US vs First Security Bank of Utah, March 1972, US Supreme Court, Case No. 70-305

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The 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 prohibited 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.

The tax authorities, pursuant to 26 U.S.C. § 482, 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 tax authorities assessment, but the Court of Appeals reversed the decision and set aside the assessment.

Judgement of the Supreme Court

The Supreme Court upheld the decision of the Court of Appeal and the assessment of the tax authorities was set aside.

US vs First Security Bank of Utah 1972 SC 70-305

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