# Appendix — Commissioner v. First Security Bank of Utah, NA > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0370%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1972 - **Citation:** 405 U.S. 394 ## Text . zs © ed ne | 4 | . if : Supreme Court, U.S. LL! ARDY. o FILED a are ENDIX 4d. yy 26, | oe : ; — = [ERSTE CLERK oth re : In 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 4 A PETITION FOR A WRIT OF CERTIORARI FILED JUNE 18, 1971 CERTIORARI GRANTED OCTOBER 12, 1971 Seo: — . — a ae ’ \ e aie S. : : ; ; ‘ * . - ¢ : ae , : . bd . 2 a . 2 . . ; ° : e . . . : : ; 7 : 3 . eee ee a ‘ = . " be 5 e ae . =! » ; ~) . — ch . the Supreme Court af the United States, OcropER Tana, 1971" . No. 70-305 _ CoMMISSIONER ox INTERNAL REvENvE, Petitioner. V. ms °. 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 2 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 ° ‘ 7 | eae or se . : - — . i gy go. ax Court or THE ‘Unstan States DocxmrN No. “1190. 63 a Fin ws-SCUMITY Bax OF Uran, N.A., Petitioner 3 77 2: se . " . A de ~ : Vv. ° . o bad Commissioner or InTERNAL Revenve, :-Respondent_ . . & .¢ ° ° A . oe ~ e 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 v. -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 Oa Dee. 27, 1967 | Jan. 26, 1968 | "Oct. 8, 1969 » ~~. Mareh 3, oe > May 7,1968 J uly 31,1969 ‘ Aug. 6, 1969 oe Ge 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: . ; a: ‘ ‘ ace . . . ree oy ea) ers gs : o a a oe ; | ae ° ; i ee if adaes ‘ MEMORANDUM FINDINGS OF FACT .: Unrtep States Court or ‘APPEALS. For toe: Tents Circuit ~ ." Docket Nos. 611/69 and 612/69 g - [Caption Omitted] a * 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: vay © P . _ J | Wa = - F 4 a) . - ef ¢ . . e - ¢ - ; ‘ c o d . ee + \: ray er Ty An ° é 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: 7d 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 - B 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 - . Oe ae Ge . . -— . . Ps ‘ 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 . 3 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- . = | - ©. : . ~ Ie E> a. Regi : "FG. - 10 | | ’ 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 > e. 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 © years 1955 through 1959. The Commissioner’s determina- | 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 av | - 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 ° = we 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 ° \ : - . rT ; . we ; : * , ° . ; Gs Se . ; ¢ Ap:SLC:WBH ee - 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 = , . a 15 : : 3 ; . - 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, . MS NE 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. ps 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 22 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...” ae oy 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! 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 a 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] . \. . -* : . . 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 > 41 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 © 43 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] . 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 >t [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. ” e 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 ae > 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. eS 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 ra B o ‘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- : ap : 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. 3 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? ie “ 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 - ‘ , ‘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 63 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 . tic © | Ry Me Boomm: 66 50 Pt et [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 returns of Petitioner Management Company for the years © 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 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 -@ a - 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. the First Security. Life-Insurance Company could become © 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. | 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 tm - 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. ~ © Mp. Asperson: Very well. We will prepare ‘such a ‘list ‘and submit it. © - - 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 see By Mz. Boouzr: © 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 - for certificate, as you'call it, the document.will be executed © . by the borrower? eer ee oe ee Te ees: a“ . a. J 6 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 C company, not just any Tom, Dick or Harty,.to go around - and. interview thepeoplee .. © - . 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- xt 2 +— 8 ‘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. a ., 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 _ total salaries paid, I determined the fringe benefit cost per © 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 7 ¢ 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 ee ‘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 » ny ta SS: ' @o8 (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 Pa 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 4 single premium per $100. oy segs os Q. The banks, were charging the going rate during the yearsinsuit? \ cae phe Aik ome A. Yes. ‘ a [191] C-J which you have previously examined, which con- tains formulas for various rhtes. | PTR tec ge Are these formulas in\any way inconsistent with what. _ you havegust testified to? \ A. Not in my opinion..: Ne pA ND ce BiB. RN Q..Are you familiar with ‘the. First Security Life In--. surance Company of ReeReT Ns: og eee ee A..Yes, sir, |” oe 8 Q. At our request have you examined its operations? | A. Tell the, Court why a company wotild begin by re- insuring only. \ | 2 We ig Rad A. Well, the‘major purpose for commencing .a life in- _ \ \ surance company operation through reinsurance would be. -a reduction in initial capital requirements. . For. instance, to start a life insurance peety it is tool-up expense, for organizational expenses, for. develop- - ing such things as gyemium rates, policy forms, mechanical forms for data proéessing. = —-- oe es oe ene These could be obtained: generally as a reinsurer by em- - ploying someone else’sforms.. . ; yi ..Q. Is there any comparison between a life insurance — company, such as Security Life of Texas? and the life in- - Surance agents? | cane ~(192] A. No, sir. Businessyise they are different con- \. cepts. heats — : Q. Explain to the Court just how different those concepts 5 aR a ae on laa 2 te ECOL BERT A. As an agency organization, an ‘entity would: be con- cerned with simply selling an intangible product, and its sole interest in this product would be in the commissions or ~ a _ the compensation received for its efforts in the sale. A life insurance company, on the other hand, is in the . "= See GounrrYes.,. --- : | We will adjours ae gentlemen, to Tesume at 2:00. eee o’elock. 7 , ib Abin Hotigees) Qh cole f [197 ] “Mr. ANDERSON : : ur. =. will you resume ” ie seni please. = : 2 eee bon ey Epvt - " i = the stand and, = Been previonl daly sworn, tified eta a4 eee: SN Dd Q. ‘Would you “Sieiniesialictiin aut tae Axperson: Read'back the last question and answer pany if you have. that? ee a . {us Court: I think that the record should show that we ' are talking about Bxhibit59- = : ge Wrrness : All right, 59, yes. A. In 1954, the number of—— - Tue Court: Justa moment. : i, s And ‘your testimony prior to this chart was concerned with Exhibit ’58. That’s just for the record. 3 Mr. ANDERSON : Thankyou. re ian Tas Wrrness: All right. ; eas CS aioe A. At the year end 1954 there were 12,500 and six policy holders. The following year nine deaths would have ‘been ‘gufficient to eliminate the surplus amount, nine extra deaths | at the maximum amount. Pe. & Rie Rae |. Bhe company had 27 594 policy holders. The following | -year,. 1956, 28 deaths: required to eliminate surplus, the _ 8 args : And so on, and in 1959, the number of policy holders were | 36,416. And this graph was drawn to demonstrate the ~magnitude of the risk involved or the possibilities of finan- — cial disaster for this company: due to chance fiyetuations -Q. Could you ‘elate that to a block on your chart 58. so that the Judge could relate 59 to58? 3 fF _~ 93 4] ‘he Yes. 59 was intended to" point out thi oroblem 4 in this square a : which refers to claims ‘due to chance fluctuations ne of ~.. gourse, due, of course, to small numbers. ; Q. Are you now moving to Chart No. 601 A. Yes, sir. . Chart No. 60 is just: shown to amplify the siaide shown _ . in the previous chart and to show the relationship of the . - total outstanding insurance risk of this” company as com- pared to its surplus account; In 1954 or by the end of 1954 the volisme—beg your pardon. This chart shows the average exposure during the year _ as compared to the surplus account at the end of the year. I beg your pardon, again. To thé average surplus os theyear. . So at 1954 with an exposure of $3 million, the company had $22,000 of surplus. In 1955 with the exposure of $10 million, the company had a surplus of $84,000.0n the average. — [209] In.1959 with an exposure of $40 million, the com- _ pany had a surplus of $40,000 on. the average for that year. This relates—or amplifies ’59.._ . .Q. Which. block in 159% I mean °58? A. The same one as the—the same one as before. - Q.. This is an amplification ng the same block on 0Bt A. Yes. Now, within the life insurance industry: there i 18 a very ". “muh used rule of thumb for new life insurance companies that is-to establish it with capital and surplus of approxi- mately 100 times its maximum risk of one life. . This is arbitrary and a rule of thumb, but it is also ‘true that throughout the industry the amount that companies will retain on ome life is closely in that neighborhood. And here are:a list. of companies in 1955.and the capital and surplus accounts during that year or at the end of that . year and the relationship in the final column; of a single life—retention on a single life to that capital and surplus; a the figure is very. gbviously—and this is just a sample of-a couple of hundreds that we went through to determine what the business. jidgment of the insurance industry manage- ment considered to be a reasonable relationship. _ The average for this group is about 62.62 which itis : it takes” scott! a ‘hundred and Bima f claims. at 2 Siete. . ~- through °59, we find that they gradually did‘ retain monies | not needed for other. purposes, for claims, experises, to build :- _. [210] the maximum amount to eliminate the. capital and " °. gurplus account2f these companies on the average. 2 oe you relate this chart to Security Life of Texas? . i 2 7 : ae We are still referring to claims due to fluctuations, but now also in this and this would be more protection for a company. against the catastrophic loss, 80 you.might oon- ~ sider that this last chart which is No.’61 is in part ademon- - stration of the needs for capital funds, both to protect — against chance fluctuations due to small numbers and also ~ - to protect the company’s financial position against catas- . trophic losses. pti cake ee Now, Exhibit 62 is to show for First Security Life over : ‘the period under consideration here the relationship of its -_ gapital and surplus account to a maximum retained on a single life.- a Ree wie caks ue + As you see, in 1954 by industry standards or by industry - averages, the maximium retention on one life was particu- . . larly high in comparison to its -available funds. | ae - Now, a company which has this-arrangement should take. _ every expedient that would allow it to increase its capital - account, capital and surplus account, so that a ehance fluc- uation or a small disaster would not put it out of business. ~ Following the Security Life through the years 55 | [211] the capital and surplus account, so that they were by 1959 in a position to have a-$10,000 retention on one life. _ I might add that it is also beneficial to the owners of a - - Jife insurance company to retain the maximum amount ‘possible within its’capital frame work on a single life, since to buy insurance protection from angther is to share part '. of the potential profits. Those.charts then were to demonstrate the points made with respect to chance fluctuations and with respect to the - catastrophic hazards. ._ eee — oe: There is another and maybe more important reason why ' . in the credit life business, pre nig companies of all sizes, small and large, should retain more money for pro- . tection against future losses. e., | *xnd this has to do with what has in practice been occur- ring withintheindustry, ==—«._:— | Bawa aaa | ” Credit insurance was practically unused before 1945. The - volume in force at that time was something liké 365 millions J co att 2 95 which was less than one-fourth of one per cent of the insur- ~ anceinforcein America, = Geihee tate _, Well, after 1945 and as, the credit and consumer restric- tions, Segumer credit restrictions, were reduced and credit . became more available, credit’ insurance was used in an © . increasingly large measure as we have already mentioned. . In 1955, 10 years later, it had gone from 300 million. [ot] ’ to 10 millions and 12 years later, it had gone from 10 mil-. lions to 60 millions or thereabouts in,force, _ Pie - Well, during that period of time the industry has been . struggling from trying to determine how to measyre it to ~ determine what true loss ratios are there to determine what ee. of regulation should be imposed to protect policy olders, _ a Oe. Pg ae indicia Gartieaas? Goad *: It has. done it with very poor atadistien. et vie itp e # The original study in 1958 by Mr. Biddle and other people _ was wasted on statistical information derived from annual statements of, life companies who were in the credit life — business, in the credit life files. | eo Seiee ae . The first such annual statement containing such infor- — Imation was for the year 1955: The study reported in 19 utilized the iiformation from 1955 statements and theT: _ Statements. . ° Fo ies ine a eos It is unfortunate so. much emphasis was placed on the material. and information derived. from those statistics, .— since for ‘one person, at least, I know how-difficult it was - for the companies, for the industry to supply meaningful . information, having been responsible for trying to déter- Mine such information for the company I was with at -that time: nee ae . -Much has been done to improve statistics since then. — | However, -we are still far short of adequate to tell us one _ thing that we are going to need to know as time: goes on te . and that one-thing is what premium rates or what average _ [213] claim rates or what claim. provisions should we make... . . for credit life, depending on age? ton ts ; Now, in 1954—_ gece Q. May_I interrupt just long enough to point out for the- record that you were referring to Exhibit 63 and your last . . minute or so of testimony has been relating to Exhibit 63; is that correct? «ss Bot ae ahead . A. I guess so. I think I am going between Exhibit 62 and Exhibit 63, however, I am building to describe what. this table is supposed to demonstrate. | Anes "2 |] i ~ The siraetlaa' in the industry. has been. to sell. an “indi ‘ - vidual policy. either’ on a group basis—single premium _ ": . policy, either on a group basis or individual basis for one — _*. dollar a hundred and this premium was atrived at by.some '* @ne, and I know not whom or how or why, but it was ' Sevel- he ‘oped through a i concept and a group of Sonee Pt and eh ign approach, the group insurance Westhead a group writing life insurance company will look at one employer who has many . «lives and he will take each individual life'at his particular " ... - ‘attained age, calculate a premium adequate for that indi- - hee: and likewise for all other individuals in the included group, add them together and divide\by the total amount to deter-. mine what is known as the life average rate. ~. This life average rate then is\charged to in [214] practice ~ each employee in the group during. the period i in which this \ ‘premium rate applies. - ; \ = . * Onee each year the group in kurance company. redeter- A Ae mines this life average rate. What they have recognized aN is the fact that people increasing in advancing age. are. \ = the group. oro “It has been ‘known. in group life insurance since’ 1920 _ that any given employer may have an increase in his pre- \ nium rate as years go on because his particular group -of employees are maturing. 4 f \They are ageing. And thus. he can expect—and in this _. respect, this is. a point well.communicated within the life * - Imsurance agencies—all employees expect this. ~ : Well; credit insurance evolved from a group concept and "+ the one dollar — S someone’s qpenton as to the life . . |. average rate. . Tt was: nerally dieciphial and in fact’ during the 50s and sitice that time, except for states. in which regulations . have restri the use of the. premium rate to a lower “figure; two do still generally is used. The part of the confusion as to the adequacy or ais. ee, quacy. of the one dollar rate has. been this tremendous influx - of new WS fossa lives ae. the. increase in volume in. this: We ha haven’t had an \wepoitanity thou ngh, i in my opinion, - [215] we will have an opportunity and that it is underway. Asa matter ™ fact, we: wil rhsve an ene to see Cet ” vidual for the amount of inaurance he has and for his age — .»\ ' * more likely to die than the people who are the youngest: in © : e | GE ee ae these averago claim rates increase and there is evidence . how between the study which was conducted and reported _ in ’58 and the study which was conducted and reported — last year, there is a-definite indication that this is at work» and is in truth happening. . ls pits +7 | The claim ratios have increased. I.don’t recall the pre- | - ¢ise: figure, but approximately 20 to: 30 per cent during that period of time, which has been barely, well, the'periods - covered were only six years spread. aida s HIgh 3x ' Now, this ¢hart then was to take for First Security Life, _ one policy holder. He is a policy holder out in‘some agri- cultural community: He is a borrower at the bank in 1954, . Heis 45 years old. ' - Now, it just so ha pens on the average, the borrowers of First Security Life or First Security Banks or First ' Security Corporation were about 45 at that period ‘of time. The American National contract provides for termina- tions of benefits or coverage at attained age 65. 2 Now, taking what ie on this chart-and advancing the | man from age 45 to age 65, this will reflect what is going . . to happen and what has been happening with respect to that one individual: _- jeg igh [216] _ The fact that we as an industry are completely unin- | _ formed as to the true rate of increase in this man’s cost : is because we haven’t. gotten the statistical information to - enable us to keep track of claim costs by age. ei We don’t have this information. To keep track of that, e "” we have to conclude that by deduction and otherwise. However, takingthe. man at 45 and taking the 1958 CSO table mortality which was chosen ‘deliberately, not to rep- _, resent eredif life insurance mortality rates, because crédit Bie exp insurdnce mortality rates, as should-be and have been f a “experienced by companies issuing unrestricted policies, ‘lacking underwriting requirements, lacking waiting periods, ‘should be higher than the »758 CSO mortality tables, 3 The’ ’58 CSO mortality table covers insureds’ lives and ~ examined lives during the period under which we have in , consideration and that’s roughly the period, the year 1954. -,It is not only illustrative, but conservative. | ! Now, following this' man, he goes to the bank and he — borrows $100. He stays in this position and as soon as he pays back the $100, he goes back and. borrows some more... He constantly and continuously is renewing and staying . : . ee ne ae Sly a b ; a ,, i. Pee f this vio We charge him $1 a » premium, /Now, it is e \ tm oe i ee | | Dae: “Tite Wrreess : ‘Diasnnk = he tad a Pe r the 3,000, it would just, be $30. thaw Covey Right. ° "Ture Witness : ‘Now, ‘the. fact that it has appeared ‘anti ._ this date that the ‘dollar premium was. adequate, is to ignore what is really in practice developing in the credit insurance industry, and that is you have an increasing cost. due. to >, those: people who have been in the ‘pool for the ‘longer ace Of: time.- | are being’ subsidized today ne younger, people and lareee ‘gabe of younger people coming in and paying +a dollar, but at.some state at some.time, in fact, it would probably be predictable that these claim ratios would have’, © to increase within the next decade because of the slump in — 4° new births following World ‘War II. We are probably: looking-at a tauch’ reduced claim rate 2 because of the influx-of men in, the economic ‘society who: "were born during the War.. . However, if you took a closed ovmananailty such as a small - town, of course, buying éredit insurance from-a local banker ‘or some one else and remaining the clientele of that bank, eventually the dollar rate will be ‘insufficient. So that we do today is profit. According to our annual © ° ~ statement of accounting in’ 1954, when our men age 45 was = = “. that age,” ‘if he really had. mortality in the average code , [218] oi that table, we had that area of. profits.. Saco Now, following that.man juntil he retires, something has. Ee pes to change in our industry. 2 : “We are either going to have: ‘to say, “Well, we will cut es. him off when he gets above the buck, Md or we say, ‘We are ores going to’ raise .the rates. when the community gets above the buck, then we must save money” now to one: — é then.’’. i a , ° ~ Anything else i is a short term aliit of view. ‘Anything else is less than realistic: of the circumstances and the.facts . ~ ahd the practice that i is now generally under current in our \ __ waciety or in our ixisurance industry. ‘ It seems to us that the problem of this ageing population i isa very qeetedy consideration. \- : | Dae Odiier: ‘You: ‘are talking about the e $100 n man, not 7 te 99 And that also if you had a’ stationary group, for instance, if. you were the largest.insurance company ‘in ‘the world, - writing the most credit insurance than any other company and you had insurers from the youngest age to the oldest . age and every year they all moved up with some néw people Moving in to fill up the spot so that every. year the com- ‘position in the group was precisely the same, then you — could say whatever -your book profits were, were profits. | . _ You could spend them and wouldn’t have t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0370%3A1. Public record. Not legal advice.