Commissioner v. First Security Bank of Utah, N. A.

PETITIONER: Commissioner
RESPONDENT: First Security Bank of Utah, N. A.
LOCATION: Bay Marchand Area

DOCKET NO.: 70-305
DECIDED BY: Burger Court (1972-1975)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 405 US 394 (1972)
ARGUED: Jan 10, 1972
DECIDED: Mar 21, 1972

Ernest J. Brown - for petitioner
Stephen H. Anderson - for respondents

Facts of the case


Media for Commissioner v. First Security Bank of Utah, N. A.

Audio Transcription for Oral Argument - January 10, 1972 in Commissioner v. First Security Bank of Utah, N. A.

Warren E. Burger:

Number 305, Commissioner of Internal Revenue against First Security Bank.

Mr. Brown you may proceed whenever you are ready.

Ernest J. Brown:

Mr. Chief Justice and may it please the Court.

This case, on certiorari to the Tenth Circuit.

brings to the Court for the first time since it was enacted as part of the Revenue Act of 1928, what is now Section 482 of the Internal Revenue Code.

That provision is as follows.

In any case of two or more organizations, trades or businesses owned or controlled directly or indirectly by the same entities, the Secretary Office delegates, the Commissioner as I phrase it, to distribute a portion or allocate gross income, deductions, credits or allowances between or among such organizations, trades or businesses if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses.

This provision of course expresses the judgment that autonomous business units will exercise self interest and bargaining power which will cause income and outlays to reflect the performance or function and the acquisition of benefits in accordance with the values of the market.

But on the other hand, when we have units under common control, a host of factors which may or may not include tax considerations, may distort this picture and cause considerable divergence between income, expenditures on the one hand and performance or function or the acquisition of benefits on the other.

So that the regulations have always provided since -- as they provide now since 1934 that the authority given account is not solely or even necessarily primarily to cases of improper accounting or fraudulent, colorable or sham transactions or a device designed to evade or avoid taxes, but the authority extends to any case in which by inadvertence or design, taxable income, in whole or in part of the controlled tax payer is other than it would have been had the taxpayer in the conduct vist to ask, been an uncontrolled taxpayer, dealing at arm's length with another uncontrolled taxpayer.

To bring performance or function and taxable income into life to create what some Courts have referred as economic reality, the Commissioner may and often has found it necessary to analyze pricing, charges, of their services, distribution of receipts or the bearing of burdens of expenditures.

In this case, the Commissioner found it necessary to allocate to the taxpayer banks a substantial part, some 40% of the premium income received by a -- like insurance company under common control for the years 1954 through 1959.

His allocation was upheld by the Tax Court, relying on its previous review decision in Local Finance Corporation, a decision which thereafter had been affirmed by the Seventh Circuit Court of Appeals.

In the Local Finance Corporation decision, the Tax Court had reviewed extensive and reference was made in this case in the Tax Court to those findings, had reviewed extensively the nature and customs of the business of credit insurance which is much involved here.

The Tenth Circuit Court of Appeals, however, reversed the Tax Court, disagreeing with the Seventh Circuit in Local Finance.

Because of this conflict and because the significance of Section 482 increases as business aggregates grow not only larger, but more varied in their nature, we have more and more cases where a business aggregate includes corporations that are subject to methods of taxation other than the normal, barring the corporations, Western Hemisphere Trade Corporations and life insurance companies as in this case.

For those reasons, the Government sought certiorari which this Court granted.

The facts giving rise to the controversy are as follows.

The taxpayers are two national banks; First Security Bank of Utah and First Security Bank of Idaho.

They are holding on subsidiaries of First Security Corporation, a publicly owned Holding company, which owns a number of other corporations as well, including First Security Company or Management Company which I would refer as Management Company to avoid confusion, Smith and Sons, an insurance agency and beginning in 1954, First Security Life, an insurance company incorporated in that year which is a -- that one is prime activist in this case.

We should go back to 1948 at the opposite.

Beginning then and since that time, the banks have offered to their borrowers, Credit Life Insurance.

This is diminishing term, Life insurance under which in case of the death of the borrower, his death will be paid to the creditor.

The Premium charged throughout en banc all here are concerned was $1.00, per hundred per year.

This has been the usual and standard right in the industry.

This premium, though apparently it sounds small, permits generous commissions to be paid to the person who sells the insurance.

It has been customary in the industry to pay commissions in the neighborhood of 50% of the premiums.

Potter Stewart:

Is that on each year's premium?

Ernest J. Brown:

Yes, Your Honor.

They are often paid in advance.