Washington Law Review


J. P. H.


First Security Bank, a wholly owned subsidiary of Holding Company, referred its borrowers to Security Life, a sister subsidiary, for the purpose of obtaining credit insurance. Security Life paid no commissions to First Security, but it did pay substantial dividends to Holding Company. By funneling all of the premium income through Security Life, which qualifed for preferential treatment as a life insurance company, Holding Company enjoyed a substantial tax advantage. The Commissioner of Internal Revenue, acting pursuant to section 482 of the Internal Revenue Code,4 sent notice of deficiencies to First Security based on an allocation to that subsidiary of approximately 40 percent of Security Life's premium income. The Commissioner concluded that such an allocation was necessary to correctly reflect the actual income of the related organizations, and that the restraints in section 92 of the National Banking Act upon First Security's receiving commissions for insurance referrals did not preclude application of the tax laws. The Tax Court upheld the Commissioner's allocation of income to First Security. The Tenth Circuit reversed the Tax Court, and the Supreme Court granted the Commissioner's petition for certiorari. Held: Affirmed. Since First Security did not receive any part of the premiums and was prohibited by section 92 of the National Banking Act from receiving referral commissions, section 482 does not authorize the allocation of insurance premium income to First Security. Commissioner of Internal Revenue v. First Security Bank of Utah, N.A., 405 U.S. 394 (1972) (Marshall, Blackmun and White, JJ., dissenting).

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