, namely, a loan of money or

installment sale of tangible personal property. It provides ) .

a sure,°quick and °uncomplicated means of liquidating the

oe ag nese Dertanaietcach a mcersactpgsteen!< 901255

9: ke

thé deathof the borrower or purchaser, and to ie extent of —

the benefit paid-exti guishes the debt. 3 3

‘*Credit life insurance is written in two different ways.

_ One,s under an intividual insurance policy issued [85]

directly to the insured debtor or, two, under a group policy

and the individual insured debtor receives. a certificate of

insurance. x ona . :

“The insurance “involved in ae eases was written

. on the lives of debtors of the petitioner banks-for a term ~

swhich was co-extensive with the contractual term of the ,

- related indebtedness. .

q “‘Two plans of life insurance coverage are moet genér-

*e ally provided by credit life insurance, namely, one, decreas-

ing term coverage, also. called the planning Dalance insur-

‘Saha which the amount of the death benefit decreases

the amount of the debt under the applicable: install- ~

‘ment ent: and, two, level term coverage under which

the amoimt of the death benefit remains constant during

the policy -term, a type of coverage particularly suitable

. where the debt.is not payable i in regular quataliments-bat,

for example, in a lamp sum.

“For the years Irere involved and since J antiary—or

“April 1 of 1954, the biitk, the majority of the credit life

insurance issued to the deb of the First Security Banks .

was individual, single-premium: i i

ance under a.group ‘policy, issued t at a

. ~ That i 18, the debtors received certifica vhen reed [86]

'/ tookoutimsurance. .

“During this period of time, : ‘and since Ji anuary. 1954,

a certificate evidencing this insurance was issued to: each 7

of such debtors purchasing the policy. | ;

| ‘‘Under a normal credit life insurance. policy, the éredi-

*, .. tor is the priniary beneficiary to the extent of the unpaid’ -

: . balance of: the indebtedness at the time: of the inaured's

death. —

“Er because of prepaystent or some other reason the

amount-of the death payment payable under the policy

should etceed the balance due.on the aceount, the insured’s

= designated secondary beneficiary receives the excess. Such

provisions were applhi¢able to the insurance coverage b- .

tained by borrowers. ‘trom Petitioner. banks herein.

‘The preniqm- due for the entire term of the i ins

a ‘\

i , . . .

‘ae oe

‘ . . . . a - a

§2

in which*case the beneficiary creditor is the policy holder. -

ng the policy term coincidentally with the decrease «

“4

company on the | of the debtors of the Petitioner banks.

was paid-in a lump sum at the inception of the coverage.

‘‘In the event the loan was paid off in advance, in some

instances the insurance was terminated and a. refund of

' the premium allocable- to. the unexpired portion of. the ‘ald

. loan was made.’”

That is, Your Honor, whenever a loan ceased to be out--

standing and ‘there is still insurance coverage in force,

there would be a refund where appropriate, or if there was

‘a cancellation there would be a refund where appropriate.

[87] ‘‘If the loan was refinanced by anew loan and new

life insuranee was written on the new loan, the insurance

on the old loan was always terminated and the premium

allocable to the unexpired portion of the old one was re-

funded or crédited to the premium on the’ new insurance.

“During the. years heré involved and since April 1954,

the prémium charged by the American National Life In-

surance Company to the Petitioner hanks’ debtors was one ~

dollar. per $100 coverage per year- on. decreasing term.

insurance. This rate was the rate commonly charged in the

credit life industry in Utah, Idaho and in Texas, the states —

involved in this suit all during the years in suit.””

Is ‘what I have just readcorrect, sir? ~— . a

' A. Would you read me the first paragraph again?

- Q.. The very first paragraph! a ee

A. Yes. )

Q. ‘*Credit life insurance, ur as alae herein,

. means single premium term 4nsurance on the life of a deb-

tor with his creditor designated as first. beneficiary in an

amount at least sufficient ito Serhanae his indebtedness in

case of the debtor’ s dea

A. We had one type a coverage in the First Security

‘Banks, and this was this double-dollar savings that was on

monthly outstanding balance.

- Now, on all the.insurance written.c on debtors, it was [88]:

allsingle-premium. —

Q. With that change, would what I have just read be

_ .eorrect?. . : iA

A. Yes.

Q.°Tell the Court what led to your initial contacts with

the First Security Corporation, what those contacts were

and what came out of those contacts, as briefly as possible,

would you, please?

- * ab. it, all went back to the summer ot 1953, poeneing

°°

=: a midyear meeting of the ivden Finance Conférence

.. in New York City. | ‘

~~ And the chief topic on the floor of the neeiate was .

_ why: did CIT “organize Patriot Life Insurance Company

' of New York. , D

- Well, when CIT had organized Patriot Life I happened

a have been familiar when Occidental Life was organized _

in this state, and I had some friends who wrote some of

the first life insurance policies with OccidentalLife with the

cooperation of the managefs of the Bank of America.

So what Iam saying is that where any firm has lots of

debtors, doing” business with lots of people, these are very

good prospects for life insurance. —-¢

Of course, at that time the laws: were very favorable,

tax laws, to a life insurance company as well, but some of.

the main things are that if you are successful in building a

[89] life insurance company, you have that terrific pre-

mium income available for investment. -

‘So I came back home, and I talked to our management.

I said, ‘‘We have got to. make up our minds. Unless °

we can come up with some idea, we might as well forget |

all of our big credit life accounts because I think the hand-

writing is on the wall, they are going to start organizing

their own lifé insurance companies, eed

So, making use of our various departments, our legal

departments, our actuarial department, and what-not, we

. eame up with an idea and. the idea was this: -We went to

*- our big clients, and we said, ‘‘Look, if you want to develop. ~

a life insurance company @ve will make the brains. of -the

manpower of the American’ National. Insurance Company

available to you.to aid and assist _ to — this .com-

: pany. ~

‘And as a result, today we are operating the books and .

. advising and counseling with people that own in excess of

60 life insurance companies, and we added more new life

_ imsurance companies to this group last year than any

previous year since it started in December 1953.

Do I need to say:

Q. What happened when you went to First Security

_ Corporation with this idea?

A. I had been trying to do business with First Seourity

Corporation for several years, and wed were doing business -

[90] with othercompanies. —

~ One of the first banks in the West that came with us

was the Valley National Bank of Phoenix. They came with

us in December of 1963. Naturally we called. oh other

outstanding banks in the area, and the roe Security Cor-

-- poration was on the list.

I talked to Mr. Owens Thurman, wha.in turn took me

_ to Mr. George Eccles, and-I told Mr. Eccles why I thought it

- was to the interest of their organization, as to the ownership

of alife insurance company. -

Q. Tell the Court how long the corporation considered

-what you told them before they took any action.

A. I think it was: probably a six-month period. -

Q. Did,the spring of 1963—strike that. . ;

Was it from the spring of 1953 until April 1st of 19541

_ -A. No, I didn’t say the spring of 1953, I think probably |

the first time that I talked was either the anit of 1968 or:

after the first of January of 1954. |

Tue Court: Then what action was taken?

Tue Witness: They decided to organize the life insur-

ance company. They decided to make usé of the personne]

- of American National Insurance Company to operate the -

life insurance company for them. . .

(91) By Mr: ANDERSON: i

Q. Was a life. insurance company then foineat

A. Yes. ,

Q. Was that the First Life Insurance Company of Texas”

that we are talking about in this suit?

A. Yes,sir. «| « Tes

Q. Was that corporation submitted at its ineeption for

pproval to the insurance cornmissioners of the state of

exas, or reviewed by them at the end of that year?

A. Number. one, you have to get the approval of the

- Board of Insurance Commissioners before you get a charter - »

granted. After the company, it was activated, then—back

in those days, undér-the Texas laws, it had to be examined

at least once every two years, and it-was so examined.

_ Q. Has there been any criticism from these examina-.

- tions?

_ <A. To the best of my knowledge we have never had

criticism on the operation of any of the companies. Also, *

we operate for clients onthis program. -

'. Q. Do you file annual statements for the Security Like

of Texas with the Texas Insurance Commissioners?

. 74

A Yes,

Q. All during the years 1954 through 1959, was that

correct? a ,

A. Yes. ,

Q. Tell the Court if there is any - difference between

[92] having a life insurance company and having a life

‘insurance agency. |

A. Well-——

Q. Are they the same thing?

A, There is no comparison at all. A life insurance

company is taking a risk every time they issue an insurance

contract, or if they enter a reinsurance treaty from some

other company that has issued the risk. ~

An agency has to dbs, of course, licensed by the proper

State authorities,’ an it has contracts to go out and offer. ©

insurance for sale on a commission basis. And so the

income of the agency is totally based upon their ability to

sell insurance under the terms of the agency contract they

have with a life instirance campany, whereas a life insur- ©

ance company, its source of éarnings are from underwriting

profits, if they are smart in selecting risks.

And if they are smart in making—or investing profits.

Q. Is there any guarantee that a life i insurance company

is s going to make a big profit? '

orn Boousr: I object to that as being argumentative.

Me Anperson : I withdraw the question.

By Mr. AnpERSON: a

Q. What kind of profit would a. life i insurance norapeny

expect to make?

[93] Mr. Boonsr: If this is relevant to this case, I sug-

_ gest that it would be more specific so that answer would be

_ more relevant to a company of the type similar a the ones

that are in issue in this case. | _

By Mr. ANDERSON: . ar

Q. In 1954, what kind of profit would Security Life of

” Texas expect to make, big, little, or medium? .

- A. In the first year of its operation, it was problematical

‘whether it would make any money at all.

- Q. Was there‘ any way. of ae whether it would make

money or lose money? - ;

. A. No, sir.”

Q Gals the life i insurance ia issued by\ American

National Life Insurance Company during the years 1954

through 1959, these ‘group policies we are talking about

which are in evidence, was there any legal relationship

: between \American National Life Insurance. Company and

aa the policy! nolder?

a ’ - A. The polides. were written, and the policyholder was

a policyholder of American. National Insurance.

Q. Who would the policyholder. sook to?

A. American National.

28 — -Q. Was. there any obligation from Security Life to

' American National under the.insurance? ;

A. Security Life would have - to reimburse peenenne .

National for all claims paid.

[94] - Now, if by any chance Security Life did have the

finds; American National would still have to honor the

policy, the terms of the policy contract.

7 Q. If for some reason Security. Life of Texas Le to.

_ pay on claims submitted by. you, would you consider. suing

them to get those claims?

> A. I would sue them.

Q. Security Life of Texas, as shown by exhibits in evi-

3 dence, received 85 percent of the standard rate charged,

7° that is, these premiums, less cancellations, as its payment .

: for i insuring a hundred percent of the risk.

; Now,-in your expert opinion, did Security Life of Texas

j ; need that amount to operate on a sound basis? . ,

_A. I think I have, already ansyered your question, I

told you it would.

.Q: It would?

’ A. Yes. | \

.Q: About what margin\—

‘ A. May I say this. I have some companies that have

attempted to pay some commissions in the past 12 months,

‘and without: exception we have had to call upon them to _ |

contribute additional surplus. \.

. QQ. Very well: The Judge ‘has heard’ how big Arnecionn

National Life Insurance Company is. About what margin

of profit does your company operate on?

[95] A. Less than five percent. . .

Q. Did Security Life Insurance Company of iReae have

that volume of business to stay on a Sound basis?

A. No, they don’t have sufficient volume of: —

wee - \ : :

° .s . 7 : . . £

: ca

Q. Is there any. financial ‘similarity between the two .

companies, any comparison? .

A. There is,all the difference in the world between «a.

; small country grocery story and a big super market, ‘and

‘5 . you have got the same thing here, Your Honor.

| Q. During the years 1954 through 1959, was it the excep- .

tion or the rule to have reinsurance companies like Security |

Life operating in the financis world in the business of

finance? |

Mr. Boourr: Object. to that as being argumentative.

If we are to show the pradtices, what the practices were, we

should have more definite information in the form of

statistics,

Mr. Anperson: What the ‘Govevamanl is trying to do

here is’ put us into an unusual situation. I want to erase

| _ from the record that what we are doing is unusual, rare 2 or

ee strange.

os THE Court: He may answer.

By Mr. AnpDERSON: ; | ‘4

_ Q. Will you answer, sir? :

A. With the exception of the largest finance company

of the. United States, practically every other company of/ ~

any [96]. size owns a life j insurance company, and some fe

more than one life i insurance company; , such as Commercial

Credit.

° Q. Did the Credit lifé insurance business’ operate on a

volume basis, still being comparativ ely young in 19541

. A. Yes.

‘ Q. Were rate losses fixed and known at that time? *

A. Would you want me to enlarge upon that?’

Q. Yes, briefly. |

_ A, The credit’ insurance —— is a new usiness. It

wasn’t too many years ago.that ave had very few laws

regulating the credit insurance business, Your Honor.

It was unusual for a creditor. to buy insurance wholesale,

- and then charge as much as he could for it.

In fact, some of our great big banks ehg rge two and a

half times the cost. of the insurance, and these things: are

onrecord. —

There were cases when i in the event of refinance, sprepay-

ment, they never cancelled the insurance. There were.

‘eases—we had one case in Austin, Texas, where a little:

% e

affect the—— }

A, Certainly, your. loss ratios are much A oe

s a full-line

insurance company sold apolicies for 12 and a half cents.

apiece with the understanding there would never be a claim. |

Q. Summarize. .

A. This is what brought eatuae people workine with

_ the insurance commissioners, and this is where the medical

credit life bill came into. being, which is now being passed.

by 38 [97] states, and included other states this | year.

- Q. Were Joss ratios and rates fixed and known at that

time?

A. Loss ratios ten years ago were absolutely meaning- ;

less.

Q. Do mortality rates vary in the credit life business?

A. Definitely.

Q. There is: no ‘one set percentage. of mortality? ew oy.

A. I wish there was a book that. could give us an answer.

There isn’t.

Q. On the business that Kébevionn National was involved

in with the First Security Corporation, the Petitioner .

banks, and Security Life of Texas, during thesé years in.

suit, were there any health aan for the people

‘who got the insurance? .

“oA. No, sir. Even though the man. aaavie had cancer, if

the insurance was issued we made the claim when he died.

Q. Was there any waiting period before the insurance

went in force? -

A. None. We are trying to clear this up in the industry, . .

-Your Honor, right now:

Q. Would this situation. have, ad effect on. mortality

rates? ;

A. Certainly.

Q. Bad or good? | 2 ; ; 7

[98] <A. If-you write avery restrictive cover

Q. You didn’t understand. Does the situation of not

having health requirements, not having waiting periods,

Q. Could: Security Life have begun alon

direct writer on the capitalit had? -

A. Impossible.

Q. Was. At possible to use ‘isiuametiod. service, the man-

agerial service of American National, as to all of the

personnel, in order to operate on a sound ateee

_ A. Or some other.

ue Could Security Life have duplicated 3 services’ ‘offered |

. by Anisthiat National, that i is, staff its own office and get its

~ own actuaries, and for the sdme amount of money that-it

paid American;National to perform those same services!’

A. To attempt to staff their own company would have

cost more than 50 percent of the annual premium - shat was —

originated in the first year or two.

Tux Court: Then your answer wasnot AY,

. Tae Witness : Yes, no, Your Honor. |

By ANDERSON : - | .

Q. Well, my next question would have been how much

more would it have cost, and you have answered that..

Is it common and accepted for a direct writing [99]

- insurance company to start out as a reinsurance company .

like Security Life of Texas?

- A. There have been a number of cases, yes.. In fact,

we have some cases where companies that started out as _

- reinsurance companies’ are now writing life insurance

. direct.

Q. Have you had eonversations-with the: officers of First .

Security Corporation during the period of your first con-

- tact with them on, and have they had conversations with

you about the expansion of the First Security Life Insur- .

ance Company of Texas? :

. A. This was.talked about.in our first’ interview, and

it has been talked repeatedly ever since. |

Q. That-is the expansion into whole direct line writing?

A. Expansion of First Security Life into- all cgay of

". life and casualty insurance writing. »

'Q. Just acouple of more questions. |

During the years 1954 through. 1959, did ‘Sieetinnn

National have any’ contract of any sort, of any shape or |

nature, with the First eemnay, Company, the —

‘company? .

A. No. —. nf |

-Q. Did it have any sieashiies or agreement of any sort

jus with the employees of First Security Company? "

A. No, sir.” --

-Q Other than the group ‘poligies in this suit, did’ [100]

American National have any agency agreements or con- —

tracts, or any other agreements - of any ‘sort, with the

Petitioner banks in this case? - i

gk oe

- 87

.Q Or the employees of those banks? 7

A. No,sir. .

Q. Was there any legal connestion at all between Aiseat. he

can National Life ‘Insurance Company and. the First Secur-

“ity Ogiitpany, or. the First Security Banks of Utah and

Idaho,” other than the group policies on the banks? - |

A. No, sir.

Q. Can cua anyone form a company like First Secusity,

Life?

A. No, sir: :

Q. Would you, ‘as an asdcthabe of American Natidual,

; allow your management services to be purchased by Just

. anybody, forming your nationalcompany? = =e

_ A. We have said no to a number of people, coming to us_

* because they did not meet our requirements. =

Q. Héw.would you-say that American National’s man-

agement services compare with: other large life ‘under- :

writing companies?

- A, You shouldn’t ask me that, because I would be

prejudiced. ©

_ Q, Can we agree that you think they are srperior! |

- [101]. A. As long as our clients think they are, that is all

I am concerned with. ©

Q. The Government in this case is “suggesting that part —

of the money which Security Life got. in the years. 1954

through 1959 was some sort of commission. -

Do you know of any law or regulation or practice in

the i insurance business which dictates that a certain part of

_. the premium rate is or must be a commission? —

A. There is nosuch law that I knowof. - (

Q. Is’there any standard commission in the ‘insurance -

industry out of every premium rate?

A. No. |

-- 'Q. Do commissions and rates: vary throughout the in-

dustry? ‘an

A, Yes, sir.

Mr. Anverson: ‘That is all I have. You may cross-

- examine.

‘Tue Court: Cross-examination? 4 tre ptt ,

Mr. Boouer : No questions, Your Honor. . ee

. THE Ronse; Thank you very much, Mn. Hag.an. ¥ou

may - excused, and _ can — ae: sir. : |

| “(Witness excused.) ,

ee. * e

3 [116] Mp. Watson : Your Honor, Petitioners would like to

call as their next witness, Mr. George,S. Eccles.

- Guoncs S. Econzs ©

was called as a witness on behalf of the Potitioners, and,

having been first duly. sworn, testified as follows:

Tae Covrr: For the. record, sir, may we have your

namet a ee

Tue Wrrness: George § 8. Eccles, E-c-c-l-¢-8. 3

Tue Cuzrx: Your address, please? oe,

*, re Wrrwnzss: 1525 Penrose Drive, P-0-0-1<0-8-@, Salt

Lake City, Utah. |

Dmect BEAMINATION |,

2 By Mr. Watson : |

Q. Mr. Eccles, you are an officer and/or a director of

[117] each of the Petitioner fapanies in this case; is that

~ not correct? .

A. Tam. en oe

‘Q. And you were daring the: ears 1954 Dirvaal 1959 an

‘ officer and/or a director of each pf. these Petitioners ?, :

A. Yes. 2

_ Q. And are you ‘also an officer and director of the First :

\, Security Corporation? ~

os * A. Yes.

. Q. And were you an officer and a director of First Secur-

ity Corporation during the years 1954 through en ,

A Yes,sir. - . ° a

NS “Would you explain the relationship Selena the three

Petitioner corporations and the First Security reer

tidn? »

A. That’s the two Sonde mal the. hepting. Company 5 ‘is .-

that right? ss

Q. The two.banks and the management ccepeey!

A. First Security Corporation—— pfs ial

: Tae Covst: For the record, the management company .

4 is the First; Security .Company—or corporation?

Me Watson: No. eis management SemIpAny. is the First

' Security Company..-

“Tur Court: Bight.

Ne #8.

By’ ‘Ma. Warsow: | ty abba f

- Q. Shorten it this way, cad let me ask you : directly, [118]

" are the three Petitioner companies saben ee of the Bizet Feo

_ Security Corporation? ..

_ A. They are. aiaki: ones Zvi cgate rd

Tue Covar: That’s better. E Ae ; oo

” By Mz. Watson : i ines

Q Give a short description of the history of. the First

Security Corporation. ne

' +A. The Mirst Security Corporation’ is a bond holding

_ company qualified now under the banking Act of pe as a

registered bank. holding comipany. ;

~ he First Security Corporation was. organized in 1928

_* ,or ’29 and the banks mentioned are subsidiaries of the

' «First Security Corporation.

‘The First Security Company isa service el

rendering ‘service to the banks and: wholly owned subsi-

_ diary of the First Security: Corporation. .

The First Security Corporation 3 is a Delaware corpora- |

tion, —

It is not even qualified to ‘ais basiness 3 in ‘Utah because it |

is particularly a holding company of the stock of the two

banks and the Fst Security OPO, along with other

_ subsidiaries. - ies

Q. Give us a little history of the development of the

First. Security Corporation? _ |

A. The First Security Corporation is the oldest bank

[119] holding company. in existence, ‘recognized by the .

coniptroller of the. currency in. his. annual report to the |

Congress of 058. :

Att ime there was a group of banks owned by the

people that started First Security Corporation and ‘we p..-

them all into one corporate: entity, took stock,—the owners

of those banks took stock in the holding company.

‘We started out with about, oh, a very few banks and

‘then in ’33 you had a branch banking legislation passed i in =

Utah-and Idaho and the independent banks were thrown

together in one branch in each state. 2

: ‘That was. in 1933. Now, the subsidiaries, suntale of ae

_ bariks with 101 banking offices, extending from the Cana-

dian Senier Groat to the Arizona } eonier sShionghot hole

~plfe

F res

existence, ve

we ve ° é .

. . . .

. ‘ ” m : . / ' are .

ay eo\" ; . ; : . .. ‘ - 7

\ \ «. . . . - . Ne

.* \ : v . . . . . j o

4 . nan . =) . e e ® $

e ~~” 4 ‘ . e . .

i “ \ . . e-; e /

Se Da ‘ ,° \ . . ote ’ e /

‘ “ os ‘ / >. \. . -* : . . es : 7:

-\ 2 >» oo / .

e- + ° . Be eg ° /

a Re : ~~ > . . .

e —_ see ‘ ; sm ak . . :

| | 40 an i

Lay . : =

‘ \ ° ° tb. y ee es aie ’

\*. : . ‘ 7 , oy e /

and Idaho ‘and one independent bank i in Rock Springs,

SW roming.

Ay JX es. They had sav ings and loans, They had the

| ~~ Company, Kd. D, Smith,. which was, an insurance. agency; |

oot. having been the general. nee for Actin Casualty: Com- ;

~ joo

“pany for over 20 Years.

AL think. during: those years | we acquired. First Security

“audrenos ageney of Idaho in:conjunction with hoquirihg a:

- bank in Idaho. sometime during that period, *

» Q “Letme ask you this,

~-{120] © What was‘the attitude inside the corporationt

Was the eee: expanding. its operations all of

the timey'. 5. .

A. Very definitely.

LZ We organized aaron: that: “same foriéa a Security flaw. ~

at ‘ings. and Loan with Sys ce three in, Idaho and two in ;

Utah. |

We endeav ored to nequire other ty pes: sof financial opera-

. tions. eee:

We were desirous of hav ing—vf going into the life j insir-

ance business. -

- Well, we are: desiring of expending any way ‘we could :

under a central holding company that had sufficient. finan- “i

~-gial base.to go into all-types of the financing field.

+. What j js the management’ s strueture of First-Security -

—Corporationt How is it’ operated? Through what—— :

"A The First Security ; Sa eae the parent holding 7

direetors during its entire.

nia asananet directors. of industry and :

“company, aay from 25 to

- finanee.

They meet quarterly. The First’ Seoutity Cixpenition ?

through its Board of Directors is—has appointed an execu- .

tive committee with power to act between board meetings.

‘They act for the board and any legal actions taken by

’ the. executive committee is teported to the board at the

~ 121] quarterly meeting for board approval.

~The executive committee also meets in an informal capac- nd ;

\ ity oftener than they ‘do in the so-called legal capacity. »

-and then it is somewhat of a policy type board.

a ~The minutes are not—they don’t go ‘into the general— |

I mean, the soma sad are — memorandums i is. is all

- they are.

[7 :

. In these. early years from: 1954 through 1969, did the -

ee rst Seourity. Corporation. also have other ‘non-banking es

| _afiiliates t his >

Q. Has the - corporation ‘i attempted to obtain as

members of its board, outstanding men in business and

finance i in the ‘inter- -mountain areaf °°

A: Well,. not only the inter-mountain area, beenuse ine

influence, we feel, goes beyond the ‘inter-mountain area.

’ We participate in national company credit. lines and .

_. that and so we expand our board very much.

Today, for example, we have and have had the peleident —_

of Union Pacific; headquartered at,Omaha; the president of |

the Rio Grandé and Denver Railroad; we have the presi-

- dents of two of the largest lumber and plywood and paper = -

companies which includes the president of Potlash Forest,

one of .the largest ‘lumber and paper compaiies in the

country.

They have a huge mill in Lewiston, Idaho, but me head-

quarters are in San Francisco...

We have the head of the Boise OS, Se ‘That iB. one

of the national companies, one of the large ones in. lumber

and paper, the lumber and paper industry. —-

[122] Their headquarters. are Boise, Idaho. We have the

president of Utah Construction Company and his head- -

7 quarters are in San Francisco.

_° We have the. head of the Utah Copper encainaiict don’t : “

mean that. I mean the Utah Power and Light Company.

We did have the head. of the Utah Copper ee at that

. time.

‘ Q. During these years 1954 throngh 1989, you had simi-

larly representative men? —

4g Allof the time, ever since it started:

Q. Would you explain to the Court how your boards of

. . the two banks are constituted?

~~ A, The legal board of directors of the two banks is sail

up of the senior officers of the two banks, not overlapping,

: except i in my particular case. —

I happen to be on the board of the Idaho bank and the

_ board of the Utah bank.

We have senior officers of the’ banks ‘and the member

f the executive committee of the First Security Corpora-

| - tion on the Utah board.

' Then we have a board that we call an advisory. board

_ in the Utah picture. They consist of representatives citi-

zens and would act as the same as a Board of Directors of

any other bank, ‘but being a. branch system, yondon’t take _

‘a day or two of their time to go over alfthe matters in the .

branches of the four corners of oe

— 42

| [123] You do that legally under the National Bank Law..

That is, you do that through your official Board of Direc-

tors. But,. ato | Salt Lake and Ogden and the major parts

not only go to'this board of directors but go to this advisory.

board. M

Many@f those: advisory board members are also directors |

of the First Security Corporation.

Q. Does-a director of a national bank have any special

obligations or duties? |

A. I would think very definitely he does. It is set forth —

in the National Banking ‘Law... It is wey. detailed and you

have very grave responsibilities. © .

‘Q. Could you name some of these restrictions?

.A, Well, you are required to approve the loans that are

put on by your loan officers, identify them by number,

review them once a moth.

You are.required to have a member of your board as.

chairman of your trust committee or yodr trust department.

You are required to own, unpledged, just. a normal

amount of stock, but that i is one of the requirements Df fhe

law.

You are responsible for the soundness, the proper opera-

tion’ of the banking institution.::And if you violate’ any

provisions of the law,.of the bankinglaw, it sets forth very

grave penalties and not only that, but\it gives the right of °

‘the banking authorities to ask. for your removal. vw o*

[124] Q.-Mr. Keclgs, are you now on the a s'

advisory staff? |

A. Iam and have been since uk Saxson set it up.

Q. During your years asa bank-officer and bank presi-

dent, have you worked closely with. National Banking

Associations? |.

A. Very definitely.

T have held many positions with the American, Bankers

their economic research department. I have been a member

of the legislative committee.

- I have been a member of their economic educational

group.

I have. been a. iste of the. “Reserve City Bankers

Association which is an inner group mada up of the 200

‘largest banks, representatives from those banks. |

They happen.to be the senior officers. -In fact, I am the

oldest. member in years of service of that organization.

. ¢

Association, all through the years. I have been. head of ©

There are aligat: 350 members. I have chairmaned four

committees during the-period I have been i in there.

I have been in since 1926. I have been vice- -president. and .

i have been président of it. I have been chairman of the |

Credit Policy Committee and I have been chairman of—

and now am a member of their legislative committee.

Q. In connection with your barking interests, have you.

_ [125] also made studies in, different foreign countries?.

A. The year I was president of the Reserve City Bankers

Association, the president of American Bankers Assogia-

tion and I made a trip through South America, mecting

with the different bankers of those countries, studying the

- economic and the banking picture of the various South

Ameriéan countries. .

' The American Banking Association have conned for

11 years—I was one of the original members of this group.

_ and am still a member, what they call the A.B.A; Inter-

national Monetary Conference. | a

We mect in the states one year. We er" slecatt: one

year. We have the heads of the central banks of Europe. —

We have about 35 of the top leading banks in the United

‘States representative senior officers. And two or three

years’ agq I was general chairman of the conference in

Vienna, Austria. —_-

This year Iam chairing the ‘ieoond jay? s session of that

_particular‘meeting which will be held in California in April.

Q. Are you an officer and director of First Security Life

. Insurance Company? |

“A. Tam. .

Q. Were you an officer and director - of that company

during the years 1954 through 1959? :

.. &. Yess.

[126] Q. Did you participate in discussions leading to the

incorporation of First Security Lifet : |

A.Idid. | . .

Q.: Would you explain to the Court how—or what con-

siderations were involved in making the. decision to ns

the life.insurance company?

A. As I have said in my earlier. testimony, we were

anxious to expand the operations of the First Security

Corporation through .its subsidiaries.

We felt that'a life insurance company was a very bene-

ficial adjunct to our entire operation.

| We felt that a full line company was very beneficial. 1

“had had some experience w ith's so-callod baby life companios

‘in that T was one of the original stockholders and still am, .

and a director of the American Bankers Life Company of

Florida,

T could. see that in a‘ general life company, properly

“operated, it Was a very profitable type of operation and the

investment: in that company and the American: National at

a later date has proven that it is very profitable.

However, we just wanted to expand and give service of

all types, financial service, .

We have even tried to go into the small Joan. field. We.

have even tried to go into many other fypes of business,

Q.- Were there ever business considerations besides the

[127] life insurance, the full line direct w iting insurance

company business f

| A. Yes. We had a very active consumer éradit depart:

ment and we call it Time W ay. It is one of the largest. in

the inter-mountain area. We finance the purchase of nuto-.

mobiles, We finance under Title 1 FHA. .

We finance personal loans, all type of consumer ‘credit.

And along at that time it was anecessary to offer the

borrower a: protection. We call it Credit Life. He was >

“insured fer the amount that he was borrowing on a dimin-

. ishing basis as he paid back the loan, thé insurance would

a ‘erdown. °

- ~ However, if he died during the life of that loan, the loan

weal be paid off by the insurange that he was carrying.

Then in the mortgage field, along about ‘that same time,

and I guess it is because you got into long-term mortgages

under GI and FHA programs and so on, you wrote what

we call mortgage cancellation insurance. ;

‘Tt was a policy on the individual. It was a fixed amount.

of 10,000 in Utah and 5,060 in Idaho to start with because

that was the statelaw.. .

HoWever, as the matters was paid’ down to the amount —

of the insurance, then it became diminishing term i insurance '

from then on out.

Q. Let me interrupt youa minute. | |

Did you also take into consideration. such things as [128]

pe REE - ais

.. Mr Boonze: I silken he will be — the. itnans with

_ this type of questioning. | .

Tue ‘Cover: Yes.

*°

: 45:

Tun Witness: Well, I was going to continue——

Tux Court: Yes.

By Mr. Warsorr:

Q. Werddhere oth Sther considerations, ifany? |.

A. Very definitely. I was going to get to that.

‘As you build up your insurance company, the insurarice

company is not restricted on the type of investments which

itan make the accumulated assets. _It may go into stock

which a bank can’t do.

It can go into types of bonds which a bank can’t do. It

can handle mortgage servicing which our company did out.

of California, originated mortgage there and sold them to

Kastern investors and did the vervicing for them. over the

life of the mortgage.

You might say a bank is very redtricted: in what +t can.

invest in while a mortgage company is not nearly as

restricted.

Q. Mr. Eecles, in your opinion, would the First Security

dd haere have organized the life insurance company in:

954 if it then felt that the company. would not*develop into

; a fall line direct writing company? |

[129] <A.-Oh, wé thought right from the start that we

would develop into a full line company.

Q. Would you have organized it uriless you thought you

_ could have gone into a full line direct writing company?

A. Well, you wouldn’t have been so anxtous to start it, I~

know that. It is pretty hard to say—I ‘don’t think you

would, no, because it wouldn’t have given you the scope.

.. You couldn’t develop intoethe size that you had thought at

the time that you had started it. that you were going to be

. able to develop it into.

Q. Why is it that First Security Life Insurance Com-

pany has not become a full Hine direct writing company -

then?

A. Because of the bank holding company Act.

I can go back on that.

_ I have. been active on the bank holding company group

since we started in 1928 and all during the period of the

’30’s the late ’30’ 8, the *40’s, in which there was discus-

sions in Congress i in committees on proposed. bank holding

company legislation.

Nothing developed until thé banking Act of | 956. How:

ever, from ’50 on, every time the banking ney com-

mittee of the Hoon and the Senate would ‘meet, they

would bring up possible proposed legislation whith meant

separating non-banking. subsidiaries from sub- banking sub-

- sidiaries of the bank holding company,

- [1380] So, at that time we didn’t know what woul be the

eutcome of our non-banking subsidiari iés which included the

First Seeurity Life:

ow included the Saving and Loans. and so on.

. Were there other reasons, if any, why the life com-

re has iiot developed: into a full direct line insurance.

company? . ‘ ;

A. I don’t think ‘so. It couldnt, under the holding com-

. pany, apparently,’and I—by' '56 we knew we couldn’t. —

Q. There were no other reasons that inhibited this life

insurance company ft = es

“Mr. Boonkr: The witness answered the question. There:

were no other reasons that he knows of and this should:

terminate the matter.

Tobject. |

Tre Court: Have you Snichedy our answer?

Tre Wirnkss:I think Ihave.

Tue Covert: Next question, please: e

I haven't acted on your objection. Let me hea the ques-

tion rephrased or get into your next question, Mr. Watson.

By Mr. Watson: “Fae ._ °

Q. I asked him if- there were other reasons, if: ‘any, why

the plan to create a full direct line life insurance company

was not carried out ?. . . = -

A. May I answer that?

Tue Covrt: Yes. You can answer yes or no.

[131] Tue Wrrness: Yes.

Tue Covrt: Any objection? “* | -o 5

Mr. Boorer: I object ty the question. The withess pre-

viously stated he knew of ho other reasons and that ‘should

end the examination on this oint.

By. Mr. Watson: .

Q. Have you now had an n opportunity to think about it a

little more?

A. Yes.

Mr, Boousn:; : The Court hasn’t ruled. oe

v : F rs 3 . Z }

_ 47

Tun Courr: Tam going to overrule the objection and

realizing at the same time that the weight: that the Court

- would give to this next answer is judged 4 virtue of the.

way it is developed.

You may eG

happened to be sitting in a tax court and the reason is a -

tax reason. Our tax, returns were still open from 1990 on.. >.

The Wrrness: I don’t ee I dian think of it, i I

We couldn’t very well. merge with whole line lifeLeom-

- panies which would be your normal means of expanding a

- eredit life company into the whole life business because we

didn’t know our tax liability: Som

It would be hard to appraise.the company, 80 you could

arrive at aproper valuation.

We didn’t know whether we were going to be considered

~~ [182] as a life insurance company.

Tlreré were many questions being raised as to whether

. acredit life company is a life insurance company. I under- |

a stand that has ‘been. determined” in- some courts that they

are.

The whole thing is of suck a and that you didn’t know

from the bank holding company Act if-you-could do it. You

didn’t know from the tax picture whether he would arrive |

at a valuation, so those were the reasons-we sott of marked —

time with the First Security Life Insurance Company.

By Mr. Watson: > -. et am

Q. As a result of the bank holding company Act, was it

_ necessary for the First Security Corporation to ‘dispose

of the stock of the First Security Life Insurance Company?. -

Just yes or no?

Mr. Boouzr: This is calling toa conclusion of law on -

the. part of. the witness. The bank holding company Act

contains very ‘specific statutory language, concerning what

‘ subsidiary companies may be retained by a bank ne 2%

“company or must be spun off, so to speak.

Tue Court: The objection is sustained.

. I am not precluding you to arrive at it by virtue of

another. or different question.

By Mr. Watson :

Q. Did the First Security Corporation, in fact, dispose

of the stock of First Security Life Insurance Company?

-f

[133] A. Well, there was a separation. It didn’t go quite |

that way. That isn’t the way it was handled, if I could

explain how the split was made?

Tr Court: Yes. ~

By Mr. Watson :

Q. Go ahead and explain what happened. ”

A. The bank holding company Act: in 1956 gave us a

_ certain number of years to divest non-banking affiliates.

_ The Transamerican Corporation was the first one that_

had gone through that type of divestment.

And they had had. hearings before the Federal. Reserve .

Board which i is required by: the*bank holding Act.

And they were required to spin off Occidental Life along

with their other non- banking affiliates.

So our counsel and’I went back, met with the Federal

Reserve Board. They told’us there was two ways in which

- we could do this. One would be to spin off our banks and the ~

First Security Company which is the bank service company —

which is specified in the bank holding company Act is —

similar to a bank in being able to retain it, or we could

spin off in a.separate corporate entity the other-companies.

However, if we did that, then we would” have to go

through the complete hearing. , |

What we did, at the suggestion - ‘of the counsel for

Transamerica, our own counsel, after our discussion with _

the [134] Federal Reserve, we organized a new holding

~“eompany. We put the banking’ entities and the First

Security Company into the new holding company.

‘We’distributed that to thé stockholders and we retained

in the first.so-galled old First Security Corporation, all of

the other subsidiaries that we had.

Now, by splitting everything right down the line like that,

~ the Federal Reserve didn’t ask for a hearing. And had -

you had a hearing, you had-to have a hearing on every

subsidiary, not only the Fyrst Security Life, but on every

subsidiary.

_ And they had to certify to you a spin-off before you

_ could get: tax ruling which made the spin-off a tax free

_ divestment, so that is the way we—then the name of the

First Security Corporation was changed to First Security’

Investment Company and the new spin-off company. carried

the name First Security Corporation, owning. nothing but .

_ the banking entities and the First Security Company.

aes

oe : en a

Q. Then is your testimony that after—— 4

' Mr. Boousr: I will object to bse 8 summarization of

‘the witness’s testimony.

_ Tue Court: Sustained.

- By Mr. Watson :.

! Q. Does the First Biourliy’ Investment ‘Company now |

' . own all the stock of the First Security nate’ oe

[135} A. Yes.” -

Q: Has it owned all of that stock: since September of | ~

= toma : i, -

a Se — —

Q. Are you a member of the board of directors of the ‘

First Security Investment cage he ;

A. Iam.

Q. And have you ‘been since. the middle of 19591

A. Yes. , ee

Q. And since 1959, has theta ion: any expansion and

contractions in the types of investments held by First

Security Investment Company t. }

A. There has.

. Q.. Would you explain what those are

A. Three or four years ago, we purchased the controlling

interest in F.I.F., that -is Financial Industrial Fund, a

mutual fund management company, located in Denver,

managing a mutual fund of about $290,000,000..

We retained that for several years, ‘but we found that |

during that period it was headquartered in Denver. It re-

quired a lot of extra effort and we didn’t feel we were

making out to that what we were! justified in making and

‘we finally sold it to the Gate Rubber people of Denver. ee

_ Then we purchased 51 per cent of Security Leasing Com- -*

pany, a leasing: company, headquartered in Salt Lake, but

_ [136] operating throughout the United States, having about

$15 million of leases outstanding. .

Y _ We retained the ey. interest 1 in that company at

the present time. ; - ae

Q. In 1959-———

Tue Court: I don t believe he was Gnished:

‘Were you finished with your answer?

_ Tue Wrrness: No. The largest in New ‘York, Aubrey,

A-u-b-r-e-y, Glanston, G-la-n-s-t-o-n, Company deals

nines in Government bonds. wobe Ad

«6

. 60

Through’ our various interests, we have beech a small

holder in that company since 1939, The owner, that is; the .

head of it, the one that started it, Mr. Glanston, contracted

- gancer, lung cancer, and knew that his time was limited, 80

he offered to sell to us ‘a much larger percentage of ‘that

company, and First $ ee ee t Company. Ronee

that and nomown it.

“Tam chairman of the executive committee and active in

the actual — and functioning of that Government

~ bond house. -

‘By Mr. W ATSON :

Q. Let me ask you this. . |

In 1959, did the First Security Life Insurance Company

“pay a div idend to the: First Secur ity Inv estment Vompany !

A. Yes. eee .

~ [187] Q. And approximately hw much

Mr. Boousr: We will stipulate that a diyidend of $398; ;000

‘was paid during the year 1959. meee |

Tue Court: Is that agreeable? kas

Mr. Watson : Yes:

By Mr. Warsow:

Q.: In your opinion, has there been a considerable change

in the stock holdings of First Sec urity Investment Com-

pany since 1959. s *

Tur Cover: Let'me have the question so I can rule.

Read the question back, Mr. Reporter. |

(Record'read.) .

Tue Covrt: You “object?

Mr. Booner: It iisn’t an objection i in a sense. I believe

> a

counsel mentione jin the openirig statement that we don’t ~° :

_ have detail information concerning this change in owner--

- - ship and so the record will be- left open to get this informa-

. ion

If it please the Court, I lacie appreciate a few minutes

with—I would appreciate a few minutes recess to talk this

over with counsel off the record ‘to see what. the most

expeditious way is in working this out.

/ My understanding. is that we were not going to have

testimony with respect to these estimates, that we would

get an actual physical count of the change in ownership..

Me Warsow: asad I will withdraw the question and

1188) we will leave the reson. open for the purpose wo oe

. finding out. eee

‘Tam Court: Do you want a ‘yes or no answer to it or MM

-_ do you want to skip it! Fis a OX

. Mr. Watson: I will just withdraw it, your Honot. ) hod or

Tue Court: All right. a 2 Mes een,

By Mr. Watson: : ve ag

Q. Mr. Eccles, in your opinion as a tattle Siaai

—and-officer of First Security Investment Company, would

. either First Security Investment Company or First Secur-—

ity Life pay-over to any of the Petifioners the.income which

is asserted to be taxable to the Petitioners if this Court — .

hold such income to be taxable to ‘Petitioners or any on

them?

Mr. Boourr: Before the ‘wihabes answers, I will inake an

objection to that question.

[ understand Petitioners’ position to be: that iti is illegal -.

- for any such payment to be made.

‘If that’ is their position, then the: Sovaliieiint of: that

position is.a matter of argument, is a question of law, and

does. not require any_testimony from thé witness. -

_ Tue- Court: Are you asking. from the. standpoint ae. .

legal conclusion or his opinion as not from the legal stand-—

point, but from the business standpoint? -

Mr: Watson: From the business standpoint athe officer ;

- ahddirector. . - - ,

[139] Mr. Boousnr: If your Hie sleanas if his adie pur-

pose is his business opinion, from’ the legal standpoint"that

would be irrelevant from the dices dnc raised by Peti

tioners: — |

_ Tus Covrr: I ‘am not so sure. I am goingsto let him ~

. answer from the business standpoint, but I ion you to ..

stay away from any legal aspect of an answ@ .

I don’t want you to say, ‘*The law reads. so Gnd so.”” —.

- If you have had‘meetings with your legal staff and you

have been advised of thus and so and based on. that, you

have concluded-that ‘‘we shouldn’t do it from a peprnate

_ standpoint or other standpoints,” this is all right :

‘ THE WITNESS : The answer is yes. BD le

. By Mr. Warsow: cia age : PARE Ss. 0

~ Q. Have you discussed — silico

oO,

. - into. the banking system. moet — er le

: payment.

fllegal, but the rest of the answer w vill stand.

garding thissituation? ~ . Pn

this matter{.. :

', Tue Court: What advice did they g give vat :

‘ national banks. chartered and — to function under |

federal laws? . °

eral agencies? ¢

Sah Division, the Federal Reserve Bank of the Federal Reserve _

_ ‘System’ of which we are a member and one other on top.

— of “that, . by the Federal Reserve und

. bank. holding company’ bill.

<< (141) A. The National Banking Department ‘makes the

*- examination for both the National and the Federal Reserve

- makes examination of the parent holding company.

bd .

. : aR ce.

. y >

A. It would: be sllegel—ta: in Nedinoe ‘Yodgitink cnc

_jadgment” ‘as that I would nat» have them pay anything

' 7. +]

| Mr-~-Boou@e: F move: to strike, the last. 4 answer of. the

witness sinée~ involves the question Sf the legality of the

Tue Court: It is strickin-intofer as he anid it would be

- Have there been any meetings with your leg | staff re- ”

>Tue Witness: Yes. > “a

11a] THE met Has your r legal staff advieed you on

THE Wirsaana Yes. 3 ‘ mt

_- Tue Witness: That it could not be done. .- © .. |

‘Tue Court: Did théy. advise you that it would be illegal?

Tue Wrrness: In their interpretation it would be illegal.

Tue Court: This answer will stand. . ¢

oe > By. Mr. Watson: 9° ae 2 pees

Q. hve the First Security Bank of Utah and tistie-s as--- - \

A. They are. - ‘ 7 pak oar

Q. Are they swpject fo. supervigion and control by fed- :

A. Theyare. )

-Q. What are these eenieet Tee . |

‘A. The comptroller’s -office of the. Nationat Banking

A ;

er the ‘terms, of the :

Q. Did. these: ‘agencies make regular jumpechinen?/ :

and so far as-the banks.are concerned, the Federal Reserve

Q. What-is the purpose of these examinations? ay

Mr. Boouer: I object. That is a statement of law.

They are making these examinations pursuant to ee .

dulytonstituted federal authorities. | mee ot

‘Tur Court: You may be hele ie ea

- Mr. Watson: Your Honor, ay an olla and director of

a national bank, he certainly knows what purpose eee

comptroller’ s men make these axqulnesiene, wKat a are

in there for, what to look at.

Tur Court: Let higestate what ‘his opinion. is.

Of course, it the law is to the contrary, Fwill be dene ~

- by the law, not this witness impression of what—I will let 2 | |

himarswer. . .° ey ae

Tue WIryEss: ‘They make two cdeuesdions: a year, nor- :

: mally, and sometimes three in two years.

They go through your credit pouch very definitely to

make sure you are complying with the requirements 6f |

the national banking law and the types of credit you make.

As to the amount, you have.certain legal limit restrictions _

as set forth in the National Banking ‘Act on the regulations

of the comptroller. They check for that. They {142] check

the credit statements to determine whether your credits

--are desirable‘assets for the bank.

'They ‘check your bond. account. They ‘check entirely

through. your trust department. It. takes about, in our |

‘ leading questions, counsel.

system, over a month and a half‘to complete the examina- :

tion of either: one of the two state banks. - \\ -

By Mr. Watson :

Q. “Well, are they looking for violations in the national

~ banking laws?

A: Very—— . i . rae

Mn. Booner: I object to that as siaiiints: for a’ conclusion

_ of law. 4

It is also hearsay to learn what the purpose of the bank

_ - examiners are.

Tue Court: It ® leading, but, I will overrule the ‘ques- |

tion. Obviously they are. Ley us see this account and let

us hat account.

I will overrule the. objection, . but’ try. and watch the

Anything that the examiners have done or any ‘of the

béards coming in‘to examine the banks, all of that i is Aspe

testimony.

- Tue Witness: There i is one question in the exarinition

report that asks that if we know of any violation by any

‘Officer or ee of the’ bank, that could have occurred

s $ u -

. : ; :

> a.

Ors

ay eRe: he tia. Warsow?

“

and [143] we have to certify to thaf€end if we do know

- of any, we have tog give a complete report,

And if we don’t give it, we are hiding ‘evidence, you

miglit say, and. we are zich lable as the guilty person,

oe. =") : 5 ee Gy S.

en 2

-Q. If these violations are not cor rected, what can happen

“thent ° : re ee

Mr, Booura: Again, I world object.

> He is asking for an/answer which soak es the application

and interpretation of the National Banking Laws..,

| It is ealling for.a legal conclusion. If it does not involve:

.« thé thagansw er would have no substance: or meaning.

Mr. Watson: Again, your Honor, as a businessman and

in dealing w ith these people regularly, he knows what——

Tur Covrt: I think he can ask the question, if you don’t:

comply, are there penalties?

. I think: he ‘can. answer that one, but if he heotanes very

speculative after that—obviously ‘there are . er..

.Tue Wirnsss: Yes.

Tur Court: Is. there any thing further. you ‘need on thatt

Mr. Watson: That's all, your Honor.

Tur Court: T men if-there have been sitiiation in the

a>.

ce ~ ‘hank where the pénalty Was proposed by. the examiners or

[144] they came iti and said, ‘‘ Now, this is a strange. trans-.

action here and yoware aware of such and such a penalty,”’

- this'is proper testimony, but I don t think you can speculate

on “as to what they might do.

ur Witness: This is what they do do in actual practise

up to a poinfs From then on I have had no experience.

Any ‘violation or any unsound banking practice, they -

Write up in the examinatian report and the report is not

sent to me as president of the bank. eee: ee Deere

of Directors of the bank. —~ a tH

It sets forth. very definitely. And they ask for correc- -

tions and if it isn o corrected, then they come in. And:

- I know of one national bank institution by experience in

, Salt Lake City that we were not interested in, but the case .

is in the record and they have had-many, many hearings

and the Federal Reserve comies in and assists the National

Department and they try to exfell them froin membereip:

in the Federal Reserve and SO on. ; ..

’ au . : . s. _° 2 4 ° 4

However, the San. Francisco National over here was a _

typical example, —

- . Here are great: Penalties and all. you can do is try to.

comply a 100 per cent witk your interpretation oKthe

banking law and their directive to you.as far as. your inter-_ .

pretation goes. 3 3 5 nein

Cy aE

[145] By Mr. Watson : eee! iy .

Q. Mr. Eccles, I show. you a copy of what :has been. re-

Tnx Court: I see. |

. ait ;

‘~eeived-in evidence ag Petitioners’ ‘Exhibit 54 and ask you

«54 is?

,. What thatis, sir?’ /°,

Mr. Boourr: I will ‘object to any answer to the question.

_He is showing him a, copy of Title 12 U.S.C.A. 92, which is

‘a Federal Statute. nee

Tnx Court: What does your stipulation say that Exhibit |

Mr. Warson: It has ‘been received in evidence,

Turik Court: Yes, ‘I_know, but may I have-a copy of the

stipulation?

Mr. Boouerr: I believe it“was received in: evidence to

assist the Court. Bg eee 7

Tue Court: I think it has already been stipulated that

Exhibit 54 is Title. 12 U.S.C.A. Section 92 and 93, relating

to the powdebe -national banks to sell insurance.

~~.

You can ask that question. It-is not a leading question -

‘and it is already stipulated to and you can show him the: .

document. | See eee a

The objection is sustained with the exception of the way

the Court stated it: Re eg =

Now, Mr. Eccles, thatis what thatis? .

\ Tae Wéyness : I understand that’s right.

By Mr. Warsow: 7 ie |

[146]. Q. Now, a8 a president of a national bank and asso-

_ ciated with these various national banking associations,

are you familiar with the provisions of these two sections? —

~ AsTam. i @ \ cao |

That is ny bible, you might say. me S50

Q; Now, have you discussed these provision’ with legal

QOUINGES se 26 Bos ; Ge 3s

A. Lhave. eo era aT ania ater eee:

Q. And have you also discussed these provisions ‘ with

es:

* '

ing Bei a) : 4 “ P -§ -

ip.

‘ 56 ce “

| various other officers and directors i in ‘the banking frater- _

Bog fi! ar ¥. i a

-A. Thave. . : ;

Q. Now, i is it your understanding, based on 1 sack discus-

sions and upon your knowledge and experience ‘as a banker

that it was illegal for banks to receive permissions or fees

-- for services rendered in selling insurance in cities over

50,000 in population during the years 1954 through 1959? ~

6 Mal Boommn: I object to that question as. calling: for Yegal =

‘ dpinion on the part of the witness. | aes

If he bases his Opinion on discussions with third parties. er

who are\not:in ae would be hearsay because the source, y.

_ of the information he has given is a statement or opinion - _

of an individual which also is not present-in-the courtroom, -

-. not subject to cross-examination and we have no way of...

‘ determining the validity’ or accuracy of research be in.

developing this opinion.

“(147] ,Txe Court: I overrule the objection for the reason,

as a businessman, he would take certain action, based on .

the advice given to him by. is legal staff and the other

8 ad

-.- individuals: me

And this question, I. assul is directed to his business

reactions to the advice and not to whether or not—not to. _

na all the -question-of whether or not that advice was—— et

+. _Mr, Boower: If I understand the Court’s ruling then, a

. .the relevancy of the answer to this question will be limited —

to the business purpose for this witness doing whatever

~ he did. |

, It will not involve a. borirest or snievest interpretation of -

_ Title 12 U.S.C.A. 92, no legal interpretation, correct?. °

Mr. Watson: No; just his See of what these

——— meant. |

Tre WIrtness: Your Tonos, I can » enlarge 0 on — a little ,

_ bit from actual experience.

’ We acquired a state bank. eid? ; ae

—». . Mr. Boouer: I don’t believe this answer is responsive to

es the question." -

THe WITNEss: Well, I was going ~ report—swhat I was ~

“.”- going to report was the examiner’s—— Sp

. + Te Court: Do you want it read back againt

_ P's Wrrness: I believe so. -

* [148] (Recordread.) S:.

_ Tae Wirxess : My answer would be yes on that. 2 i

Me Mr. Watson: -- - 4a 3)

. life insurance whether or not they yeccived income of any -

sort from the insurance written? Ee aa ae

‘ Q. Would a bank seek :to have borrowers to take credit

_ Mr. Boonen: I object. to the question as being too general

SME Ofeoulativer scoala ni ie ht 4s ae ae

‘Tue Court: Rephrase it and say, ‘‘Did a bank’’? et

cetera. You are-saying, ‘would a bank’’, I.believe.

- Read the question back again, Mr. Reporter; |’

(Record read.). \, ts ee tS

_ Tue Covrr: If. you ‘change that would to did, do you ©

remember the question now? ‘ uh ak

_ ‘Tue Wiryzss: Yes. » a er eS

. Mr. Warsow: Let me'‘put it titisway. ©- - ad

Mr. Boouer: I understand the witness has some papers

Are thoggaotes? | Fiat ELE Ce aA ie —

- Tue Wrfness: Ihave papers, but I answer without-them:. ~

_ Twas trfing to hurry things yp_———_—7~ emg eae fe

___ THe Courr:-You can refresh your recollection if you

es need figures. : : sp bce Ty, FS es

-I think he was doing that for the record to show that:

perhaps some of this was not coming off*the top of his head. — -

: [149] \By Mr. Watson: , ee eth

Q. Is there a bénefit to the Petitioner banks ‘to. having

credit life insurance, whether they receive any income as a

result of nee being written onthe lives of those

borrowers? . Sos 3 a

_ Mr. Boonen: I object to the question. peas Geit van

Do you.say is-there a benefit with no income? The ques- .

- tion is rather, confusing to me? What is the purpose of s

this question? ee AEG Eke boas

-» Mz. Watson: I have in mind the Security. .

Tue Court: The objection is overruled.

You imay answer the question. _ is

Tue Wrrnzss: There is benefit, ~ Agee ts Oa eae

- It assists you in the credit goodness of your loan. If youn St

are making a loan and a man has no other assets thanhis.°.

earning ‘power or his salary and he should die before the - ‘

<e Vr em

Ee EEN He

; 58

loari is repaid, a personal loan, and you got credit life

protection: on it, you take no loss and your loan j is paid, off.

ee . By Mr. W ATSON ?

Y Q. Thank you. 3

In the years 1959—or 1954 through 1959, were there any

ployees | of that . company and. _Ainerican National with

‘réspect to selling | or handling life insurance or ‘credit. life

rerevd that question?, — |

Ber Covrr: Read | it_baek;.

yy, ; Mr. Boourr: If I may, could. I ask the reporter-to 1150) .

e: nase, “Mr. Reporter.

ee B WITNESS: oN ot t6 my kniow ledge. I think not.

Mr. Boouer: If ILmay——/ - 3

* Tur Court: Written cere teed do you ‘meant

Mr. Watson: egy Ces,

Tire Court: Ye EASE so .

- Mr. Boonrr: tay T hav ea few minutes diseussion?

\. Tur. Court: Yes.

~\Off thé record. 2 ts

_WWiscussion off the record.) mee

Tae Covrt: Back’ on the record. pe sid ee

.By Mr. Warsow: ‘ ee ie.

9, Hencd a8 First. Security: Company hold any agent’s°

‘license to.sell life, insurance? ..

re os

vie nel i imtlat organization to sell life insurance? er ae

+” A. No, they couldn’t. .

pany have any contact with the public with respect to selling

life insurance? | ca rf : .

A.No. | eco

Mr. Warsox : : You may cross-examine.

[151]: Cnoss-ExAMINATION | ? :

. By. “Mr. Boouer:

.Q. Mr. Eccles, I urtderstand that the First ee Life

‘Insurance: Company is now owne< y: the First pacianieds

Investment ae, : teers

2 oe

-insuranceft ~* , lo

“yf Siete between the First Security Company or the em-. °:

Q. oes the First Security Company license any person- ;

'Q. Does. the company kant dius 6 the First Security Com-

Ge oe i

» ; . 4 . ; 2 rs F — a

—

Tue Court: Let

ee ei: : - 2 *"

me hear that question again,-Mr, Re-

ON, ormipes :

By Mr. Booner: ~ fo ht Qs ;

prevent First Security a Insurance Company of Texas’ .-

curity company ? ee ae

«i Mr. Auten: That calls for a conclusion, your Honor.

| * We object. ae ete

‘oy, Miers ‘Court:

question: . Big tee Tels

+. Dae Wirness: First Seema ity Investment Company is not

a Yank holding company. It doesn’t come under the bank

olding cémpany Act at all. ae eH ;

Well, I: am going to: let a answer that

; Ph: ies ; on

Theyownit: yn ge _*

Mx. Boouzr: The answer is not Tesponsive to my ques- —s_,

tion. - - , iste ee

- [152] I request the reporter to reread the question. +

”. Tue Wrrnass: Yes,. May I have the question aggin?

Tue Court:-Reread it, Mr. Reporter. ee

(Record read:) | 8 woe

Tue Witness: No. ~_ vue

«are a ech Forthereasons——- . is

‘-*. company Act, your Honor, that would prevent it, but you _

; . couldn’t organize one in the bank holding company. You. ~

- eouldn’t do that, - a Pats mek eee

) . By Mr. Boouer:

Q. The “same would: also be true from the year 1959

through the present time since the First Security Life

. insurance Company of Texas has been owned by the First

Security .Investnient Company:sincé 1959 ae Scie :

? A.'Inmy opinion, yes. . °°. re ee

_- Q: So, since 1959 through the present time, there has: .

- been no feature of ‘the bank holding company Act whjch

would have’ prevented the First Security Life Insurance _

Company from becoming a full line life insurance. com: _

MRR a 7 ao RATS eS

ios

e ‘

oi No, because there is no relationship:

-Q. New, First Security Company—did First Securify.

Combeny request a ruling with respect to whether the bank

holding company could retain ownership of the First Secu- |

. rity Life Iisurance Company of Texas pursuant to the

_° provisions of-the bank ce cane Spt Actt

[153] A. Did they? .

+ Q. Yest °)

A. No, they didn’t. |

Q. They have not requested any such Jalidigt.

Mr. Watson: He refers to the company and there might

be samé confusion.

Tur, Court: : Just a moment.

Come on, gentlemen. Let one party speak at a time..

- If you don’t, my record is g going: to be so confused that

- you won't understand it an won’t understand it, so if:

there is an objection; alfow Sunsel to finish it: and by: the™

same token, allow opposing’ counsel to get his words ‘in

es or separately now. -

Where do we stand? Who is doing what!

Mr. Watson : Tam sorryyyour.Honer. ae

All I Was trying to do was. clear up the confusion. be-

tween the. company and the corporation and I probably was

outoforder,. os

“Tue: Court: No, you were not. You were within your :

—you are perfectly in order and there may - have -been

confusion there, because I can see how this is confusing as

| [have been-following it.

‘And everytime you. say company or ede poention, I havé _

. my-notes here and I take note of the differentiation and’it.

is difficult because they both have the same names.

: [154] Are you sure you had your designations correct? &,

; Mr. Boouer: I asked the. — to reread me last .

question. :

‘Tue Covet: All right, reread if Mr. Reporter. . 7

(Record read.) | een

_ Tue Wrrwnesse The answer is Tio.

Tue Court: Proceed. ' si

' By Ma. Boonen:

Q £ understand the question was answered no, is that |

correct? ,

a That’s. righ’.

ss es ‘ . -

ili . di coed

a ‘ ° ‘

. * .

_ sale [155] of credit life in

‘is Cunt Off the record. pote

_(Diseussion off the record.) ee S4 Se:

Pun Courr: : Back on the record. . _ ee oe

s @-

By Mr. Boourr :

ie I believe. you testified that the banks wield receive a

benefit from the sales of credit insurance even ifsit f re-

ceived no income from this type of activity. :

’ In fact, -however, the banks did recejve a commission oe

from the sales of credit insurance or the management. com- *

pany received such a commiggion on sales. of ‘credit. insur- -

ance through the —— 8.prior to 1 a. | SMa si Seo | “

Mr. ANDERSON: Lobject | o that ahestion: : ie yh is

This record shows that the banks nevér took in one. [

penny: of commission or a other form of return from: the | -

Wronce at any time in the history

of this banking organization. . -

THe Court: Yes, but Mr, Eecles } is very competent and |

"avery capable witness.

‘Mr. Anverson:: But: Mr, Booher assumed i in’ his question.

that the banks had taken i in’the. commission 80 the question’ 7

"1s improper.

Tue Court: Let me hate Mr: Eccles’ answer, I think he’

_.. knows more about this hanking business than apybody "else

_ dn the courtroom and even more than I. ur eT

Tue. Witness: The ‘answer is we never taoke hogs cae

.Tue Court: Proceed.

I think you have to recognize; pentieatin + am not. con- ~

trolled. by the question at -all. i don ’t. Pay any attention

to.it.

I look to the answeand any. inferense. i in. the: question —

is not going to be taken into consideration’ in any. oping

_ . that I write ini this case. 3

_ By Mn. Boonen: ANDRA AS: ee

Q. I cndenptina that ‘our stipulation i is to ee effect that,

‘below 1954 the First Security Managemient- Company. re--

; ported a commission on the sales of cr it insurance to.

. customers of Petitioner banks. « ~

‘ Ididn’tanderstand that last——- a oe: neds et

' “Me. Aen: There isn’t a question, there, your [156]

: ewe cs et sea rest

e. ; 3 3 ; a) . 4h be,

62...

THE Cour: He hasn t asked a question yet.

-.By Mr. Boousr: |

Q. But that is: a stipulation that commissions were paid

2 Om sales of credit insurance through Petitioner banks prior.

- come by the First Security. Management Company? =

. - \

- Mr. ALLgS: Let’s have him read the stipulation if we.

are going to preface the questton—— ,

" Mr. AnpveEkson: The stipulation states that. We stipulate. “

te it. The stipulation says that First. Security Management

_ Company: during the years ’48-to ’52 reported commissions

- *. thatwere paid’ under an insurance agency agreement with

- Ed D.. Smith and Company, executed by Credit Life. of

* Springfield and:American Life of Florida. _

~ . The mangement: company did take the commission and

that isewhat the stipulation states and we-will rest on that

ze “Tae Courr;Let me say something, gentlemen. » 8

It is goin be too confusing if I find three lawyers on

- Petitioners’ stde of thé room, one making objections and

a ‘one: asking questions " on direct examination and someone

q . . else making statements. Ss

I think you had -better get together ; and Budge one an-

other, buf let me have one lawyer from the Petitioners’

' side make the objections. 3

- [157] You can nudge Mr. Watson and I. will : ‘give you

’* plenty-of time to discuss any objection. I would prefer to

_ have one manmaking me = pranes as it is too confusing

' otherwise. - <a

% * Go ahead, ‘Mr. Boo er, You understand now.what the . -

eo agreement. is regarding the stipulation and I think the ee

4 witness knows, too.. — :

«8 a De you have a question Te oy. \

By Mg... “Boouer: ; mo. SY

to customers of Petitionér bank&,: Petitioner Management :

S\ - Company did in fact receive a cae a on such sales 3.18,

>, ‘that.your understanding? . emit’ .

‘_— -

A. I don’t think ‘it was a commission. I think it was

- a reimbursement of expenses, a certain reimbursement.

| ) They were not ‘an insurance agency, and they couldn t

as receive a commission. . |

. —

e . &, e ae

* Ste : . . 5 .

‘. Fy . > : = A

They had io agency. ‘They could be reimbursed and $i: .

_ is all, for expenses. ieee = ey nae

_« “Mr. Boongr: If I may, your Honor, I would refer. back. a

« .. to the stipulation’ which is ‘that. the management \com-.

- pany cae ane ea.

\> Tut Covrr: The’ stipulation. under our rules is: con-

é trolling,asyouknow. Ee. = -

So, I don’t think you need say anything further.. You

know what therulesprovide. 5 |) me

[158] Q. Is it your understanding, Mr. Eccles, that the .

management company.and the banks have never received 4

commission on the sales of credit insurance before as well

» as after 1954? — * ag wit, Mae a

* . A. A commission, no. 7 so ee .

Q. Now, we have stipulated into evidence the income tax

1955 through 1959 as Exhibit 0-3. ce

I can furnish you-these returns to look at it:if you desire,

but*my question is, lid Petitioner, management company

_ Teport income from c\nmissions on the sales of urance ~

_during the years 194 through 19594 eae a

’ A. [have never seen the returns. I didn’t maké-them.: ot

we S Q. I would take it your answer is you have no personal

Ye knowledge as to whether they did or not? - ; :

| A. Ihave no knowledge of it. Senior Lie. nis 2a ep!

| Q. Would your answer be that you have no -personal

@ ._ knowledge as to whether they reported a commission from —

the sale of insurance before 1954 also?

A. Ihayen’t been over the income tax returns. -_ ra a

" Q. Well, dg you presently have any knowledge as to .

whether they did report a commission prior to 1954?

~ A. [have no present beowtides of it, no. eae

c - THe Cofar: You have present knowledge? -_

Tae Wrrvzss: No. Expenses; I .think, but not [159]

-- commission...‘ eal , Se 3

_ Tue Court: All right. ee

re <<: reimbursement of expenses? >

oe Tae Woes. That’s right, your Honor, yes. saat,

_ .’ Tie Court: Mr. Booher; if your ination ¥s drawing

~. toaclose, I will take a five-minute rece 8 if it will facilitate

i ese

es PSE tee type mm

hie you getting near, the conclusion of it oe ra fis 7

Mr. Boourr: I would appreciate-a five-minute recess and...

4 ean finish this up within a few miniites after the recess. +.

Tne Court: Very well, |

We will recess for five minutes, then.

~ (Short-récess,) :

Tue Court: Back on the record. ; oo

_ Proceed, Mr. Booher. eae. ee ‘

By Mr. Boourr: ?

Q. As I: mderstand your testimony, ‘the First Security

~ Life In8urance Company of Texas is not today a“multiple

line or full line life insurance company ; is that correct ?

* A. That’s correct. , Se ye

32Q. Now, in discussing the expansion “of the subsidiary

_ corporations owned by the two holding companies, I don’t

believe you discussed a foreign corporation known as F.R.G.

- “Company, a Lichtenstein Corporation, right? |

[160] Mr. Warson: We are going to object to this, your,

~ Honor, because anything on the Lichtenstein Corporation

has been excluded from the record as being’ pEsretician.

“Tar Court: Did I admit that? .

Mr. Watson: You excluded all of that yesterday.

Tue Court: The objection is sustained. ~

_ Mr. Boonzr: The evidence wiis offered at that ina: on

‘the issue of tax avoidance or tax motivation and since

. that time the witness has testified to the reasons why the

" First Security Life Insurance Company of Texas did not .

develop into a. multiple line life i insurance company. -

We believe that the testimony concerning the first F.R.G.

Corporation will be’ relevant as explaining as why this ~~

* corporation has so developed, that is, the Texas life insur-. -

ance company, since. much of the incame from the sales of. ~

credit insurance was diverted from the First.Security Life

Insurance Company of Texas into the foreign corporation.

This evidence is:also relevant with respect to, Petitioners’

. business purpose for’ using” the First Security Life Insur-

ance Company of:Texas since they state that they formed

' this company as an. investment company to generate income

frominvestments. _—.

The activity of Petitioners: in diverting i income ‘from the

First Security Life Insurance.Company of Texas into the

First R.G. — would be. inconsistent with the

‘ opinion. «

: {

[161] On these points we believe that testimony concern- - ”

ing the F.R.G. Corporation is, relevant to the issues in thig

case, ie: % Plien crcrer ee bi ere) ot ae

‘Mr. Watson: I don’t’ see where if could at all be relevant

to the business reasons for organizing a-First Security -

- Life Insurance Company back in, 1954 to what happens in -

1959 or 1960 pertaining to the foreign corporation. 3

And it certainly doeg€ave anything to do with whether.

a full direct writing life insurance company. - : Ay

It is another. thing done many years later: and for dif. .

ferent purposes. j . = | isis Os |

_ Tux Court: I am going to permit the witness to answer.

You may answer. | <— s Wet “

Mk. Booner:- I. request the reporter to read the last

* question back...” -

| Q. When was the First B.G. Corporatioy formed?

_ * Q. Was the business of the First R.G. Corporation pri- |

.. (Record read.) GOS aeire ohare tatets. -wtadh te,

: Mr. Watson: May: I make one further,objection? .._

Mr. Boourrs;There is no objection to the question as __

actually being asked. There.is no basis for an objection.at

this point.

Pue Court: Yes. ee - - @:

~~ By Mr. Boongr: i” 2

_. Mz. Warsow: I'am going -to object to that® This [162]

corporation has. nothing to do with the issues involved in:

this case. It isn’t related to any of these Petitioners that

And it is—it ‘functions ‘years that were subsequent.to _

the years that areinissue. ~< °~ , . |

Tue Court: The objection is overruled. -

_ Youmay answerthequestion.. .

‘Mr: Boouer: If Imay——.- a

- Tue Wiryess : I am not sure of the date. .

_By’ Mr. Boouer: - . Af

__Q. If I said that it was formed in the latter part of

1959, would that be sut tantially correct? —~ .

‘A. Yes. Ican answet yes.to that. - .

marily the reinsurance of credit insurance: sold to bor- .

rowers of Petitioner banks? Seay h eEN

A. Together with automobile casualty insurance.

: 66

mare It dealt with other types of i insurance also?

: . A. Automobile easualty, yes. - 7

Q. What advantages did the First R. G Corporation .

aves over the First Security. Life Insurance Company of

Texas?

A. it could Write auto casualty, It was a foreign corpo- *.

ration and it could invest in foreign securities.

-Q.. However, the, premiums paid into the ‘First R. G.

Corporation with respect to credit life, health and adent

[163] insurance could equally as ‘well have been paid into

First Security Life Insurance Company of Texas?

Mr. Watson: I object to that as being argumentative and.

. . outside the issues in this case.

Tue Court: Overruled.

You may answer...

¢fux Witness: They could have bob, put hey couldn’t

have :been used for foreign investments which’ was our.

. purpose at that time because of the ‘foreign. money market

: ‘and the domestic money market. |

\We .were able to. invest ‘in Barkeley Bank of London

at six and six and a half-per ceut while the rate ¥ this

country. was three per cent.

_ Every dollar in reinsurance in the reinsurance company

was: invested ‘in foreign investment and- because of my __

knowledge’ in the foreign field, working in the -World

’ Bank and in the Marshall Plan. |

_. . Mr. Boonrr: Could. you — reread the question, Mr.’

Reportept )

_ ‘Tue Wriryzss: We felt that the. foreign market was very

desirable in relationship tq’ the rate of interest that. we

+ could get on seeuritiés domestically. — - .

For several: years the foreign money such as the English

pound, the German mark, the Italian lira,’the Belgium franc _

_. and others were sound.

|: youcould get by — fortign investments.

a, a. 5

[164] ‘There wasn’t a : question of the ‘valuation at that

time. We even put our money in without hedging the

» foreign exchange at all. We did it to incfease the i incomes

Q. And was the First R. G. 3. Corporation i liquidated?

Poon \ 67

tle 7% zr. ‘

_.Q. When was it liquidated? °° é

Was it approximately in 19681 ~ « - , eet:

A. It was liquidated when ‘the pound sterling. became

very weak.. _ - ; 7

It was talked of devaluation. <All your foreign currency

- became very weak in relation to the dollar and just the

investment field ‘wasn’t conducive in the foreign after that

*fime—or about that time. - of seas

Q. And at the time of its liquidation, the F.R.G. Corpo-.

ration paid a liquidating dividend to its parent corpora-

. tion—— |

Mr. Warsow: We object to this, your Honor. ‘It is going

way outside the issues in this case. uss ages al Baas

- It has nothing to do with what we are dealing in. . -

Tne Court: Yes. We have gone f enough ‘into this, =

Mr. Booher,

By Mr. Boouzr:

. Q. Now, according to your testimony, or your under-

“standing [165] of, the Title 12 U.S.C.A. Section 92, receipt

of acommissgion wasillegal. .

If so, why as a’ businessman-couid you not provide.a .

cheaper insurance for your customers or have the banks —

rebate their over changes to you r customers? 7g

_ A. We charge the’rate which is permitted: by state law.

We.charge the rate that was. charged by. our competitive

finance’ companies and our customer. finance companies.

_ There was no reason to go ahead and give a lower rate.

° Q. Well—— “ict ;

°° Tue Court: Let him Saiek his answer, -

THE Witness : That is all I have. |

~ .

By Ma. Boonen; ae, a SS ¥-

Qin charging the prevailing rate at least:for the years _ |

before 1954, did not that prevailing rate usually include

. the payment of a ‘commission or a retrospective rebate to he

the lending entity or an affiliated entity?

_ Mr. Watson: I want to object to this question. _

He_is asking the witness about questions that require -

an intimate knowledge of the insurance business ang show . -

they operate, how they figure their ey wha sort .

: *

dl e

InN

of actuarial data they base their figures on, I don " think |

it is proper,

Tun Court: Well, Mr. Keclos will he able to handle the

ee ~ question. : 8

we. . [166] - You may answer, sir,

Tux Wrrness: May 1 hav o it repented

Tue Cover: Yes. .

Ploase read it back, Mr, Reporter.

Mr. Watson: Another: thing, or another point ‘that - I

think that we ought to object to is that it doesn’t say pay-

nent to whot There, is nobody: designated as the recipients.

~ Mr, Boone: I witlidraw the question. et ‘“

Tar Court; All right. ‘ Mae eR Le

I was having trouble u understanding the- ramifications =. ~~

of “a too. Ee aw Bee - ,

. By Mr. Boon: | x : |

Q rE understand } your teatimoit’y is that Petitioner banks wal

a se “charged the prey ailing | rate with respect ‘to credit i insurance ;

— -sold to bank customers sold before.1954%) «. : ol :

A. I think they did ‘To my: knowledge they did,

Q. Did not ‘the prev ailing rate charged on credit: insur-

ance before 1954 make allowance for the payment of a.

commission or a retrospective. atenan to the lender or a |

‘Telated entity? ot 4s ETS 2g Lo ®

’ Ma Warsox ; AA hate: ® bas interrupting, but I think,

_. + once again thjais a question for an insurance man. ne

~ Tae Courr: Well, I have ruled onthat.

You may answer, sir. -

Tar Wrrness: The prev ailitig rate was set pis the [167] a

State Insurance Commissioner.

I don't know how he set the rate. ee ue Ga

. By Mr. Boone :

@ Did. the First Security Sikigetonat oiagaks report —

in its taxable income commissions on the sale of 4 eins

insurance for the years before 19542. .

Tar Covrr: I think that. has been: answere—or that

_- . has beenasked before.

oe Me Boonzs: Tt has been aiswered and it has been

Pega ae aie

v - 2 en,

eae flee

» & The answer is yest | 7 am

43 A. My answer wasn’t yes, —

Tun. Covnr: The record will show what the answer was. .

- That question was asked and there Was an. answer pre-'.

vious.to our recess, hs ;

Now, whatever the record shows the ‘answer was, that is ee ott

what the answer is. | ae Bee ere a bones

_ | 7 ByMn. Boonga; ——— one

| Q. Did the First Security Banks charge the prevailing .

. +—tate on sales of credit insurance-to their customers before Sea: ?

s 19549 We abit ~\ CL ae

Mr. Watson :: Your Honor, the banks don’t charge the.

rate: 5 |

. [168] That's the insurance company. hee Dr; cies

Tux Court: I am aware of that. I mean the way the -

question is framed is not. going to confuse me, :

Has. your answer right along. heen Yhatever they were

told to charge, they charged? Ce rr eer

. Tue Witness: The bank acted as agent for the borrower

°.. and they collected the rate that was specified in the rate -

. Schedule and they acted as an agent to remit that to the

Mr. Boousr : I have no further questions. erate Stat Gees:

Y : Pak : f- : es é ° :

Mr. Watson : No redirect, your Honor. — yi

. Tue. Court: Call your next witness, please, sir. : Ci

“insurance company to cover -the cost of the insurance.

_ THE Court: Thank you, sir;~you are excused.

Mz. Annerson: I call Tom Hawkes. &

Tue Court: I am’ aware of the factual background, yes. ~

‘Tug Court: Any redirect? -. - |

(Witness excused.)

THomas F. Hawkes

_ Was called as a witness on behalf of the Petitioners, and, -

, -. having beengfirst duly sworn, testified as follows: tid

| Tue Ciesx: Take the witness stand, sir, and for the

' record,maywehaveyournamef §-—s—* i eae

‘Tux Wrryess : Thomas F. Hawkes, H-a-w-k-e-s.°

. Tue Cumex: ur address, sir? - ?

: 5 Wy

. °. ™ rs

Ne Rs =.

a : ; é 3

1169} Tin Wckilia 1149 Bonneville, B- 0-n-N-0-Vv- viel Le a

é ‘Drive, Salt Lake City, Utah. : |

Dinxcr RXAMINATION oie.

By Mr. ANDERSON: Nes,

-Q. What is your business, Mr. Hawkes?

A. Vice-president and: treasurer of the First Socurity

4 Corporation. 3 ;

Q. How long, please? a :

Aj T had the title‘of vice- president | since 1950, prior ‘to: ¢

that‘time having the title of comptroller: -

Q. To clear up what has gone on ‘agrees by—— 7

- Mr. ANDERSON : ‘Strike that.

“By Mr. Anprrson:

]

F. 'Q To clear up what has gone on sicetdiaty. about 6 com- ’

/missions ftom 1948 to’ 1952, the stipulation has been: read.

4 into evidence and it was that from ’48 to. 52 there were

oe agency agreements with’ Ed D. Smith & Sons outstanding

ge. With Credit Life of Springfield ‘arid’ American Bankers

wi - Life-of Florida whereby there would be a commission paid

to Ed: D. Smith & Sons for the sale of Credit. Life Insurance. -

_ bythe banks.

_ Now, during this périod of tine, was this® income under.

the—that is the income to go to Ed D. Smith & Sons taken

into income by the First Security Vempeny?:

/A, Yes. ?

-Q And reported on their tax returns?

$O)-A, Tee

Q. Was there any special reason for that? -

A. Well, the banks at that time were just petting into the 7

| installment credit fieldin a big way.-

'./ Prior to that it was very small. “As we entered into that

Le field we got into this credit life program. ae

/ To start out with, it was very small. And this. arr ge.

Ment was entered into by our subsidiary Ed D. Smit &

Bo Sons, ©

Checks were Neiiana by these ihindirenbe companies to ms

. D. Smith & Sons for these Commissions. For some reason,

I can’t tell you why, for no better place to put it,. it went \ ®

the books of First Security Company. oe

gw ‘as that. a constitution made by: a

A ‘No, It. seemed to Matic! wren of the sitalttioes of -

the amounts. It was deemed of no consequence at the time.

As it became larger, then at that time it did | come before

* management. .

Q: Was that about the time that: Pevigs! of Security

_Life of Texas was formed! ee

§ wn ee ep

A.. Yes..

_.Q. And the problem was then climinatedt ) 3 ee

Ae You, ° 7 “eo

“Mr. Boonszn: I object to the line of questions AS : ‘being.

leading.

[171] Mr. Anverson: This’ line is hroeghi: wr

THe Court: : The answer will stand. ee

By Mr. ANDERSON ;

Q. From 1954 through 1959. Mr. Booher ‘seked: on : his

examination of Mr. Kecles whether an item—— :

Mr. Booster: T- object to that as a os pocgener tr in the

examination of a different ‘witness, | :

Tur Court: Overruled. |

This is preliminary to atiother question. Mae

gg’ is By Mr. ANpERsoN : |

‘ Q. —stated that an item appeared on the tax’ returns

| “eapyof the. First Security Company referring to i insurance com-

missions, .

T show you Exhibit .C.3, the tax returns of the First Beeu- es

tity Company and an item on one of those returns.

-Would you pleene read the item?

A. The top one? .

_ Q. This item. =e

A. ‘Commissions i insurance gross.”’

Q. Were those cotnmissions—what were those ¢ commis-

sions—what daes that r efer to? ; |

A. Well—— \

- Q. Does this ref¢r to

A. It is ‘an item of income reported. Definitely, me ee ee

& commission. It" applies. only to automobile casualty: in. ei :

surance, _ See

[172] Q. Does it have anything, to do’ with the i insurance .

- involved in this suit, credit life i “ype ieee ‘yy

A. No. , viggaopagas

“@ Ts the word d “coimmission’” in there appropriatet :

s ; eae op

ao Ne, defititely not. It is'not’a- _ commission.

_Q. Explain to the judge, so that this record wil be pe oa ao

just how management company from 1954 through 1959. *

was handling automobile casualty insurance, and why this -

-item of income would appear on these tax returns. -

‘A. Well, during this period, banks were getting into the

automobile. finance deal.’ It was -new. It was very difficult. —

to obtain insurance on the automobiles: financed. In fact,

we couldn’t get it. Sp we had to go—on I believe they call ;

it a retrospective plan i in whigh we absorbed the loss.- -

If for’some reason or other it did show in the black,

there was a refund. made, and that is- what this particular

item was, pertaining only to automobile casualty insurance.

.Q. Was that a profit funetion for the company?

_ A. No. Over the years it has been a loss..

A. Noes

-Q. Was it it meant to be a profit function for the soeaipasee? os

Q. What was it meant to be?

A. Tt-is just a method of optaining i insurance. We éouldn a

have claimed it in any other way. -

[173] Q. Would it refresh your recollection. if I stated’

i that it was to cover expenses: that the company incurred? ,

Ma: Boouzr: I object, to that as a leading question. ,

Tuz Court: I sustain the objection. qt is peas,

By Mz. Awpenson:

me Q. Dia the company incur any expense in. ue fey:

: siatecachity casualty insurance during-thése ‘years from 1954 °

' ‘through 1959, the management company? .

A.,There were, some expenses inéuyred i in the writing of -

- -- that insurance, yes:

., Q. Did the ‘retrospective sashes have. any relationship

or bearing~any relationship to thtse expenses?

_ A. No. It could’ have gone either way. This particular

_ year. it evidently produced. a return. However, there were .

other years where it was in the réd more or less. -

Q@ Hine Shs erapany.soningn.qteral prvi from hendling

automobile casualty insurang6?.

__& Wan thé word commiaion ot, thon taxable rota»

: Aorta ment

ission’? src sauna

¥ oF

gh 3 . eo

i Do you. know ‘how it. 4 :

Reg & 73° . Ne

is probably just following the tax for, i isn’t it? It def-

* nitely isn’t & commission. It is an experience: factor [174] °

ou there that was paid back to’ the company.

Pee,

‘Ma. ANDERSON : You may cross-examine,

’ Cross-mxaarnatrOn Beil “ad eee Se gis wen)

| By Mr. Boonen: ~

2 ae I derstand your teatimony; this. automobile: in--

surance ig | eee ra as on } automobiles financed bys *

the bank? ee .

Sea es f

-. 2. An ger premium was. paid by the purchaser of the

automobit ieee. ee a

A.. Right. .

‘Q: And at the end of the period thers would be a deta.

- mination as to whether that premium® was excessive or per-

haps insufficient?” (

_-> GA. T suppose that is | it. What is the right term, retro-§

spective? Is thattheword?

: Q. Well, in the event that it were ‘dotpinmtried or found, ,

m that the preminm paid ‘by the customer was excessive, .

ha would that excess’ be refunded to the ) custegpert :

A. No. |

—. Q. That excess: would be Fetumed—or elaine by the

. First Security Company? i

"A. Right, —

- . Mp. Boomae: I liave. no farther questions, Your Honor. is

Ley Tue Cour: Any redirect? '

ay, [175] Mr. Anperson; May: we. have a moment

. ‘Tue Court: Yes. ‘e his Gh uae

_ Mp. Anpersow: That is all we have, eta ais

zy . Thank you, Mr. Hawkes. -

Tre Court: You may step tiie a Hawkes You are

excused. ' .

“eo ‘

Ve Warson :. ‘Could we have a idiiniite or two? a:

“. Tor Cover: Let the record show | i yesterday. when

Behe you were introducing a number of exhib sits the Court ex.

..* eluded some and admitted others, and this i Probe to affect’ >.

B bark uaesion of facts, your supplemen tal stipulation of

4 facts, ond 4 am hot sure. OEE it is on the record or. age ip

fe;

Bas

we a , j

- and I ead ‘it on the record that at you are bing to do -

+ ‘is submit_another exhibit to ¢he Court which will reflect the

number of exhibits which were admitted and the number of

exhibits which were excluded. *, ;

Is that right? ‘

Mr. Booner: That is correct, Your Honor.

‘Tar Court: Is that your understanding, too, counsel for

Petitioners?

Mr. ANDERSON : The exhibit that we are going to talk

about now has been previously. marked—— __.

Tue Court: I don’t want to get into anything we are

~ talking about now. |

[176] Yesterday at the start of the trial, the Court, suled

out several exhibits and it admitted several others, the ones

that you objected to for materiality and relevancy having. -

- - been excluded, and all of this. ,

Now, since you have a stipulation of: facts before .the .

Court listing those exhibits which you thought would be .~

| admitted into evidence, which were not. admitted, to that’

stipulation of facts I want another exhibit attached or some

_ statement’ attached regarding the exhibits which are in evi-

; dence, and those which were excluded. ~

- Tur Court: The minutes of the Court will have to show

a _ this, and I realize that we are getting. outside of our

normal routine by virtue of the manner — we peponeses,

. ‘and this will take care of that.

Mr. Anperson: We will répare such a list, and submit

ant it to the Clerk, Your Honor. ks

- HE Court: All right. neni, :

’ 'Warson: Your Honor, as you will recall in some

of the pretrial conferences, we made an arrangement to put

- on atime and dost ‘study prepared by Mr. Hermansen. ' We °

would like to call Mr. Hermansen for that purpose. :

_ Tue Cover: All right. =

ow Mr. Warson;: Also, in accordance with the agreement

, [177] reached at the pretrial confererice,. we said we would

make a very brief explanation. in order to save time. This

.. was a study made at our request by Mr. Hermansen fo de-

- termine the actual cost to the Petitioner banks and to the

Petitioner companies for processing, handling the insurance _

2 ocean, — the ‘money, transmitting — i

a Pe

——

o ae

the banks fo the Petitioner companiés, and from the cqm-

pany down to American National. pe ee

Now, with that ‘preliminary explanation, we are offering. .

Exhibit—Petitioner’s Exhibit 57 for identification and hav-._

ing Mr. Hermansen také the stand for the purpose of cross-

éxamination by the Respondent. v/ :

_. Tue Court: Very well. He may be sworn.

Pur J. Hanseawaniy: ?

Was called as a witness on behalf of the Petitioners and, .

_ having been first duly sworn, testified as follows: -

Tue Crerk: Take the witness stand, sir, and may we

have your name, please? aie j ; eee

| Tue Wirness : Phil J. Hermansén. |

Tue Cierk : What is your address?”

’ Tae- Wrrfess: 1622-25th Street, Ogden,

Utah: ©

(CRoss-EXAMINATION

Q. Am I correct in yqur understanding that the general

procedure for handling crédit insurance during the years

~ 1954 [178] through 1959, which are reflected in your study,

are*substantially as follows, that when a loan officer in the

installment loan or commercial loan department of the First

Security Banks interviewed. an application for loan, they

7 rages explainto-the borrower that insurance was ayailable

to assist them to pay off the loan that they. had if the -

borrower died?: ars Baio aoe

- A. Yes. : Higa da . |

Q. Then the loan: officer would give the borrower an ap-

' plication form; is that correct ? Si Sie gett :

_ A. That is my understanding, yes... eee eo .

~~ Q. And the application form would be filled in: by per-

. Sonnel of Petitioner banks? ay Fore

A.’ No: Fhe application form would be filled in by the

- boPrower. -

: _ Q.. Then what forms were filled in by personnel of Peti-

tioner banks? : eo ae red Td]

A. The certificate or the application for certificate. _

Q. And on completion of the. certificate or application -

by the borrower? eer ee oe ee Te ees:

a“

7 :

, a é

"A. In some cases it didn’t require an execution. It was a

group policy. —

_ - Q® At the time these forms were sidiiaslatl was the. full —

‘amount of the premium collected from the’ borrower? — ;

[179] A. Yes, or added to the loan.

Q. And thereafter the amount of the premium: together |

with the completed forms, was transmitted to the Petitioner, -

Fist Security Management, Company,

A. Correct...

-Q. And then First Recniiy Management Company trans-

mitted the completed forms and thie. ‘premium to the Ameri--

can National Insurance Company? }: ae

A. That is right. | Lo

Q. ‘Now, this study that you “have sills. was ihis study

made recently i in connection with this case?

A. Yea...“ a:

Q: This study was not made contemporaneously with the

years involved? |

‘&. No. .

. .Q. This study was not made for management purposes

during these years? le .

— A. No. -

Q. This. study was wads for purposes of this litigation?

_ A. Yes. :

Ma. Boouzr: I have no ‘farther questions,

Tur Court: Any redirect? - 5 |

Mr. Watson: There is just:one thing we want to look |

at in the exhibit, Your Honor, and we will offer it into

evidence.

- [180] Te Count: Is there another copy?

-. Mr. Watson: We have no redirect, Your Honor, and we

‘are at this time offering the exhibit ‘into evidence.

::Mr. Boouer: No. objection, Your Honor. ,

_ Tum Court: All right. Now, gentlemen, it is agreed. that

' this witness:is qualified, and all that, to proceed’ with this?

.There is no objection to that partofit? |

; Mr. Boousr: My. understanding i is that this is not a type :

- of study which requires special ee It isa mapa.

matical computation. | 3 ,

Mz. ANDERSON: May I speak? oF ®

“Txe Count: Yes. bts 3 ie ’

| ‘Mr. Anverson : ‘The study does require intimate business

knowledge 0 of Mr. Hotmanaes with the pate of the

company, not just any Tom, Dick or Harty,.to go around

rs. He spent many weeks traveling around to branches and

“-talking to the people involyed. He is especially qualified.

Tue Court: I meant ees sheet showing his qualifica-

tions on what he had don¢, er pes we ee ah

‘Mr. Anpersow: If that would help the Court, we will ask

him those questions, unless Mr. Booher will stipulate ‘to | :

his answering and qualifications as an officer in the businesé. xe

[181} Tue Court: Mr. Booher? - «. : #

Mr. Boourr: I think——* a Vike psa jf e |

Tue Covrr: Well, I think we had better put on the record |

_ his qualifications. ° rf Rs a el ae :

oo Repmect EXAMINATION a “

“ot - ° By Mr. Warsow: | |

. ' eo. | : ' m >. j

) Q: Mr. Herthansen, what offices do you hold with the

First Security Company? : .

A. I am assistant secretary and assistant treasurer. -

Q. How long have you held those offices? ~ he

A. Over 25 years.: . ee | . Yee 2

~ Q. And have you been with the First Security Company

- for 25 years? ~~ nee. Bos 2 “ed FOO 7

‘A. Thirty-one years, sir. gt ee

-" Q. As the assistant secretary and assistant treasurer,

_ A. Presently preparation in the supervision of the—

supervision-in the preparation of our tax returns, super- -

vision in personnel operations in our immediate office, and —

’ personnel operations,- so I am thoroughly familiar: with —

the various job classifications and positions and what.these

people do in each of our offices. g sctea te yet axe :

- Q. And in connection with your employment you have.

= had [182] ample opportunity ‘to become familiar with the

*’. manner in which these insurances are processed; is that

correct? : eee ears eae

A. Thatiscorrect, a ee ee

_ Q. Would*you explain to the Court the procedure you

_ followed in making the study that we Presented:.as Ex: -

hibit 57? | 2 ees ae ee ee eS a

4- Yes. Through interviews with the various people in-

+—

‘alee I determined the scenes at the office seid for

“both the management function“and the: clerical function. . -

I also determined the Ipencedures at the management

company level.

., I sent these p ures out in written fg, which is *

included in the exhibit, and through interviews- - with

people actually doitig. these. jobs, some of these in per

some by telephone, verified by letter from them later, I de-

— the average length of time for éach of the pro-

ures.

"We then determined from ie available the number

of policies written, the number of refunds made, the number

*. of claims paid, so.we had a complete total. for each pro-

'. ‘eedure. -

And aiielping these out, we arrived at a total number

: of hougs for the operation. .

I thin went back td our perssnael viaadie nad from

actual-records I determined the number of weeks paid to.

each of the people involved in these procedures.

[183] The actual weekly salary by week, and snitipteing

> this out, multiplying each rate by the number of weeks that

rate was paid, and dividing by the total number of weeks, I |

: arrived at the average weekly salary.

I then: -determined—it i is commonly. known as fringe bene-

fits; although it-is probably a misnomer—the benefits ap-

plicable,to the salaries, by: nore. 3 the total benefits —maiy

I refer to my notes here’.

Tue Court: Yés.

Tue Wirness: These benefit costs included ‘Social Se- |

‘cutity, Federal and State Unemployment, Workmen’s com-

and vacation costs. 3

When I obtained the dollar figure. for thuse for each

_ company involved, by dividing this dollar figure by the

salary dollar, and by multiplying the average weekly salary

by-this factor I determined the fringe benefit for each

mmlary thus arriving at an average cost per week. .

Our average work week is 40 hours. Dividing this average’ ;

cost by:the 40 hours, I arrived at an hourly rate... sg

_I developed this procedure both for the executive level ;

and the clerical level.

‘pensation, group aaa gaia pontrtbutians, bonus aa

_ And then multiplying the total cconbue: of hours by

Reon sonnen ag? Py

4. . 79 f . me ; Po Ls :

the average soins obtained, I obtained a cost figure, the-.

_[184] total cost figure.

I then determined the weight of the policies of the can-

-cellations claimed, to determine a postage cost. An allow-

ance. was included in this to cover cost of transmittal docu-

| ments, tapes, and other things.

Adding this cost to the salary and. benefit cost, I arrived ee

ata total cost, following the procedures set out. a :

Mr. “ANDERSON : We have nothing further, onor, if 24

that satisfies the Court. . sisiee ae ee yee

‘Tas Cover: And have you made, on similar studies: te :

have y Load work of this nature. before for the company f.

Tue Wirness: I have made some Aige studies, yes, =

. various departments.

Tue Court: That is what I meant. i ees eas aif

Tue Witness: To determine the cost of the ee a

Tue Court: And did you have clerical help and other ;

perhaps professional help,” if you care to call it that, in

_ preparation for this report? —

‘Tue Witness: I consulted with members of our CPA.

~ firm as to whether my procedures would adegnately give a

true cost, and they—— ‘

’ THE Covrr: They approved of your ’ Procedure for this hs

computation? |= -

Tue Witness: Yes. -

~ [185] . Tue Covrr: All right.

_ redirect?”

I assume that concluded your direct, did itt Or your —

Mz. Awpanson : It did.

Tue Court: And there is na recross! ve

‘Mz. Boouer: No. ~ 7

THE Court: Thank you very. ‘mich, sir, » you may. step

down. - 3 .

‘And Exhibit 57 is received. ee wa pas ‘. key 0

Ft . (Witness excused.)

(The docnment previously marked

| a for identification Petitioners’ Ex--

*. hibit No. 57, “was received. i mh Bex: evi--

rae, Pecaragg

Mr. Kees Your Honor, 1 may we take a moment to a8

SS:

' @o8

<A Civile’ Yes. We are ‘going to recess at 4h minutes

~ + to 12:00. I am due at aduncheon’ 8t12:15. .

_.. Mr, Anperson: I suggest that I take this time now. before

—~.. the lunch. hour_to put up. the screen and ‘spend the next ten *

. minutes qualifying ‘the next witness so that after lineh we ———»—

__¢an get started. ast taake? £5 etd

Is that satisfactory?

Mn AwpEnson I call Mr. ‘Arthur Citoke Rady. So

| [196] | ARTHUR Crooxs Eppy

was called as. 18 A witness. on. behalf of the Petitioners ind,

having been first duly sworn, testified as follows:

° "Te -Currk: For the record, may we have your name?

- Tur Wreness: Arthur Crooks. Eddy. :

‘Tue Cierx: How do you spell your middle name?

Tue Wrirness: Just like: it sounds, C-r-0-0-k-8. _

Tue CierK: How do you spell your last name?

THe Wrrnzss : Bi-d-y.

-Tur Cuerx: And your address, lease?“

~ Tes: “Wirness : 2456 Hanover West ‘Terrace, ‘Adlants,

Georgia. deeish Sa :

Dmgcr EXAMINATION ao TRE. os

By. Mr. ANDERSON : _

Pe —6Q Whatis your business, Mr. Eddy? Ae | . | (

— A. Consulting actuary. -

' With what firm ?_- | al

a the firm of Bowles, Andrews & Towne.

Q. How is that firm? |

A. The number of employeesdo you meant

Q. How- large geographically, and the number of em- .

purest ) ,

A. Geographically, we have ities spread: up and aowi

“ the East Coast; one at Atlanta, one at Richmond, and one in’ -

. New York, and one in Portland, Maine. -

'' ’ ‘We have approximately 100 employees in the firm. . =~

[187] Q. Are you in the Atlanta office? ba | eis ae

- A. Yes. : :

_. Q. How many: employees -are there i in the Atlanta office?

A. Approximately 60. . |

- Q What is your position i. . the Atlanta ofice, and with -

the company? ) =

- Tam managing partner in Atlanta, and withthe frm

oe 2

oo.

bse 21 set

- Tam Sepiite' managing plartaps: 3

Q. When did’ ed begin: your ‘sotuarial career? ts

A. 1948, 3 cone

Q. Where?

.._ A. Bilot Life Insurance’ Odthpidhiy: Pabsidiary with the

_ Jefferson Standard in Greensboro, Nort apie art

Q. How large is that company? .

_ 4, As of the current date, the combined company is shoe Bi

tenth in size,.based on assets, tenth amongst the stock !

companies in the United States. :

Q. When did you leave the company and what position

| did you hold?

A. I left the company, Pilot Life: ‘Insurance’ Company,

. : in August of 1962, and at that time. I held the position of

. second vice-president

-Q. Are you a fellow of the Society of Actuaries?

A. Yes. |

~Q. What\ year did you become admitted ab 8 fellow? .

: [188] A. In 1955.

i ‘pany include

Q. What ~ your duties at at Pilot Life Insurance -Com-

easet ~ :

A. The general scope of actuarial: work that i is required HE

| by the home office personnel of a life insurance company.

Q. When; did you join siehboees Andrews & Ton your.

present firm?-.

A. As of August 1962. 7

Q. In what position? ~

A. I joined the firm as | partner i in n charge 4 the Atlanta

Office:

~ Q. Then became, as 3 you said, deputy managing partier oa

of the firm!

ae > (eee ee 7

Q. Halve you hela any positions with the Life Office

Management Association? .

. A. Yes, sir, I: have. I have been on the Educational

Council. |

Q. Are you a ‘member of the Academy of Actuaries? :

A. Yes. . |

Q, Are you fully accredited as. an actuary?

- f. Yeus oc |

* Q. Are you familiar with: the credit life i insurance busi

ness, Mr. Eddy? .

. 82 *

(189) Q. Explain to the J udge how you s are familiar with

that industry. :

A. It began with my experience at Pilot.

In. the mid-Fifties, Pilot was very, active in-the aay

insurance business, and this became a very substantial. part

it was necessary in the duties of. the actuarial department:

to assist in matters relating to the credit i insurance business

of the company, and this was the total scope of operations, .

-and it included Various facets of credit. life. -

_ _Q. What has’ been your contact with the credit life busi- + .

ness since that time? eg

A. Our firm are cmnialitaile for a number of ‘eredit life -

surance.

Q. Can you express to the Court-the percentage of credit:

_ life in force through-your firm in relation to what 1 is in force |

+ in the United States?

lig A. Amongst our clients, the total i is ten pereent, or in ex-

‘ cess of $6 billion a year. é :

+ Q. Is that considered large, small or medium? |

; | A. A volume of $6 billion out of. approximately $60

\ billion. . ;

-. Q. Do you corisider yourself. familiar with the industry?

A. Yes..

' [190] Q. During the years 1954 through‘ 1959, what was

the standard ee rate for decreasing term credit fe

insurance? :

A. Single premiuni decreasing term, one ‘dollar per

hundred. Ais dite ome

Q. Level term would be what?

_ A. Twodollars per hundred. > phe

_ « Q. lnfevidence in this case are group credit life policies

American National, issued on lives of debtors of First :

is ity Banks of Utah and Idaho. Those policies. state a

wd figure of one dollar and 54cents. _.

Would you explain to the Court whether ‘that constitutes

- any variation in rates from the one dollar a hundred i in rate

you just quoted ?

'. A, Only in that this $1.54 was derived from an average

of the premium rates demonstrated i in the table within the

contract, -

’ ageregate were assumed to be $1.54 on an average, and this

of their group operation during that period of tite, and .°

‘insurance companies, or companies writing credit life in- he

Those premium rates varied by age and i issue, ind in the in ‘

is per jetenes and this translates to precisely one dollar

+ _Q. The Government had: admitted into evidence Exhibit

“necessary to have a considérable amount of ca

single premium per $100. oy segs os

Q. The banks, were charging the going rate during the

yearsinsuit? \ cae phe Aik ome

A. Yes. ‘

[191] C-J which you have

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