CLIFFORD L. MERRILL et al., Plaintiffs and Respondents, v. DEPARTMENT OF MOTOR VEHICLES et al., Defendants and Appellants.
Young & Young and W. Herbert Young for Plaintiffs and Respondents.
The Department of Motor Vehicles (Department) appeals from a judgment granting a writ of mandate commanding it to set aside a decision denying an application for a motor vehicle dealer's license.
Clifford L. Merrill and Harold E. Morris, dba The Merchandiser, a copartnership (Merchandiser), operate what is commonly known as a membership discount house. In addition to selling furniture, appliances and household goods, Merchandiser offers new automobiles to its members by means of an arrangement with several franchised automobile dealers whereby the dealers sell automobiles to customers referred by Merchandiser for less than the normal retail price.
The record shows that Merchandiser's method of doing business was substantially as follows. It would obtain from its member-customer upon a printed form a detailed description of the type of automobile and accessories which the member desired to purchase. Its salesman would then fill in the wholesale price of the car and the accessories, adding a markup which had been agreed upon between Merchandiser and the dealer. The salesman would give one copy of the form to the customer in a sealed envelope, send one copy to the dealer and keep one copy. The customer would then take the envelope to the dealer who would quote to the customer the price contained therein. If the customer found the price satisfactory and decided to purchase the car, he would sign all contracts with, and pay the purchase price to, the dealer directly. The latter would pay Merchandiser a commission.
On March 3, 1965, the Department wrote a letter to Merchandiser which informed it that it had been engaged in activity which rendered it a motor vehicle dealer within the provisions of section 285 of the Vehicle Code fn. 1 and advised it that it must desist from such activity unless it obtained a license. (§ 11700.) Merchandiser thereupon filed with the Department an application for a license--which application was proper in form and included all information required by [71 Cal. 2d 911] law. (§ 11704.) With the application Merchandiser filed a bond as required by law. (§ 11710.) The Department informed Merchandiser that the application would be denied and, at Merchandiser's request, scheduled a hearing in the matter. (§ 11708.) On February 11, 1966, a hearing was held in conformity with the Administrative Procedure Act (Gov. Code, § 11500 et seq.; see Veh. Code, § 11708, subd. (b)), and the matter was submitted on stipulated facts together with certain testimony.
On April 11, 1966, the hearing officer issued a proposed decision recommending denial of the application, and this decision was subsequently adopted by the Department. Six grounds for denial of the application were stated in the decision, each of which was declared to constitute reasonable cause for such denial. (§ 11702). fn. 2 Three of these, however, were essentially restatements of the three basic grounds, which were these: (1) that Merchandiser's activity was "most akin" to that of a motor vehicle salesman as that term is defined by section 675, subdivision (a) (1), and "issuance of a dealer's license would permit [Merchandiser], by said referrals to many dealers, to gain an unfair economic advantage over those licensed motor vehicle salesmen whose activities are confined to one licensed dealership pursuant to the provisions of section 11806 of the Vehicle Code"; fn. 3 (2) that Merchandiser's "present and intended future status, with reference to having no inventory of a stock of motor vehicles [71 Cal. 2d 912] for sale to the public, fails to meet the requirements of section 285 of the Vehicle Code in conjunction with section 11701 of said Code fn.  in that [it does] not now, and will not in the future qualify as a bona fide motor vehicle dealer"; and (3) that the issuance of a license to Merchandiser would be beyond the jurisdiction of the Department because the Legislature has not "authorized a type of license for the type of activity respondents now practice or intend to practice in the future."
 Applying these principles to the case at bench, it is clear that the right or interest affected by the Department's decision is not a "vested" right within the meaning of the Jockey Club and McDonough cases. (Cf. Val Strough Chevrolet v. Bright, supra, 269 Cal. App. 2d 855, 860.) Therefore no limited trial de novo was authorized by law, and the function of the trial court was to determine whether the Department, in denying Merchandiser's application for a dealer's license, had committed errors of law. Insofar as this determination concerned a review of the evidence in support of the findings of the Department, the trial court was required to uphold such findings if they were supported by substantial evidence. Our scope of review on appeal is identical to that of the trial court.
It is not disputed herein that Merchandiser falls within the definition of a "dealer" which is set forth in section 285, subdivision (a), of the Vehicle Code (See fn. 1, ante.) It is equally clear that Merchandiser may not "act as a dealer" (§ 11700) unless and until it procures a license and certificate from the Department in accordance with section 11701. The latter section, which we have set forth in relevant part above (fn. 4, ante), requires that an applicant for a dealer's license and certificate "submit proof of his status as a bona fide ... dealer" to the Department; and section 11702, which [71 Cal. 2d 917] authorizes the Department to refuse to issue a license and certificate "for reasonable cause shown" (fn. 2, ante), has been interpreted by it to authorize such refusal when the applicant fails to demonstrate that he is a "bona fide dealer." It is not contended that this interpretation is improper.
 Looking to the entire statutory scheme governing the licensing of automobile dealers (Veh. Code, div. 5, ch. 4, art. 1) we observe that the primary concern therein manifested is that the public be protected from unscrupulous and irresponsible persons in the sale of vehicles subject to registration under the code. This concern is furthered by various provisions seeking to insure, in the words of the Department's brief, "the honesty and integrity of automobile dealers." Thus it is provided that the Department may, generally speaking, refuse to issue a license to a previously licensed person whose previous license has been revoked or suspended for cause (§ 11703, subds. (a) through (c)), or who has been convicted of a crime involving moral turpitude (§ 11703, subd. (d)). A license may be refused to one who has illegally used or permitted use of special license plates issued under a former dealer's license, has commited fraud in making application for the registration of a vehicle, has failed to deliver to a transferee a properly indorsed certificate of ownership, has illegally used a dealer's report of sale (see § 4456), has knowingly dealt in stolen vehicles, has failed to provide and maintain a clear physical division between his dealer's business [71 Cal. 2d 919] and other businesses conducted at the place of business, has violated certain statutory provisions dealing with the registration of motor vehicles, has violated certain statutory provisions dealing with stolen and stored vehicles, has violated certain duly published regulations issued pursuant to statutory provision, or has submitted a subsequently dishonored check or draft in payment of an obligation or fee due the state. (§§ 11703.1, 11705.) An existing license may be suspended or revoked on the same grounds (§ 11705) and may be temporarily suspended when such action is deemed by the Department to be "in the public interest" (§ 11706).
Finally, section 11713 of the code sets forth 14 kinds of activity on the part of a dealer which are unlawful and constitute cause for revocation or suspension of a license (see § 11705). Among these are specifically detailed varieties of misleading or false advertising (subds. (a) through (d), (k)), addition of unauthorized costs to the selling price (subd. (g)), employment of unlicensed salesmen (subd. (h)), [71 Cal. 2d 920] delivery of improperly equipped vehicles (subd. (i)), and tampering with the odometer on any motor vehicle (subd. (n)).
As we have suggested, we consider that the dominant concern of this statutory scheme is that of protecting the purchaser from the various harms which can be visited upon him by an irresponsible or unscrupulous dealer. It is within this context that we now address ourselves to the specific phrase whose interpretation is here in question.
"Bona fide" is of course a Latin term whose literal English translation is the compound adjective "good faith." Webster's Third New International Dictionary (1961) indicates that it is or has been used in three different senses. The first of these signifies an absence of fraud or deceit and is used in connection with promises or representations--e.g., a bona fide contract. The second imparts sincerity or "earnest or wholehearted intent"--e.g., a bona fide proposal or suggestion. The third expresses genuineness or authenticity and is the antithesis of the spurious or counterfeit--e.g., a bona fide Renoir.
 Viewing the term "bona fide" within the entire statutory scheme in which it appears, we conclude that it is there used in the first lexical sense adverted to above--to wit, that of honesty, fair dealing, and freedom from deceit. There are two basic reasons for this interpretation.
First, we observe that the Legislature in its wisdom has set forth in section 285 of the code an extremely broad definition of the term "dealer," and has excluded from the scope of that definition five categories of persons, including salesmen. (See fn. 1, ante.) Through this arrangement of definition and exclusion the Legislature has intimate control over who shall be and who shall not be a "dealer" within the meaning of the code--at any time the Legislature may enact additional exclusions and thereby contract the scope of the term. It has not, however, chosen to exclude persons in Merchandiser's category, i.e., discount houses, and therefore Merchandiser is clearly a "dealer" within the meaning of the code. There is here no question that Merchandiser is "just what it purports to be"--that is, a "dealer"--because it falls within the statutory definition and does not fall within any exclusion. Therefore, because the Legislature has itself undertaken to prescribe who shall be an authentic and genuine "dealer," its use of the term "bona fide" to modify the term "dealer" must have reference to some quality other than authenticity. That quality, as we have suggested, is honesty and fair dealing.
Our second reason for reaching this conclusion is also grounded upon our view of the whole statutory scheme. As we have indicated the dominant concern of the scheme is that of protecting purchasers from irresponsible and unscrupulous persons in the sale of automobiles. It is wholly consistent with and in furtherance of that concern that the Legislature has provided in section 11701 that an applicant submit proof of his bona fides "as may reasonably be required." (See fn. 4, ante.) This requirement simply allows the Department to determine whether an applicant possesses those qualities of reliability and honesty which the statutory scheme is intended to foster.
In the case at bench the Department found that Merchandiser [71 Cal. 2d 922] was not a "bona fide dealer," and that therefore reasonable cause existed to refuse it a license, because it lacked an inventory of motor vehicles for sale to the public.  What we have said above, however, makes it clear that a dealer can be found lacking in bona fides within the meaning of the statute only if he is found lacking in the qualities of honesty and reliability for which the statutory scheme manifests concern.  Although the presence of an inventory might be considered one of the usual indicia of reliability in a dealer, we think it clear that a stock of new cars is not a necessary concomitant to "bona fide" dealership, for one lacking an inventory might demonstrate the reliability and honesty requisite to that status in other ways. fn. 16 In the absence of any evidence or finding to the effect that Merchandiser lacks such honesty and reliability as is requisite to "bona fide" dealership, the conclusion of the Department that Merchandiser is not a "bona fide dealer" cannot be sustained. The trial court properly determined that the decision of the Department cannot be supported on this ground.
The Department's decision was also based upon the ground that if Merchandiser were issued a dealer's license it would thereby gain an unfair economic advantage over licensed motor vehicle salesmen, whose activities are confined to one licensed dealership. (§ 11806.) To state an effect of granting the application, however, is not to state a ground for denial thereof. As the trial court found, all motor vehicle dealers have an economic advantage over salesmen.  Although the nature of Merchandiser's advantage differs from that enjoyed by most dealers, i.e., those having an inventory of vehicles, the present statutory scheme clearly does not prohibit such a situation. The trial court properly concluded that the existence of Merchandiser's economic advantage over salesmen was not reasonable cause for refusal of a license, and that the decision of the Department cannot be supported on this ground.
The third ground upon which the Department's decision was based was that it had no jurisdiction to issue a license to Merchandiser because the Legislature had not "authorized a type of license for the type of activity respondents now practice or intend to practice in the future." What we have said [71 Cal. 2d 923] above makes it clear that this ground rests upon an erroneous interpretation of the statutory scheme. The trial court properly found that the Department had jurisdiction in the premises.
For the foregoing reasons we have concluded that the Department's stated grounds for refusing to issue a dealer's license and certificate to Merchandiser were legally insufficient to support its decision, and that the trial court therefore properly issued its writ of mandate. (See Code Civ. Proc., § 1094.5, subd. (b).) The judgment must therefore be affirmed.
We do not here consider the two possible grounds of refusal which were raised for the first time in the mandate proceeding. (See fns. 6 and 7, ante, and accompanying text.) As to the ground of lack of franchise, the Department has stated in its briefs that it does not require a franchise in order to obtain a dealer's license, and we assume that this position is taken in light of decisions in other states holding that such a requirement would be unconstitutional. (See Killingsworth v. West Way Motors, Inc. (1959) 87 Ariz. 74 [347 P.2d 1098]; Ohio Motor Vehicle Dealers' & Salesmen's Licensing Board v. Memphis Auto Sales (1957) 103 Ohio App. 347 [142 N.E.2d 268]; Signore v. Rizzolo (1950) 9 N.J. Super. 539 [75 A.2d 757]; Nelsen v. Tilley (1939) 137 Neb. 327 [289 N.W. 388].) We express no present opinion on this point. As to the ground of lack of an "established place of business," we think that the findings of the trial court allow and contemplate that evidence dealing with this matter may be produced and considered by the Department in the course of any subsequent proceedings undertaken pursuant to the judgment of the trial court.
FN 1. Section 285 provides: " 'Dealer' is a person not otherwise expressly excluded by Section 286 who: (a) For commission, money, or other thing of value, sells, exchanges, buys, or offers for sale, negotiates or attempts to negotiate, a sale or exchange of an interest in, a vehicle subject to registration under this code, or induces or attempts to induce any person to buy or exchange an interest in a vehicle and, who receives or expects to receive a commission, money, brokerage fees, profit, or any other thing of value, from either the seller or purchaser of said vehicle, or (b) Is engaged wholly or in part in the business of selling vehicles or buying or taking in trade, vehicles for the purpose of resale, selling, or offering for sale, or consigned to be sold, or otherwise dealing in vehicles, whether or not such vehicles are owned by such person."
Section 286 excludes from the definition of "dealer," generally speaking, (a) financing institutions and public officials holding vehicles in the course of contractural arrangements or under legal duty; (b) wholesalers; (c) salesmen employed by dealers; (d) exporters; and (e) persons disposing of vehicles acquired for their own use. It is not contended that Merchandiser falls into any of these categories.
Unless otherwise indicated, all section references hereafter are to the Vehicle Code.
FN 2. Section 11702 provides: "The department may issue, or for reasonable cause shown, refuse to issue a license and certificate to any applicant applying for a manufacturer's, transporter's, or dealer's license and certificate."
FN 3. Section 675, subdivision (a) (1) provides: "(a) 'Vehicle salesman' is a person not otherwise expressly excluded by this section, who: (1) Is employed as a salesman by a dealer as defined in Section 285, or who, under any form of contract, agreement, or arrangement with a dealer, for commission, money, profit, or other thing of value, sells, exchanges, buys, or offers for sale, negotiates, or attempts to negotiate a sale or exchange of an interest in a vehicle required to be registered under this code; ..."
Section 11806 at the time here relevant provided: "A vehicle salesman, as defined herein, shall not engage in such activity other than for the account of or for and on behalf of a single employer, who shall be a licensed dealer."
FN 5. Section 1094.5, subdivision (b), which we shall set forth in full infra, provides inter alia that the trial court may base its issuance of the writ upon a "prejudicial abuse of discretion," on the part of the administrative agency.
FN 6. Although the decision of the Department did not state lack of franchise as one of the grounds for refusal, Merchandiser in its petition for a writ of mandate alleged that such lack was "the real underlying basis and reason" for the Department's action.
FN 9. See Dare v. Board of Medical Examiners (1943) 21 Cal. 2d 790, 795-801 [136 P.2d 304].
FN 12. See generally Beverly Hills Federal Sav. & Loan Assn. v. Superior Court, supra, 259 Cal. App. 2d 306, 312-318; 3 Witkin, Cal. Procedure (1954) Extraordinary Writs, §§ 16, 18, pp. 2484-2486, 2488-2490.
FN 16. It has not been contended in this proceeding that Merchandiser is deficient in those qualities relevant to its bona fides--or that its lack of inventory has an effect upon its honesty and trustworthiness.


text:
Respondent 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 were deemed to prohibit 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. Petitioner, pursuant to 26 U.S.C. 482, granting him power to allocate gross income among controlled corporations in order to reflect the actual incomes of the corporations, 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 petitioner's action, but the Court of Appeals reversed. Held: Since the banks did not receive and were prohibited by law from receiving sales commissions, no part of the reinsurance premium income could be attributed to them, and petitioner's exercise of the 482 authority was not warranted. Pp. 403-407.
Ernest J. Brown argued the cause for petitioner. On the brief were Solicitor General Griswold, Acting Assistant Attorney General Ugast, Matthew J. Zinn, and Bennet N. Hollander.
Stephen H. Anderson argued the cause for respondents. With him on the brief was S. J. Quinney.
Ernest Getz filed a brief for Bud Kouts Chevrolet Co. et al. as amici curiae urging affirmance.
Respondents, First Security Bank of Utah, N. A., and First Security Bank of Idaho, N. A. (the Banks), are national banks that, during the tax years, were wholly owned subsidiaries of First Security Corp. (Holding Company). Other, non-bank, subsidiaries of the Holding Company, relevant to this case, were First Security Co. (Management Company), Ed. D. Smith & Sons, an insurance agency (Smith), and - from June 1954 - First Security Life Insurance Company of Texas (Security Life). Beginning in 1948, the Banks offered to arrange for borrowers credit life, health, and accident insurance (credit life insurance). The Tax Court found that they did this "for several reasons," including (1) offering a service increasingly supplied by competing financial institutions, (2) obtaining the benefit of the additional collateral that credit insurance provides by repaying loans upon the death, injury, or illness of the borrower, and (3) providing an "additional source of income - part of the premiums from the insurance - to Holding Company or its subsidiaries."
Until 1954, any borrower who elected to purchase this insurance was referred by the Banks to two independent insurance companies. The premium rate charged was $1 per $100 of coverage per year, the rate commonly charged in the industry. The Insurance Commissioners of the States involved - Utah, Idaho, and Texas - accepted this rate. The Banks followed a routine procedure in making this insurance available to customers. The lending officer would explain the function and availability of credit insurance. If the customer desired the coverage, the necessary form was completed, a certificate of insurance was delivered, and the premium was collected or added to the customer's loan. The Banks then forwarded the completed forms and premiums to Management Company, which maintained records of the [405 U.S. 394, 397] insurance purchased and forwarded the premiums to the insurance carrier. Management Company also processed claims filed under the policies. The cost to each of the Banks for the actual time devoted to explaining and processing the insurance was less than $2,000 per year, characterized by the courts below as "negligible." The cost to Management Company of the services rendered by it was also negligible, slightly in excess of $2,000 per year.
We note at the outset that the Banks could never have received a share of these premiums. National banks are authorized to act as insurance agents when located in places having a population not exceeding 5,000 inhabitants, 12 U.S.C.A. 92. 12 Although 92 does not explicitly prohibit banks in places with a population of over 5,000 from acting as insurance agents, courts have held that it does so by implication. 13 The Comptroller [405 U.S. 394, 402] of the Currency has acquiesced in this holding, 14 and the Court of Appeals for the Tenth Circuit expressed its agreement in the opinion below.
We know of no decision of this Court wherein a person has been found to have taxable income that he did not receive and that he was prohibited from receiving. In cases dealing with the concept of income, it has been assumed that the person to whom the income was attributed could have received it. The underlying assumption always has been that in order to be taxed for income, a taxpayer must have complete dominion over it. "The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not." Corliss v. Bowers, 281 U.S. 376, 378 (1930).
This regulation is consistent with the control concept heretofore approved by this Court, although in a different context. The regulation, as applied to the facts in this case, contemplates that Holding Company - the controlling interest - must have "complete power" to shift income among its subsidiaries. It is only where this power exists, and has been exercised in such a way that the "true taxable income" of a subsidiary has been [405 U.S. 394, 405] understated, that the Commissioner is authorized to reallocate under 482. But Holding Company had no such power unless it acted in violation of federal banking laws. The "complete power" referred to in the regulations hardly includes the power to force a subsidiary to violate the law.
It is argued, finally, that the "services" rendered by the Banks in making credit insurance available to customers "would have been compensated had the corporations [405 U.S. 394, 407] been dealing with each other at arm's length." 23 The short answer is that the proscription against acting as insurance agent and receiving compensation therefor applies to all national banks located in places with population in excess of 5,000 inhabitants. It applies equally to such banks whether or not they are controlled by a holding company. If these Banks had been independent of any such control - as most banks are - no commissions or premiums could have been received lawfully and there would have been no taxable income. 24 As stated in the Treasury Regulations, the "purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer . . . ." 25 We think our holding comports with such parity treatment.
"In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, 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 of such organizations, trades, or businesses."
[ Footnote 2 ] The corporate income tax imposes the same rate of taxation on taxable income up to $25,000 and the same rate for income greater than $25,000. 26 U.S.C. 11. Therefore, if, excluding the sales commissions in question, we assume, as seems likely, that before [405 U.S. 394, 398] 1954 the income of both respondents and of Management Company exceeded $25,000, then the total taxes paid by the Holding Company subsidiaries would not be affected if the commissions were allocated wholly to respondents, or to Management Company, or partially to all three.
[ Footnote 3 ] This plan was proposed to Holding Company by American National, which was making similar recommendations to other financial institutions. The Tax Court found that insurance companies anticipated that lending institutions would soon begin to form their own affiliated life insurance companies to write the credit insurance, which was proving to be a profitable business. Such a move by lending institutions would deprive the independent insurance companies of substantial credit insurance business. The type of plan recommended by American National was intended to salvage a portion of such business by charging a fee for the actuarial, accounting, and other services made available to Security Life, which reinsured the entire risk. T. C. Memo 1967-256.
See Knetsch v. United States, 364 U.S. 361, 365 (1960); Chirelstein, Learned Hand's Contribution to the Law of Tax Avoidance, 77 Yale L. J. 440 (1968).
[ Footnote 5 ] The opinion of the Tax Court, supra, includes tables showing the profitability of Security Life. Its net worth (capital and surplus) increased from $161,370.52 at the end of 1955 to $1,050,220 at the end of 1959, despite the paying out of claims and claims expenses over the five-year period totaling $525,787.91. The Tax Court found that: "Although Security Life's business proved to be successful, there was no way to judge at the outset whether it would succeed. In relation to its capital structure, Security Life reinsured a large amount of risk."
[ Footnote 6 ] Both the Life Insurance Company Tax Act for 1955, 70 Stat. 36, applicable to the years 1955-1957, and the Life Insurance Company Income Tax Act of 1959, 73 Stat. 112, applicable to later years, accorded preferential tax treatment to life insurance companies.
[ Footnote 7 ] The Commissioner made an alternative allocation to Management Company. Because it upheld his allocation to the Banks, the Tax Court rejected this alternative. In reversing the allocation to the Banks, the Court of Appeals found the record insufficient to pass on the alternative allocation. It therefore ordered that the case be remanded to the Tax Court for further consideration. The alternative allocation is therefore not before us.
[ Footnote 8 ] See 26 CFR 1.482-1 (a) (6) (1971).
[ Footnote 9 ] B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders p. 15-21 (3d ed. 1971).
[ Footnote 10 ] 26 CFR 1.482-1 (b) (1) (1971). The first regulations interpreting this section of the statute were issued in 1934. They have remained virtually unchanged. Jenks, Treasury Regulations Under Section 482, 23 Tax Lawyer 279 (1970).
[ Footnote 11 ] The court below held that the mere generation of business does not necessarily result in taxable income. As we decide this case on a different ground, we need not consider the circumstances in which the origination or referral of business may or may not result in taxable income to the originating party. We do agree that origination of business does not necessarily result in such income. In this case if the Banks had been unaffiliated with any other entities (i. e., had been separate, independent banks, unaffiliated with any holding company group), they would nevertheless have performed the "services" that the Commissioner asserts resulted in taxable income. These services - namely the negligible paperwork and the referring of the credit insurance to a company licensed to write it - were performed (as the Tax Court noted) for the convenience of bank customers and to assure additional collateral for loans. They also may have been necessary to meet competition. The fact of affiliation, enabling referral of the business to another subsidiary in the holding company group, does not alter the character of what was done. The act which is relevant, in terms of generating insurance premiums and commissions, is the referral of the business. Whether this referral is to an affiliated or an unaffiliated insurance company should make no difference as to whether the bank, which never receives the income, has earned it.
[ Footnote 12 ] Section 92 of the National Bank Act was enacted in 1916. When the statutes were revised in 1918 and re-enacted, 92 was omitted. The revisers of the United States Code have omitted it from recent editions of the Code. However, the Comptroller of the Currency considers 92 to be effective and he still incorporates the provision in his Regulations, 12 CFR 2.1-2.5 (1971).
[ Footnote 13 ] Saxon v. Georgia Association of Independent Insurance Agents, Inc., 399 F.2d 1010 (CA5 1968). See Commissioner v. Morris Trust, 367 F.2d 794, 795 (CA4 1966).
[ Footnote 14 ] 12 CFR 2.1-2.5 (1971).
[ Footnote 15 ] Findings of fact and opinion in T. C. Memo 1967-256, p. 67-1456, filed Dec. 27, 1967, in this case.
[ Footnote 16 ] MR. JUSTICE MARSHALL's dissenting opinion is based on the "crucial fact . . . [that] respondents [the Banks] have already violated the federal statute and regulations by soliciting insurance premiums." The statute, 12 U.S.C.A. 92, prohibits a national bank from acting "as the agent" of an insurance company "by soliciting and selling insurance and collecting premiums on policies." MR. JUSTICE MARSHALL concludes that the banks have violated this statute, and notes that "the penalties . . . are indeed severe."
This finding of illegality, with respect to conduct of the Banks extending back to 1948, is without support either in the record or in any authority cited. Indeed, the record is to the contrary. The Tax Court found as a fact that there was no "agency agreement" between the Banks and the insurance companies; it further found that the Banks "made available" the credit insurance to their customers. There is no finding, and nothing in the record to support [405 U.S. 394, 403] a finding, that the Banks were agents of the insurance companies or that they engaged in "selling insurance" within the meaning of the statute. The Banks no doubt "solicited" in the sense that they encouraged their customers to take out the insurance. But in the absence of an agency relationship, and in view of the undisputed fact that the Banks received no commissions or premiums, it cannot be said that there was a violation of the statute. Moreover, the Banks were regularly examined by the federal banking authorities "looking for violations in the national banking laws." The making of credit insurance available to customers was and is a common practice in the banking business. There is no suggestion that the federal banking authorities considered this service to customers to be a violation of the law as long as the Banks received no commissions or fees. This administrative interpretation over many years is entitled to great weight.
The dissenting opinion raises this serious issue for the first time. It was not raised at any stage in the proceedings below. Nor was it briefed or argued in this Court. The Commissioner, the Tax Court, the Court of Appeals, and the Solicitor General all assumed that the Banks' conduct in this respect was perfectly lawful. But quite apart from the consistent administrative acceptance and from the assumptions by the Commissioner and the courts below, we think there is no basis for a finding of this serious statutory violation.
[ Footnote 17 ] See Helvering v. Horst, 311 U.S. 112 (1940) (assignment of interest coupons attached to bonds owned by taxpayer); Lucas v. Earl, 281 U.S. 111 (1930) (taxpayer assigned to wife one-half interest in his earnings). See generally Commissioner v. Sunnen, 333 U.S. 591 (1948), and cases discussed therein at 604-610.
[ Footnote 18 ] 26 CFR 1.482-1 (b) (1) (1971).
[ Footnote 19 ] James v. United States, 366 U.S. 213 (1961); Rutkin v. United States, 343 U.S. 130 (1952).
[ Footnote 20 ] 12 U.S.C. 93.
[ Footnote 21 ] Thus, in Commissioner v. Lester, 366 U.S. 299 (1961), in determining that a taxpayer should not be taxed on alimony payments to his divorced wife, the Court determined that it was more consistent with the basic precepts of income tax law that the wife, who received and had power to spend the payments, should be taxed rather than the husband who actually earned the money.
[ Footnote 22 ] As noted at the outset of this opinion, certiorari was granted to resolve the conflict between the decision below and that in Local Finance Corp. v. Commissioner, 407 F.2d 629 (CA7 1969). The Tax Court in this case felt bound to follow Local Finance Corp., which was decided subsequently to L. E. Shunk Latex Products, Inc. v. Commissioner, 18 T. C. 940 (1952). For the reasons stated in the opinion above, we think Local Finance Corp. was erroneously decided and that the earlier views of the Tax Court were correct.
"In the case before us, the taxpayer, while he had no power to dispose of income, had a power to appoint or designate its recipient. Does the existence or exercise of such a power alone give rise to taxable income in his hands? We think clearly not. In Nicholas A. Stavroudis, 27 T. C. 583, 590 (1956), we found it to be settled doctrine that a power to direct the distribution of trust income to others is not alone sufficient to justify the taxation of that income to the possessor of such a power."
[ Footnote 23 ] See dissenting opinion of MR. JUSTICE BLACKMUN, post, at 422.
[ Footnote 24 ] If an unaffiliated bank were able to provide the insurance at a cheaper rate because no commissions were paid, this would benefit the customers but would result in no taxable income.
[ Footnote 25 ] 26 CFR 1.482-1 (b) (1) (1971).
The facts of this case illustrate the natural affinity that lending institutions and insurance companies have for each other. Congress depends on the ability of the Commissioner of Internal Revenue to utilize 482 of the Internal Revenue Code, 26 U.S.C. 482, to insure that this affinity does not provide a basis for tax avoidance. H. R. Rep. No. 1098, 84th Cong., 1st Sess., 7; S. Rep. No. 1571, 84th Cong., 2d Sess., 8. In my opinion, [405 U.S. 394, 408] today's decision renders 482 a less efficacious weapon against tax avoidance schemes than Congress intended and provides the respondents with an unwarranted tax advantage. I dissent.
First enacted as 45 of the Revenue Act of 1928, 45 Stat. 806, the statute was intended to prevent the avoidance of tax liability through fictions and "to deny the power to shift income . . . arbitrarily among controlled corporations, and to place such corporations rather on a parity with uncontrolled concerns." Central Cuba Sugar Co. v. Commissioner, 198 F.2d 214, 216 (CA2 1952). See H. R. Rep. No. 2, 70th Cong., 1st Sess., 16-17; S. Rep. No. 960, 70th Cong., 1st Sess., 24-25. It is intended to serve the same purpose in the present Code.
It is well-established law that in analyzing a transaction under 482, the test is whether the arrangement as structured for income tax purposes by interlocking corporate interests would have been similarly structured by taxpayers dealing at arm's length. See, e. g., Borge v. Commissioner, 405 F.2d 673 (CA2 1968), cert. denied sub nom. Danica Enterprises v. Commissioner, 395 U.S. [405 U.S. 394, 409] 933 (1969); Eli Lilly & Co. v. United States, 178 Ct. Cl. 666, 372 F.2d 990 (1967).
Applying that test to this case, the following facts are relevant. Before 1954, an independent insurance company paid respondents commissions ranging from 40% to 45% for their services in offering insurance to borrowers designed to discharge their debts in the event that they died or became disabled during the term of their loans. After 1954, respondents offered borrowers policies issued by a different insurance company. At this time the holding company that controlled respondents created a new subsidiary to reinsure the borrowers who purchased policies. By paying off the independent insurance company with 15% of the proceeds of the policies, the subsidiary assumed the insurance risks and garnered the remaining 85% of the proceeds. No commission was paid to respondents by either the independent company or the insurance subsidiary.
The tax advantage of the post-1954 structure derived from the fact that the Life Insurance Company Tax Act for 1955, 70 Stat. 36, as amended by the Life Insurance Company Income Tax Act of 1959, 73 Stat. 112, as amended, 26 U.S.C. 801 et seq., gives preferential tax treatment to life insurance companies. By funneling all proceeds from the sales of the insurance policies to a subsidiary that qualified for tax treatment as a life insurance company, the holding company avoided the heavier tax that would have been imposed on respondents had they been paid commissions.
Based on respondents' earlier experience dealing at arm's length with an independent insurance company and on the well-known fact that insurers pay solicitors a portion of the premium as a commission for generating income, see Local Finance Corp. v. Commissioner, 48 T. C. 773, 786 (1967), aff'd, 407 F.2d 629, 631-632 (CA7 1969), the Commissioner determined that 40% of the premium income was properly allocated to respondents.
The respondents make, in essence, two arguments in their attempt to rebut the Commissioner's position. First, they urge that they never received any funds as a result of offering the policies to borrowers, and that it is therefore unfair to tax them on any portion of said proceeds. If 482 is to have any meaning, that argument must be rejected. It makes absolutely no sense to examine this case with a technical eye as to whether respondents actually received or had a "right" to receive any commissions. This is not a case involving independent companies or private individuals where we must scrupulously avoid taxing someone on money he will never receive regardless of his will in the matter. See, e. g., Blair v. Commissioner, 300 U.S. 5 (1937); cf. Teschner v. Commissioner, 38 T. C. 1003 (1962). This is a case involving related corporations, and 482 recognizes that such corporations may be treated differently from natural persons or unrelated corporations for certain tax purposes.
We need not look far to find that this entire complicated economic structure - established, designed, administered, and amendable by the holding company - had the right to the proceeds. Pursuant to 482, the Commissioner properly attempted to insure that the proceeds would be equitably allocated.
The Court apparently concedes that if respondents' only argument against taxation were that they have [405 U.S. 394, 411] received no money, that argument would fail. This concession is, in fact, mandated by various decisions of this Court, including Harrison v. Schaffner, 312 U.S. 579 (1941); Helvering v. Horst, 311 U.S. 112 (1940), and Lucas v. Earl, 281 U.S. 111 (1930).
"In addition to the powers now vested by law in national banking associations organized under the laws of the United States any such association located and doing business in any place the population of which does not exceed five thousand inhabitants, as shown by the last preceding decennial census, may, under such rules and regulations as may be prescribed by the Comptroller of the Currency, act as the agent for any fire, life, or other insurance company authorized by the authorities of the State in which such bank is located to do business in said State, by soliciting and selling insurance and collecting premiums on policies issued by such company; and may receive for services so rendered such fees or commissions as may be agreed upon between the said association and the insurance company for which it may act as agent; and may also act as the broker or agent for others in making or procuring loans on real estate located within one hundred miles of the place in which said bank may be located, receiving for such services a reasonable fee or commission: Provided, however, That no such bank shall in any case guarantee [405 U.S. 394, 412] either the principal or interest of any such loans or assume or guarantee the payment of any premium on insurance policies issued through its agency by its principal: And provided further, That the bank shall not guarantee the truth of any statement made by an assured in filing his application for insurance."
This statute by inference and the regulations of the Comptroller of the Currency, 12 CFR 2.1-2.5, by explicit language bar national banks in communities with more than 5,000 inhabitants from selling, soliciting, or receiving the proceeds from selling insurance. Respondents are within the legal prohibition and the penalties provided for a violation are indeed severe. Assuming that the respondents will not attempt to violate the law and not wishing to appear to encourage a violation, the Court concludes that respondents will receive none of the proceeds and that they cannot be taxed on money they will never receive.
"It seems desirable from the standpoint of public policy and banking efficiency that this authority should be limited to banks in small communities. This additional income will strengthen them and increase their ability to make a fair return to their shareholders, while the new business is not likely to [405 U.S. 394, 413] assume such proportions as to distract the officers of the bank from the principal business of banking. Furthermore in many small places the amount of insurance policies written . . . is not sufficient to take up the entire time of an insurance broker, and the bank is not therefore likely to trespass upon outside business naturally belonging to others.
"I think it would be unwise and therefore undesirable to confer this privilege generally upon banks in large cities where the legitimate business of banking affords ample scope for the energies of trained and expert bankers. I think it would be unfortunate if any movement should be made in the direction of placing the banks of the country in the category of department stores. . . ." Letter of June 8, 1916, to Senate, 53 Cong. Rec. 11001.
There is nothing in the history of the provision to indicate that Congress was more concerned with banks' actually receiving money than with their performing the activities that generated the money. In fact, the history that is available indicates that it is the activities themselves that Congress wished to stop. Banks in large communities were simply not permitted to do anything that insurance agents might do, i. e., they were not permitted to solicit insurance.
The Court seeks, however, to distinguish all of the prior cases holding that a taxpayer may be taxed on income illegally earned on the ground that the issue was never raised as to whether the taxpayers in those cases had actually received the income. The distinction is valid but it does not warrant a different result in this case.
The reasoning of the majority runs along these lines: if A violates the law - by attempted embezzlement or by illegally soliciting insurance sales, for example - but he receives no money and has no "legal right" to receive any money, then he cannot be taxed as if the money had been received; but, if A actually embezzles money or receives insurance premiums in violation of the law, A can be taxed even though he may have transferred the money without any personal gain to a third party from whom he has no right of recovery.
I would agree with this analysis in most cases. Where I differ from the Court is in which category to place this transaction. To pretend that respondents have not received any money and have no right to any money is to ignore the thrust of 482. That section requires that we treat this case as if the commissions had been paid to [405 U.S. 394, 416] respondents and had been transferred to the insurance subsidiary by them. Of course, that did not occur. But, we know that the whole notion of the section is to look behind the form in which a transaction is structured to its substance. The substance is either that the respondents violated federal law, earned illegal income, attempted to avoid taxation on the income by channeling it elsewhere, and were caught by the Commissioner; or, that they did not violate federal law by soliciting sales of insurance and that there is no legal bar to their receiving the proceeds from their sales. In either case, the result is the same, and respondents cannot prevail.
If respondents had actually received the proceeds and transferred them to the insurance subsidiary, they would still be free to make essentially the same argument that they make in this case, i. e., they could argue that federal law prohibited them from receiving the money; that they violated federal law, but had no right to keep the money; and that they should not be taxed on receipt of funds which they could not legally keep.
In my view, the Commissioner has done exactly what 482 requires him to do in this case. Accordingly, I [405 U.S. 394, 418] would reverse the decision of the Court of Appeals and would remand the case with a direction that judgment be entered for the petitioner.
[ Footnote 1 ] Neither the statute nor the regulations use the words "originating and referring" insurance. These are the words chosen by the Court to describe the respondents' activities, ante, at 405. The statute and regulations speak of "soliciting and selling." Because the respondents themselves argue that they would violate 92 and the regulations were they to receive the income generated by their activities, I assume that they, in effect, are admitting that these activities amounted to "soliciting and selling" insurance. Thus, [405 U.S. 394, 414] the Commissioner could properly determine that the statute was violated by the acts of solicitation, and, as the Court recognizes, since "the illegality involved was the act which gave rise to the income," this Court's prior decisions permit the Commissioner to tax the income of the lawbreakers.
If, however, the Court is attempting to distinguish sub silentio between "originating and referring" and "soliciting" and is concluding that only the latter is illegal, then there is nothing in the statute or regulations that would make illegal the receipt of income generated by the former. Hence, the Commissioner could reject the respondents' second argument that it would violate federal banking laws to include the proceeds in their income.
Whichever approach the Court selects, the statute requires consistency - i. e., the statute requires that the activities that produce income be illegal before the receipt of the income is deemed to violate the law.
I agree with the Court that deference must be paid to the expertise of the Comptroller, but in proposing that 92 be added to the already existing banking laws, Comptroller Williams himself noted that "[i]t is certainly clear that the Comptroller of the Currency has no right to authorize or permit a national bank to exercise powers not conferred upon it by law." Letter of June 8, 1916, supra.
Senator Owen, who shepherded the 1916 legislation through the Senate, noted at one point that 92 is not a very important part of the statute. 53 Cong. Rec. 11001. Perhaps, it is therefore unimportant whether or not the respondents have technically violated it. Whether or not the Comptroller has properly permitted such activities to take place may also be of no great moment.
What is critical to a correct disposition of this case, in my view, is that if respondents' activities are not illegal, there is no reason that receipt of the income generated from them should be illegal. It should be pointed out that the theory that receipt of said income would be illegal was first proffered by respondents' counsel. This theory is certainly self-serving in the sense that it provides what the Court regards as the dispositive factor in this case without hindering the activities of the holding company in any way.
"The Commissioner's allocation does not force respondents to violate the federal banking law. It was they, not the Commissioner, who chose to solicit and sell credit life insurance at a rate set at a sufficiently high level to permit the payment of commissions. If their activities did not violate the banking law, the Commissioner's allocation will not, of itself, constitute a violation on their part. And, surely, the payment of taxes would not be an illegal act."
Both sides dealt with this point in oral argument. Tr. of Oral Arg. 14-18, 30, 40.
This is the nub of the case. What is there in the legislative history or the purpose of 92 that requires that we treat the activities as legal, but the receipt of the income they generate as illegal?
[ Footnote 2 ] While the premiums from the insurance policies were not paid directly to the parent, there can be no doubt that the parent benefited from the financial success of its subsidiaries.
[ Footnote 3 ] We know that nontax statutes do not normally determine the tax consequences of a particular transaction. There is no inherent inconsistency in reading the banking legislation as making the receipt of insurance premiums illegal, and, at the same time, reading the Internal Revenue Code as allowing the Commissioner to allocate the income from the sale of insurance policies to the party actually earning it, so long as the income is received by the corporation controlling that party.
As I read the Court's opinion, I gain the impression that it chooses to link legality with taxability or, to put it better oppositely, that it ties illegality to receive with inability to tax. I find in the Internal Revenue Code no authority for the concoction of a restrictive connection of that kind. Because I think that the Commissioner's allocation of income here, under the auspices of 482 of the 1954 Code, and in the light of the established facts, was proper, I dissent.
1. Section 482 1 surely contemplates taxation of income without formal receipt of that income. That, indeed, is the scope and purport of the statute. It is directed at income distortion by a controlling interest among two or more of the controlled entities. I, therefore, am not convinced that the fact the income in question here did not flow through the Banks at any time - because it was deemed proscribed by the 1916 Act (if the pertinent portion thereof, 39 Stat. 753, is still in effect, a proposition which may not be free from doubt), 2 and because the [405 U.S. 394, 419] controlling interest routed it elsewhere - serves, in and of itself, to deny the efficacy of the statute.
2. Section 482 has a double purpose and a double target. It authorizes the Secretary or his delegate, that is, the Commissioner, to allocate whenever he determines it necessary so to do in order (a) "to prevent evasion of taxes" or (b) "clearly to reflect the income of any" of the controlled entities. The use of the statute, therefore, is not restricted to the intentional tax evasion. No evasion of tax, in the criminal sense, by these Banks is specifically suggested or at issue here. And I do not subscribe to my Brother MARSHALL'S intimation that what the Banks were doing was otherwise illegal. The second alternative of the statute, however, is directed at something other than tax evasion or illegality. It is concerned with the proper reflection of income (or deductions, credits, or allowances) so as to place the controlled taxpayer on a tax parity with the uncontrolled taxpayer. It is designed to produce for tax purposes, and to recognize, economic realities and to have the tax consequences follow those realities and not some structured nonreality. This is the aspect of the statute with which the Commissioner and these respondents are here concerned. Thus, legality and illegality seem to me to be beside the point.
3. From this it follows that the Court's repetitive emphasis on the missing 92 and the inability of these Banks legally to receive the insurance commissions give undue emphasis to the first alternative of 482, and seem almost wholly to ignore the second.
4. The purpose of the controlling interest in structuring the several entities it controls is apparent and cannot [405 U.S. 394, 420] be concealed. The Banks were wholly owned subsidiaries of Holding Company. The Tax Court found - and the respondents concede 3 - that one of the purposes of the Banks' arranging for borrowers' credit life insurance 4 was "to provide an additional source of income - part of the premiums from the insurance - to Holding Company or its subsidiaries." T. C. Memo 1967-256, p. 67-1453. For me, that means to provide an additional source of income for the group irrespective of the particular pocket into which that income might initially be routed.
(b) In 1954 the American National-Security Life arrangement appeared on the scene. This was prompted by the blossoming of the credit insurance business as a profitable undertaking. Obviously, it was a matter of concern to established and independent insurance companies when they came to realize that lending institutions were in a position to form their own insurance affiliates [405 U.S. 394, 421] to tap and drain away profits that the independents theretofore had received without hindrance. Security Life was just such an emerging insurance affiliate of Holding Company and of Management Company. But American National, by its proposal to Management Company, as well as to other financial institutions, salvaged 15% of the premium dollar in return for actuarial and accounting services. Security Life never did develop into a full-line insurance company; it remained essentially a re-insurer and yet it accomplished the purpose for which it was given life. Now no sales commissions needed to be paid. In fact, none were paid; they just disappeared, and that erstwhile cost remained as profit in Security Life. But the Banks, as before, solicited their borrowing customers to purchase credit life insurance.
(c) The Life Insurance Company Tax Act for 1955 was enacted, 70 Stat. 36, followed by the Life Insurance Company Income Tax Act of 1959, 73 Stat. 112. These statutes served to accord preferential tax treatment - as compared to ordinary corporations - to life insurance companies. See United States v. Atlas Life Ins. Co., 381 U.S. 233 (1965). This happily coincided, of course, with Security Life's development.
6. Only the Banks were the responsible force behind the premium income. No one else was. Certainly American National was not. Certainly Security Life was not. Smith was out of the picture. And if it can be said that Management Company or Holding Company contributed a part, they did so only secondarily. It was the participating bank that explained to the borrower the function and availability of the insurance; that gave the customer the application form; that examined the application; that prepared the certificate of insurance; that collected the premium or added it to the loan; and that sent the form and the premium to Management Company. It was the participating bank that thus [405 U.S. 394, 422] offered and sold on behalf of a life insurance company under common control with the bank. It was the participating bank, in short, that did what was necessary, and all that was necessary, to sell the insurance. Clearly, services were rendered by that bank on behalf of its commonly controlled affiliate. Just as clearly, those services would have been compensated had the corporations been dealing with each other at arm's length.
7. It is no answer to say that generation of income does not necessarily lead to taxation of the generator; here the earnings themselves stayed within the corporate structure dominated by Holding Company, and did not pass elsewhere with consequent tax impact elsewhere. I do not so easily differentiate, as does the Court, ante, at 401 n. 11, between referral outside the affiliated structure and referral conveniently within that structure to a re-insurance company that could be taxed on the premium income (unreduced by commissions) at advantageous tax rates.
8. That the selling effort of the Banks seems comparatively minimal and that the processing cost seems comparatively negligible are, I believe, beside the point and quite irrelevant. No one else devoted effort or incurred cost of any significance whatsoever. Taxability has never depended on approximating expenses to receipts; in fact, the less the cost, the greater the net income and the greater the tax burden.
10. Taxability, despite nonreceipt, is common in our tax law. It is present in a variety of contexts. For example, one has been held taxable, under the applicable statute's general definition of gross income, for income or earnings assigned to another and never received; 6 for the income from bond coupons, maturing in the future, assigned to another and never received; 7 for dividends paid to the shareholders of a transferor corporation pursuant to a lease with no defeasance clause; 8 for another's income from a short-term trust 9 (until 673, with its 10-year measure, came into the tax structure with the 1954 Code); for the employer's payment of income taxes on his employees' compensation; 10 and for an irrevocable trust's income used to pay insurance premiums on the settlor's life, 11 or, in the absence of particular state law provisions, distributed to a divorced wife in lieu of alimony 12 (until 215 came into the Code with the Revenue Act of 1942, 56 Stat. 817).
11. In the area of federal estate taxation an obvious parallel is found in the many instances of includability in the decedent's gross estate of property not owned or possessed by the decedent at his death. The Code itself provides for the inclusion of transfers theretofore effectively [405 U.S. 394, 424] made, but in contemplation of death, 26 U.S.C. 2035; of a variety of inter vivos irrevocable transfers in trust, 26 U.S.C. 2036-2038; and of joint interests, 26 U.S.C. 2040, in all of which situations the ownership interest at death was nonexistent or less than full.
15. I doubt if there is much comfort for the Court in L. E. Shunk Latex Products, Inc., 18 T. C. 940 (1952), for there the significant fact was that the taxpayer could not have raised its price even to a noncontrolled distributor.
In conclusion, I note that the Court of Appeals remanded Management Company's case to the Tax Court for consideration of the 482 allocation, alternatively proposed, to that corporation. With this I must be content. At least Management Company is not a national bank, and the barrier that the Court has found in the missing 92 supposedly does not provide a protective coating for Management Company or, for that matter, for Holding Company.
And so it is. The result of today's decision may not be too important, for it affects only a few taxpayers. It seems to me, however, that it effectively dulls one edge of what has been a sharp two-edged tool fashioned and bestowed by the Congress upon the Internal Revenue Service for the effective enforcement of our federal tax laws.
[ Footnote 1 ] Section 482 is not new. It appeared as 45 of the Revenue Act of 1928, 45 Stat. 806, and has predecessors in 240 (f) of the Revenue Act of 1926, 44 Stat. 46, and in 240 (d) of the Revenue Act of 1924, 43 Stat. 288.
[ Footnote 2 ] The revisers of the United States Code in 1952 omitted the section because of the possibility of its having been repealed by its omission from the amendment and re-enactment in 1918 of 5202 of the Revised Statutes by 20 of the War Finance Corporation Act, 40 Stat. 512. Compare administrative ruling No. 7110 of the Comptroller of the Currency with the Comptroller's current regulations, 12 CFR 2.1-2.5. See Saxon v. Georgia Association of Independent Insurance Agents, Inc., 399 F.2d 1010 (CA5 1968); Commissioner [405 U.S. 394, 419] v. Morris Trust, 367 F.2d 794, 795 (CA4 1966); Hackley, Our Baffling Banking System, pt. 2, 52 Va. L. Rev. 771, 777-779 (1966). United States Code Annotated carries the provision as 92 of its Title 12.
[ Footnote 3 ] Brief for Respondents 2.
[ Footnote 4 ] I use this and other terms as they have been defined in the Court's opinion.
[ Footnote 5 ] Despite this payment to Smith, it was not Smith, but Management Company, that reported the commissions as taxable income. This reveals the fluidity of control of the structure. Of course, the fact that the Commissioner did not allocate the premiums to the Banks during this period is of small, if any, significance, for, as the Court points out, ante, at 397-398, n. 2, the then tax rate for each of the corporate entities was likely the same. The Government thus would lose nothing by not allocating.
[ Footnote 6 ] Harrison v. Schaffner, 312 U.S. 579 (1941); Helvering v. Eubank, 311 U.S. 122 (1940); Burnet v. Leininger, 285 U.S. 136 (1932); Lucas v. Earl, 281 U.S. 111 (1930). Cf. Hoeper v. Tax Comm'n, 284 U.S. 206 (1931); Blair v. Commissioner, 300 U.S. 5 (1937). See Commissioner v. Sunnen, 333 U.S. 591, 604 -610 (1948); United States v. Mitchell, 403 U.S. 190 (1971).
[ Footnote 7 ] Helvering v. Horst, 311 U.S. 112 (1940).
[ Footnote 8 ] United States v. Joliet & Chicago R. Co., 315 U.S. 44 (1942).
[ Footnote 9 ] Helvering v. Clifford, 309 U.S. 331 (1940).
[ Footnote 10 ] Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929).
[ Footnote 11 ] Burnet v. Wells, 289 U.S. 670 (1933).
[ Footnote 12 ] Douglas v. Willcuts, 296 U.S. 1 (1935); Helvering v. Fitch, 309 U.S. 149 (1940); see Commissioner v. Lester, 366 U.S. 299 (1961).
[ Footnote 13 ] ". . . But the net income for 1924 was paid over to the petitioner's wife and the petitioner's argument is that however it might have been in different circumstances the income never was his and he cannot be taxed for it. The legal estate was in the trustee and the equitable interest in the wife.
"But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed - the actual benefit for which the tax is paid. . . ." 281 U.S., at 377 -378.
"There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. . . ." Lucas v. Earl. 281 U.S. 111, 114 -115 (1930).

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So here are my questions: What are the sleep modes and what do they do? What interrupt vector(s) are available and how do I enable them?
In the datasheet, §7 covers the sleep modes. Right at the top, Table 7-1 summarizes which clocks and oscillators are active, and how the device can be awaken from each of the three supported sleep modes. Looking at §7.1.1-3, the lowest power consumption sleep mode looks like “Power Down Mode” (no surprise), and once in that state it can be awoken by an external interrupt (i.e. a level change on a pin) or through the Watchdog Timer.
Looking at §8.4, the Watchdog timer (WDT) is a separately clocked counter/timer system, capable of generating interrupts which we can use to bring the device out of the Power Down sleep mode. §8.5.2 details the WDT’s register, and in particular Table 8-2 lists how to alter the length of the WDT’s time period.
We’ve sen that there’s a way to put the device to sleep, and a way to periodically wake it up. Last time our LED flasher toggled its LED state each time a timer-based interrupt was generated. Let’s do the same thing, except put the device to sleep once the LED state has been toggled. Hopefully this will reduce the power consumption overall, but mainly during the “off” part of the cycle.
We need to adjust the timer setup and interrupt we’re using, and add the power mode change. Working on the timer part first, we remove all references to Timer0, and replace them with set up for the WDT. Having read through §8.5.2 it’s clear that operating the WDT is very similar to Timer/Counter0. Setting the WDTIE bit enables WDT interrupts, and combinations of WDP3, WDP2, WDP1, and WDP0 adjust the prescaling and thus the WDT’s period. Looking at Table 8-2, setting WDP2 and WDP0 gives a 0.5s timer period.
To wrap up replacing the older timer code, we also need to change the interrupt vector we’re using. The documentation for interrupt.h shows that this is called WDT_vect.
Finally, because we can prescale the timer this low, we can also dispense with our old overflow counter.
If you set up the circuit and program this into the ATtiny13, the LED should flash on and off with a period of ~1 second, as you would expect. It might be interesting top find out what kind of power savings the sleep modes might give us, so before we add the sleep code let’s measure current drain right now. To make measurements a little easier slow down the flash rate by setting the prescaler to 4 seconds – WDTCR |= (1<<WDP3); – then set your multimeter to measure current and put in the main power loop somewhere. For me the most convenient way was to break the connection between VCC on the ISP breakout and pin 8 on the ATtiny, and insert the ammeter there. I measured 50mA on the mark (whilst the LED was on), and 2.3mA on the space.
is all there is to it. But what parameter do we pass to set_sleep_mode to enable Power Down Mode? Since it’s not in this page of the documentation, if you take a look at the code for the header file itself, at line 253 there’s a #define for SLEEP_MODE_PWR_DOWN that’s applicable to ATtiny13s.
Plugging in the ammeter again shows 47mA on the mark and 7µA on the space. These readings (and the previous set) are definitely within range of the typical DC characteristics shown in Table 18-1 in the datasheet. If you were using a CR1632 lithium coin cell rated at 125mAh, using the power down mode might increase battery life from 2.4h to 2.6h. Ok, that’s not fantastic but the huge majority of electron juice is used by the LED. If your circuit was a little more complex and had longer periods of inactivity, using the power down saves you a lot of power. If our LED were on for 1/10th of the time it were off, the battery duration change goes from an increase of 8% with the sleep code to an increase of 55%, which seems well worth it to me.
For more ways to reduce power consumption, read §7.4 in the datasheet.
Jumptuck’s LED Menorah is a real-world example of using the sleep modes to reduce power consumption – in that case it’s to reduce power whilst the device is “off”.
Go back to part 1 or part 2.

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The Colorado Court of Appeals issued its opinion in People v. Senette on Thursday, July 26, 2018.
Criminal Law—Witness—Subpoena—Motion for Continuance—Bench Warrant.
The prosecution charged defendant with aggravated robbery and menacing against a single victim, M.T. When M.T., who was a necessary witness and was under subpoena, did not appear at trial, the prosecution requested that the trial court issue a bench warrant and grant a brief continuance to secure the M.T.’s attendance. The trial court denied both requests and, at defendant’s request, dismissed the charges.
On appeal, the People argued that the trial court erred by denying its motion for a continuance and dismissing the case. The trial court abused its discretion in denying the continuance because it (1) misapplied the law regarding the issuance of a bench warrant as a remedy to procure the attendance of a missing witness, and (2) failed to consider the factors relevant to the prosecutor’s motion to continue. Those factors included whether the prosecutor was diligent in securing the witness’s attendance, whether a continuance would be effective in securing the witness’s attendance, and the prejudice that a continuance would cause both parties.
The People also contended that the trial court erred in dismissing the charges after denying the continuance. Because the trial court erred in denying the motion for continuance, and the dismissal of the charges was a direct result of that erroneous decision, the trial court erred in dismissing the case.
The Colorado Supreme Court issued its opinion in People v. Ehrnstein on Monday, May 21, 2018.
Special Prosecutors—Colo. RPC 3.7—Post-Trial Proceedings.
In this interlocutory appeal, the supreme court reviewed the trial court’s order appointing a special prosecutor for the purpose of litigating defendant’s post-trial motion for a new trial. In his motion, defendant alleged that the prosecution had improperly instructed a witness to evade a defense subpoena. The trial court concluded that the Colorado Rules of Professional Conduct compelled it to appoint a special prosecutor for the purposes of the hearing on this motion because, subject to exceptions not pertinent here, Colo. RPC 3.7 prohibits an attorney from acting as both an advocate and a witness during the same proceeding.
The court concluded that the trial court abused its discretion in appointing a special prosecutor because that court misapplied the law when it found that Colo. RPC 3.7 required the appointment of a special prosecutor in the circumstances present here. Specifically, the rule serves to prevent prejudice that arises from jury confusion in cases in which an attorney serves as both counsel and witness. Because this proceeding arose in the context of a post-trial motion, that concern is not implicated.
The court reversed the trial court’s order and remanded this case for further proceedings.
The Colorado Court of Appeals issued its opinion in People v. Short on Thursday, April 5, 2018.
Sexual Assault on Child—Testimony—Credibility—Rule of Completeness—Exculpatory Statement—Hearsay Exceptions—Sentence.
A jury found Short guilty of sexual assault on a child and sexual assault on a child as a pattern of abuse.
On appeal, Short contended that the testimony of three witnesses improperly bolstered the victim’s credibility. Short did not object to any of this testimony. It was not improper for the therapist to testify as an expert as to the typical demeanor and behavioral traits displayed by a sexually abused child. It was also not improper for the detective to testify concerning his observations about child victim disclosures; he rendered no opinion about whether a child’s difficulty in disclosing something made it more or less likely that he or she was telling the truth. Finally, although the grandmother’s testimony that the victim “normally would not lie about something like that” was improper, it did not warrant reversal.
Short also argued that the trial court erroneously compelled him to forgo admitting an exculpatory part of a statement he gave to the police by telling him that, if that part of the statement was admitted, the prosecution would be permitted to expose the jury to the fact that he had previously been convicted of a felony. The trial court properly determined that Short’s otherwise inadmissible self-serving hearsay was admissible under the rule of completeness to qualify, explain, or place into context the evidence proffered by the prosecution. However, a defendant’s exculpatory statement to the police admissible under the rule of completeness is not subject to impeachment under CRE 806. Although the trial court erred, the error was harmless.
Short also contended and the People conceded that only one judgment of conviction and sentence should have been imposed in this case. The trial court incorrectly entered separate convictions for sexual assault on a child and sexual assault on a child as a pattern of abuse. The pattern of abuse count acts only as a sentence enhancer.
The judgment was affirmed in part and vacated in part, and the case was remanded with directions.
The Colorado Court of Appeals issued its opinion in McGillis Investment Company, LLP v. First Interstate Financial Utah, LLC on Thursday, August 13, 2015.
Fifth Amendment Privilege Invoked in Front of Jury by Nonparty—Adverse Inference Instruction.
McGillis Investment Company, LLP’s (MIC) principal, McGillis, and First Interstate Financial Utah, LLC’s and First Interstate Financial LLP’s (FIF) principal, Thurston, worked to finance a multitude of commercial real estate loans between 1995 and 2009. This dispute concerns a 2003 loan made by MIC and FIF to Kersey Commercial Park, LLC (Kersey Commercial) for $1.85 million (Kersey Loan) to purchase sixty-three acres of property to develop an industrial park (Kersey Property). When Thurston recommended that MIC finance the Kersey Loan, MIC did not know that the purchasers were involved in a series of transactions of questionable legitimacy surrounding the Kersey Property.
Kersey Commercial never made a payment on the Kersey Loan and was in default by May 2004. Thurston, on behalf of MIC and FIF, executed a Dry-Up Agreement on July 29, 2004, which sold certain Water Rights of the Kersey Property to Lower Latham Reservoir Company in return for a payment of $785,000 to one of the developers. In October 2004, MIC and FIF commenced foreclosure proceedings and on May 12, 2005 purchased the Kersey Property at foreclosure for $1.6 million. On June 6, 2006, FIF sued the appraisers. On November 8, 2006, Thurston had MIC execute an assignment of the Property (Assignment) from McGillis Investments to FIF (though the purpose of the Assignment is disputed). In 2012, FIF settled the appraiser litigation for $438,500 and remitted the proceeds to MIC.
In February 2009, FIF sued Sytech Development (one of the developers) over the Kersey Loan. After McGillis’s son took over MIC in 2008, he concluded that FIF had breached its fiduciary duty to MIC in a variety of transactions, and in April 2009, MIC filed suit in Utah against FIF. In October 2012, the jury returned a verdict in MIC’s favor for $1.25 million. Three days after the Utah verdict, FIF recorded the Assignment with the Weld County Clerk and Recorder. FIF settled the Sytech litigation on November 17, 2012 for $20,000.
On June 1, 2011, MIC filed this lawsuit against FIF, seeking to quiet title to the Kersey Property and damages for breach of fiduciary duty for FIF’s recording the Assignment and settling the Sytech litigation. On cross-motions for summary judgment, the trial court granted partial summary judgment based on claim preclusion in favor of FIF as concerned the validity of the Assignment and quieted title to the Kersey Property in FIF. MIC appealed, and a division of the Court of Appeals affirmed in part and reversed in part, vacating the decree quieting title and reversing the summary judgment on claim preclusion. Following trial on remand, the jury returned a verdict for MIC for $1,300,625 and found that MIC owned the Kersey Property.
In this appeal, FIF argued that the trial court did not follow the Court’s mandate on remand by failing to determine whether MIC knew or should have known of the Assignment’s validity when it filed the Utah action and that it was error to allow the Sysum brothers to invoke their Fifth Amendment privilege against self-incrimination in front of the jury and in giving an adverse inference instruction. In civil cases, an adverse inference may be drawn against a party who invokes the Fifth Amendment privilege against self-incrimination. The Court found no Colorado case addressing whether a nonparty witness’s invocation of the Fifth Amendment privilege constitutes admissible evidence. It adopted the analysis set forth in LiButti v. United States, 107 F.3d 110, 123 (2d Cir. 1997): the admissibility of a nonparty’s invocation of the Fifth Amendment privilege and concomitant drawing of adverse inferences should be considered on a case-by-case basis to ensure any inference is reliable, relevant, and fairly advanced. The overarching concern is whether the adverse inference is trustworthy and will advance the search for the truth.
Based on the record before it, the Court found no error in the trial court’s having decided that one of the brothers could answer a generic question, to which he invoked his Fifth Amendment right, and that there was enough evidence presented to give the adverse inference instruction as to him. The Court found it was error to allow the other brother to invoke his Fifth Amendment privilege because there wasn’t enough evidence to involve him in the alleged fraud. However, the trial court remedied this error when it did not give the adverse inference instruction as to this brother but told the jury to disregard his invocation of the privilege.
FIF also argued that it was error for the trial court not to have determined whether MIC knew or should have known there was a dispute concerning the Assignment’s validity when it filed the Utah action. The jury did consider this issue, but FIF argued it should have been the trial court that made the determination. The Court disagreed. The law of the case established in MIC I was to determine what MIC knew or should have known and there was an interrogatory to the jury that covered this issue. The jury’s answering of the interrogatory resolved the factual dispute dispositive of claim preclusion against FIF and that satisfied the law of the case.
The Court also rejected FIF’s arguments that MIC could not re-litigate anything concerning the Kersey Loan transaction other than the issue concerning the validity of the Assignment and the settlement of the Sytech litigation. The Court determined that this argument was based on a fundamental misunderstanding of the prior ruling in MIC I on the part of FIF. The judgment was affirmed.
The Tenth Circuit Court of Appeals issued its opinion in United States v. Dewberry on Tuesday, June 23, 2015.
During an investigation of Virok Webb for crack cocaine distribution, the government became suspicious of Kennin Dewberry as Webb’s dealer. Some time in 2009 or 2010, Dewberry began supplying between 4.5 and 9 ounces of cocaine powder weekly to Webb, and Webb would convert the powder to crack cocaine or cut it with other ingredients (a process known as “the trick”) to double the quantity of powder. In October 2011 a grand jury issued a superseding indictment charging Dewberry, Webb, and others with two drug conspiracies: Count 1 charged them with conspiring to distribute 280 grams or more of crack cocaine and Count 2 charged them with conspiring to distribute 5 kilograms or more of powder cocaine. The government also filed an information stating that Dewberry had a prior felony marijuana conviction.
Dewberry filed a motion to sever his trial in March 2012, which the trial court denied as premature. He filed another motion to sever in February 2013, which the trial court granted. Dewberry’s trial was held in July 2013, and the government’s case was built almost entirely on the testimony of cooperating witnesses. All of the witnesses entered into plea agreements with the government. Dewberry moved for judgment of acquittal under F.R.Crim.P. 29 at the close of the government’s case and again at the close of his case, but the trial court denied both motions. The jury convicted Dewberry of both counts, and also issued special verdicts pertaining to the amount of drugs and finding he conspired to distribute 280 grams or more of crack cocaine and 5 kilograms or more of powder cocaine. In the PSR, the probation office recommended Dewberry be held accountable for 4.5 ounces of cocaine per week for a 21-week period, and of that he should be accountable for conversion of 2.5 ounces to crack cocaine. The remaining 2 ounces per week was doubled by employing “the trick,” and together these drug amounts equated to a base offense level of 34, which would lead to a presumptive sentencing range of 168 to 210 months, but Dewberry faced a mandatory minimum 20 year sentence because of his prior felony conviction. The district court adopted the PSR’s findings, sentencing Dewberry to concurrent sentences of 240 months for Count 1 and 168 months for Count 2. Dewberry appealed his convictions and sentence.
The Tenth Circuit first evaluated Dewberry’s sufficiency challenges to both counts. Dewberry asserted the government’s evidence was insufficient because it relied on cooperating witnesses who were not reliable and whose testimony was uncorroborated. The Tenth Circuit first noted that it would not reverse a conviction solely because the verdict was based on the uncorroborated testimony of a coconspirator. The Tenth Circuit similarly noted that credibility challenges are generally disfavored and found no reason to entertain Dewberry’s. Although Dewberry asserted the witness testimony was self-serving because they were offered plea deals, the Tenth Circuit found such arrangements common in criminal cases and the arrangement does not necessarily render the testimony incredible.
The Tenth Circuit next considered Dewberry’s challenges to the sufficiency of the evidence concerning the amount of crack cocaine. The jury must have based its finding of 280 grams of crack cocaine on reasonable foreseeability because there was no evidence that Dewberry handled that much. Dewberry contended that the quantity could not have been reasonably foreseeable to him. The Tenth Circuit disagreed, finding sufficient evidence to support the jury’s finding. The Tenth Circuit affirmed the conviction and 240-month sentence.
The Tenth Circuit considered Dewberry’s challenge to the amount of powder cocaine for which he was held responsible. Dewberry argued the amount of crack cocaine attributed to him was incorrect, which affected the amount of powder cocaine. The Tenth Circuit affirmed the district court’s finding, noting that because it made a plausible finding it was not clearly erroneous.
Finally, Dewberry argued the court erred in denying his first motion to sever and causing him to experience undue delays waiting for trial. The Tenth Circuit disagreed, finding Dewberry could show no prejudice since the trial court granted his second motion to sever and finding the issue of Speedy Trial Act delays inadequately briefed.
The convictions and sentences were affirmed.
The Colorado Court of Appeals issued its opinion in People v. Vigil on Thursday, July 2, 2015.
Challenge for Cause—Burglary—Simple Variance—Unanimity Instruction—Lay Witness—Footprint Evidence.
A jury convicted Vigil of second-degree aggravated motor vehicle theft and second-degree burglary for taking a truck, motorcycle, flat-screen television, DVD player, and stereo from Casey Caldon’s farm. On appeal, Vigil contended that the trial court reversibly erred when it denied his challenge for cause to juror C.A. Although C.A. had performed electrical work for the Caldons over a number of years, he did not exhibit any bias and his statements indicated he could render an impartial verdict. Therefore, the trial court did not err in denying Vigil’s challenge for cause as to this juror. Vigil also claimed that the court erred in granting the prosecutor’s challenge for cause to prospective juror D.K. because that juror might have voted to acquit him. Here, Vigil’s claim failed because a defendant is not entitled to have any particular juror serve in his or her case.
Vigil also asserted that the prosecutor’s closing argument impermissibly expanded the second-degree burglary charge to include burglary of the “lean-to” (a shed up against a shop on the farm). In the bill of particulars, the prosecutor alleged that Vigil burglarized three structures: the trailer, the north shop, and the tractor. In closing argument, the prosecutor alleged that Vigil entered the lean-to to steal the truck. Therefore, a simple variance occurred. Because Vigil did not suffer prejudice from the simple variance, however, reversal was not warranted.
Vigil further argued that the trial court reversibly erred by not giving a modified unanimity instruction regarding the burglary count. Where the incidents occurred in a single transaction, such as here, the prosecutor need not elect among acts, and the trial court need not give a modified unanimity instruction. Therefore, the trial court did not err by not giving the modified unanimity instruction to the jury.
Vigil argued that the trial court erred by permitting Sergeant Crown, a lay witness, to testify about shoeprint evidence and by not excluding the shoeprint evidence for failing to disclose a Colorado Bureau of Investigation (CBI) report indicating that its analysis of the shoeprint evidence was inconclusive. Crown’s testimony was based on general measurements and peculiarities common to the shoeprints and Vigil’s shoes that were readily recognizable to a lay witness. Accordingly, the trial court’s finding that Crown’s testimony did not constitute expert opinion was not manifestly unreasonable, arbitrary, or unfair. Finally, the discovery violation did not result in reversible error because the content of the CBI report was presented through Crown’s testimony. The judgment was affirmed.

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