Document: 405 U.S. 394 92 S.Ct. 1085. 31 L.Ed.2d 318 COMMISSIONER OF INTERNAL REVENUE, Petitioner,v.FIRST SECURITY BANK UTAH, N.A., et al. No. 70—305. Argued Jan. 10, 1072. Decided March 21, 1972. Syllabus Respondent banks were subsidiaries of a holding company that also controlled management company, an insurance agency, and, from 1954, (Security Life). In 1948 the began to offer arrange credit life for their borrowers, placing with independent carrier. National banking laws deemed prohibit receiving sales commissions, which paid by carrier agency subsidiary. The commissions reported as taxable income 1948—1954 period company. After when Security Life was organized, on banks' customers placed carrier, reinsured risks Life, latter retaining 85% premiums. No paid. all reinsurance premiums its tax returns 1955 1959, at preferential rate companies. Petitioner, pursuant 26 U.S.C. § 482, granting him power allocate gross among corporations in order reflect actual incomes corporations, determined 40% Life's premium allocable commission earned originating and processing insurance. Tax Court affirmed petitioner's action, but Appeals reversed. Held: Since did not receive prohibited law no part could be attributed them, exercise 482 authority warranted. Pp. 403—407. 436 F.2d 1192, affirmed. Ernest J. Brown, Cambridge, Mass., petitioner. Stephen H. Anderson, Washington, D.C., respondents. Mr. Justice POWELL delivered opinion Court. 1 This case presents review determination Commissioner Internal Revenue (Commissioner), Act,1 taxpayers within group should reallocated true each. Deficiencies assessed against Commissioner's respondents appealed Tenth Circuit. That court reversed decision Court, 1192 (1971), we granted petition certiorari resolve conflict between below Local Finance Corp. v. Revenue, 407 629 (CA7), cert. denied, Guardian Agency, Inc., 396 956, 90 424, 24 420 (1969). We now affirm Appeals. 2 Respondents, First Bank Utah, Idaho, N.A. (the Banks), are national that, during years, wholly owned (Holding Company). Other, non-bank, Holding Company, relevant this case, Co. (Management Company), Ed. D. Smith & Sons, (Smith), and—from June 1954—First Insurance Company Texas Beginning 1948, Banks offered borrowers life, health, accident (credit insurance). found they 'for several reasons,' including (1) offering service increasingly supplied competing financial institutions, (2) obtaining benefit additional collateral provides repaying loans upon death, injury, or illness borrower, (3) providing 'additional source income—part insurance—to subsidiaries.' 3 Until any borrower who elected purchase referred two charged $1 per $100 coverage year, commonly industry. Commissioners States involved—Utah, accepted rate. followed routine procedure making available customers. lending officer would explain function availability If customer desired coverage, necessary form completed, certificate delivered, collected added customer's loan. then forwarded completed forms Management maintained records purchased processed claims filed under policies. cost each time devoted explaining less than $2,000 characterized courts 'negligible.' services rendered it negligible, slightly excess year. 4 It custom business (although nvariably followed), regardless incidental paperwork, pay 'sales commission'—ranging 55% net collected—to party originated generated business. But had been advised counsel lawfully conduct resulting customers' Neither nor officers licensed sell insurance, there is question here unlawfully acting unlicensed agents. received other respect them. During 1954 companies writing directly, Smith, one Company. These income, above described. (1948—1954), attempt Banks.2 5 organized new subsidiary engage A adopted to, written American Galveston, (American National), same customer. policies 'treaty reinsurance.' For assuming risk sold Banks' customers, retained National, furnished actuarial accounting services, remaining 15%. Under plan,3 continued manner before.4 6 paper corporation. commenced initial capital $25,000, increased 1956 $100,000. Although become full-line (contemplated possibility organized), substantial. assumed grown $41,350,000 end substantial claims.5 7 entire amount premiums, charged, years 1955—1959. Because subject lower effective ordinary total liability have commissions.6 Pursuant his compensation insurance.7 view so allocated equivalent must included 'true income.'8 8 parties agree designed prevent 'artificial shifting, milking, distorting enterprises.'9 Treasury Regulations provide: 9 'The purpose section place taxpayer parity uncontrolled taxpayer, determining according standard property taxpayer. . applied every dealing arm's length another taxpayer.'10 10 answer whether shifting receipt retention described.11 11 note outset never share these authorized act agents located places having population exceeding 5,000 inhabitants, 12 U.S.C.A. 92.12 does explicitly over agents, held implication.13 Comptroller Currency has acquiesced holding,14 Circuit expressed agreement below. penalties violation include possible forfeiture bank's franchise personal directors. Banks, advice counsel, 'held belief contrary Federal insurance' belief, 'the attempted insurance.'15 13 Petitioner contest finding Accordingly, assume purposes insurance-related although prohibition apply non-bank Company.16 14 know wherein person he receiving. cases concept whom it. underlying assumption always taxed complete dominion man's unfettered command free enjoy own option may sees fit not.' Corliss Bowers, 281 376, 378, 50 336, 337, 74 L.Ed. 916 (1930). 15 is, course, well established assigned before nonetheless assignor. assignment-of-income doctrine assumes arranged another. Harrison Schaffner, 312 579, 582, 61 759, 761, 85 1055 (1941), said: 16 '(O)ne vested right (does) escape kind anticipatory arrangement, however skillfully devised procures payment another, since, enjoys laid.'17 17 One regulations implementation expressly recognizes implies control follows: 18 interests controlling cause affairs transactions truly taxpayers.'18 19 regulation consistent heretofore approved different context. regulation, facts contemplates Company—the interest—must 'complete power' shift subsidiaries. only where exists, exercised such way income' understated, reallocate 482. unless acted federal laws. hardly includes force violate law. 20 Apart inequity attributing receive, neither statute our prior decisions require result. faced situation existed those cases, urged Commissioner, proceeds criminal activities taxable.19 Those concerned situations actually funds. Moreover, illegality involved gave rise income. Here referring practice widely followed, acknowledged legal. Only thereon not. Had ignored laws, thereby risking loss charters subjecting liability,20 illegal-income relevant. inception use careful themselves position. think fairness requires fall receives rather cannot.21 21 L. E. Shunk Latex Products, Inc. T.C. 940 (1952), considered closely analogous situation. interest manufacturer distributor rubber prophylactics. OPA Price World War II became December 1, 1941. Prior thereto raised prices retailers, affiliated distributor. some distributor's ground portion profits fact manufacturer, even though increasing prices. improperly, said 'no attribute petitioners received.' T.C., 961.22 22 argued, finally, 'services' 'would compensated length.'23 short proscription agent therefor applies inhabitants. equally control—as most are—no income.24 As stated Regulations, 'purpose ..'25 comports treatment. 23 conclude attributable Banks. utilize distort incomes. therefore unwarranted case. judgment Affirmed. 25 MARSHALL, dissenting. illustrate natural affinity institutions other. Congress depends ability revenue Code, insure avoidance. H.R.Rep.No.1098, 84th Cong., 1st Sess., 7; S.Rep.No.1571, 2d 8. my opinion, today's renders efficacious weapon avoidance schemes intended advantage. I dissent. Section provides: 27 'In more organizations, trades, businesses (whether incorporated, United States, affiliated) directly indirectly interests, Secretary delegate distribute, apportion, deductions, credits, allowances businesses, if determines distribution, apportionment, allocation evasion taxes clearly businesses.' 28 enacted 45 Act 1928, Stat. 806, through fictions 'to deny arbitrarily concerns.' Central Cuba Sugar 198 214, 216 (CA2 1952). See H.R.Rep.No.2, 70th 16—17; S.Rep.No.960, 24—25. serve present Code. 29 well-established analyzing transaction test arrangement structured interlocking corporate similarly length. See, e.g., Borge 673 1968), denied sub nom. Danica Enterprises 395 933, 89 1994, 448 (1969); Eli Lilly 372 990, 178 Ct.Cl. 666 (1967). 30 Applying following Before ranging 45% discharge debts event died disabled term loans. issued At created reinsure By paying off 15% policies, garnered proceeds. either advantage post-1954 structure derived 1955, 70 36, amended Income 73 112, amended, 801 seq., gives treatment funneling qualified avoided theheavier imposed bee commissions. 32 analysis overly complex: He saw performed essentially after before, concluded required earning. 33 Based respondents' earlier experience well-known insurers solicitors generating see 48 773, 786 (1967), aff'd, 629, 631 632 (CA7 1969), properly 34 make, essence, arguments rebut First, urge funds result unfair them meaning, argument rejected. makes absolutely sense examine technical eye 'right' involving private individuals scrupulously avoid taxing someone money will matter. Blair Interal 300 5, 57 330, 81 665 (1937); cf. Teschner 38 1003 (1962). related treated differently persons unrelated certain purposes. 35 need look far find complicated economic structure—established, designed, administered, amendable company—had equitably allocated. 36 apparently concedes taxation money, fail. concession fact, mandated various (1941); Helvering Horst, 311 144, 75 (1940), Lucas Earl, 111, 241, 731 37 Having implicitly rejected mere nonreceipt sufficient taxation, accept second legally barred ever circumstance cannot Respondents legal bar issue herein 92, addition powers associations association doing exceed five thousand shown last preceding decennial census, may, rules prescribed Currency, fire, authorities State bank do State, soliciting selling collecting company; fees agreed agent; broker others procuring real estate hundred miles located, reasonable fee commission: Provided, however, shall guarantee principal pricipal: And provided further, truth statement made assured filing application insurance.' 39 inference CFR §§ 2.1—2.5, explicit language communities inhabitants selling, soliciting, indeed severe. Assuming wishing appear encourage violation, concludes none receive. 40 crucial theory already violated Title 1916 suggestion John Skelton Williams, Currency. wrote recommend small permitted associate companies, larger same: 41 'It seems desirable standpoint public policy efficiency limited communities. strengthen increase make fair return shareholders, while likelyto proportions distract banking. Furthermore i many take up broker, likely trespass outside naturally belonging others. 42 'I unwise undesirable confer privilege generally large cities legitimate affords ample scope energies trained expert bankers. unfortunate movement direction country category department stores. .' Letter 8, 1916, Senate, 53 Cong.Rec. 11001. 43 There nothing history provision indicate performing money. indicates wished stop. simply anything might do, i.e., solicit 44 thus fait accompli illegality.1 Sullivan, 274 259, 47 607, 71 1037 (1927); Rutkin 343 130, 72 571, 96 833 (1952); James 366 213, 1052, 246 (1961). Tank Truck Rentals, 356 30, 78 507, 562 (198). seeks, distinguish illegally neve distinction valid warrant 46 reasoning majority runs along lines: violates law—by embezzlement sales, example—but 'legal right' received; but, embezzles law, can transferred without gain third recovery. cases. Where differ transaction. To pretend ignore thrust treat Of occur. But, whole notion behind substance. substance illegal channeling elsewhere, caught Commissioner; or, sales. same, prevail. subsidiary, still argue money; keep keep. 49 supra, line reject argument. Yet, maintain just what arguing here. reality position give undue weight absence temporary possession abstract thought overruled Wilcox, 327 404, 66 546, 752 (1946). Finally, mysterious reason why read suggested respondents, remain consciously chose perform parent reap rewards.2 Certainly, performance services. context complex ministered best served permitting earns it, Again, remember danger allocating render financially unable taxes. involves interrelated system. fiction leave bind. Hence, good earn.3 51 view, done exactly reverse remand entered 52 BLACKMUN, WHITE joins, Court's impression chooses link legality taxability put better oppositely, ties inability tax. Code concoction restrictive connection kind. here, auspices light facts, proper, 54 1. 4821 surely formal That, indeed, purport statute. directed distortion entities. I, therefore, am convinced flow because proscribed (if pertinent thereof, 753, effect, proposition doubt),2 routed elsewhere—serves, itself, efficacy 55 2. double target. authorizes delegate, whenever (a) taxes' (b) 'clearly any' statute, restricted intentional evasion. tax, sense, specifically subscribe Brother MARSHALL's intimation otherwise illegal. alternative t something illegality. proper reflection (or allowances) produce purposes, recognize, realities consequences follow nonreality. aspect concerned. Thus, seem me beside point. 56 3. From follows repetitive emphasis missing first almost second. 4. purose structuring entities controls apparent concealed. found—and concede3 arranging borrowers' insurance4 provide Memo 1967—256, p. 67—1453. me, means irrespective particular pocket into initially routed. 58 5. What, then, happened? chronology revealing: 59 Initially, until solicited premium, turn sent then-favored recognized Company's agency.5 60 National-Security appeared scene. prompted blossoming profitable undertaking. Obviously, matter concern came realize affiliates tap drain away independents theretofore hindrance. emerging affiliate proposal salvaged dollar develop remained re-insurer yet accomplished given life. Now needed paid; disappeared, erstwhile profit Life. borrowing (c) enacted, 112. statutes accord treatment—as compared corporations—to Atlas Ins. Co., 381 233, 1379, 358 (1965). happily coincided, development. 62 6. responsible else was. Certainly out picture. contributed part, secondarily. participating explained insurance; form; examined application; prepared loan; behalf common bank. bank, short, necessary, allthat Clearly, affiliate. Just clearly, 63 7. say generation necessarily lead generator; earnings stayed dominated pass elsewhere consequent impact elsewhere. easily differentiate, ante, 401 n. 11, referral conveniently re-insurance (unreduced commissions) advantageous rates. 64 effort comparatively minimal negligible are, believe, point quite irrelevant. incurred significance whatsoever. Taxability depended approximating expenses receipts; cost, greater burden. 65 9. organization emergence change very much changed situation, took thenceforth nestled structure. 10. Taxability, despite nonreceipt, variety contexts. example, taxable, applicable statute's general definition received;6 bond coupons, maturing future, received;7 dividends shareholders transferor corporation lease defeasance clause;8 another's short-term trust9 (until 673, 10-year measure, Code); employer's employees' compensation;10 irrevocable trust's used settlor's life,11 state provisions, distributed divorced wife lieu alimony12 215 1942, 817). 67 11. area obvious parallel instances includability decedent's possessed decedent death. itself inclusion transfers effectively made, contemplation 2035; inter vivos trust, 2036—2038; joint 2040, ownership death nonexistent full. 68 12. demonstrates examples dominion' finds necessary. quotation, cited Holmes' (1930), consists support income; language, be, supported nontaxation Justice's posture Court's—in looks much, perhaps more, excludability.13 69 13. shrinks extending taxation-without-receipt 'prohibited receiving' states gone far. refrained going Seventh existence prohibitory regulating (1969), 420, be. Congress, enacting captives 'finance companies.' 8.14 14. reluctance reminiscent 'claim doctrine, expression short-lived (15 years) (1946), effect embezzled embezzler. stood sharp contrast obtained extortion extortioner; overruled, last, wrestled imaginary barrier illegality, impressed mix linked. encountered resistance rightly aberration later decisions. 15. doubt comfort significant price noncontrolled conclusion, remanded consideration allocation, alternatively proposed, With content. least supposedly protective coating matter, is. too important, affects few taxpayers. dulls edge two-edged tool fashioned bestowed Service enforcement trades imposes $25,000 $25,000. Therefore, if, excluding question, assume, likely, both exceeded affected partially three. plan proposed similar recommendations institutions. anticipated soon begin write proving Such move deprive type recommended salvage charging actuarial, accounting, risk. 1967 256. Taxpayers consider lawful (which companies) minimize Perhaps classic principle Judge Learned Hand's comment dissenting Newman, 159 848, 850—851 1947): 'Over again sinister one's possible. Everybody so, rich poor; right, nobody owes duty demands: enforced exactions, voluntary contributions. demand name morals cant.' Knetsch 364 361, 365, 132, 134, 128 (1960); Chirelstein, Contribution Law Avoidance, 77 Yale L.J. 440 (1968). tables showing profitability Its worth (capital surplus) $161,370.52 $1,050,220 five-year totaling $525,787.91. that: 'Although proved successful, judge succeed. relation structure, risk.' Both 1955—1957, accorded upheld alternative. reversing record insufficient allocation. ordered further consideration. us. 1.482—1(a)(6) (1971). B. Bittker Eustice, Taxation Corporations Shareholders 15—21 (3d ed. 1971). 1.482—1(b)(1) interpreting 1934. They virtually unchanged. Jenks, Lawyer 279 (1970). decide ground, circumstances origination party. orgination unaffiliated (i.e., separate, banks, group), nevertheless asserts resulted services—namely paperwork it—were (as noted) convenience assure meet competition. affiliation, enabling group, alter character done. relevant, terms Whether difference 1916. When revised 1918 re-enacted, omitted. revisers omitted recent editions However, considers incorporates 2.1—2.5 Saxon Georgia Association Independent Agents, 399 1010 (CA5 1968). Morris Trust, 367 794, 795 (CA4 1966). Findings 1456, Dec. 27, 1967, based 'crucial (that) Banks) premiums.' prohibits 'as agent' 'by policies.' MARSHALL notes severe.' findind back cited. Indeed, contrary. 'agency agreement' companies; 'made available' finding, engaged 'selling meaning 'solicited' encouraged relationship, undisputed regularly 'looking violations laws.' long nocommissions fees. administrative interpretation great weight. raises serious time. stage proceedings Nor briefed argued Appeals, Solicitor, General perfectly lawful. apart acceptance assumptions below, basis statutory violation. (1940) (assignment coupons attached bonds taxpayer); (1930) (taxpayer one-half earnings). Sunnen, 333 591, 715, 898 (1948), discussed therein 604—610, S.Ct., 722—725. (1961); (1952). 93. Lester, 299, 1343, 306 (1961), alimony payments wife, basic precepts spend payments, husband noted 1969). felt bound Corp., decided subsequently reasons above, erroneously views correct. v.Commissioner, 1003, 1009 (1962): "In us, dispose appoint designate recipient. Does alone hands? Nicholas A. Stavroudis, 583, 590 (1956), settled direct distribution trust justify possessor power." post, 422. able cheaper paid, words 'originating referring' chosen describe activities, 405. speak 'soliciting selling.' activities. they, admitting amounted selling' determine acts solicitation, recognizes, since income,' permit lawbreakers. If, attempting silentio 'soliciting' concluding illegal, former. Whichever approach selects, consistency—i.e., deemd deference expertise Comptroller, proposing existing Williams himself '(i)t certainly clear authorize conferred law.' supra. Senator Owen, shepherded legislation important Perhaps, unimportant technically geat momen. moment. ofthe pointed proffered counsel. selfserving regards dispositive factor hindering way. suggests relied opinion. On contrary, brief (p. 13) set sufficiently high level not, constitute part. And, surely, act.' sides dealt oral Tr. Oral Arg. 14—18, 40. nub What legislative legal, generate illegal? While parent, benefited success nontax normally inherent inconsistency reading time, allowing sale earning new. predecessors 240(f) 1926, 46, 240(d) 1924, 288. 1952 repealed omission amendment re-enactment 5202 Revised Statutes Corporation Act, 512. Compare ruling 7110 Comptroller's current regulations, 2.1—2.5. 1968); 1966); Hackley, Our Baffling Banking System, pt. 2, Va.L.Rev. 771, 777—779 (1966). Annotated carries Brief defined Despite reveals fluidity small, any, significance, for, points out, 397—398 same. Government lose allocating. Eubank, 122, 149, (1940); Burnet Leininger, 285 136, 345, 76 (1932); Cf. Hoeper Comm'n, 284 206, 120, 248 (1931); 465 (1937). 722—725, (1948); Mitchell, 403 190, 91 1763, 406 (1940). Joliet Chicago R. 315 44, 442, 86 658 (1942). Clifford, 309 331, 554, 84 788 Old Colony Trust 716, 499, 918 (1929). Wells, 289 670, 1439 (1933). Douglas Willcuts, 296 59, 80 (1935); Fitch, 427, '. 1924 trustee equitable wife. 'But refinements title taxed—the U.S., 377 336. Holmes 'There salaries escaped arrangements contracts skilfully salary vesting man 114—115, potential abuse so-called captive finance establish parent. charges excessive business, diverted lief believed (relating deductions taxpayers) regulative deal problem.' U.S.Code Cong. Admin.News 1956, pp. 2253, 2260.

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