Brief for the Respondent in Opposition — Commissioner v. First Security Bank of Utah, NA

oo @ INDEX

Opisicds Below and J urisdiction

Question Presented .. |

_ Statutes and Regulations Involved . ats

. Statement - ............-.... | . |

Argument ................ se :

a a ee as ad

capa! ’ CITATIONS

'y @ to to a _§@

Cases: 7s. | RAE

‘Advance Machinery Exchange. v. Commissioner,

“php .2d 1006’ (C.A. 2); certiorari denied, 344

U.S. 885 a 8°

Alabama-Georgia Syrup Co. v. Commissioner, 36 Ct

T.C. 747, rev'd on other grounds sub nom, —

| Whitfield v. Commissioner, 811 F.2d 640

(CAL 5) naan oe |

Asiatic Petroleum Co. v. Commissioner, 79 F.2d

‘284 (C.A.-2), certiorari denied, 296 U:S. 645, es

rehearing denied, 296 U. S..0@6 2.2L... 8.

Bank of Kimball v. United States, 200 F. Supp. ee

688 (S.D. 1962) ...........2...... 18, 19

Basye v. United States, 295 F. — 1289 ee:

‘Calif.). i 19

Campbell County State.Bank, Inc. v. Commis- |

sioner, 87. T.C. 480 (1961), rev’d on other

grounds, 881 F.2d 374 OE eae 12, 15, 19

Central Cuba Sugar Co. v. Commissioner, 198.

_ F.2d 234 (GA 2), certiorari mashed 344 US.

AE a re sw

‘Charles Town, fae. v. dileiaialtaainiseae 872 F.2d

~ 415 (C.A. 4), certiorari denied, 389U.S.841.. 8° |

Commissioner v. Chelsea Products, age F.2d 620

(C.A. 8) i em

Crowley .v. Commissioner, 84 T.C. ae ae 12

“Davis v. United States; 282 F.2d 628 (C.A. 10) 10

INDEX—Continued

— etactig Bank | v. United States, 218 -

~ F.Supp. 862 (D.C: Mont. 1963), aff'd 884

F.2d 120. (C.A. 2 SDR MRED oN See 18, 19

* First. State Bank v. United States, (D. C. Ss .D,, -

', * decided June 25, 1962) Sdtake ee sc eee 12, 19

; wey Motor Company, Inc. v. Commissioner,

Memo. 1958-189 (17 T.C.M. 944) ........ 19

Grenada ladustrice, Inc. v. Commissioner, 202

F.2d 878 (C. A. 8). ‘certiorari denied, 346 U.

Sco ESE Cra ie epee ee 8.

Hugh Smith, ‘Inc. v, \ iannalleme?. 178 F2d

- 224 (C.A. 6), certiorari denied, 837 U.S. 918 .. 8 |

Jaeger Motor Car Co. v. Commissioner, 'T.C.

Memo. 1958-223 (17 T.C.M. 1098), aff'd, 284

* F.2d 127 (C A. 7), certiorari denied, 365 U.S.

860

sc 13, 19

" James'v, United States, 366 U. eee ‘VW

L. E. Shunk Latex. Products, Ir nc. v. Commis-

sioner, 18 T.C. 940 (1952) ...ssscteeeeceeeeeeeee 18

‘Likins-F oster Honolulu Corp. v. Commissioner, ~

417 F.2d 285 (C.A. 10) F cortical denied, 807

_ U.S. 987 3 PS cet PONS Me Re UR Ta oe

teas Finance oheraion 4 v. Commissioner, 48

T.C. 778, af’d. 407 F.2d 629, (C.A. 7),

certiorari denied, aoe U.S. 956 ....7, 8, 14, 15, 16, 18,

20, 21, =

‘Moke Epstein, Inc. v. Commissioner, 29 T.C.

eS EE ae 19

Nat Harrison Aséoeiates, Inc. v. Commissione?,

en EE, iene eek ed 12:

National Securiti o Corp. v. Commissioner, 187

F.2d 600 ic 8), certiorari denied, 820:U.S.

794 ;

Nichols Lem hari ‘v. Commissioner, T.C.

- Memo. 1962-149 (21 T.C.M. 805), rev’d' on

_ other grounds, 821 F.2d 905 (C.A. 7) ........12, 17,19 _

(iy -:

| ENDEX-Continuc

Oil Base, Inc. v. Commissioner, 862 Fa 3 212

(C.A. 9)

= Paramount Finance. Co. v. United States, 804

‘F-24460 (Ct. Cl. 1962)

Pauline W. Ach, et.al. v. Commissioner, 858

F.2d 842 (CA. 6), certiorari denied, 885 U.S,

Sec. 5239 (12 U.S.C. 93) ...

_—

- 8, 10

20.

- 899 .

Ray Waite Motors v. United States, 145 F.Supp. aha

- 269 (E.D.S. Car.4956) .... 18, 19

South Texas Rice Warehouse Co. v. Commis- —

sioner, 866 F.2d 890 bbe: 29 5), certiorari de- |

-nigd, 386.U.S. 1016 ._._... 8

Tennessee Life Tees Co. v. Phinney, 280

F.2d 88 (C.A. 5), certiorari denied, 364 U.S.

914 8, 9, 18

Teschner v. pene wee 88 T.C. 1008 ....... a |

” W. G. Duncan v. Commissioner, 178 F.2d 218

(C.A. 5), certiorari ‘pee 837 U.S. WT ees

Statutes: =?

Internal Reveriue Code of 1954 (26 U.S.C. ne

_ Section 61 .......... ETE Tne 1, 22

. Section: 482 1, 2, 8 9, 10, 14, 19, 21, 22, 24

Sections 801-820 ........ "20

~ Life Insurance Company Income Tax Act of

7 1959, P.L. 86-69, 78 Stat. 12 2... ig

Bank Hoag Company Act of 1956, 120

ULS.C. § 1841, et.seq. 2... 6

| Revenue Act of: 1928, ¢.852, 45 Stat. 791, Sec.

45 ; a | ee

Revised Statutes: ~ |

Sec. 5202 (12 U.S.C. 92) 4

‘é

INDEX—Continued a

Miscellaneous: | es :

. Hi. Rep. No. 2, roth Cong. tat Hees. D. 16 ae, 9.

H. Rep. No. 1098, 84th Cong., Ist Sess. ............ 22, 23

* Treasury Regulations on Income Tax (1954

Code), Sec. 1.482-1 (26 C.F.R.) ...002....:...9, 10, 14 7

Seieroe and Gerber, Section 482—Still Growing :

at the Age of 50, 46 Taxes 893 (1968) ....... w. —'19

@

oa ck the Sekine nc

bas of ‘the United States

OcrToser TERM, 1971

é ' .

“No. 70-805 |

ComMissioneR or INTERNAL REVENUE, PETITIONER

Uv. . . .

‘Fret SECURITY Bank oF UTau, ET AL

_-ON PETITION FOR A WRKF OF CERTIORARI TO THE

‘ UNITED STATES. COURT OF APPEALS FOR THE

|. TENTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW AND JURISDICTION -

“The opinions below and the basis for this Court’ s- ;

jurisdietion are as set forth in the petition.

QUESTION PRESENTED

Where national banks, prohibited by national bank-

Ry ing laws from receiving, insurance income or engaging in |

the insurance busines. made available to their’ borrowers.

' credit life, accident and health insurance written by an —

‘unrelated i insurer, which in turn ceded the risks and prem-

| iums to a life insurance company related to the banks, did

‘the Court of Appeals correctly hold under the particular

_ facts of this case that it was improper for the Commis-

i sioner to attempt to allocate almost one-half of the prem-

| ‘jum income to the banks under — 61 and 482 of the . .

_ Internal Revenue Code? :

“STATUTES. AND REGULATIONS

INVOLVED

Ee |

sae The pertnest statates sind ecistione « are set forth

“in the petition at p. 2, and App. D 53-57. :

- rarest

. This is a: ‘consolidated i income tax case ‘for the years

1954 through 1959, primarily involving Section 482 of the .

Internal Revenue Code of 1954.’ Section 482 empowers

the Commissioner of Internal Revenue to allocate. income

is _among. business enterprises controlled by the same in-

terests “if he determines. that such * * * allocation is .

* necessary ‘in order to prevent evasion of taxes or clearly |

to reflect the income of any such * * * * businesses. .

Respondent feniks, First Security Bank of Utah,

‘N.A. (Utah Bank) and First Security Bank of Idaho,

N.A. (Idaho Bank), are large, respected national banks,

almost one hundred years old, controlled, supervised, and

regularly examined by the Comptroller of the Currency,

the Board of Governors of the Federal Reserve System,

‘and the Federal Deposit ‘Insurance Corporation (Pet.

App. A 21). They are owned by the. First Security. Cor- |

poration | (Holding Company) , the oldest bank ‘holding

company in existence,-the stock of which is publicly held

“by thousands of ‘stockholders throughout’ the United -

- States and in various foreign countries (Pet. App. A. and

#19, 38). as

- lal citations to on Internal Revenue Code, or Code, herein

refer to the Internal ‘Revenue Code of 1954 unless otherwise jndi--—

cated. 7

g

+ Almost a quarter of a century ago the banks began 2

to make available to their borrowers credit life, health and — :

accident. insurance, which’ pays off the debt in case the.

borrower dies or is incapacitated during the term of his

loan. (Pet. App. B 39). The premiunis charged | were at

the uniform rate of $1.00 per $100.00 of coverage per.

- year on a decreasing term basis. That | was the rate com-

- . monly charged in the industry and was accepted by the In-

- surance Commissioners of the states involved — Utah,

_ Idaho and Texas (Pet. App. B 89).

_. Thei insurance was never more than an incidental part —

of the banks’ primary transactions, the lending of money, -

and the customers were never required or urged to pur-

chase it. Thus, during the years in issue less than half of «

the banks’ installment loan customers and only 13% of

their real estate loan customers took insurance (Pet. App.

_° B-39). As a routine part of loan transactions, the bank

- loan officer (who was not ‘a licensed insurance agent) ex- . ~

"plained the function and availability of such insurance.

If the customer desired insurance, the loan officer gave

‘ him ‘application forms for completion. Bank’ personnel ~

- examined the application, made out ‘a certificate’ and

either collected the premium from the customer or added

it to his loan. The, completed forms.and prethiums were

transmitted at intervals to the management corporation ~ :

for the banks, the First Security Company (Management .

Company), which performed certain bookkeeping func-

-. tions such BS, making records of the insurance purchased,

and then, forwarded the premiums and related work to the *

insurance carrier (Pet. App: 4 A and B 25-26, 89-40).

>

Ve

4

: Explaining aii processing the insuranee took only .

one to two minuté# of the loan officers’ time on each loan,

and the total annual cost to each bank for the time and = g

expense ,of explaining and processing all of such insur- :

: “ance was less than $2,000.00. That expense was found by

both courts below to be negligible. (Pet. App. AandB |

28, 40, 49—For the five years in issue, the total cost was : ‘

$8,029.80 for Utah Bank and $9,826.48 for Idaho Bank). 4

i The banks’ articles of incorporation limit thern to the

_ business of banking (Pet. App: A 21). And, the national

banking laws,:12°U.S.C. Sec. 92 prohibit the banks from

engaging in the insurance. business or receiving commis-

_-sions from the sale of insurance. (Pet. App. A, B and D:

29, 44-45, 55-56). As a result, the banks never received

or attempted to receive any commissions at any’ time from

oe ie oe renee qaction \ Salata he

B 20, 45).

7 From 1948 t April’, 1954, the credit insurance cov-

_ erage on the banks’ borrowers was carried first by Credit

_ Life Insurance Company pf Springfield, Ohio, and later:

by. American Bankers Life Assurance Company of

. ‘Florida, both of were independent of Holding Com-

pany and its subsidiaries. Commissions yarying from 40%

“ “to 55% of net premiums were paid by-those companies to

. Kd D. Smith & Sons which was an insurance agency

: snc sesame saa) ain _ App. » ©):

ee isan (over $800,00 paid of eligible tine and expense 2 satin

SS ei a B49). . zs

oe

American’ National Tiietfuilie Gcaiipeay of Galvan: - .

ton, Texas (National), an independent insurance com- ~

bf pei, wrote a large vohime of credit insurance. Foreseeing :

a change in the credit insurance ‘business, National, jate

. in 1958, approached Holding Company and other financial

~ institutions with a. plan whereby it would. write. credit in- 3

surance for the banks’ borrowers, The plan called for

-. Holding Company to create a life insurance subsidiary. pee

| The subsidiary’s business would be to reinsure the risks — ae

of the credit insurance policies written by National for

the customers of Utah Bank and Idaho Bank, Profits -

from the business, if any, cbuld be retained in the subsid-

iary for investment. In its initial years, the subsidiary

_would utilize National’s established and experienced op-

erating services, such as actuarial and accounting, on a fee

basis. If the plan proved successful, the new subsidiary

——Sauoah ree eee

pany. (Pet. App.B41). 0 {| 0 7

' Holding Company adopted National’ 8 ete and.in

June, 1954, incorporated First Security Life Insurance » e

. _Company of Texas (Security Life), under the laws of

the State of Texas. Security Life was a bona fide, viable

business enterprise. (Pet. App. A and B 24-29, 41-42).

7 The credit insurance written by National for the two banks

| was reinsured with Security Life under contracts: called

- reinsurance treaties..Thereynder, National received ap-

proximately 15% of the premium.dollar for its technical

services and Security Life received the balance for. its

assumption of 100%. of the risks under the policies. (Pet. =

App. B 41)..Although Security Life’s business. proved |

successful, this result was not assured at the outset. In i:

relation to its capital structure, Security Life reinsured ds

a large amount of risk, and several aspects of its business

could have invited high mortality rates. (Pet. App. B4l- |

' 42). ee eaneminien whe? — nor Secur- :

ity Sat paid or commie, . :

The banks benefited trom Bete available i in shes “

offices the forms and means whereby those applying for “

loans could also secure credit life insurance: it constituted |

an added attraction to customers, provided for 1 Tepayiment

| of insured loans in case of death, illness or disability, and

_ improved public relations by eliminating demands for pay- —

' ment upon the families of

-rowers. .(Pet. App. B 89). As a tesult of the additional

collateral provided by such i insurance, the banks had more

than one-half million dollars i in loans paid off ve the

years in-issue. (Pet. App. B40). — \ een

. * On September 15, 1959, as the esiat of a reorganiza- x

_\\ tion pursuant to the Bank Holding Company. Act of

1956, 12 U.S.C., Sec. .1841 et. seq., the banks became

wanes owned by the . First Security Corporation, and ecules :

a Life became owned by -First Security Investment

Company, another ‘(publicly held corporation. Under :

or incapacitated bor- . . |

the plan .. of _ Feorganization, the stock of. First —

Security Investment’ Company was distributed

- originally to. the shareholders of the First Security Cor-

~ poration, but the, stock was actively traded on the open

. market and by the énd of 1959, 7.2% of the First Security

Corporation stock had been sold.and 8.9% of the Invest-

: a eae As of February, 1967,

; Re jf : |

a « dieterential of 48. A% existed in the shareholders of the

_ two canyon epee. (Pet. App. B 42). ’

Notwithstanding the fact that‘ for soviiel: years

Security Life and the taxpayer banks had been owned

by separate; publicly held corporation, the Commissioner, i

- oby notices of deficiency dated December 21, 1962, pro-

posed to allocate to the banks approximately 47% (about”

-$800,000.09) of Security Life’s ‘premium income. (after

-. payment of National’s. management fee), for the years

1954 through 1959. An alternative allocation was made to

‘Management Company. (Pet. App. B 42). Thereafter,

‘the banks and Management Company petitioned. the

United States Tax Court for a redetermination of that

proposed deficiency and the consolidated cases were tried

before the Hon. William. M. Fay. In a brief opinion,

Judge Fay upheld the Commissioner’s allocation’, solely

- upon what he deemed to be the authority of Lecal Finance :

_ Corporation v. Commissioner, 48 T.C. 778 aff'd. 407 F.2d

. 629 (C.A: 7), certiorari denied, 396 U.S. 956. Judge’ Fay

dissented i in-Local Finance after hearing the trial of this

case (48 T.C. at 800), making it clear that he — with

the = banks’ position i in this case :

pe

On L, the United States Court, of Avsian for

the Té £ Cirenit reversed Judge Fay’s decision with re-.":

spect to the petitioner banks and reversed and remanded.

‘the pare oti Bi Company's case for oe considera- |

tion. ,

The Court oi Apiale held that windes the particular

_ facts of this case the Commissioner was in grror in at-

ae

mn pting to “allocate ajiproxiauiinly $800,000.00 to banks

\/ which. had never received or attempted to receive income:

* from: the: sale: of insurance, including the six-year period

--of time from 1948. to 1954 when Security Life was not

even in. existence, and which: expended a “negligible”

amount of. time and expense in having the insurance avail-

“A ‘able for their customers while. benefiting from that

~~ availability by having more than $500,000 in loans _

off in tive and one-half years.

ARGUMENT ©

“The issue ¢ presented was ‘correctly decided upon thées —

~ particular circumstances af, this case by the Court of Ap-

~ ‘peals. Cases under Section 482 of the Code are essentially —

--faetual in nature, and no conflict of law or question of

: _ statutory ‘interpretation | or application i is: involved i in this |

ease. Consequently, there is no basis and no many

. for further review by this Court. aN |

This Court has deriied petitions for certiorari in Sec-.

> tion 482 cases 14 times,’ and has never accepted a case

ster Honoluly Corp. v. Commissioner, 417 F.2d 285

897 U.S. 987

ga aati sett S78 Serna edt

j . en -y inance

- pS ved Tony 401 F.2d 623 (AL. oe ceri denied, 4% 18.

US. 928; Pete yi ft ae, Commissioner, |

"878 (C.A: 5), certiorari. deni, Sie. Us! S. 819; "Central Cuba Sugar

Co. v. Commissioner, 198 F

US. 874; Advance Machinery Exch. v. C Commissioner, 196 F.2d'1006.

(C.A. 2), certiorari denied, 344 U.S. 835; Duncan v. . Commissioner, °

178 F.2d 218 (C.A. 8), orari denied, 387- U.S. 957; Hugh Smith’

Inc. v. Commissioner, 1 F.2d 224 (C.A. 6), certiorari denied, 387 .

US. ‘918; National oarteles 506 Us 984 v ape penny Aan vB 187 F

8),. certiorari denied, 320 U.S. 794; Asiatic Petroleum Co. v.

, 79 F.2d 284° US ei. 2), certiorari A 296. US.

(4; rehearing denied, 296

a

—>$-—_—_>_4—

——— —-_4- i wa

9

, arising under that statute for review. In each Sibi tee

petitions urged the involvement of important legal ques-

‘tions of general applicability in the administration of the

_ statute, and many petitions cited conflicts. And, i in each

instance, the Commissioner opposed review by this Court,

. stating repeatedly that Section 482 basically presents only _

factual quéstions. In one of those cases, Tennessee Life

Eneurance Co. v. Phinney, 280 F.2d 88 (C.A. 5), certiorari

: denied, 864 U.S. 914, the. Commnianioner 10wledged a

5 lig Se Se ces

- of é gh \

+). “Section 482 pererie the Coliabinn ‘to celle:

cate income and deductions between commonly controlled

- ” business entities if he- determines that. such allocation is

necessary in order to prevent “evasion of taxes or clearly

to reflect the income” of any of such entities. This ‘/pro-

vision, which first appeared in its present form as ie ae

45 of the Revenue Act of 1928, was designed—

_“* * * to prevent evasion (by thejshifting of profits,

the making of fictitious sales, and other methods fre-

quently adopted for the purpose of ‘milking’), and

in order ‘clearly to reflect their; true tax liability.” ~

| H.Rep, No. 2, 70th Cong., p: 16 (1980-1, Pt2.

- Cum.Bull. 895). a

The test for determining whether an ae is

| warranted under Sec. 482 is whether— 3

“@ © © the taxable income, in whole or in part, of a .

controlled taxpayer, is other than it would have been

had the eee in te conduct of = affairs been

=

‘Brief for the Suienbias & Oe tion on (op. 6, & ike

960, N =

hg nessee Life Insurance Co., supra, Octo

10

an uncontrolled taxpayer dealing at arm’s length with

another. uncontrolled taxpayer.” Regs. Sec..

1482-1 (c) » (Pet. App. D 55), (Emphasis added).

That test has been universally adopted. See.e.g., Davis v.

United States, 282 F.2d 628, 626. (C.A. 10) ; :Commie-

sioner v. Chelsea Products, 197 F.2d 620, 628 (C.A.8);

Oil Base, Inc. v. Conimissioner, 862 F.2d 212, 218-214

(C.A. 9). And, the test was specifically adopted and ap-

_ plied by the Court of Appeals.in this case when it con-

cluded that the banks’ taxable income would ‘not have

been. any different if they had dealt with unrelated, un-

controlled third parties rather than with Security Life’

_ through National.. Of course that inquiry under the

statute and regulations is essentially factual, and “pen

review by this Court it would not lead to the creation of a

‘Yule. of general application or " development of herstot ore ° |

unknown facets of the tax laws. .

Both -courts below lik that. the honk * “|. never

received ot attempted to receive commissjons or niles:

ance premiums resulting from their customers’ purchiase

. credit i insurance.” (Pet. App. A and B 29, 45). Con-

versely, as pointed out by the Court: of Appeals (Pet.

App. B 45), the lower court made no finding that if

Security Life did not exist (and the banks were dealing

‘strictly with an “unrelated insurance company) that the: |

banks would then receive or attempt to receive such in-

. . Come, As shown by the record, for six full years after

~ the banks began making available the service of credit

life, health and accident insurance to their customers —-

prior to the formation of Security Life — the banks dealt -

aa SY Pee Seeeiget tnrernndd ecmpetics in in un-

2s

——

> . ; ; 11 5

4

controlled situation. Yet during that time the banks had

> no contact whatsoever with insurance. commissions or

profits resulting from their customers’ purchase of credit

insurance. (Pet. App. A and B 29, 45).:The reason. why .

this was and continues to be so is that federal banking law

prohibits banks such as the taxpayers here from receiving

compensation from the sale of insurance (12 U.S.C. Sec.

92,"Pet. App. A, B and D 29, 44-45, 55-56). The penalty

~ for violating that’ statutory prohibition includes loss of

the organization’s national banking franchise and per-

sonal liability against directors of the bank (12 U.S.C.

Sec. 98, Pet. App. D 56-57). | er

- There is no evidence or finding below that the banks

*

would jeopardize their very. charters and subject their

directors to the risk of personal. penalties* by. violating

national banking laws for a few dollars of insurance

"profit. The evidence is to the contrary. (Pet. App. B 49-

officer-owners stand to enrich themselves through mg pea ps

These banks are publicly owned through Holding

- of industry.

6On pages 14-15 of his brief the Commissioner alludes tothe

federal banking laws in.question but misinterprets their effect here

by pantie an argument which suggests that the banks are placing

“in issue the supremacy of the federal tax laws. The

Commissioner .

has missed the point. It is what the existence of the banking laws

did to affect the entire structure of the transactions in

that is the point here. As the Court of Appeals found, because

the national banking laws, the banks remained aloof from any

titlement to insurance’ related. income. (Pet. App. B 49-50).

_ Commissioner’s reference to James v. United States, 366 US.

.* (Pet. 15) also misses‘the point. In James, the ‘in fact rn

- geived income, although receipt was illegal. H taxpayers

only did not receive any income, they i :

affairs in ‘good faith compliance with federal. law so as, to |

1

t

completely removed from and unrelated to it. In James, the taxpayer’

broke the law and took money for himself. Here, Commissioner

". geeks to force the banks to break-a law which

oe in order to sustain a theoretical

. . which will never happen in real life. °

ze

7

, and

S This is no closely held’ corporation. situation where director-

their directors are independent businessmen from many segments:

238.

50). ‘Thus, the Commissioner’ s position in these cases is a.

perversion of what Congress. intended Section 482 to.

achieve. The Court of Appeals recognized that he is using

a so-called “controlled” situation to attribute to the banks:

income which both courts below determined that they would

" never receive in an uncontrolled situation, resulting in the

fiction of attributing hundreds of thousands of dollars to

banks which will never receive that money. and a tar where .

Be there is no possibility of income. (Pet. App. B 50).’

" The decision of the Court of Appeals in. this case

accords with the weight of. authority that the Commis-

_ sioner cannot force a taxpayer to violate a law which that

taxpayer is in good faith attempting to respect, and that |

_ good faith efforts by the taxpayer to comply with the law

must be recognized and sustained. Nichols Loan Corp. v.

_ Commissioner, T.C. Memo. 1962-149 (21. T.C.M. 805),

rev'd on other grounds, 821 F.2d 905 (C.A. 7); First

_ State Bank v. United States, (D.C.S.D., decided June

25, 1962), unofficially reported at 62-2 U.S.T.C. Par. -

9613; aa County State Bank, Inc. v. er.

Gam arent repmive tg tnstroatedunder’Srion

v. . Seaton’ 86 T.C. 747 (1961) ; Sel. on Georoie Sor sub. -

Whitfield v. Commissioner, 311 "F.2d 640 (C.A. 5); Nat Har-

Associates, Inc. v. C ns T.C. 601 1964 M ,

a Sp wet the power whi 9 tena A

Scere enictee tio Sat eet ena a Se et ee be any ait

tng i entirely alone, —" - wand other haces or control-’

8

87 T.C. 480, 488-443 (1961), rev rev'd on other cae 831

F. 2d 874 (Cc. A. 8); First Security Bank v. United States,

"218 F.Qypp. 862 (D.C. Mont. 1968), aff'd 884 F.2d 120 ©

(C.A. 9); L. E. Shunk Latex Products, Inc..v. Commis-.

| - sioner, 18.T.C. 940, 959-961 (1952) ; ; Ray W aits Motors —

uf United States, 145 F.Supp. 269. (E.D.S.Car. 1956).

See also Jaeger Motor Car Co. v. Commissioner, T.C.

Memo. 1958-228 (17 T.C.M. 1098), aff'd, 284 F.2d 127. -

(C.A. 7), certiorari denied, 365 U.S. 860, where. the Com-

missioner, contrary to his present position, was arguing that

- it would be against the law for the corporation ta, receive

the income. in question, and the court agreed.

.

2. The Coniasieaieaan briefly seeete a ite of

circuits (Pet. 7-8); but does not point out in what respect

the two circuits disagree on the interpretations of either

of the two statutory provisions involved. He seeks on gen-

eral terms to establish a conflict by saying such fact was

. recognized by the Court of Appeals for the Tenth Circuit.

But the language from the opinion of that court refutes

the Commissioner and shows only that the Tenth Circuit, ©

as well as the Tax Cougt, recognized that the fact situa-

tions.in the two cases were similar. Mere similarity of fact _

situations, however, does not necessarily give rise toacon- .

flict. in the interpretation of legal principles of the kind

- that it is necessary for this Court to.resolve. Courts, as —

juries, will- continue to draw different conclusions from

similar factual patterns, despite a decision i in @ particular

_ case by a higher court that it agrees with one rather. than

the other stig oecmas of the facts. : see

The Tenth and Seventh Circuits have not + dined

14

“concerning the applicable legal test. Both have’ accepted

_ and applied the same standard; and nothing in either opin- — |

_ jon suggests a different legal analysis of the applicable

- statutes. The Commissioner went to the heart of the mat-

. ‘ter in his brief in opposition to the petition for certiorari:

in Local Finance when he told this Court that cases such |

as‘this do not present “dif ficult and fundamental issues _

"in federal tax law” since they involve ‘ ‘essentially factua P

fe questions.* Consequently, if. the Court grants certiorari it

would be only to decide which of the appellate courts took

the: correct view of fact patterns which have similarities,

(but which also have dissimilarities) .

The ‘Commissioner’ s bare, unamplified conclusions

(Pet. 11-12) that the Tenth Circuit’s opinion will “impair”

"the “effectiveness” of Section 482, andi that it goes to the

“meaning and ‘scope” of. the statute, are unsupported by

_ any explanation of why that is so, or. any showing that

the Court of Appeals used an erroneous test for applying

Section 482, ora test different from that used by the ©

Seventh Circuit. The fact is that the Tenth Circuit recog-

_ nized and applied the precise test set forth. in the Com-

missioner’s regulations (Reg. Secs. 1.482-1 (b) and (c)—

Pet. App. B 43-44), and made the resulting fact finding |

that, under such test, the statute: would not apply since

the banks’ income would not have been any different if

Security. Life did not exjst, and no matter with whom the

banks might have been. dealing. This was so because of _

- ’ the: undisputed ne that au banks were unwilling to

ee * Brief for the Respondent in Oepealtio’ 15, October Term,

1969, No. 561. : sade

15

violate. natiqnal banking: laws under any circumstances. -

‘The Commissioner reveals his erroneous concept of this

crucial point where he attempts to clinch his statements

just referred to by asserting incorrectly and. trary to”

‘the record (Pet. 18) that the banks’ income was less than

it would have ‘been under different circumstances. In -

. short, the Commissioner is not really proposing review of

a legal principle by this Court, -he is seeking another

opinion.on the facts. fs

The Commissioner also erred in his, statement (Pet.

8) that only one factual difference exists between pis case -

and Local Finance. Certain critical differences do

~ First, in Local there was a finding that the commis- Z

- sions in question would have been paid to the finance com-

_ Panies but for the existence of a controlled entity. The

Seventh Circuit emphasized that difference asa control-

ling feature which distinguished Local from similar cases

__. involving insurance commissions: (407 F.2d at 634). The

findings in this case are exactly opposite (Pet. App. B 45,

49-50). All the-evidence indicates that the banks would

not violate natiorial banking laws (with the consequent

severe penalties) under any ciféumstances. 88

Second, the Seventh Circuit in’ Local distinguished

that case from Campbell County State Bank, Inc. v. Com-

missioner, supra, on the additional ground that in Campbell

there was a specific finding that “the services performed |

by the Bank in connection with the insurance were mini-'

mal.” (407 F:2d at 634). In this case, like Campbell, there

was a specific finding by the courts below that the banks’

gt :

—

16

expenses (hence, services perf ormed) ir connection with .

. the insurance were “negligible” eae ai A and B 25,

. 40,49)° |

. r e

: - Third, the Tax ak in Local, stressed that. “there

is no showing that” the amount which the related life in-

surance company was allowed to retain under the Commis-

sioner’s allocation “tis not adequate compensation for the ~

reinsurance.” (48 T.C. at 792). 'To.the contrary, the rec-. -°

ord in this case establishes that Security Life earned and |

needed évery cent it received due tothe size and nature of

the risks it assumed and the fact that several aspects of }

. its business could have invited high sai rates. (Pet.

App. B 41-42).

‘Fourth, the .finance company employees ‘in Local

-- were licensed insurance agents; whereas, the barik person-

"nel were not insurance agents (which may account for the

‘fact that almost all of the borrowers in Local took: insur-

ance, while most of. the bank customers did not). - T. C.

(at 779; Pet. App. B 89). ie’

Ben assuming eae that a conflict exists be-

; "tween Local Finance and this casé on the Commissioner's

| 8It is significant that the banks in this case mt far less

time and effort in connection with the insurance han did the

finance companies in‘Local. Over the tape wpe involved in suit

third ae ton ee collected. $1, ragged Bak mg Pitan one-

collected in C. at 784), and yet

in handling jess :

here did in handling more insurance over a six-year period. More-

ona We Ladd od ey 0s WH, at Co camhnins ot Ud thsonte coe

panies credit insurance (48 T.C. at 776), but less than -

of thé banks’ installment loan customers and less than 13% -

Bie Sane ‘sual estate castemnere purchased instrance. (Pet. App.

ee “4

aan

G

ne

* ¢ e . °

17 +

- limited ante totally iiidlaeik. i in. his petition, that

lending institutions should be taxed whenever their activi- -

ties amount to the “sine qua non” (whatever that may be)

of the insurance business (Pet. p.8, n.8), there ‘is still no

- compelling legal question’ for this Court to review. In-

deed, . the Commissioner me ' not ask for review on the

2 (a). Such a question does init aad to snything i new .

; or unique in the law for this: Court to decide. Any rule E

announced on the point could. not possibly result in a con-

clusion more definitive than that each case should be

_ Judged upon-its own facts. For instance, what if the re-

_ lated i ingarance company had its own personnel at separate

desks in each bank, and. they (not bank personnel) ‘ex-

"plained and processed the insurance. Where are the “sine °

_ qua non” services in. that situation? What about situa-

tions where corporations make medical (such as Blue’

Cross, Blue Shield) and other i insurance services available

_ totheir employees. Would that be a “sine qua non” activ-

ity resulting in insurance ’ income being attributed to the

corporation by the Commissioner? And, what of the magy

"varied facts situations ly decided by the courts in the

- cases cited infra, p-19? ‘One of the writers of this or,

. 10 In this case, the availability of insurance had its own built.

in benefits to the banks unrelated to | i from: insurance

18

: ‘Stephen. Anderson, tried one of those cases, Bank of Kim-

ball v. United States, 200 F.Supp. 688 (S.D. 1962), for

the Government—resulting i in the only win for the Goy-

érnment on an insurance related case until Local. (See

lane Fay’s comment to that effect ® his dissent in =

Local, (48 TSS. at 808). The Commissioner's “sine qua

non’ > eee was not suggested by the government in that

|. ease. And, this Court will note from a review of the facts.

‘of the:case that such a theory would not have strengthened ©

the ——_ REE or changed the result one iota. |

“Fe iceaprntentiin Shs collet to shareve Mint bennuse

of - the many different fact patterns involved in these types"

of cases, the issue here does not have overriding and spe-

cial significance for the insurance or lending industries. |

The Commissioner's brief in opposition to certiorari in

_ Local Finance underscores that point, and. refutes his sug-

gestions paseo ceeeaiie: here. (Pet. 10-11);

_(b). The oaaels advanced by the Commissioner

_ in opposition to a petition for certiorari in Tennessee Life

_ “Ins. Co, v. Phinney, supra, ‘where an ‘admitted conflict

. existed, apply with equal force here. The Commissioner —

argued in that case that “though the question i is important,

a the nature of the conflict is hot such as to require resolu-

_ tion by this Court,” ‘principally because the case in conflict

‘was an “isolated decision” and the case before the Court

was “in accord with the weight of authority.” Likewise,

, Se pee cette of Local Binenee, courts have.re-

peatedly rebuffed the Commissioner’s ef forts to — a

oe “ait Biiet for the Respondent in Opposition, 8-9, October

_ a =

19 ee

~\tax in situations indistinguishable i in pare to he on y

_ here, and have. ref used to. recognize the Commissioner's

- proposition that any efforts which “generate” income mus.

result: j ‘in the inclusion of the amount thereof i in the gross ne

. income of the person or entity responsible for that effort.

_Beschner ‘v. Commissioner, 88 T.C. 1008, 1007, 1009; .

Basye v. United States, 295 F. Supp. 1289, 1292-1295

aie (N -D. Calif.) ; Ray Waits Motors, Inc. v. United States mg

Ba supra; Moke. Epstein, Inc. v. Commissioner, 29 T.C. 1005

-(1958) ; Gaddy Motor Company, Inc. v. Commissioner, - :

T.C. Memo. 1958-189 (17.T.: .C.M. 944) ; ; Jaeger .Motor

Car Co. v. Commissioner, supra; Campbell. County Bank, .

_ Ine. v.. Commissioner, supra; Bank of Kimball v. United’

= States, supra; Paramount Finance Co: v. United States,

, - 804 F.2d 460 (Ct. Cl. 1962) ; Nichols Loan Corp. v. Com-

_ ‘missioner; supra; First Security Bank v. United States,

7 eupra; First eee me: v. United States, supra.

&s Py Ss

| See also, Seieroe and Gerber, we — tn

Growing : at the Age of 50,” 46 Taxes 8938 902 (Dec.

1968. |

The : so-called ‘ generation” of i income argument 6f the

Commissioner \ was described by the Tax Court as being 3

, ee completely at variance with every Bccepted concept

of Federal income taxation * * * '.” Te.

ae, 88 T.C. at 1007.

q

&

i

:

All of those previous etstiin: ie many hes,

"have settled the trend of this area of theclast, and this ,

"plus the. factual nature of the issue, is the complete an- Loe

~ swer to Commissioner's statement “ 10-11) ‘that

-_7~

oe . ; . “

- 20 : . .

> “ee .

r cases vill arise in- this context. Leeal, not this case,

Was the aberration from the rule (unif ormly’ adverse to.

_ the Commiissioné d tle Commissioner represented to

wih. 7

ere

an

he,

this Court in that case tha atter did not present any

ee suff iciently important f OF review. ?

(ef Additionally, the. importance ‘bf cases of -ali 7

sorts involving . insurance companies diminishes rapidly

. for yegrs after 1959 since, as: pointed out by the Tax &

Court (Pet. App. A 28), the Life Insurance. Company

Income Tax’ Act of 1959 in large part eliminated the tax

- savings on income to insurance companies. ‘Respondent’ s

‘arguments, (Pet., notes 4 and 5, pp- 8-9, and p. 10), that

preferential treatment of life insurance companies still

exists under the law. (Secs, 801-820 of the Code), are in-

complete. The only tax’ ‘advantage enjoyed by life insur-

ance compénies | sincé 1959, is a deferral of taxes on that -

portion of the company’s income which goes into certain _

reserves up to a stated limit. After that limit i is reached, .

‘ othe entire income of. the insuggrice ‘Gompany | is taxed as-

any other corporation. And,: whenever the money .in the.

favored reserves is paid out, a full corporate tax is paid .

‘at that time. Hence, the effect of the 1959 Act is to cause ©

every. dollar. of net income to insurance companies to be |

subject to an eventual full corporate tax.’? .

co 8. The ‘bulk of the Conimissioner’s pobihians ive. 8- .

15) is devoted to representations of alleged administrative

- The Piieimeiabieianiat attempt to avoid that fact by arguing.

Pet. 8-9, ‘notes 4 and 5, and p. 10, that cases still exist for years

subsequent to 1959, is mislea ng. Proposed allocations by the Com-

missioner reveal nothing whatsoever as to what total taxes are or

cine tis Gels tlie thee balled Enueranes cod absent th

: ) ego e proposed

tions relate to who may th t how

mach, on a comparative basis, will evenly be bai “Seay

et

oe : ; “. . ; oz:

Ri a . : : “, me

4 a 2100 2

importance. of this case, suggesting ‘that: it controls $67 :

million in taxes in 22 groups of other cases (Pet. 10); it

contains issues of national impact upon Government offi i-

cials and private counsel (Pet. 11) ; and that it raises im- |

portant questions of: law (Pet. 11- 15).

“=

Every | one of the fourteen previous petitions f or

have alleged similar considerations, only to be ‘uniformly

opposed by tlie Commissioner ¢ on the ground that questions

under the statute are “essentially factual.” However, the

complete’ answer to the Commissioner’s: present assertions

and expressions of concern is found in the briefs to this —

- Court i in. Local-Finance. In that, case, which the Commis-

_ sioner claims involves the identical issues which are present

here (Pet. 7-8) ; the taxpayer’ s petition * for a writ of cer- —° \\

certiorari in Section 482 cases’* (involving every kind of

‘complicated interpretation and application of that statute)

\

tiorari advanced the same arguménts as are now urged —

- by the Commissioner: administrative importance ; control-

ling effect upon 1,899 cases pending in lower courts in- .

fundamental and important questions of law, and so forth.

In his reply, the Commissioner denied all of those. argu-

ments and solemnly declared to. this Court that the case

And issues involved did not merit review, saying:"* | ;

“If’any event, measurement of the administra-

tive importance ends, as it begins, not:with petitioners’ .”

13 2 Note 3, supra.

volving the allocation of: $282,470,659.00 of income;

160, Na Brief sor. the Respondent i in : eae: p. 15, October Term, .

t .

assertion: (Bet. 22) that this case raises ‘seme of the

‘most difficult and f undamental issues in federal: tax

‘) . law,’ but rather with recognition that an essentially

. factual question is presented. Further review by this

> Court consequently i? ‘wpwarranted. - ——

~. added. he ae

: We adopt that representation by the Commissioner.

As we have pointed out througho out this brief, there ‘is

simply no way of knowing what different sets of: facts"

. ° will control the pending: cases referred to-by the respond- _

> ent. (Pet. 10).'> And; also as pointed out, above, the legal

questions are nofnew. The insurance arrangements here.

gre: simply -variations’on a themé already passed. upon.

numerous times by various courts (see the cases cited’ |

, supra, p- 19), in situations invariably controlled by the f. acts

_. of the particular case. As J udge- ud of the Tax ‘Court

7 _stated in his dissent (48 T. C. at 808) :

-* Tt is particularly noteworthy i in this context to con- |

_. sider the past history of respondent’s” attempts to at-

sk various business-connected insurance arrange-

' ments. Respondent has pitched his arguments on Sec.

~ 61,” 269, .482, and a general argument that income

- was properly taxable to a lending institution rather

than a controlled reinsurer or the shareholders of tl the. ©

lending institutiog>as partners of an insurance

agency. All these approaches have been repeatedly re-

jected by this-and other courts.” (Emphasis added).

Lastly, the Conimissioner s reliance upon the excerpt ;

from H. oe No. 1098, ae: Ist ‘Séss., p. 7 (Pet. :

ee

1s This also applies to the Commissioner’s attain. Pet. 10,

a of the —s that he has been settling cases on the basis

. « / . or

PAT Ee HIER eB -

a. sy .

9); eee not sensilla sine report i in question which -

in context directly supports the bank’s position here."

The quoted statement refers to some exceptignal abuse —

situations where a subsidiary was caused to charge exces-

- _ sive premiums, which in turn, were paid by the parent as 7

a way to shift the parent’s income to the subsidiary. The

_quotation in the Commissioner’ s brief reveals that fact it-

_ self where it states: “er the subsidiary charges’ excessive ~

premiums . Pad Emphasis added). On page 46 of those

comments. by the Subcommittee, and page 48 of the report .

of the Committee, the: problem is identified as one where

‘a lender pays “excessively large net premiums to avoid

taxation to itself.” The report goes on to state, ina part

. not quoted . the Commissioner. that:

"Tt is pointed out that the difficulty is that the pre- -

, scription ‘of some sort of standards is ‘necessary. It

is suggested that one test would be the fact of a prem- ot

ium charge higher than the going rate for the type of

insurance. purepased.’ . (Emphasis added) . :

. It is undisputed in Wis case that tic bapke were not ”

. charging excessive premiums. They were not charging any —

premiums at all. And, the premiums which were charged

- by National were the “going rate,” as specifically found

by both, courts ‘helow. (Pet. App. A and B 26, 39). In,

his proposed findings to the Tax Court, the Commissioner

admitted i in his own brief that: aed — —

16 The Commissioner’ s analysis (Pet. =. n.6) of the Commit-

tee’s intended meaning with respeet to the cited rt, does not

- . find any support in the language of the report itself. The “exces-

sive premium” referred to in the report was specifically defined

as “a premium charge higher than the going rate for the type of |

ineuranye purchased.’ adi (Emphasis er

.

r 7

a

24

od

“4.- From’ 1948 6 through 1959, the Banks had avail- .

able for their borrowers, credit life, health and acci-

derit insurance, at the prévailing and com petitive rate —

eo of $1.00 per hundred or its’ equivalent . ’(EKm- -

_ - phasis added). pe

:. Thus, the situation ine ial by iia House of Rep-

resentatives is altogether different fr om the present sitia- _

tion. * And, far from helping the Commissioner; those ™

excerpts from the legislatiye history-of the Life Insuranve |

Company Tax Act of 1955 disclose Congressional opinion

that Section 482 would not abply to the facts present here.

No lender paid premiums in this case and the premiums

_ {which were paid by borrowers) were, not excessive ; they

_ were > the going. a and: corfipetitive rate.

CONCLUSION |

The petition for a writ of certiorari should be denied.

id

. Respectful sabia ———

3 | -- §. J. QUINNEY

7 _.. ALONZO W. WATSON, JR...

| a STEPHEN H. ANDERSON ©

ee __ . Counsel for Respondents ,

Sher

Vasey.

ce

CERTIFICATE, OF SERVICE | f

2 STEPHEN H. “ANDERSON, hereby. certify

— that five copies of the foregoing Brief for the Respond-

ents, First Security Bank of Utah, ‘N.A,, et al, were air -

. mailed by me by depositing the same in a United States.

- Post Office, postage. prepaid, pursuant to paragraph’ .

~ Rule 88 of the Rules of the Supreme Court of the United .

_ States, to ERWIN N. GRISWOLD, Solicitor Géneral,

a EE of Justice, “Washington, D.C. 20580, ‘this

...rd.. day of August, in. OX

_ STEPHEN H. ANDERSON

__ Counsf for Respondents. Boje

ae >.

al = *