48 T.C. 773">*774 The respondent determined deficiencies in the 1967 U.S. Tax Ct. LEXIS 47">*49 petitioners' income tax as follows:

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 1967 U.S. Tax Ct. LEXIS 47">*50 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. 773">*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.

FINDINGS OF FACT

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 1967 U.S. Tax Ct. LEXIS 47">*51 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 Danville were licensed under the Indiana Small Loan Act ¹ 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. 1967 U.S. Tax Ct. LEXIS 47">*52 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. 773">*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 wholly owned subsidiary of Guardian, having been acquired by Guardian in 1956, and was engaged in the same business.

None of the petitioners has ever been authorized in writing by any life insurance company to act as an agent in connection with the writing or selling of any life insurance 1967 U.S. Tax Ct. LEXIS 47">*53 policies, nor has any been licensed by any State as a life insurance agent. Section 39-4608 of Burns Indiana Statutes Annotated provides that no corporation shall act in Indiana as an agent for a life insurance company and that no life insurance company shall pay a commission to any person who is not entitled to act as agent.

In connection with, and as an incident to, the loans made by the finance companies, credit life insurance was offered to their debtors for a term which was coextensive with the contractual term of the related indebtedness. The finance companies did not require that their debtors take out credit life insurance, but in the years involved 85 percent to 95 percent of them did so. Since before 1936 the finance companies have offered credit life insurance to their borrowers for several business and economic reasons, including the following: (1) Their competitors generally offer credit insurance, (2) the insurance is an important factor in obtaining repayment of the loans, and (3) collection on the insurance policies, rather than collection from a coobligor (usually the obligor's spouse) is more favorable to public relations.

Credit life insurance, as referred to herein, 1967 U.S. Tax Ct. LEXIS 47">*54 is single-premium term insurance on the life of a debtor in an amount at least sufficient to discharge the debt in case of the debtor's death. Such insurance may be written on either an individual or a group policy basis. In the former case the debtor is the policyholder, and the creditor is the first beneficiary, while in the latter case the creditor is the policyholder as well as first beneficiary. Also, two types of coverage are generally provided under credit life insurance: (1) Decreasing term coverage, under which the amount of the death benefit decreases during the policy term coincidentally with the decrease in the amount of the debt under the applicable installment payments schedule; and (2) level term coverage, under which the amount of the death benefit remains constant during the policy term.

Since January 1954 the credit life insurance issued to all but an insignificant number of debtors of the finance companies was single-premium decreasing-term insurance, written on an individual policy basis. The single premium was paid at the inception of the coverage.

48 T.C. 773">*777 After World War II it became common practice for life insurance companies to pay compensation for credit life insurance 1967 U.S. Tax Ct. LEXIS 47">*55 sold to debtors of lending institutions. Such compensation consisted of a commission equal to a fixed percentage of the premium charged, and sometimes, in addition, a contingent commission based upon the insurer's later determined loss ratio. Where the insurance was issued pursuant to a group policy held by the lending institution such contingent commissions were paid in the form of retroactive premium adjustments. Later, a practice was adopted by some lending institutions whereby the lending institution would form a life insurance company in a State where capital requirements for insurance companies were low and have such company reinsure the risks to the original insurer and receive reinsurance premiums.

Prior to January 1954, Lincoln National Life Insurance Co. (hereinafter called Lincoln) issued the credit life insurance sold to debtors of the finance companies. This insurance was issued under a group policy held by Local Finance. Lincoln paid a percentage commission on this business. The commissions were paid to Guardian, rather than to Local Finance, because Local Finance had been advised by its attorney that it could not accept any commissions or income from the insurance 1967 U.S. Tax Ct. LEXIS 47">*56 business since Indiana law precluded small loan companies from receiving any income other than from small loan interest. ^{41967 U.S. Tax Ct. LEXIS 47">*57 1967 U.S. Tax Ct. LEXIS 47">*58} As the volume of such insurance increased an arrangement was made whereby Lincoln would pay contingent commissions (retroactive premium adjustments) over and above the percentage commissions already being paid to Guardian. Lincoln insisted that such contingent commissions would necessarily have to be paid to Local Finance as the policyholder. One check for such contingent commissions was issued to Local Finance. 48 T.C. 773">*778 Local Finance, for the same reason stated above with respect to the percentage commissions, felt that it should not accept these contingent commissions. Lincoln was willing to pay the contingent commissions to Guardian if Local Finance would execute an assignment of the commissions to Guardian, but Local Finance was not satisfied that such an arrangement would be a satisfactory solution to the problem. It approached other credit life insurers, including Old Republic Life Insurance Co. of Chicago, Ill. (hereinafter called Republic), a company which was not affiliated with the petitioners in any way.

On January 4, 1954, Don H. Miller, who was an officer of each of the finance companies and of Guardian, executed an agreement with Republic which provided that Miller was to be Republic's agent for soliciting credit life insurance on the lives of debtors of the finance companies. It was provided that the insurance to be written should be single-premium decreasing-term insurance written on an individual policy basis, that the amount of insurance in any case should not exceed $ 500 on any one life, and that the insurance should be written only on the lives of persons who were 65 or under and who appeared to be in sound health and were actively 1967 U.S. Tax Ct. LEXIS 47">*59 employed. The premium charged by Republic was $ 1 per year per $ 100 of coverage, which was the rate which had been charged by Lincoln and was the rate commonly charged in the credit life insurance industry in Indiana. ⁵ In fixing its rates for credit life insurance Republic took into account the expected mortality costs, the administration expenses, the direct acquisition costs (which included principally any commissions paid for generating the business), and a profit margin. Local Finance selected Republic as the insurer because Republic was willing to retain less of the premiums than another insurer which Local Finance was considering.

In the above agreement Republic 1967 U.S. Tax Ct. LEXIS 47">*60 agreed to pay Miller a guaranteed commission of 40 percent of the premiums collected plus, at 3 month intervals, an additional commission equal to the balance of premiums collected remaining after subtracting the sum of 12 percent ⁶ of the premiums to be retained by Republic for overhead and profit, the 40-percent guaranteed commission previously paid, the net refunds made, losses paid, and unpaid claims outstanding. Any deficit resulting would be accumulated and charged against future contingent commissions, but would not affect the 40-percent guaranteed commission. Either party could terminate the agreement on 30 days' notice.

48 T.C. 773">*779 On the same date, January 4, 1954, Miller executed an assignment to Guardian of all commissions which might become due him under the agency agreement for a stated consideration of $ 1 "and other good and valuable considerations." On January 13, 1954, Miller, as vice president of Local Finance, wrote Republic, notifying it of the assignment and directing it to make commission checks under the agency agreement 1967 U.S. Tax Ct. LEXIS 47">*61 payable to Guardian.

From 1954 through 1962 the premium charged by Republic did not change. The finance companies' debtors paid the full premiums at the inception of the coverage out of the loan proceeds. In the event a loan was paid off in advance, in some instances the insurance was terminated and a refund of the premiums allocable to the unexpired term of the loan was made. If a loan was refinanced by a new loan, and new credit insurance was written on the new loan, the insurance premium paid on the old loan was either refunded or was credited toward the premium on the new insurance.

In each of the Indiana branch offices of the finance companies there was at least one employee who held a license as an Indiana life insurance agent for Republic. These employees signed the individual policies issued to the debtors. At first the licensees were office girls in the branch offices. However, in more recent years the managers of the branch offices have been the licensees. When a licensed employee was not available at a branch office, an employee of Guardian, also licensed as an agent by Republic, signed the policies. These employees did not receive any payments from Republic for acting 1967 U.S. Tax Ct. LEXIS 47">*62 as agents, nor did they receive additional pay from the finance companies.

Whenever a customer of one of the finance companies applied for a loan, the employee of the finance company interviewing the customer would discuss the availability of credit life insurance. If the customer agreed to take credit life insurance, both the loan papers and credit life insurance papers were prepared by the employees of the branch office. Any refunds of premiums paid for credit life insurance were handled by such branch office employees. In the event of the death of an insured debtor the branch office through which the policy was sold would complete a claim form, attach to it a death certificate, and forward this to Guardian or Beneficial which would check the computations and forward the form to Republic for payment.

Credit life insurance premiums received by each branch office of the finance companies were segregated by the branch office employees and deposited from time to time during each week in a separate bank account in the branch office city in the name of Guardian or Beneficial. Once a week the insurer's copies of the register sheets, evidencing the issuance of the insurance policies, were 1967 U.S. Tax Ct. LEXIS 47">*63 forwarded from the branch offices to either Guardian or Beneficial for transmission to Republic. 48 T.C. 773">*780 Guardian or Beneficial prepared a monthly report to Republic showing the amount of premiums collected on policies issued, the amount of premiums returned on policies canceled, and the amount of the difference. From such difference Guardian or Beneficial withheld the guaranteed 40-percent commission and transmitted a check for the remainder, together with the monthly report, to Republic. ⁷ The contingent commissions, which were paid every 3 months, were paid by Republic directly to Guardian or Beneficial.

The finance companies also placed and handled fire and casualty insurance written through Guardian and Beneficial, the paperwork being more extensive than that involved in handling credit life insurance, and received no compensation therefor from Guardian or Beneficial.

Under date of September 18, 1956, the insurance commissioner of the State of Indiana issued a directive to corporate insurance agencies, which stated, 1967 U.S. Tax Ct. LEXIS 47">*64 in pertinent part, as follows:

Whereas, there is some evidence to indicate that some corporate insurance agents have violated the law of Indiana which prohibits a corporate agency from acting as a life insurance agent; and

Whereas, the illegal device sometimes used to accomplish such violation is to employ an individual life licensee and to take an assignment of his commissions; and

Whereas, it is now declared that the assignment or transfer of life insurance commissions by a licensed life agent to a corporate insurance agency which employes [sic] such life agent is illegal; and

Whereas, it is now further declared to be illegal for any corporate agency officer or employee who is a licensed life agent to assign or transfer life insurance commissions to any corporation, foreign or domestic, which holds or controls the employer corporate agency;

Now, Therefore, it is directed that any corporate insurance agency which receives life insurance commissions by way of assignment or transfer, or in any other form, from or through an officer or employee who is a licensed life agent or which permits any employee or officer who is a licensed life agent to assign or transfer life insurance commissions 1967 U.S. Tax Ct. LEXIS 47">*65 in any form to any holding corporation which control the said corporate agency shall forthwith have its license as an agent in the State of Indiana revoked permanently.

This Directive does not condone or legalize any device not herein described which violates the aforesaid law prohibiting any corporate agency from acting as a life insurance agent.

In view of the above directive Republic was concerned as to the legality of the procedure by which commission payments were assigned by Miller to Guardian and Beneficial. It felt that the finance companies relied heavily upon it for advice as to procedures which would preclude any difficulty with any State agency. It accordingly brought this directive to the attention of Miller. Miller was concerned that the 48 T.C. 773">*781 continuance of the assignment of commissions by him to Guardian and Beneficial might jeopardize the latter companies' insurance agency licenses. Republic was also concerned with the possibility that as a result of the assignment procedure its license as an insurance company might be suspended or revoked, and that Miller might lose his agency license. Various possible arrangements were considered by Republic and Local Finance, including 1967 U.S. Tax Ct. LEXIS 47">*66 the possibility of licensing the stockholders of Local Finance as agents and paying the commissions to them or the forming of a partnership consisting of such stockholders and the payment of commissions to the partnership. However, neither of these plans was feasible because there were too many shareholders of Local Finance, and no basic change in procedure was made at that time. The only change made at that time was that, beginning in November 1956 and continuing through June 30, 1958, Republic paid the contingent commissions by check made payable to Miller, instead of directly to Guardian or Beneficial, and Miller endorsed the checks over to Guardian and Beneficial. Guardian and Beneficial continued to withhold and retain the 40-percent guaranteed commissions. ⁸

In the latter part of 1957 Republic suggested to Local Finance that it would be advisable to form a life insurance company to reinsure life insurance policies issued by Republic with respect to debtors of the finance companies. Its primary purpose in recommending 1967 U.S. Tax Ct. LEXIS 47">*67 the reinsurance procedure was to retain the credit life insurance business generated by the finance companies and at the same time avoid any possible violation of Indiana law with respect to the payment of commissions. Under such an arrangement Republic would continue to retain a portion of the premiums but would shift the mortality risks to the reinsurer.

After discussions among the directors of Local Finance and Guardian and officials of Republic, it was decided that such a life insurance company should be formed, but Local Finance's attorney advised that such company should not be owned by Local Finance. It was also decided that since Guardian and its subsidiary, Beneficial, had been receiving the commissions derived from the credit life insurance sold to the debtors of the finance companies, the stockholders of Guardian should be offered the opportunity to become the shareholders of the new insurance company.

Thereafter on March 18, 1958, there was incorporated under the laws of the State of Arizona a corporation under the name of Grand National Life Insurance Co. (hereinafter called National). The new insurance company was incorporated under Arizona law because that State permitted 1967 U.S. Tax Ct. LEXIS 47">*68 low minimum capitalization. On June 25, 1958, National obtained from the State of Arizona a certificate of authority as 48 T.C. 773">*782 a life insurance company. It issued 661 shares of stock (par value of $ 40 per share) at a price of $ 60 per share (a total of $ 39,660, representing $ 26,440 of paid-in capital and $ 13,220 of paid-in surplus). Each stockholder of Guardian was entitled to the same number of shares of National stock as was held by him in Guardian. The shareholders of Guardian acquired 655 of the 661 issued and outstanding shares of National. Miller, who was not a stockholder of Guardian, acquired the other 6 shares. The stockholders of Guardian paid for their stock in National in cash. A special dividend of $ 40 per share was paid by Guardian in order that its stockholders might avail themselves of the opportunity of acquiring such stock.

On July 21, 1958, National and Republic entered into an agreement entitled "Reinsurance Treaty No. 1," whereby National assumed Republic's liability for losses on credit life insurance written by Republic on or after July 1, 1958, on the lives of debtors of the finance companies. Such agreement provided in part as follows:

ARTICLE II

Within 1967 U.S. Tax Ct. LEXIS 47">*69 twenty (20) days after the receipt by OLD REPUBLIC of any premium paid by or on behalf of policy holders for said policies, OLD REPUBLIC shall pay to GRAND NATIONAL a premium equal to ninety and one-half percent (90 1/2%) of the total premium received by OLD REPUBLIC on said policies issued in the previous month.

ARTICLE III

Together with each payment of premium, OLD REPUBLIC shall furnish to GRAND NATIONAL a statement giving the following information for the preceding month:

1. The total premiums on all said policies written during the preceding month.

2. The total premiums returned on policies surrendered for cancellation during the said month.

3. Life Insurance Account Number of Policies and amount of insurance.

a. Issued during the preceding month

b. Surrendered for cancellation during said month

c. Terminated by death during said month

d. Expired during said month

e. In force at the end of said month

Tannenwald, J., concurring: Petitioners herein would have us posit our decision on certain purportedly abiding principles which they claim prior cases have made into articles of faith, i.e., that a taxpayer may not be taxed on income which he cannot legally claim as his own, and that merely providing the source of income or the mere ability to designate who performs the income-producing services are insufficient touchstones of taxability. An examination of the decided cases, however, reveals that these so-called articles of faith represent no more than semantic rationalizations designed to sustain a result dictated by the particular factual situation involved. I would not, as the majority appears to have done, indulge in further propagation and thereby 1967 U.S. Tax Ct. LEXIS 47">*105 add to the confusion with which the decided cases already abound. I take my cue from the admonition of Mr. Justice Holmes that "general propositions do not decide concrete cases" (see Lochner v. New York, 198 U.S. 45">198 U.S. 45, 198 U.S. 45">76 (1905) (dissenting opinion)) and would reach the majority result simply by answering these essentially factual questions:

(1) Did the approximately 8.4 percent of the payments received by National from Republic and not allocated by respondent to petitioners constitute adequate compensation for the reinsurance risk? I think it did. Petitioners offered no evidence to dispute the adequacy of 48 T.C. 773">*797 the 8.4 percent in this regard. Indeed, the testimony of Arthur J. Cade, the former executive vice president of Republic, set forth in footnote 15 to the majority opinion, points to the likelihood that no reinsurance risk compensation whatsoever was intended. National had no claims or underwriting department or salaried employees except its attorney who acted as office manager and received $ 20 per month. I think it is clear therefore that the allocated payments in excess of 8.4 percent were commissions paid by Republic as compensation for services rendered with respect to credit 1967 U.S. Tax Ct. LEXIS 47">*106 life insurance business.

(2) Who performed the services which were thus compensated? Clearly, petitioners did. Their employees informed the customers of the availability of credit life insurance, prepared the papers relating to such insurance, handled refunds of premiums, completed the claim form in the event of death, and, after attaching a death certificate, forwarded the same to Guardian or Beneficial. Petitioners' employees received the premiums, segregated them, and deposited them in bank accounts in the branch office cities in the name of Guardian or Beneficial. Each week, petitioners' employees forwarded the insurer's copies of the register sheets, evidencing the issuance of the policies, to either Guardian or Beneficial for transmission to Republic. Guardian and Beneficial were simply conduits for forwarding to Republic the papers prepared by petitioners; additionally, they prepared and sent to Republic a monthly report showing the amount of premiums collected, the amount of premiums refunded, and the net difference.

To be sure, at least one employee of each Indiana branch office of petitioners held a license as an Indiana life insurance agent for Republic. But, as far 1967 U.S. Tax Ct. LEXIS 47">*107 as the record reveals, this had no more than symbolic significance. Petitioners hired, controlled, and paid all the branch office employees involved in the handling of the credit life insurance; no part of the expenses relating to such employees or the services they performed was charged to Republic, National, Guardian, or Beneficial. Petitioners' argument that such services on the part of its employees were negligible is beside the point. It may well be that no significant services on the part of anyone were required in connection with the writing of credit life insurance activities. But, if such were the case, it would not follow that the income should remain with other parties, who did nothing, as against allocating such income to the petitioners, whose activities certainly produced the business.

The factual situation outlined is equally applicable to respondent's allocation to petitioners of 50 percent of the net premiums paid to Guardian and Beneficial during the period January 1 to June 30, 1958, except that the possibility of identifying such payments as compensation for the risk of reinsurance is concededly not involved. ^{11967 U.S. Tax Ct. LEXIS 47">*108}

48 T.C. 773">*798 Under the foregoing circumstances, it cannot be gainsaid that petitioners performed the services for which the payments involved herein were made. Petitioners cannot avoid taxability on the allocated amounts simply because the payments were made to someone else. In none of the cases relied upon by petitioners, with one possible exception, did the taxpayer in fact perform the services for which the allocated payments were made. In each, as petitioners themselves point out on brief, the taxpayer was simply in "the position to have performed the services for which the income was paid but chose not to do so." (Emphasis added.) At best, those cases stand for the proposition that the mere possibility of performance of services by the taxpayer does not sustain an allocation of payment by respondent. They do not hold that taxability cannot be imposed where the taxpayer actually performs the services. The possible exception is Nichols Loan Corporation of Terre Haute, T.C. Memo. 1962-149, 1967 U.S. Tax Ct. LEXIS 47">*109 reversed on other grounds 321 F.2d 905 (C.A. 7, 1963). But it is significant that neither in the opinion of this Court nor that of the Court of Appeals was there any reference to section 482 and the opinion of this Court makes clear that its decision was based on a "consideration of all the evidence." In any event, if that case can be viewed as requiring a contrary result herein, I would not follow it.

Nor can petitioners take shelter from the application of section 482 simply because a violation of Indiana law was the genesis of the business purpose of the arrangements herein. I will assume, for the purposes of argument, that direct receipt of the commissions by petitioners would have violated Indiana law and also that the actual arrangements satisfied the requirements of that law, although the record herein is not clear as to whether either of these conditions existed. Section 482 empowers respondent to allocate "in order clearly to reflect income." The presence of actual receipt of, or the legal right to receive or obtain, the allocated income is not always a necessary prerequisite to the application of that section. L. E. Shunk Latex Products, Inc., 18 T.C. 940">18 T.C. 940 (1952), does 1967 U.S. Tax Ct. LEXIS 47">*110 not hold otherwise. In that case, the taxpayer was caught in a vise imposed by the OPA regulations. The hard fact was that, by virtue of those regulations, it could not have charged any higher price to a wholly independent distributor than it did to the distributor which was under common control with it. ^{21967 U.S. Tax Ct. LEXIS 47">*111} In short, the OPA regulations conclusively established an "arm's-length" price which the taxpayer actually charged its distributor. The taxpayer had no other choice except to forfeit the economic benefit, which respondent sought to tax, by selling its manufactured goods to an independent distributor. We were not disposed to impose such forfeiture and therefore held that, under such circumstances, section 482 could not properly 48 T.C. 773">*799 be applied. In the instant case, the Indiana law left petitioners with a clear-cut alternative. The way was open to them to adopt arrangements under which National, Guardian, and Beneficial rather than petitioners themselves would, in fact, perform the services for which Republic made payment in the allocated amounts. Under such arrangements, petitioners could have continued to receive the same economic benefit.

It does not follow, as petitioners seem to assume, that, because they may have put sufficient flesh on the bones of National, Guardian, and Beneficial to avoid problems under Indiana law, respondent is necessarily precluded from establishing different poundage requirements to support his allocation under section 482. At the very least, petitioners, as they concede, had the burden of proving that respondent was arbitrary in so doing. In this respect, they have, in my opinion, failed to carry the day.

Since the respondent's action can be sustained under section 482, I see no purpose to be served by discussing the applicability of section 61. Indeed, I see good reason for not entering the mare's nest of the decided cases under that section. See Teschner, "Anticipation of Income," 41 Ind. L.J. 587">41 Ind. L. J. 587 (1966); cf. Eustice, "Contract Rights, Capital Gain, and Assignment of Income -- The Ferrer Case," 20 Tax L. Rev. 1 (1964).

Drennen, J., dissenting: I am not sure that I would agree with the majority, as Judge Fay has done, that National was a viable business 1967 U.S. Tax Ct. LEXIS 47">*112 entity and not a sham. But if National's vitality is assumed, I agree with Judge Fay that the taxation of the major portion of the reinsurance income to the petitioners here is contrary to the previously decided cases cited in his opinion and is also difficult to make coexist with L. E. Shunk Latex Products, Inc., 18 T.C. 940">18 T.C. 940.

I wish to add that I disagree with the approach taken by the concurring opinion of Judge Tannenwald wherein he concludes that the 8.4 percent of the payments received by National from Republic and not allocated by respondent to petitioners constituted adequate compensation for the reinsurance risk, and the balance represented commissions paid by Republic as compensation for services rendered with respect to the credit life insurance business. I do not believe it is the business of this Court to determine what is a reasonable fee for reinsuring this type of risk. That would be a matter for the State insurance commission to decide. If the fee allowed was higher than the risk warranted, in order to pay commissions, then those commissions would be payable by National not Republic. If the premiums chargeable and charged for this type insurance were more than 1967 U.S. Tax Ct. LEXIS 47">*113 adequate to cover 48 T.C. 773">*800 the cost of writing it and the risk involved, I do not believe either the Commissioner or this Court should attempt to allocate the excess to the cost of performing the services of writing the insurance rather than to the risk involved, which National assumed.

Fay, J., dissenting: With all deference, I am unable to agree with the conclusion reached by the majority of the Court. It is my opinion that the rationale relied upon by the majority is contrary to existing case law and an unwarranted application of the statute.

The majority finds as a fact that National, the reinsurer, was a bona fide insurance company. It holds that National assumed liability for the reinsurance of the policies written by Republic and that it could validly retain part of the total premium. We agree with the majority that National was a viable business entity and not a sham.

The majority holds that a portion of the commission income received by Guardian and Beneficial during the period January 1 to June 30, 1958, and a portion of the reinsurance premiums received by National during the period July 1, 1958, to December 31, 1962, constituted compensation earned by the finance companies for selling 1967 U.S. Tax Ct. LEXIS 47">*114 and processing the credit life insurance. It further holds that petitioners exercised the power to dispose of such income by diverting it first to Guardian and Beneficial and later to National, rather than receiving it themselves. It concludes that, under section 61, this income is properly taxable to petitioners despite the actual receipt by others.

The majority relies principally upon the services performed by the petitioners in connection with the sale and servicing of the insurance. It lists the following facts as being descriptive of these services: Petitioners wrote the policies, collected premiums, deposited them in bank accounts in the names of Guardian and Beneficial, made refunds, prepared the necessary papers in the event of the death of the insured, and made weekly reports to Guardian and Beneficial. For the years 1958 through 1962, the cost to the petitioners of the services was approximately $ 60,000. Guardian and Beneficial prepared monthly reports of the collated information and forwarded these reports together with the net premiums to Republic. The cost of this processing service to Guardian and Beneficial for the period July 1, 1958, through December 31, 1962, 1967 U.S. Tax Ct. LEXIS 47">*115 was approximately $ 11,000.

Though petitioners' activities in filing death claims were consistent with their status as beneficiaries under the policies, it is true that they have, along with Guardian and Beneficial, performed some services in connection with the sale and servicing of these policies. I do not agree, however, that these activities can result in the allocation urged by the respondent.

48 T.C. 773">*801 I think the case at bar is controlled by such cases as Nichols Loan Corporation of Terre Haute, T.C. Memo. 1962-149, reversed on other grounds 321 F.2d 905 (C.A. 7, 1963); and Campbell County State Bank, Inc., 37 T.C. 430">37 T.C. 430 (1961), reversed and remanded on another issue 311 F.2d 374 (C.A. 8, 1963). See also Jaeger Motor Car Co. v. Commissioner, 284 F.2d 127 (C.A. 7, 1960), affirming a Memorandum Opinion of this Court, certiorari denied 365 U.S. 860">365 U.S. 860 (1961), Moke Epstein, Inc., 29 T.C. 1005">29 T.C. 1005 (1958); and Ray Waits Motors v. United States, 145 F. Supp. 269">145 F. Supp. 269 (E.D. S.C. 1956).

In both Nichols and Campbell, the employees of several loan corporations and of a bank provided services similar to those provided by the petitioners herein in selling and servicing insurance policies. No compensation was 1967 U.S. Tax Ct. LEXIS 47">*116 received by them for so doing. In the Nichols case the total payments went to one of the loan corporations' shareholders and was divided by him with the other shareholders. In Campbell the payments went to a partnership formed by the bank shareholders. In both cases none of the shareholders actually performed any services, nor did they compensate the lending institutions for any space or materials or expenses of the solicitation or processing service. I am aware that in the Campbell case the partnership ostensibly "hired" three employees but we found therein that they were persons who were already bank employees and who were treated as having been compensated wholly by the bank for withholding purposes. In both these cases we held that none of the income of the individual shareholders in Nichols or the partnership in Campbell was taxable to the loan corporations or to the bank, respectively. This Court in the Campbell case rejected respondent's position that the partnership was a sham and held that the bank did not earn the income and in the Nichols case rejected respondent's general argument that the income was chargeable to the loan companies. In this connection, I would point 1967 U.S. Tax Ct. LEXIS 47">*117 out that the Court of Appeals for the Seventh Circuit in reversing on another issue in Nichols held that the expenses of the loan companies were so minimal regarding the insurance operation as not to require any reallocation of the companies' expense deductions. In this light it appears strange that the majority now uses the same type of activity on the part of the finance companies as a basis to allocate to them 50 percent of the net premiums.

I can find no meaningful distinction between the actual services in these two cases and the case at bar. Therefore, I am of the opinion that to hold, as the majority does here, in the absence of a finding that the reinsurer, National, was a sham, that the income is not properly taxable to a corporation set up by a majority of the finance companies' shareholders is irreconcilable with our earlier holdings that the same type of income is properly taxable directly to the loan corporations' shareholders (Nichols) or to a partnership made up of bank shareholders 48 T.C. 773">*802 (Campbell). I cannot conceive that the fact that in Nichols and Campbell what is essentially the profit in the credit insurance operation was passed ultimately to shareholders of the 1967 U.S. Tax Ct. LEXIS 47">*118 loan companies or bank in the form of a commission operates to distinguish it from this case where the profit vehicle takes the form of a reinsurance premium.

Even assuming arguendo as the majority concludes, that some part of the income is taxable to those who perform the services, I cannot understand how it allocates all of the income to the finance companies thereby ignoring the fact that services were also performed by Guardian and Beneficial. I am of the opinion that such a conclusion is not consistent with the rationale upon which it is based.

The majority opinion also relies upon section 482 for support in allocating the income to petitioners in order to clearly reflect income. The premise of this approach is the previously reached conclusion that petitioners have earned the income by the performance of various services and have exercised a power of disposition over this income to channel it to the reinsurance company. The majority would negate the application of the Nichols and Campbell cases by noting that therein the loan companies and the bank did not "earn" the income. I cannot agree. The same criteria used by the majority to conclude that the petitioners herein earned 1967 U.S. Tax Ct. LEXIS 47">*119 the income were present in both the earlier cases. In neither of these earlier cases were services performed by the stockholders who actually received the money. Indeed, it would appear that the case before us contains stronger facts in this regard than either Nichols or Campbell since National seems possessed of a more readily apparent business operation in connection with the profit from the insurance, i.e., reinsuring the risk, than was possessed by either of the stockholder groups in the earlier cases which did no more than receive the income. I again am of the opinion that the majority's rationale is not reconcilable with our earlier decisions in this area.

Unable to distinguish this case from our earlier decisions, I am left with the curious result that where employees of lending institutions perform services regarding credit life insurance the stockholders of those institutions may validly take a profit from the insurance business by setting up a partnership to receive it but may not validly take, in effect, the same profit by setting up a legitimate insurance company to reinsure the risk.

I am aware of the favorable tax treatment which may be available in some circumstances 1967 U.S. Tax Ct. LEXIS 47">*120 to insurance companies. Because of this treatment, favorable tax consequences might inure to the petitioners if the Court were to follow Nichols and Campbell in the case at bar. I do not, however, think that the case law permits us to prevent this result. I do not contend that section 482 is inapplicable to insurance companies. I do contend that, as interpreted by existing case law, it does not apply to these facts. If favorable tax treatment is to be prevented in such 48 T.C. 773">*803 cases as this, it is in my opinion up to Congress to do so. See the excellent discussion of the boundary between legislative and judicial jurisdiction in this area in Alinco Life Insurance Co. v. United States, 373 F.2d 336 (Ct. Cl. 1967), which held that section 269 did not authorize the Commissioner to disallow the benefits of the special tax treatment of life insurance companies to a reinsurer controlled by the lending institution. It is particularly noteworthy in this context to consider the past history of respondent's attempts to attack various business-connected insurance arrangements. Respondent has pitched his arguments on sections 61, 269, 482, and a general argument that income was properly taxable 1967 U.S. Tax Ct. LEXIS 47">*121 to a lending institution rather than a controlled reinsurer or the shareholders of the lending institution as partners of an insurance agency. All these approaches have been repeatedly rejected by this and other Courts. See cases cited, supra. The only case in which a court has held that this type of arrangement gives rise to income, taxable to the lending institution, is Bank of Kimball v. United States, 200 F. Supp. 638">200 F. Supp. 638 (D.S.Dak. 1962), in which the District of Court held, because no valid partnership had been formed, that commissions were taxable to the bank rather than to the alleged partnership comprised of its stockholders. The court, however, noted that for later years, after a formal partnership agreement had been signed by the stockholders, the Government had conceded that the income thereafter was properly taxable to it and not to the bank.