Tax Legal Services · Primary-source case analysis

First Security Bank: Section 482 Could Not Allocate Income the Banks Were Legally Barred From Receiving

By Aneeta Mishra and Timothy Chan

Published September 4, 2026 · Updated October 29, 2026

Decision: Comm’r v. First Sec. Bank of Utah, 405 U.S. 394 (1972).

Commissioner v. First Security Bank of Utah, decided by the Supreme Court on March 21, 1972, involved affiliated banks that arranged credit-life insurance for borrowers while a nonbank affiliate reported the reinsurance premiums. The question was whether the IRS could allocate part of those premiums to banks that had not received them and were treated as legally unable to receive them.

The group separated banking and insurance functions

Banks helped borrowers obtain insurance, but a separate insurer assumed the risks and retained 85 percent of the premiums. The Court described a genuine operating insurance company, not merely a paper entity. First Security Bank, 405 U.S. at 396–399.

The Commissioner allocated forty percent to the banks

The allocation treated part of the insurer’s premiums as commission income earned for originating and processing insurance.

Banking law prohibited receipt of commissions

The government did not contest the premise that the banks were barred from receiving the insurance income, so the Court assumed that prohibition for its decision. Common ownership did not give the holding company lawful power to force a bank to receive prohibited income. First Security Bank, 405 U.S. at 402–405.

The appellate judgment was affirmed

The Court affirmed the Tenth Circuit’s rejection of the allocation to the banks. It did not decide the Commissioner’s alternative allocation to the management company, which remained outside the question before it. This was a ruling on the particular legal restriction and allocation. First Security Bank, 405 U.S. at 400 n.7, 407.

Two dissents challenged the focus on the banks’ inability to receive commissions. Justice Marshall argued that section 482 reached income the banks earned and the holding company directed to an affiliate; he also disputed separating lawful insurance activity from allegedly unlawful receipt of its proceeds. Justice Blackmun, joined by Justice White, stressed a different point: Section 482 could correct distorted income without a finding of illegality or criminal tax evasion. He emphasized that the banks performed the services generating premiums retained within the controlled group. Both dissents would have sustained the allocation to the banks, while the majority applied the assumed banking-law restriction. First Security Bank, 405 U.S. at 407–426 (dissenting opinions).

Key takeaways

• Map functions, risks, and income across affiliates.
• Identify legal restrictions on each entity.
• Document contracts and actual payment flows.
• Apply the regulations governing the actual transaction and tax year. The current Treasury regulation separately addresses foreign legal restrictions in section 1.482-1(h)(2); do not treat that provision as a general exemption for every legal constraint.