Local Fin. Corp. v. Comm'r of Internal Revenue
| Decision Date | 31 August 1967 |
| Docket Number | Docket Nos. 1693-65-1703-65. |
| Citation | 48 T.C. 773 |
| Parties | LOCAL FINANCE CORPORATIONS, ET AL.,* PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
48 T.C. 773
LOCAL FINANCE CORPORATIONS, ET AL.,* PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket Nos. 1693-65-1703-65.
Tax Court of the United States.
Filed August 31, 1967.
[48 T.C. 774]
Max E. Meyer, Stephen A. Milwid, Wilbur S. Legg, and John K. O'Connor, for the petitioners.
Dennis J. Fox, for the respondent.
Finance companies, licensed under the Indiana Small Loan Act and related Indiana statutes to make loans, made available to their debtors credit life insurance in connection with the loans. Such insurance was sold by an independent insurance company at a rate, standard in Indiana, which would allow for the payment of compensation to the party selling such insurance. The insurance was offered to the debtors on a voluntary basis by employees of the finance companies who had been designated as agents of the insurance company and who performed all the work necessary to sell and service the insurance. During the period January 1 to June 30, 1958, commissions were paid to an officer of the finance companies, rather than to the finance companies, in order to avoid possible violation of the Indiana statutes under which they were licensed which limited the charges which might be made. Such officer assigned such commissions to a corporation controlled by the finance companies' stockholders. Effective July 1, 1958, a new procedure was adopted. The stockholders controlling the finance companies and the corporation to which the insurance commissions had been assigned organized an insurance company under Arizona law which reinsured the risks. The finance companies and the insurer continued the same procedures in selling the insurance and the premiums charged the finance companies' debtors remained unchanged. The insurer continued to retain the same percentage of net premiums as before and the balance was paid to the reinsurance company and was denominated premiums for reinsurance. Held, that the finance companies earned, and controlled the disposition of, compensation derived from the sale of the credit life insurance during the taxable years 1958 through 1962, and that the respondent's allocation of 50 percent of the net premiums paid for such insurance to them during such taxable years pursuant to secs. 61 and 482 of the Internal Revenue Code of 1954 was not erroneous.
ATKINS, Judge:The respondent determined deficiencies in the petitioners' income tax as follows:
+-------------------------------------------------+
¦Docket ¦ ¦Taxable¦ ¦
+-------+----------------------+-------+----------¦
¦No. ¦Petitioner ¦year ¦Deficiency¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦$60,190.09¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1959 ¦56,492.22 ¦
+-------+----------------------+-------+----------¦
¦1693-65¦Local Finance Corp ¦(1960 ¦75,958.84 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦65,136.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦67,582.00 ¦
+-------+----------------------+-------+----------¦
¦1694-65¦Local Finance Corp of ¦ ¦ ¦
+-------+----------------------+-------+----------¦
¦ ¦South Marion ¦(1961 ¦2,724.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦773.00 ¦
+-------+----------------------+-------+----------¦
¦1695-65¦Local Finance Corp of ¦ ¦4,058.57 ¦
+-------+----------------------+-------+----------¦
¦ ¦Elkhart ¦(1959 ¦1,327.26 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1960 ¦380.68 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦529.61 ¦
+-------+----------------------+-------+----------¦
¦1696-65¦Local Finance Corp. of¦(1959 ¦557.85 ¦
+-------+----------------------+-------+----------¦
¦ ¦Gas City ¦(1960 ¦632.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦368.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦385.76 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦523.36 ¦
+-------+----------------------+-------+----------¦
¦1697-65¦Local Finance Corp. of¦(1959 ¦690.55 ¦
+-------+----------------------+-------+----------¦
¦ ¦Rushville ¦(1960 ¦604.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦669.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦175.57 ¦
+-------+----------------------+-------+----------¦
¦1698-65¦Local Finance Corp. of¦(1960 ¦1,150.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦Danville ¦(1961 ¦478.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦ ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦2,251.89 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1959 ¦3,354.15 ¦
+-------+----------------------+-------+----------¦
¦1699-65¦Local Finance, Inc ¦(1960 ¦4,406.10 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦3,172.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦4,108.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦394.79 ¦
+-------+----------------------+-------+----------¦
¦1700-65¦Local Finance Co., ¦(1959 ¦1,890.14 ¦
+-------+----------------------+-------+----------¦
¦ ¦Inc. of Gary ¦(1960 ¦1,269.58 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦234.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦1,365.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦4,341.05 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1959 ¦10,253.35 ¦
+-------+----------------------+-------+----------¦
¦1701-65¦Local Finance Co.,Inc ¦(1960 ¦15,742.90 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦11,392.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦13,416.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦17,781.82 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1959 ¦42,283.41 ¦
+-------+----------------------+-------+----------¦
¦1702-65¦Guardian Agency, Inc ¦(1960 ¦52,681.68 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦44,500.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦48,366.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1958 ¦4,297.21 ¦
+-------+----------------------+-------+----------¦
¦1703-65¦Beneficial Insurance ¦(1959 ¦18,097.12 ¦
+-------+----------------------+-------+----------¦
¦ ¦Agency, Inc ¦(1960 ¦20,120.50 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1961 ¦16,312.00 ¦
+-------+----------------------+-------+----------¦
¦ ¦ ¦(1962 ¦19,026.00 ¦
+-------------------------------------------------+
The parties having agreed upon one of the issues in docket Nos. 1693-65 and 1701-65 and the respondent having conceded error with respect to one of the issues in docket No. 1693-65, the issues remaining for decision are (1) whether, for the period January 1 to June 30, 1958, the respondent erred in allocating to the petitioners in docket Nos. 1693-65 through 1701-65, pursuant to sections 61 and 482 of the Internal Revenue Code of 1954, a portion of the income reported by the petitioners in docket Nos. 1702-65 and 1703-65 as commissions on sales of credit life insurance, and (2) whether, for the period
[48 T.C. 775]
July 1 to December 31, 1958, and for the taxable years 1959 through 1962, he erred in allocating to such petitioners a portion of the income reported by Grand National Life Insurance Co. as premiums for reinsurance of credit life insurance. In the alternative there is also the issue of whether, for such latter period and taxable years, such portion is allocable to the petitioners in docket Nos. 1702-65 and 1703-65.
Some of the facts were stipulated and the stipulations are incorporated herein by this reference.
The petitioners are corporations organized under the laws of the State of Indiana, having their principal offices at 333 West Fourth Street, Marion, Ind. They filed their Federal income tax returns for the taxable years involved herein on a calendar year basis with the district director of internal revenue, Indianapolis, Ind.
The petitioners Local Finance Corp. of South Marion, Local Finance Corp. of Elkhart, Local Finance Corp. of Gas City, Local Finance Corp. of Rushville, Local Finance Corp. of Danville, Local Finance, Inc., Local Finance Co., Inc. of Gary, and Local Finance Company, Inc., are wholly owned subsidiaries of Local Finance Corp. (hereinafter called Local Finance). Collectively, Local Finance and its subsidiaries will sometimes be referred to as the finance companies.
During the years in question, the finance companies were engaged in the business of making small loans. Local Finance and its five subsidiaries at South Marion, Elkhart, Gas City, Rushville, and the Danville were licensed under the Indiana Small Loan Act1 and the Indiana Retail Installment Sales Act.2 The other three finance company petitioners were licensed under the Indiana Industrial Loan and Investment Act.3 The greater dollar volume of business of the finance companies collectively was derived from loans made, at the maximum rate of interest permitted, under the Indiana Small Loan Act. Under that Act the loan to any one borrower was limited to $500. The finance companies making loans under the Indiana Industrial Loan and Investment Act voluntarily limited their loans to $1,000 to any one borrower.
The petitioner Guardian Agency, Inc. (hereinafter referred to as Guardian), was formed in 1936 as a general insurance agency and broker to provide fire and casualty insurance coverage on property given as security to the finance companies by their debtors, and the finance companies were virtually the entire source of its fire and casualty business. In the years in question stockholders who owned
[48 T.C. 776]
in excess of 70 percent of the stock of Local Finance also owned 100 percent of the stock of Guardian.
The petitioner Beneficial Insurance Agency, Inc. (hereinafter referred to as Beneficial), is the...
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