# Opinion — Commissioner v. First Security Bank of Utah, NA > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0370%3A8 ## Record - **Collection:** Supreme Court brief - **Document type:** Opinion - **Published:** January 1, 1972 - **Citation:** 405 U.S. 394 ## Text “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... 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 : = 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, ; 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 “ --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0370%3A8. Public record. Not legal advice.