Commissioner v. First Security Bank of Utah

Respondent banks were subsidiaries of a holding company that also 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 deemed to prohibit the banks from receiving sales commissions, which were paid by the carrier to the insurance agency subsidiary. The commissions were reported as taxable income for the 1948-1954 period by the management company. After 1954, when Security Life was organized, the credit life insurance on the banks' customers was placed with an independent 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 reversed.

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 exercise of the § 482 authority was not warranted. Pp. 403-407.

436 F. 2d 1192, affirmed.

POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and DOUGLAS, BRENNAN, STEWART, and REHNQUIST, JJ., joined. MARSHALL, J., filed a dissenting opinion, post, p. 407. BLACKMUN, J., filed a dissenting opinion, in which WHITE, J., joined, post, p. 418.

Ernest J. Brown argued the cause for petitioner. On the brief were Solicitor General Griswold, Acting Assistant Attorney General Ugast, Matthew J. Zinn, and Bennet N. Hollander.

Stephen H. Anderson argued the cause for respondents. With him on the brief was S.J. Quinney.

Ernest Getz filed a brief for Bud Kouts Chevrolet Co. et al. as amici curiae urging affirmance.