Court Opinion

ID: 4480611
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:26.06467+00
Date Added: 2024-06-11T15:03:34.519396
License: Public Domain

Fat, J., dissenting: With all deference, I am unable to agree with the conclusion reached by the majority of the Court. It is my opinion that the rationale relied upon 'by the majority is contrary to existing case law and an unwarranted application of the statute. The majority finds as a fact that National, the reinsurer, was a bona fide insurance company. It holds that National assumed liability for the reinsurance of the policies written by Republic and that it could validly retain part of the total premium. We agree with the majority that National was a viable business entity and not a sham. The majority holds that a portion of the commission income received by Guardian and Beneficial during the period January 1 to June 80, 1958, and a portion of the reinsurance premiums received by National during the period July 1, 1958, to December '31,1962, constituted compensation earned by the finance companies for selling and processing the credit life insurance. It further holds that petitioners exercised the power to dispose of such income by diverting it first to Guardian and Beneficial and later to National, rather than receiving it themselves. It concludes that, under section 61, this income is properly taxable to petitioners despite the actual receipt by others. The majority relies principally upon the services performed by the petitioners in connection with the sale and servicing of the insurance. It lists the following facts as being descriptive of these services: Petitioners wrote the policies, collected premiums, deposited them in bank accounts in the names of Guardian and Beneficial, made refunds, prepared the necessary papers in the event of the death of the insured, and made weekly reports to Guardian and Beneficial. For the years 1958 through 1962, the cost to the petitioners of the services was approximately $60,000. Guardian and Beneficial prepared monthly reports of the collated information and forwarded these reports together with the net premiums to Republic. The cost of this processing service to Guardian and Beneficial for the period July 1, 1958, through December 31,1962, was approximately $11,000. Though petitioners’ activities in filing death claims were consistent with their status as beneficiaries under the policies, it is true that they have, along with Guardian and Beneficial, performed some services in connection with the sale and servicing of these policies. I do not agree, however, that these activities can result in the allocation urged by the respondent. I think the case at bar is controlled by such cases as Nichols Loan Corporation of Terre Haute, T.C. Memo. 1962-149, reversed on other grounds 321 F. 2d 905 (C.A. 7, 1963); and Campbell County State Bank, Inc., 37 T.C. 430 (1961), reversed and remanded on another issue 311 F. 2d 374 (C.A. 8, 1963). See also Jaeger Motor Car Co. v. Commissioner, 284 F. 2d 127 (C.A. 7, 1960), affirming a Memorandum Opinion of this Court, certiorari denied 365 U.S. 860 (1961), Moke Epstein, Inc., 29 T.C. 1005 (1958); and Ray Waits Motors v. United States, 145 F. Supp. 269 (E.D. S.C. 1956). In both Nichols and Campbell, the employees of several loan corporations and of a bank provided services similar to those provided by the petitioners herein in selling and servicing insurance policies. No compensation was received by them for so doing. In the Nichols case the total payments went to one of the loan corporations’ shareholders and was divided by him with the other shareholders. In Campbell the payments went to a partnership formed by the bank shareholders. In both cases none of the shareholders actually performed any services, nor did they compensate the lending institutions for any space or materials or expenses of the solicitation or processing service. I am aware that in the Campbell case the partnership ostensibly “hired” three employees but we found therein that they were persons who were already bank employees and who were treated as having been compensated wholly by the bank for withholding purposes. In both these cases we held that none of the income of the individual shareholders in Nichols or the partnership in Campbell was taxable to the loan corporations or to the bank, respectively. This Court in the Campbell case rejected respondent’s position that the partnership was a sham and held that the bank did not earn the income and in the Nichols case rejected respondent’s general argument that the income was chargeable to the loan companies. In this connection, I would point out that the Court of Appeals for the Seventh Circuit in reversing on another issue in Nichols held that the expenses of the loan companies were so minimal regarding the insurance operation as not to require any reallocation of the companies’ expense deductions. In this light it appears strange that the majority now uses the same type of activity on the part of the finance companies as a basis to allocate to them 50 percent of the net premiums. I can find no meaningful distinction between the actual services in these .two cases and the case at bar. Therefore, I am of the opinion that to hold, as the majority does here, in the absence of a finding that the reinsurer, National, was a sham, that the income is not properly taxable to a corporation set up by a majority of the finance companies’ shareholders is irreconcilable with our earlier holdings that the same type of income is properly taxable directly to the loan corporations’ shareholders (Nichols) or to a partnership made up of bank shareholders (Campbell). I cannot conceive that the fact that in Nichols and Campbell what is essentially the profit in the credit insurance operation was passed ultimately to shareholders of the loan companies or bank in the form of a commission operates to distinguish it from this case where the profit vehicle takes the form of a reinsurance premium. Even assuming arguendo as the majority concludes, that some part of the income is taxable to those who perform the services, I cannot understand how it allocates all of the income to the finance companies thereby ignoring the fact that services were also performed by Guardian and Beneficial. I am of the opinion that such a conclusion is not consistent with the rationale upon which it is based. The majority opinion also relies upon section 482 for support in allocating the income to petitioners in order to clearly reflect income. The premise of this approach is the previously reached conclusion that petitioners have earned the income by the performance of various services and have exercised a power of disposition over this income to channel it to the reinsurance company. The majority would negate the application of the Nichols and Campbell cases by noting that therein the loan companies and the bank did not “earn” the income. I cannot agree. The same criteria used by the majority to conclude that the petitioners herein earned the income were present in both the earlier cases. In neither of these earlier cases were services performed by the stockholders who actually received the money. Indeed, it would appear that the case before us contains stronger facts in this regard than either Nichols or Campbell since National seems possessed of a more readily apparent business operation in connection with the profit from the insurance, i.e., reinsuring the risk, than was possessed by either of the stockholder groups in the earlier cases which did no more than receive the income. I again am of the opinion that the majority’s rationale is not reconcilable with our earlier decisions in this area. Unable to distinguish this case from our earlier decisions, I am left with the curious result that where employees of lending institutions perform services regarding credit life insurance the stockholders of those institutions may validly take a profit from the insurance business by setting up a partnership to receive it but may not validly take, in effect, the same profit by setting up a legitimate insurance company to reinsure the risk. I am aware of the favorable tax treatment which may be available in some circumstances to insurance companies. Because of this treatment, favorable tax consequences might inure to the petitioners if the Court were to follow Nichols and Campbell in the case at bar. I do not, however, think that the case law permits us to prevent this result. I do not contend that section 482 is inapplicable to insurance companies. I do contend that, as interpreted by existing case law, it does not apply to these facts. If favorable tax treatment is to be prevented in such cases as this, it is in my opinion up to Congress to do so. See the excellent discussion of the boundary between legislative and judicial jurisdiction in this area in Alinco Life Insurance Co. v. United States, 373 F. 2d 336 (Ct. Cl. 1967), which held that section 269 did not authorize the Commissioner to disallow the benefits of the special tax treatment of life insurance companies to a reinsurer controlled by the lending institution. It is particularly noteworthy in this context to consider the past history of respondent’s attempts to attack various business-connected insurance arrangements. Respondent has pitched his arguments on sections 61, 269, 482, and a general argument that income was properly taxable to a lending institution rather than a controlled re-insurer or the shareholders of the lending institution as partners of an insurance agency. All these approaches have been repeatedly rejected by this and other Courts. See cases cited, supra. The only case in which a court has held that this type of arrangement gives rise to income, taxable to the lending institution, is Bank of Kimball v. United States, 200 F. Supp. 638 (D.S.Dak. 1962), in which the District of Court held, because no valid partnership had been formed, that commissions were taxable to the bank rather than to the alleged partnership comprised of its stockholders. The court, however, noted that for later years, after a formal partnership agreement had been signed by the stockholders, the Government had conceded that the income thereafter was properly taxable to it and not to the bank.