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

“Bylabas

COMMISSIONER OF INTERNAL REVENUE v..

niente south aged BANK OF UTAH, N. A,

y a AL. x *

(CERTIORARI | 10 THE UNITED STATES COURT OF APPEALS FOR © iy

| «No. 70-305. das January 10, 1972—Decided March 21, 1972

Respondent | banks were subsidiaries of ‘a holding company that aleo

controlled a management company, an insurance agency, and, from.

1954, an insurance company (Security Life). In 1948 the banks |

began to offer to arrange credit life insurance for their borrowers, .

~ placing: the insurance with an independent insurance. carrier. —

. ~ National ‘banking laws were deemied to prohibit: the banks from

. - receiving sales commissions, which were paid by the carrier to the

’ jmsurance agency subsidiary. The commissions were Teported as

taxable income for the 1948-1954 period by the management com-

+ pany. - After 1954, when Security Life was organized, the credit

_ ‘life insurance on the banks’ customers was placed with an inde-

; pendent carrier which reinsured the risks with Security Life, the’

latter retaining 85%. of the premiums. No sales commissions were

paid. Security Life reported all the reinsurance premiums on its

income™tax returns for the period 1955 to 1959, at the preferential

tax rate for insurance companies. Petitioner, pursuant to 26.

U. S. C..§'482, granting him power to allocate gross income among.

controlled corporations in order to reflect the actual incomes of

the corporations, determined that 40% of Security Life’s premium

‘income was allocable to the banks as commission income earned

for originating and processing the credit life insurance. The Tax

Court: affirmed petitioner’s action, but the Court of Appeals re-

_ versed.. Held: Since the banks did not receive.and were prohibited

by law from receiving sales commissions, no part of the reinsurance .

premium income could be attributed to them, and petitioner’s exer-

cise of the § 482 authority was not pepramnene: - Oe:

436 F. 2d 1192, affirmed. :

PowELL, J., delivered the opinion 1 of the Court, in which BurcEr,

»Qods ‘and Dovatas, BRENNAN, Stewart, and REHNQUIST, JJ.,

joined. Marsuaut, J., filed a dissenting opinion, post, p. 407,

-Buackmvn, J., filed a dissenting opinion, in which Wuirte,.J., ining

‘ post, p. 418..

> *

bd

a

COMMISSIONER ». FIRST SECURITY BANK OF UTAH 395

Mr Opinion of the Court.

‘Ernest J. paras argued the cause for petitioner. On

the brief were Solicitor General Griswold,. Acting ‘As-

ag sistant. Attorney General Ugast, Matthew . J. Zinn, and

Bennet.N. Hollander.

‘Stephen H. Anderson enpll the. cause 5 fae weil

ents. With him on the brief was 8. Pe Quinney. ~

“Ernest Getz fed a brief for Bud Kouts Chevrolet

Co. et al. as amici curiae urging affirmance. we |

- Mr. Justice Powe delivered the opinion of the ze

Court. m .

This case titbeduts for review a detetinination by the

Commissioner of Internal Revenue (Commissioner},.

"pursuant to § 482 of the Internal Revenue . Act, that

the income of taxpayers within a controlled group should

be reallocated to reff®ct the true. taxable income of each.

Deficiencies were ‘assessed against respondents. The

_ Tax Court affirmed the Commissioner’s action, and

“ respondents appealed to the Court of: Appeals for the

Tenth Circuit. That court reversed the decision of the

Tax Court, 436 F. 2d 1192 (1971), and we granted the

Commissioner’s petition for certiorari to resolve a con-

flict between the decision below and that in Local Fi-

nance Corp. v. Commissioner, 407 F.2d 629 (CA7),

cert. denied, 396-U; ‘8, 956 (1969)... We now affirm the

decision of the Court of Appeals... < ae

126 U.S. C. § 482 provides:

“In ‘any case of two orf more siiialentha: trades, or businesses

- (whether or’ not incorporated, rhether or not organized in the United

- States; and whether or not iated) owned or controlled. directly or

indirectly by the same interests, \the Secretary or his delegate may

distribute, apportion, or allocate , gross income, deductions, credits,

_ of allowances between or among such tions, trades, or busi-

nesses, if he determines that such distri ion, apportionment, or al-

location is necessary in order to prevent,evasion of taxes or clearly to

- reflect the income of any of such organizations, trades, or businesses.” _

Respondents, ‘First’ Security. Bank” of ‘Utah: N. A.,

and First Security Bank of Idaho, N:-A. (the Banks),

are’ national banks -which, during the tax years, were

wholly owned subsidiaries of First Security Corp.

- (Holding Company). Other. non-bank subsidiaries of

‘the Holding ‘Company, relevant to this case, were .

~ First. Security .Co. - (Management Company),. Ed. D.

Smith & Sons, fan_ insurance agency (Smith), and—

from -June 1 at Security Life Insurance Com-

-. dgeveie ile ealeaadineen alee ‘Beginning in -1948, °

the Banks offered to arrange ‘for borrowers credit life,

health, and. ,accident. insurance. (credit life insurance).

Pa

The Tax Court found that they did this “for several Z,

reasons,” including. (1) offering @ service increasingly

supplied by competing financial institutions, (2) ob-

taining the benefit of the additional collateral that

' credit insurance provides by repaying loans upon. the

death, injury, or illness of the borrower, and (3) pro-

viding an “additional source of income—part of the

premiums from the insurance—to Holding Company or

its subsidiaries,”

- Until 1954, any borrower who elected to purchase

this insurance was referred by the Banks to two inde-.

pendent insurance companies. The premium _ rate

charged was $1 per $100 of coverage per year, the rate

- commonly charged in the industry. .The Insurance

- Commissioners of the States involved—Utah, Idaho, and

" Texas—accepted: this rate. The Banks followed & rou-

tine procedure in making this insurance available to cus-

_ tomers. The lending officer would explain the. function

and availability ofcredit insurance: If the customer

desired the coverage, the necessary form was completed;

& certificate of insurance was delivered, and the premium

"was collected or added te the ciistomer’s loan. The Banks

- then forwarded the completed forms and premiums to

— Company which: maintained records of the -

COMMISSIONER v, FIRST SRCURITY BANK OF UTAH 297 *

304. - +, B88 i “Opinion. of, the Court z

: ~ insurance purchased. and, foxyanded, the premiums, to.

ent Company also. proc- -

- essed claims filed under, the’policies. The cost. to,.each

of the’ Banks. for the’ actual, time devoted to. explain-

ing and ‘processing the. ihsurance was less than $2,000

‘per year, characterized by the courte below as “negli-

gible.” The cost to Management Company of the serv- -

lees yenrates deri Sares alts near ae, Laver cdbarlene

. Of $2,000 per year:

_ Tt was the custom in the i insurance ‘busthesk (although

not invariably followed), regardless of the cost of inci-

- dental paperwork, to pay a “sales commission”—ranging

from 40% to 55% of’ net ‘premiums collected—to a

‘party ‘who originated. or generated the business. But

_ the Banks had been gdvised by counsel that they’ could

not lawfully conduct the business of an insurance. agency

or receive income resulting from their customers’ pur-

‘chase of credit life insurance. Neither the Banks nor

any of their officers were licensed to sell insurance,

atid there is no question here of unlawfully acting as

_ unlicensed agents. The Banks received. no commissions

or other income on or with respect tothe credit insur-

ance. generated by them. During the period from 1948

to 1954 commissions were paid by the independent com-

panies writing the insurance. directly, to Smith, one of

the wholly owned subsidiaries of Holding Company. .

These commissions were reported as taxable income not

by Smith but by Management Company which had

rendered the services above described. During this -

period ) (1948-1954), the Commissioner. did not attempt.

‘to allocate the commissions to the Banks.’

oe

hcTibedomaians: tnasend: tax ‘eibatarthas enh saesot sknhataid es

taxable income up to $25,000 and the same rate for income greater

_ than $25,000. 26 U. 8. C. $11. Therefore, if; excluding the sales ©

commissions “in:-qquestion, pacmvegeemdncserngelngciog. that before

Pa.

taFP

4.

ie DSTI F ‘OCTOBER TERM, 1971

| ., "Opinion ‘of the Court k 408 U.8..

Tn 1954, Holding Company. organized Seourity ite. ;

_@ new wholly owned subsidiary licensed to engage.in the

insurance business. A new procedure was then adopted

with respect to placing oredi¢ life insurance. It was

referred by the Banks to, and written by an independent

company, American National Insurance. Compgny ° of

_- Galveston, Texas (American National), at the same rate

to the customer. American National 'then reinsured the —

_ policies with Security Life pursuant to a “treaty of re- . -

insurance.” For assuming the risk under the policies —

. sold to the Banks’ customers, Security Life retained 85% —

of the premiums, American National, which furnished .

actuarial and accounting services, received the. remain-

; ing 15%, No sales commissions were paid. Under this

“new plan,* the Banks continued to offer crédit life in-

surance to their borrowers in the same manner as before.‘

_ Security Life was not & paper corporation. It.com- —

menced business in 1954 with an initial capital of $25,000

1954 the inetnhe of both responderits and of Matingemént Com-

pany exceeded $25,000, then the total taxes paid by the Holding

Company subsidiaries would not be affected if.the commissions were

‘allocated wholly- to respondents or to Managepent Company, or

_ partially to all three. -

This plan was proposed to Holding Company by American Ne-

_ tional, ‘which ‘was making similar recommendations to other financial _

_ institutions. The Tax Court found that insurance companies antici-

pated that lending institutions would soon begin to form their own

affiliated life insurancé companies to write the credit insurance which

was proving to be.a profitable business. Such a move by lending

_ institutions would deprive the independent insuranee companies of

. substantial credit insurance business.: The type of plan recom-

‘by Atherican National was intended to salvage a portion of -

“business by charging a fee: forthe actuarial, accounting, and

other services made availablé to Security Life, whieh reinsured the

entire risk. T..C. Memo 1967-256. _

AS saphaset Gai; Shsdaalei; adel Sade'te Ctvatene chit Vailas

affairs as they consider to be in ‘their. best interests, including lawful

structuring (which may include holding companies) to. minimize...

taxes. re ee

COMMISSIONER ». [FARBT SBCURITY BANK OF UTAH 308

- ce

‘which was Faeroe in 1956 to $100,000, Although it

did not become: a full-line insurance company (contem- -

plated as a possibility when organized), its reinsurance

business. was substantial, The risks assumed by it had.

grown to $41,350,000 by the end of 1959, and it hed

“paid tial claims.” ‘es

_ See iy Life reported the entire amount of reinaurance,

premiums, 85% of the premiums charged, in ite income

for the years 1955-1959.. Because the income of life

insurance companies then was, subject toa lower effective

tax rate than that of ordinary corporations, the total tax

liability for Holding Company and ifs ‘subsidiaries was

“less than it would have been had Security Life paid .

a part of the premium to the Banks or Management —

Company as sales cognmissions,? Pursuant ‘to his §482—

Learned -Hanid’s comment in his dissenting opinion in Commissioner

v. Newman, 159 F. 2d 848, 850-851. (CAI2 1947): |

“Over and over again courts have anid’ that’ thers ts stothing sinister ;

in so arranging ‘one’s affairs as to keep taxes as low as possible.

Everybody does so, rich or poor; and all do right, for nobody owes

2 any public duty to pay more than the law demands: taxes are en- |

forced’ exactions, not voluntary contributions. To feet: more in

the name of morals is’ mere cant.” | 4

See Knetsch v. United States, 364 U. 8. 361, 365-¢1960) ; Chirdietein,

Learned Hand's Contribution to the Law. of Tax. Avoidance, 7 Yale -

L. J. 440 (1968). |

® The apinion of the Tax Court, supra, in cloilestibbbedadhthitely ths

‘profitability of Security Life. Its net worth (capital and surplus)

increased from $161,370.52 at the end of 1955 to $1,050,220 at the

end of 1959, despite the paying out of claims and claims expenses

over the five-year period totaling $525,78791. _The Tax Court found

that: “Although Security Life’s business proved to be successful,

’ there was no way to judge at the outseé whether it would succeed.

In ‘relation to its capital —, Security life a large

‘amount of risk.”

* Both the Life Insurance. Company Tax. Act for 1955, 70 Stat. ©:

36, ‘applicable to the years .1955-1957,. and the Life Insurance .

Company Income Tax Act of 1959, 73 Stat. 112, applicable to later

years, accorded preferential tax treatment to life insurance a

Se

coy = ona

* WATY Oo ee i

<The purpose of section 482 is to place » controlled

meee Bead arin with an ee tax-

perty and business of a controlled tax-

payer... 0! standard to be applied in every

case is that of ah uncontrolled taxpayer dealing at

-arm’s length with ‘another ‘uncontrolled taxpayer.” **

The question ‘we must: answer is whether there’ was

a shifting or distorting of the ‘Banks’ true net income —

"The Commissioner made sn alternative allocation to Management

. Company. Because it upheld his allocation to the ‘Banks, the Tax

Gourt rejected this alternative. In reversing the allocation to the ~

_ Banks, the Court.of Appeals found the tecord insufficient to pass

om the alternative allocation. It therefore ordered that the case be

_ remanded: to ‘the Tax ‘Court: for further consideration. “The alter-

_ Bative allocation is‘therefore not before us. .

- 9 Bee 26-CFR § 1.482-1 (a) (6) (1971). 168 as

. *B. Bittker & J. Eustice, Federal Income Taxation of Corporations

and Shareholders: p.°15-21 (3d:ed.:4971)2

\\, < 996 GFR. § 1482-1 {b) (1) (1971). Non ai wepcthihe tani |

\preting: thie..sdetion of the statute wére issued: in 1934. They have

_ Femained virtually unchanged. Jenks; Treasury Reguistione Under

Seaien 5, oo nn Oe

Se obit AIL in ip =

Sutra Coury

a boiustie soe and tention, yeni |

pgs ary phigg ba pul nvr

} Wht |

nee Siete ow 108 ow aS

teers gre

_ held thy wo | > by implention othe, Comptroller

| es ai ial bel il

result‘ in taxable income)’ “As we decide thilé cade on

a different ground,gye:need not consider the circumstances ‘in which —

Be an Gem Mapa te te one

‘able income to the, party. We do agree that origination

: not necessa necessarily result in such income. In this cage °

it the Bear bat bd Gndthfelod GH BY Te ks (i. ¢., had

_ beett separate, independent banks, unaffiliated with any holding com-

which is relevant, Stil ot pldasting ladies pina

corhmissions, is the referral of the business. Whether this referral is ~~

_ to an‘affiliated or an unaffiliated insurance company should make no

‘difference as to whether the bank, which never receives the income,

_,- has earned it. oe

-8{Gection ‘92° of the National ‘Bank’ Act was enacted in: 1916,

; When the statutes were revised in 1918 and re-enacted, $92 was .

omitted.’ The : of the United States Code have omitted it

+ from recent of the’Code. However, the Comptsoller of the .~

’ Currency © dere $09 tobe llective tad he oll eorportes th :

BB otter ht em 12 CFR $§2.1-25 (1971).

18 Saton v. Georgia Association of Independent Insurance Agents,

(Ine, 399 F. 2d 1010 (CA5 1968). caption cone A Morris Trust,

367. ee ’ Pie

”

f

‘ + ~

a3 sie: Rai iad MObU.8

8 of ii Gustine has = thi holding, and ‘the a

A wend sw cohen to odors! b inking | law... to “y 4

ceive income resulting from their customers’ purchase

CW eed. tnaurence "and, purtuant to this belief, “the

reveived or attempted to receive

J

hit

c se

i

— ing ingurance-related income, although: this prohibition

nth Cirouit: so ite:

" :

see tas premiums resulting from _

_- ' thelr customers’ purchase of credit insurance,”*

_ ‘Petitioner does not ‘contest this finding’py' the a

- Court or the: ling in this respect of the urt of Ap- -

aa “é ngly, we assume for purpose of this

ie decision that the Banks were prohibited from roceive

did ‘not’ apply” to ‘non-bank subsidiaries Of Holding

this case,

) The statute, 12. U.S: CA. $92, prohibits »: national

"/ . bank frém “acting “as the agent” of an insurance company “by

- soliciting and selling insurance and collecting premiums on policies.”

Ma. Justice MansHatt concludes that the, Nani Baits slated «|

. are indeed severe.”

ce Maneatas.dissen dissenting opinion is based on the 3

jeral statute and regulations by ‘sdliciting insurance

} 0 fact and opinica, in T, ke} ae 1967-256, p. 67-

COMMISSIONER v, FIRST SECURITY BANK OF UTAH 408

904 , Opinion of the’ Court

owe iio tn: slat “We ka” Cores ‘yy

- person has. been found to have taxable income that -

he did not receive and that: he was prohibited from

— receivirig, In cases dealing with the concept of income,

it has been assumed that the person to whom the income

was attributed could haye received it.. The underlying —

assumption always has been that in. order to be taxed |

for income, a taxpayer must have complete dominion |

over it. “The income that is subject to a man’s un-

fettered command ‘and that he is free to enjoy \at his

* own option may be taxed to him as his income, whether

he sees fit to enjoy it or not. mS Corliss v, «Powern * ;

‘wv. S. 376, 878 (1930).

It: is, of course, well established that ipa ca

before it- is received is nonetheless taxable to the ‘as- a

_‘signor.: But the assignment-of-income doctrine assumes

a finding, that the Banks were ageits of the insurance: companies

or that they engaged in. “selling insurance” within the ‘Meaning

‘of the statute. The Banks no doubt “solicited” in the sense that

they encouraged their customers to take out the insurance, But

.. fy the absence of an agency relationship, and in véew of the undis-

puted fact that the Banks received no. commissions or premiums,

it cannot be said that there was a violation of the statute,. More-

over, the Banks were regularly examined by the federal banking

authorities “looking for violations in the national banking laws.”

The making of ctedit insurance available to customers was and

‘is & common practice in the banking business. There is no sug- ~

gestion that the federal banking authorities considered this service

to customers to be a yiolation o ‘the law as long as the Banks

received no commissions or fees, This administrative. interorptation

over many years is entitled to great weight. :

-* he dissenting opinion raises this serious issue for the ‘first time.

It was not raised at any stage in the proceedings below. Nor was

it’ brigfed or argued in this Court. The Comthissioner, the Tax

Court, the Court of Appeals, -and the Solicitor General all assumed

‘that the Banks’ conduct in this respect was perfectly lawful. But

quite apart from the’ consistent administrative acceptance and from

the assumptions by the Comimissioner and the courts below, we think

ee

456-336 O . TZ - 10

%

404 °° .> OCTOBER TERM, 1971

ek | Opinion of’ the Cont’ ars 405 U.8.

that the income wduld have been ‘received by the tax-

: Payer had he not arranged’ for it to be paid to another.

“In Harrison v. Ponadner, 312 U, S. 579, 582.(1941), we

veld |

. “(O)ne vested with the fell to receive income

_ [does] not escape the tax by any kind of antici-

patory arrangement, however -skillfully devised, by

which he procures payment of it to another, since,

by the exercise of his power to command the in-

come, he enjoys the benefit of the income on which

the tax is laid.” *"- e is

One of the Commissioner’ 8 regulations for the im-

plementation ‘of §-482 expressly recognizes the concept

that income implies dominion or control of the tax-

payer. It provides. as follows:

“The interests controlling 7 Qup of sonteolied

taxpayers. are assumed to have com hlete power to |

cause each controlled taxpayer so to conduct -its

’ affairs that its transactions and accounting records

truly reflect the taxable income from the property

°” and business of each of the controlled taxpayers.” ** .

This regulation is consistent with the control. concépt -

heretofore approved by this Court, although in a dif-

ferent context.. The regulation, as applied to the facts

in this case, contemplates that Holding Company—the |

controlling interest—must have “complete power” to —

‘shift income among. its’ subsidiaries. It is- only where

- this power exists, and has’ been exercised in such a way

that the “true taxable income” of a subsidiary has been

2 See Helvering v. Henitg 311 U. 8.112 (1940) ienslgnboint of

interest, coupons attached to bonds owned by taxpayer) ; Lucas v.

Earl; 281 U.S, 111 (1930) (taxpayer assigned to. wife one-half intef-

eatin his earnings).. See generally Commissioner v. ~~enabdiaend

U..8. 5891. (1948), and cases discussed therein at 604-610.

290 GER 14ers (0)C) APT). 0

« : @#

COMMISSIONER v. FIRST SECURITY BANK OF UTAH 405

394 ie _ Opinion of the Court :

_ understated, that*the Commissioner is authorized to

_ reallocate under § 482, But Holding Company had no -

suclt power unless it'acted in violation of federal bank-

ing- laws. The “complete power” referred to in the —

| regulations hardly includes the power to force a sub- :

sidiary to violate the law. |

Apart from the inequity of attributing to the Banks

taxable income that they have: not received and may

not lawfully receive, neither the statute rior our ‘prior

. decisions require such a result. We are not faced with

a situation such as existed in those cases, urged by

Commissioner, in which we held the proceeds of crim-

inal activities to be taxable. Those cases. concerned

situations in which the taxpayer had artually received

. funds. Moreover, the rillegality involved was the :

that gave rise ‘to the income. Here the originating

and referring of the insurance, a. practice widely fol-

lowed, is acknowledged to be legal. Only the receipt

of insurance commissions or premiums thereon by’ na-

tional banks is not. Had the Banks ignored the bank-

ing laws, thereby risking the loss.of their charters and —

subjecting their officers to personal liability,” the illegal-

~ income cases would be relevant:- But. the Banks from

the inception of their use of credit life insurance in 1948

were careful never to place themselves i in that position.

We think that fairness requires the tax to fall on the

party that actually receives the reyes rather than

on the party that, cannot.” - : hs Sas

engin

19 James v. United States, 366 U. 8. 213 (1961) ; Ruthin v. United

States, 343 U. 8. 130 (1952). 4

12'U.8.C. $93. > pipe

‘22 Thus, in Commissioner v. Lester, 366 v. "8. 299. (1961), in de-.

termining that a taxpayer should not be taxed on alimony payments

_. to his divorced wife, the Court ‘determined that it was more ‘con-

_ sistent with the basic precepts of income tax law that the wife, who

received and had power to sperid the payments, should be taxed |

ne ee a

i .

‘

“OCTOBER TERM, 1971

Opinién of the Court 7 3 as

In L. E. Shunk Latez Products, ‘Inc.-¥. Commissioner,

18 T.C. 940 (1952), the Tax Court considered a closely

analogous — situation. .The same interest controlled a

manufacturer and a distributor of rubber prophylactics.

- The OPA Price Regulations of World War II became

effective on December -1, 1941. Prior thereto the dis-

-tributor had raised its prices to retailers, but the manu-

facturer had not increased the prices..charged to its

‘affiliated distributor. The Commissioner, acting under

§ 482, attempted to allocate some of the distributor's in-

- come to the manufacturer on the ground that a portion |

of the: distributor’s profits were in: fact earned by the —

‘ manufacturer, even though the manufacturer was pro-°

hibited by the OPA regulations from increasing its

prices. In holding that the Commissioner had acted _

‘improperly, the Tax Court said that he had “no au-

thority to attribute to petitioners income which they

' could not have received.”. 18 T. C, at, 961.”

It is argued, finally, that. the “services” rendered by.

the Banks in making credit insurance ayailable to cus- _

_ tomers “would, have: been compensated had the corpora- ‘

“a2 As noted at the outset of this opinion, certiorari was granted

to resolve the conflict between the decision below and that in Local —

- Finance Corp. v. Commissioner, 407 F. 2d 629 (CA7 1969).. The Tax |

Court in this case felt bound to follow Local Finance Corp., which

was decided subsequently to L. E. Shunk Later Products; Inc.. v.

Commissioner, 18 T. C, 940 (1952). - For the reasons stated in the

_ opinion above, we think Local Finarice Corp. was erroneously decided

and that the earlier views of the Tax Court were correct.

7 See Teschner v. Commissioner, 88 T. C. 1003, 1009 (1962): .

“Tn the. case before us, the taxpayer, while he had no power. to.

dispose of income, had a power to appoint or designate its recipient.

Does the existence or exercise of such a power alone give rise to

taxable income in his hands? We think clearly not: In Nicholas.A.

Stavroudis, 27:T. C. 583, 590 (1956), we found it to be settled . ”

- doctrine that a power to direct the distribution of trust income to |

een citer mere ne. spnte one Sonam, at: that ineeme, ;

Oh peer of 8 ;

~~ 2

-

| COMMISSIONER ». FIRST°SECURITY BANK OF UTAH’ 407

304 , Manswtats, J, dissenting

' tions been dealing with each other at arm’s length. _

The short answer is that the proscription against. acting

as insurance agent and receiving. compensation therefor

applies to-all national banks located in places with |

s population in excess of. 5,000. inhab@pnte. It applies .

equally to such’ bariks whether or not they are controlled

by a holding company. If these Banks had-been inde-

pendent of any such control—as most banks are—no

- commissions or premiums could have been. received law-

fully and there would have been no taxable income.”

As stated in’ the Treasury Re lations, the “purpose of

section 482 is to place a contfolled taxpayer on a tax

_ parity with an. uncontrolled taxpayer :...”** We

think our holding comports ‘with ‘such patity. treatment.

‘We conclude that the premium incomé received by « -

Security Life could not be attributable to the Banks.

Holding Company did not utilize its control over the

Banks and Security Life to distort their true net in-

comes. The Commissioner’s exercise of his § 482 au- ©

thority was ‘therefore unwarranted in bx case. “The

judgment below "

| ' Affirmed. °

Mr. Justice ‘Midst; dissenting. Ray .

The: facts of this case illustrate the natural affinity

that. lending institutions and insurance companies have

‘for each other. Congress depends on the ability of the

: Commissioner of. Internal. Revenue to utilize § 482° of *

the Internal Revenue Code, 26 U.S. C. §482, to insure. ~

that this affinity does not provide a basis for tax avoid-

_ance. H. R. Rep. No. 1098, 84th Cong., Ist Sess.; 7; :

- ' §. Rep. No. 1§71, 84th Cong., 2d Sess., 8. In my opin# ea

*8 See dissenting opinion of Mr. JUSTICE pices. ;

“Tf an unaffiliated bank, were able to provide the insurance at

* a cheaper rate because no commissions were paid, this would benefit

_ the customers but would tesult in no taxable income.

2526 CFR § 1.482-1 (b) (1) (1971).

ws. a0: OCTOBER TERM, 1971. Zor /

| : Mansuau, J, dissenting ss 405 U.8

ion, today’s decision ‘renders $482 a less eteneiiitt "

weapon against tax avoidance schemes than Congress

| intended and provides. the. respondents with an unwar-

ranted. tax advantage. I dissent,

Seotion 482 provides:

: . “In any case of two or more vbeiphidentioiies trade, |

‘ or businesses. (whether or riot incorporated, whether

: or not organized in the United States, and whether

- or not affiliated) owned or controlled directly-or in- _

directly by the same interests, the Secretary or his.

_ delegate may: distribute, apportion, or allocate gross |

C income, deductions, credits, or allowances between

* OF among. such organizations, trades, or businesses,

' if he determines that such distribution, apportion- |

ment; or allocation is necessary in order to prevent

evasion of taxes or clearly to reflect: the income of. _

any of such organizations, trades, or businesses.” —.

First enacted as § 45 of the Revenue Act of 1928, 45

Stat. 806, the statute was intended. to prevent the

- . avoidance of tax. liability through fictions and “to deny

the power to shift income . . . arbitrarily among con-

trolled corporations, and. to. place such corporations

rather on a parity with uncontrolled concerns.” Cen-

‘tral Cuba Sugar Co..v. Commissioner, 198 F. 2d. 214, 216°

. (CA2 1952). See H. R. Rep. No. 2, 70th Cong., Ist

Sess., 16-17; S. Rep. No. 960, 70th Cong., Ist Sess., :

24-25. It is intended to “serve the same Purpose in

*- the present Code: =

It is well-established nw that in analyzing a@ trans-

_ action under § 482) the test is whether the arrangement |

’ a8 structured for: income tax purposes by interlocking

- corporate interests would have been similarly structured

by yers dealing at arm’s length. See, e. g., Borge

v. ¢ , 405 F. 2d 673:{CA2 1968), cert. denied

- sub nom. Danica Enterprises ¥. Commissioner, 895 U. s.

S scares ata v. FIRST SECURITY BANK OF UTAH 409

304 eee’ Marsnau, J, dissenting —

_ 933 (1969) : Bli Lilly & Co. v: United States, 178 Ct.

Cl. 666, 372 F; 2d 990 (1967).

| . Applying that test to this case, the following facts

are relevant. Before 1954, an independent insurance

company paid respondents commissions ranging from

40%. to 45% for their services in offering insurance

to borrowers designed to discharge their debts in the

event that they died or became disabled: during the —

term of their loans. After 1964, respondents. offered

borrowers policies issued by’ a different insurance com-

- pany. At.this time the. holding company that con-

trolled respondents created a new subsidiary to reinsure —

the. borrowers who purchased policies. By paying off

the. independent insurance company with 15% of the

‘ proceeds of the policies, the subcidiary. assumed the

insurance risks and gathered the remaining 85% ‘Of the

proceeds. “No commission was paid to respondents, by :

either the independent ‘company or the- insurance _

subsidiary.

The tax advantage of the post-1954 saietens decteot

from ‘the fact that the Life Insurance Company ‘Tax

_ Act for 1955, 70 Stat. 36, as amended by the.Life Insur-

ance Company Income Tax Act of 1959, 73 Stat. 112, as

amended, 26 U. 8. C. §801 et ‘seq., gives preferential

. tax treatment to life insurance companies, By funnel-

Y are

ing all proceeds from the’ sales of the insurance policies

to @ subsidiary that quelified for tax treatment as a

' life insurance company, the holding company avoided .

“the heayier tax that would have been imposed on re-

spondents had they been paid commisgions.

The Commissioner's analysis of this"Gase is not overky. :

. complex: He saw that respondents performed essentially

- the same services and generated the same income after

1954 that they did before, and, he concluded that §482

required that they, should be sees eon

} “that they were ackgally earning. A

| _

. ear annem 1971

/. Manastans, J, dissenting’ 405 U.8,

7 a on : cieeiaiiantel earlier experience dealing at .

arm's length with an independent insurance company —

_ and on the well-known fact that insurers pay solicitors

a portion of the premium as a commission for generating

income, see Local Finance Corp. v. Commissioner, 48

TT. ©. 778, 786 (1967), aff'd, 407 F. 2d 629, 631-632

(CA7 1960), the Commissioner determined that 40% -

of the premium income - was property allocated to

respondents.

The. respondents make, in essence, two hetastsieti in.

their attempt. to rebut the Commissioner’ 8 position. |

First, they urge that they never received any. funds ‘

, &8 & result of offering the policies to borrdwers, and.

that it is therefore unfair to tax them on any portion

of said proceeds. “If § 482 is to have any meaning, that.

) argument must be rejected. It makes absolutely no

_ Sense to examine this case with a technical eye as to

whether respondents actually received or had a “right” -

- receive any commissioris: This is not a case involving -

pendent companies or private individuals where we

= serupulously avoid taxing someone on money he |

will never receive regardless of his will in the matter.

See, e. g., Blair v. Commissioner, 300 U. S. 5 (1937); cf.

Teschner. v. Commissioner, 88 T. C. 1003 (1962). This

is a case involving related corporations, and § 482 recog-

nizes that such corporations may be treated differently

from natural persons or unrelated corporations for | cer-

tax purposes. :

need’ not look far to find that this entire com-

pliedead economic ‘structure—established, designed, ad-

_ ministered, and amendable by the holding company—

had the right to the- proceeds. ‘Pursuant to § 482, the.

Commissioner properly attempted to insure that the

proceeds. would be equitably allocated. :

+ ‘The Court apparently concedes that if respondents’ |

es omy ee — — were that they have

COMMISSIONER v, FIRST SECURITY BANK OF UTAH 4#11_

-

‘

804. aeisin titi, ‘J,, dissenting

received no money, ‘that argument would fail “This

concession is, in- fact, mandated by various decisions of.

this -Court, ineluding Harrison v. Schaffner, 312 U. 8.

‘579 (1941); Helvering v. Horst, 311 U. 8. 112 (1940),

‘and Lucas v. Earl, 281 U. 8: 111 (1930).

Having implicitly rejected the argument that’ mere ©

-nonreceipt of money is sufficient to avoid. taxation, the

' Court proceeds to aecept respondents’ second argument .

| ‘that in this case the taxpayer is legally barred from ever

receiving money, ahd in this circumstance he cannot be

taxed on it. Respondents find a legal bar to receipt of

_ the proceeds at issue here in 12 U. 8. C. A. § 92, whjch

provides: ee de IF ai

“In addition to the pomeen. now weatied by awe

in national banking associations organized under

the laws of the United States any such association

- located and doing business in any place the popula-

tion of whieh’ does not exceed five thousand inhab-

itants, shown by the: last preceding decennial

_ census, may, under. such rules and regulations 4s

may be preseribed by the Comptroller of the.Cur-

_ Teney, . act as the agent for any fire, life, or other

‘ insurance company authorized by the authorities

of the State in which such bank is Jocated to do

_ business in said State, by soliciting and selling in-

" sugance and collecting premiums on policies ‘issued

by such eompany; and. may receive for -services

so-rendered. such fees or ol ions as May be

. agreed upon between the’ association and the

. insurance. company for which/it may, act as-agent;

and may also act as the broker or agent for others

in making or procuring loans on real estate located

within one hundred miles of the place in which —

said bank may be located, receiving for such services

a reasonable fee or commission: Provided, however,

That no such bank shall in any case guarantee

ee

412° OCTOBER TERM, 1071

a

"plicit Ianguage bar national banks in communities with

- more than 8,000 inhabitants from selling, soliciting, or -

—- U8.C. A, $92 was added to the federal bariking laws in

_, ess to recommend that national banks in small com-

“Mananau, J, dissenting «|, fe v. 8.

"y either the. principal or interest. of any such loans.

Or assume or guarantee the payment of any pre-"

_ ™mium on ingurance policies issued through its agency

by ita principal: And provided further; Phat the

bank shall not guarantee the truth of any stato- -

. ment made by an aesured in filing. his application

. . for insurance.” «

‘This statute by infef®nce and the “iethatisie of the

Comptroller of the Currency, 12 CFR §§ 2.1-2.5, by Ox: -

receiving the proceeds from selling insurance. Respond-.

ents are within the legal prohibition and the penalties.

provided for a violation are indeed severe. Assuming

that the respondents will not attempt to violate the ~

law and not wishing to appear to encourage a viola--.

~

tion, the Court concludes that respondents will receive

Senet Rereccren seen San! eeeeet he Seal on

nae they will never reoéive..

‘

. -. But the crucial fact in this case ‘i that under their o own :

: theory respondents have already violated the federal stat-

ute and regulations by soliciting insurance premiums, 12

1916 at the suggestion of John Skelton Williams, who was

then Comptroller of the Currency. He wrote to Con-

- munities be permitted to- associate with insurance _

cea ee Ne and penkndetier ged cementation be peo

_ hibited from doing the.same: ~ | Ao

“tt seems desirable from the stabldpoitit of public :

: ay and banking éfficiency that this authority

-: Should be limited to banks in small communities.

This additional income will strengthen them and

increase their ability: to,make a fair return to their. -

2 shareholders, while the new business is not likely to

SS

|

i

| the regulations were they to receive the income

COMMISSIONER v. FIRST SECURITY BANK OF UTAH 413.

- yg _ Manartata, J., dimenting

assume such. proportions as’ to distract the officers

- of the bank from the principal business of banking

Furthermore in. many small ‘places the amount of

insurance policies written .... is not sufficient to’

take up the entire time of an jnsuranee broker, and

- the bank is not therefore likely to trespass upon out-

side business naturally belonging to others.

“y think it would be unwise and therefore unde-_

2 sirable to confer this privilege generally upon banks

in large cities where the legitimate business of bank-

‘ing affords ample scope for the-energies of trained

ghd expert bankers, 1 think it would be unfortunate —

if any movement should be ‘made in the direction of

placing the banks of the country in the category of

- department stores... .” Letter of June 8, 1916, to ©

Senate, 53 Cong. Ree. 11001.

There is nothing in the history of the etiaas to

_’ indicate that Congress was more concerned with banks’

_ actually receiving money than with their performing

the activities that generated the money. In fact, the

history that is available indicates that it is the activities

* themselves that Congress. wished to stop. Banks in large

We

.

-communities were simply not permitted to do anything «(is

that insurance agents might do, ¢. e, they were nog per-

mitted to solicit insurance.

- ‘Under respondents’ theory of the case, the legal viola

ig ey pass yee enc are ape SS

able as if there had been no illegality.’ See, ¢. g., United

| Neliher the tated ee the sepiletions se’ thee wlenda “originat- ”

ing and referring” insurance. These are the words m by the

- Court to describe the respondents’ activities, ante, _ The

statute and regulations speak of “soliciting and i ‘Because.

‘the respondents themselves argue that they would vi and

_~ activities amounted to “soliciting and oe insurance.

by their

activities, I assume that they, in effect, are‘ admitting that. these

Thus,

oo SMM es aay OCTOBER TERM, 1 1971 8 yal

|. Mansxaut, J ofigpenting | eee 405 U.8,

Ps Be "States. Ve “Sulbines: 74 Uv. s. -259 (1927) ; Ruthin v.

~- United States,, $43 Ur... 130 (1952); James v. United *

States, 366 U. S. 243 (1961). See also Tank Truck

ee vy. | Commissioner, 356 U.S. 30. (1958).

"could properly ‘determine that the ‘statute was:

— by of solicitation,-and, as the Court recognizes,

since “the gay jpvatved a the ct whi gave rise to the in-

° come,” this Court’s -prior decisions permit. the ner, to tax

- _ the income of the lawbreakers. . g.: o]

Rt If, however, thé Court is attempliig to ditingink vb silentio

("between “originating and referring” and “sgligiting” and is Sonclid-~-

ve . ing that only the latter is illegal, then there is ‘nothing in the rae

gr regulations that would illegal the receipt of income gener-

_,. °° ated by \the former. H s: the Commissioner could rejéct the

coe Soe respondents’ second argument that it would violate federal banking —

: " laws to include the proceeds in their income.

Whichever = approach ‘the Court selects, the satate requires:

consistency—i. e;, the statute requires that the activities that pro- -

duce income be. illegal before the - receipt of the income is deemed ”

_ to violate the law.

| F cairo, Akh dhs Chard Cink etocsnlh that bie add ty Chis expersion'

. °° of the. Comptroller, but in proposing that §92 be added to the}

_ already existing banking laws, Comptroller Williams. himself noted

tha that “[i]t is certainly clear that the Comptroller of the Currency

+ Ne tice kaka

BE rg) > Letter of June 8, 1916, supra.

of the statute. -63 Cong. Rec. 11001. Perhaps ‘it’is therefore un--.

important whether or not the respondents havé tectinically violated it.

a ee ee

. ties to take place may also be of’no great moment.

Fog pew a, ist is ertieal to a corrét disposition of this cave, in my view, s

- . ° that“iforespondents” activities are not illegal, there is no reason that —

- receipt of thé. income generated» from’ them should be illegal: It —

4 ~ shouldbe pointed out that the theory that reicipt of mid income

~~, °° would-be illegal was ‘first proffered by: 1 idents’ counsel. This

>. theory is certainly: self-serving in ‘the sense t it provides’ what

the Court regards as the dispositive factor.in this ease without hinder-

- ing the: activities of the holding company in any way.

Siacihnie rede taeeremeres rein sieibenicaiad

2

.

Se = “8 Ende

COMMISSIONER v. First SECURITY, BANK OF UTAH ais

&

The Coal ae however, to distis ae

pridt ‘eases ‘holding that a takpayer y be teed on

income illegally earned on the ground ead the issue » . ee

' was never raised as to whether. the taxpayers in those =>

cases had actually received the income. The distine-

' tion is valid but epee not warrant a different. result:

in this case. 3

The reasoning“ of the migadity funs along shi lines:

: if A violates the law—by attempted embezzlement or. _

by illegally soliciting insurance sales; for example—but ©

“he receives no money and has no “egal right” to receive —

ameny. cl iS penitent Oats waded ane

Bienis

_ ae

any money, then:he cannot be taxed as if the money had) rf

been ‘received; but, if A actually embezzles money or

receives: insurance premiums in violation of the law, A

can be: taxed: even though he may have transferred the.

money without. any personal gain to a third. party from

whom he has no right of recovery. » CIF

I would agree with this analysis in most cases. Where

-s” I differ from the Court is in which category to place this |

’ transaction. To. pretend that respondents have not re-

‘ceived any money and have no right to any: money i isto. \\

_ ¢ ignore: the thrust of § 482... That section requires | that we

‘ trent this case as if the. commissions hed! been paid to

ee

Commissioner argued in his brief (p. 13) as follows:

- “The Commissioner’s allocation’ does not force respondents to vio- .

late the federal banking law. It was they, not the Commissioner,

who chose to solicit and sell credit life insurance at a ‘fate set at a

. sufficiently high level to permit the payment of commissions. If

their, activities did not-violate the banking law, ‘the Commissioner's

tion will not, of itself, constitute s violation on their part. .

d, surely, the y .ynient of taxes would not tp an illegal act.” +o

Both sides d -with this point in oral argument, Tr..of Oral Arg.

14-18, 30, 40.

This is the nub of the case. What is there in‘ the legislative hie-

_» tory or the purpose of § 92 that requires that we treat the activities

ee ee

_ wl

’ : =

Me Ga ; TERM, ade

ah. J. disdnting ” ae M5 0.8. 8

eententh and had beer transferred to ‘the: insurance .

: gubsidiary by them. Of course, tliat didnot.occur:: But, —

‘we know that, t the whole notion of the section is to"look .

“behind ‘the form in which a transaction is structured to

its sub’tance. The substance is eithef that the respond- -

" ents violated federal law, earned illegal income, attempted

to avoid taxation on the: income by channeling it else-

_ where and were caught. by the. Commissioner; or, that

' they did not; violate federal law by soliciting sales of

‘insurance and that there is no legal bar to their retei :

the.proceeds from their sales. In either case, the res a

_ is the same, and respondents cannot prevail.

". If respondents had actually received the proceeds and

transferred them to the insurance subsidiary, they would

‘still be free to make essentially the same, argumént that a

they make in this case, i. e., they could. argue that federal

_law prohibited them from receiving ‘the. money; that -

"they ‘violated federal law, but had no right to keep the -

money; and that they should not be taxed on eceipt of .

funds which they could not legally. keep.

To be consistent with the assignment-of-income cases,

Helvering v. Horst, supra, and Lucas v. Earl, supra, and -—

. the line of cases that includes Rutkin v. Unit

supra, and James v. United Statés, supra, the Court .

. would--have' to reject this ‘argument. Yet, I main-

- tain that this is just what the taxpayer is arguing here. .

The Commissioner’ has determined_ that in reality the

- respondents have earned income, and’ he has taxed. e

: <inder § 482. To reject his position is to _give: undue

weight to the absence of technical temporary ion .<

- of. money and“some abstract concept of a “right” to

ceive it. “I had thought that this kind-of technical res .

soning: was rejected iii James v. United States, supra,

_ When the Court overruled Commissioner v. Wilcoz, 327

ei s. 404 Ue)... . |

eo. a ee

” <.-

°

- COMMABSIONER v. “FIRST spCURITY BANK OF UTAH 417

p RT OR - Manswcius, J, disenting Es

“Finally, even if there i is s some‘t mysterious reason why

". the banking. laws should be read in the manner

‘by. respondents, there is ‘sti another reason whiy hss. 3

should ‘not prevail. : The fact would remain that they * \

3 consciously chose to perform services in order that their; _

.. parent holding company would reap financial rewards.”

~” Certainly; there is nothing’ in/the federal banking laws |

_ that: required the. performance of these services. In |

. the context of a complex corporate. structure ‘ministered \* .

_ by‘one large holding com I: the purposes of §-482 are

"best. served by permitting the: Commissioner ‘to allocate _

income to the company’ that earns it, rather than to the

‘company that. receives it, “Again, We must remémber

’ that this is not-a case of unrelated private individuals or

independent corporations where there might. be’ some

danger that in. allocating | income. to the person who. gen-

"- erated biit did ‘not. receive it, -the Commissioner ‘would

render that person financially unable to pay his sence

_ This case involves one~ large interrelated system.

' would be total fiction to assume ‘that the holding osuly.

would leave its subsidiaries in a financial bind. ' Hence, |

there is no good reason’ to bar the Commissioner -from

__ taxing respondentgpn the money’ ‘that they pecrval 7

“In my ‘view, the Commissioner has do ne aYAC! : Hai

"$482 requires him to doTn this’ case Accordingly, @

= While the ‘phaniame fretp-the iheurdmsh (ilidie Wee WR poid

' directly ‘to the parent, there can be no doubt that the parent bene-

_, fited from the financial success of its subsidiaries.

3 We know that ntax statutes do not normally determine the tax .

consequ uly We reir ogre artrtt: There is no inherent .in- |

consistency in reading the banking legislation as making the recetpt

of insurance’ premiums illegal, and, at the.same time, reading the __

~—“Internal Revenue Code as allowing the Commissioner to allocate the

incomhe from ‘the sale of insurance: policies to the party actually

Br oper pea IE hr he caNrEete

—_—— ya Gruate

48 ee OCTOBER TERM, 1071 |

a Bucxaun, My dissenting * _ 405 U. 8.

would reverse. ‘the decision. of ‘the Court of ‘ena and

ae would remand the case with a direction that. judgment —

be: entered for. the petitioner, Silk Ai abate: ee

~ MR, ‘foercs BLACKMUN, he ‘whom Mn Jusmien’

i Witte joins, dissenting.

As I read the Coprt’s opinion, : I ‘ain. the ianeaieies

-. that, it chooses to link legality’with f mpeg or; to put -.

it better oppositely, that it ties illegality to receive with —

inability ‘to tax, I find in. the Internal Revenue Code

‘no authority for the concoction of a restrictive connection -

of that kind, Because I think that the Commissioner's is

\ “allocati@n of income here; undér the auspices of § 482 of

\ the 1954 Code, and in the light of the established faots, :

was proper, I dissent.

- |. Section 482 ' surely contemplates taxation of income ~

-. without forma? receipt of that income. That, indeed; is -

_, the scope and purport of the statute. It.is directed at

income distortion y a controlling interest among two or.

more of the controlled entities. I, therefore, am not con- "

- vineed that the fact the i income in question here did not

- flow. through ane Hans: at any time—because it was

deemed: proser ifthe pertinent

,» 39 WA still i in effect; a propssition

whieh may not be: free from doubt), and because the ©

.*. Section 482 is not: new. Tt appeared as’ § 48: of ‘the Revenue

Act of 1928, 45 Stat. 806, and has predpcessors in § 240 (f) of the

“Revenue Act of 1026.44 Stat. 46; and in §:240 (d) of the Revenue :

"Agt of 1924, 43 Stat. 288. ;

* The revisers of the United, States Code in 1082 omitted hi

f%,

ah) Soke

a

Gi,

oF, Kerenl Shcaeeek ts ght “tn, War. Faaense Ccpuedta

a Act, 40 Stat: 512, Compare administrative ruling No. 7110 of the

eee? Comptroller of the Cyrrency with the Comptroller's current regula--

” thons, 12 CFR §§ 2.1-2.5. See Sazon' v. Georgia. Association of I~

aa Agents, Inc., 399 F. 2d 1010 (CA5 1968) ; Com-

iia:

* oopnuisionsn v. PIRsT | SECURITY BANK oF waa 419,

304 3 Buackmun, — dissenting *

controlling interest routed it slsewrhere-sirvis, in and ‘

of itself, . deny the efficacy of the statute.

2, Section.482 has.a double purpose and a double: is

get. It: authorizes the Secretary or his delegate, that is, .

the Commissioner, to allocate whenever he determines it -

‘necessary so to do in order (a). “to prevent evasion of | :

“taxes” or (b) “clearly. to reflect the. income of any” of.

- the controlled entities). The use.of the statute, therefore, —

is not restricted to the intentional tax evasion, Noeva- —.

-sion of. tax, in the criminal sense, by these Banks is

~~ specifically suggested or at issue here.. And I do not wt ©

. scribe to my. Brother Mars#a.w’s intimation that

the Banks were doirig was othetwise illegal. The. aed

alternative of the statute,: however, i is directed at some-

* thing other than tax evasion or illegality. ‘It is con- ©

cerned ‘with the proper reflectiof: of income (or. dedue-

tions, credits, or allowances) so.as to place the controlled

eee. on tax parity with the smoceantesiie texpayer. ae

nise, economic realfties and to have the tes: congequences _ |

follow, those, rea}ties and: ngt_some-structured non- — :

reality. This-is the aspect of the statute with ‘which -

the Commissioner and these respondents are here con-

cerned, Thus, any: ait: eenlite ante 0- 299 ‘habe

- beside the point... . POR

3. From this it follows that the Court's s repetitive. a

emphasis on the missing § 92 and the inability of these. _

~ Banks legaHy to receive the insurance commissions give |

undue emphasis to the

wholly to ignore the second. . :

‘4, The purpose of the controlling interest in sivecturs |

* ing the several entities it controls is apparent and can-—

2 missioner v. Morris Trust, 367 F. 2d 794, 795 (CA4 1966); Hack St

ley, Our Baffling Bankirig System, pt. 2, 52 @a. L. Rev. 771; 771

779 (1966). Tinie Staten Code Annotated caries th proven: .

| 602 of ite Tite 12. ; .

480-390.0- 2-11

lpr vipnnitel Sassen ae

3 a gar: OCTOBER TERM, 1971

Biackuon, J, dinenting 4050.8.

| iil be pores ‘The Banks were wholly owned tub

_sidiaries of Holding Company. '. The Tax Court found—

and the | respondents concede *—that one ‘of the purposés

of the Banks’ arranging for borrowers’ credit life insur-

ance * was “to provide an additional source of. income—

part of the premiums from the insurance—to Holding

Company or its subsidiaries.” T. C. ‘Memo 1967-256,

__- p, 67-1453. For nie, that mieans to provide an addi- =

: a are income for the group’ fe of

pocket into ree ers aT ‘might

ae Meth be routed. aS |

a AS Whit;

>

= appened? The: chronology is eae

(a). “Tnitially, that: is, until 1954, tlie Bisnis solicited

° the i insurance, charged the premium, “and forwarded it to

_ Management eeaaas The latter in turn sent it onto .

- the then-favored - independent. insurance carrier. That.

alriet paid’ the recognized’ sales commission to Smith, <

ompany’s wholly owned instrance agency."

(by In-1954 the American National-Seeurity Life ar-

rangement’ appeared on the scene.’ This‘ was prompted |

= piecing the credit insurance business as a

. profitable unde: Obviously, it was a‘ matter of

\. & eonecern to ‘established. and independent*iisurance -2

~ ‘s/ panies when they came to realize that lending inatitation’®

ree were in & position to ‘form their own insurance’ affiliates :

Pm ? Respondents’ Brief 2. ; lige sig

aes Te he and oter terme a they ave ben defined inthe

Court’s'o :

_* 8 Despite ° aytient to Smiith, it was not Smith, but Manage

‘ment Company, that reported the commissions as taxable income. -

This, reveals: the fluidity of control of the structure. “Of course the

- . fact that the Commissioner did not allocate thé premiums 'to ‘the

Banks during this period is of small, if any, significance, for, as

'. the ‘Court. points out in its footnote 2, ante, at 397-398, the then tax

er ee ee ee tion

ae ee

- caanasroNER FIRST SECURITY: BANK OF UTAH 421

Mra) Buaceaon, J, dioventing’ os

7 | to tap and drain away profits that. the rar

; therétofore had received balnesiaegs hindrante

6. of the premium dollar in return. for, apes pee

ing ‘customers te purchase credit life insurance.

,.70 Stat: 36, followed by the Life

Inicome Tax Act of 1959, 3. Stat. 112..

i with Security Life’s development.

. : ‘the premium income. . No one else was, Certainly Amer- 3

_. Smith was out ef the picture. And if it can be said that

& part, they did so only secondarily. It-was the partici-

. tion’ and. availability of the. insurance; that igave the

~ plication; that prepared the. certificate of

that sent the form and the premium to.. t

: Bas tat It. was the reine hese. hank | thus

| re-insurer and yet it accomplished the purpose, for which °

_ it: was given n‘ life. Now no sales commissions needed to _

be paid... In fact, none were paid; they, just disappeared, é

and that erstwhile cost remained ‘as profit in Security |

- Life... *But the Banks, as before, solicited their. bo rOw-

~ dean. National. was not. Certainly Security Life was not...

' that collected the premium or added it to the loan; on

accounting services. Security Life never did develop into

“& full-line insurance company ; it remained essentially a .*

V

(c) The; Life Insurance:Company Tax Act for 1965

. pared to ordinary corporations—to life. insurance 3

companies. See. United States v. Atlas Life: Ins;. Co., :

381 U.S. 233 (1965). This happily coincided, of course,

6. Only: the Banks’ were the, releeniahs force behind fs

' Management Company or Holding Company contributed —

. pating bank that explained to the borrower.the func- __ -

customer the application’ form; that examined the cll ae

OCTOBER TERM, 1971 a

j

aw i. -

Broxson, J, dimenting 4080.8.

offered. and sold ‘on behalf of a life fieurinoe company,

under common control with the bank. “It_.was the ‘Par-

ticipating bank, in short, that did what was necessary,

and all that was necessary, to sell the insurance. Clearly,

services were rendered by that bank ‘on behalf of its coms.

= monly controlled affiliate. Just a8 clearly, those services.

. would ‘shave been compensated had the corporations been :

dealing with each other at arm’s length.

‘7: It is no answer to say that geheration of ‘ineome.

does not necessarily lead to taxation of the genérator;

here the earnings themselves stayed within the corporate .

_gtructure dominated by Holding’ Company, ahd did not

pass elsewhere with consequent tax impact elsewhere, ©

I do not so easily differentiate, as does the Court in its

. - footnote 11, ante, at 401, between referral outside the _

_ affiliated re and referral cotiveniently: within that

structure ’ insurance. company that tould be taxed.

on the Fini income: (unreduced by: commissions) a

advantageous tax rates.

_ 8 That the selling effort of the Banks peertis compara-

tively minfmal\and that the processing cost’ seems com-

_, paratively negligible are, I believe, beside the point and

' quite irrelevant, ‘No one else devoted effort or incurred

‘gost of any significance whatsoever. - Taxability has

Never depended on approximating expenses to receipts;

in fact, | the less the cost, the greater the’ net income and -

the greater the tax burden. =

3 ‘@, Neither is it an answer to say thet ‘before the |

organization of Security Life the Banks did not receive -

~ Income from credit insurance premiums and. that, there- ©

fore, the emergence of Security Lifé did. not ‘change: the

- situation so far as the Banks -were concerned. For

me, it very much changed ‘the situation, ‘for the con-

' trolled structure took over the ‘insurance business and. .

= premiums ‘thenceforth: were . nestled within that

es 7

oe : oe ‘ , ; ee \ , ee eet ce

COMMISSIONER ». FIRST SECURITY BANK OF UTAH 423 |

~ 304 \ » Buackun, 4 dissenting - see

_ 10. Taxability, deur nonreceipt, is common in. our

- tax law... is present in a variety of contexts, For

- exam i -has been ‘held taxable, under the appli-

cablé”statute's géneral ‘definition of -gross ingome, for

- income ‘or earnings assigned to another and never re- *

fl 2 Ceived; * for. the income from bond coupons, maturing "

. in the future, assigned to-another and never received;* = >

; for dividends paid to ‘the Shareholders of a transferor.

corporation pursuant -to a lease with no ‘defeasance |

_ clause; * for another's income from a short-term ‘trust® - |. -

.- -(until-§ 673, with its 10-year ‘megsure, came into the tax

Structure with the 1954 Code) jafor fhe employer's pay—

-- ment-of income tax otis employees‘ compensations 30

_ &nd for an irrevdcable trust's’ income used. to-pay ine |,

___ Burance premiums on the settlor’s life, or, in the absence ~

! of particular state law proviffons, distributed toa di- ,

‘f - cvorced wife in lieu of ‘alimony * (until $.215 came into

the Code with the Revenue Act of 1942, 56 Stat. 817), . .

. . .wll. Tn. the area of federal estate taxation an obvious

‘parallel is found in:the many instances of. includability _ 2

_ in the: decedent's gross estate of property not owned or © -

_ Possessed by the decedent at his death. The Code itself |

-_" provides: for the ‘inclusion of. transfers theretofore éffee- :

“Harrison ‘vy.’ Schaffner, 312 U. 8 870 (1941); Belvering |

| Bubank, 311 U. 8. 122 (1940); Burnet v. Leininger 285 U. 8.136 °° **

_ (1982); Lucas ¥.’ Earl, 281 U. 8. 111 (1930). Cf. Hoeper-v. Taz air

_ . Comm'n, 284 U. 8. 206 (1931); Blair-y. Cammissioner, 300 U. 8,'5

(1987). See Commissioner v. Sunnen, 333 U. 8, 591, 604-610 (1948) ;

. United States v:-Mitchell, 403 YJ)'8, 190 (1971).

" Helvering v. Horst, 311 USB: 112 (1940). er Seca -

"United States v. Joliet & Chicago R. Co, 315 U. 9. 44 (1942).

* Helvering v. Clifford, 309 U. 8. 831 (1940).,5 eee

*° Old Colony Trust Co: v. Commissioner, 279 U. 8, 716 (1929).

“= Burnet v. Well, 280 U. 8. 670 (1933). ac ae

_. -™ Douglas v. Willctits; 296 U! 8.1 (1935); Helvering v. Fitch, -

309 U. 8. 149 (1940) + see Commissioner v. Lester, 966 U. 8, 298

(1961). ~ . | 8a. ae tumeninaaath tn osu

-%-¢

‘

~

° Pd

ae _ OCTOBER TERM, to”).

. $2085; of a variety-of inter vivos irrevocable transfers

7 taxpayer is “prohibited from receiving” the income. by

: pauicabdy Ss hd Yoo boeNigse'angunrent ithe. be er it

KY

~

Cs Pe a

: Bucexvx, J, dissenting er U8,

tively vind but in contemplation of death, 26 v. ‘8.

in ‘trust, 26 U.S. C. §§ 2086-2038; and of joint interests, \

26 Ui.8.-C. §:2040, in all of which situations the owner-

hip interest at death was nonexistent or less than full.

-12, This demonstrates ‘for me that there have: been.

and are many examples of taxation of intome witho a

5 that: “gomplete dominion”: over it that the Court. how -

_finds 80 necessary. ‘The quotation, cited bythe Court,

“from Mr, Justice Holmes’ opinion: in Corliss v, Bowers, -

_ 281. U, S, 876, 878 (1030), consists of language uised to’

eupport the taxation of income; it is not language, as

~ the Court would make it out to be, that supported —

, the. nontaxatidn-of:income. The. Justice's posture—and ..

* the: Court’e—in that case surely looks as mych, and.

more, to includability here than it does. to

ee. *

ty. |

3; Phe Court ehrioke from. extending the pousibility:

of taxation-without-receipt, to the situation: where the |

- another statute. It states that.np decision of the Court.

has as yet gone that far. It is equally true that no 3

decision of the Court has refrained from going that far. -

. But the net indome “for 1024 was paid over to the

, might have t in different circumsthces the income never his

, and he taxed for it. The legal estate was in the trustes “

* and the equitable interest inthe wife. :

Te Sects Pica kh scaciernof

title as it is Se ee taxed—the ©

“conan v. FIRST sacuRITY BANK oF UTAH ho

304, en . BrackUN, J, dissenting | ae: = a :

The fiaventll Ciréuit has not ‘been’ onoernied with the

“existence of a prohibitory regulating statute, Local Fi- oe

a nance Corp. v. Commissioner, 407 F, 2.620 (1969), cert... -

, denied}s396 U.S. 966, and this ‘Court should not be.” The

" , Congress, in ‘enacting the Life. Insuratice Company’ Tax -

PA Act for 1955, was of the opinion that § 482 was. available —

_ to the Commissioner with respect’ to. insurance com-.

panies. that are captives of “finance companies. oo eT

— Rep. No. 1098, 84th Cong., lst :Sess., 7 7; &. Rep: No. .

1871, “B4th Cong,, 2d Seas,, 8.4 — -

14.. The Court's reluctance i is reminiscent of the “claim

of-right” doctrine which found expression inthe un- 3

fortunate and short-lived (15 years) decision in Com-

missioner v. _Wilcoz, 327 U. 8.404 (1946), to the effect. .

that embezzled income -was not taxable to the embewler.

Wilcox, of course, stood in sharp contrast to Rut 3

United States, 343 U. 8. 130 (1952), where mo ob-

tained by extortion was held to ‘be_ taxable. ift

_ the extortioner; it was overruled, at last, in J 5

| United States, 366 U. 8.213 (1961). . In Wilcoz, ia

the Court wrestled with the concept and i imaginary bar- _.

'_ rier of illegality, was impressed by it, and, as in this case, ,

concluded that illegality and taxability did npt mix and -

‘could not be-linked. That doctrine encountered resist-—

_. ance in Rutkin and in James, and was rightly rendered x

an aberration by those later decisions.

__; Methane irs potitial shuse iaation in tho ease of the scale

“captive insurances companies. It may pe, possible for _ finance ~

" _ company, for example, to establish a subsidiary life insurance com-

Nea a ec ntrace pilisias in. exmmedtion wb the.

: business of t If the charges excessive premium

on ‘this . & portion of income of the parent company “

es forked ip ap wh meena heyy se bleed in -

ea HATY oe ' OCTOE eR TERM, io71

Buacxatvy, J, dissenting me 405 0.8.

15. I doubt if there is ‘much sisin tet for the Court

in L. E. Shunk Latex Prodicts, Inc., 18 T. C. 940 (19§2),

' for there the significant fact was that the taxpayer could. -

not. have raised its price even toa esr net I

2 Uistributor.

In pondlusion: I note that the Court of Appeals re-

'. manded Management Company’s case to the Tax Court.

for consideration ‘of the § 482 allocation, alternatively *

proposed, to that corporation. - With this I must be con-.

tent. At least Management Company is not a national 4

bank, and the barrier that the Court has found in the «

missing § 92 supposedly does hot-provide a protective _

coating for Management Company or, se — matter,

for Holding ‘Company.

“And so it is, The result of today’ 8 Yestiien may iit a

_ be:too-important, for it affects only « few taxpayers. It *

seems to me, however, that it effectively dulls one edge

‘s of what has been a sharp two-edged tool fashioned and

_ bestowed by the Congress upon the Internal Revenue

Service for the effective ee, of our ew tax

= laws. . ARR

9

BS

“