Before DUFFY and KILEY, Circuit Judges, and PLATT, District Judge.
The Tax Court in a consolidated opinion determined deficiencies in income tax against the seven separate petitioners.
Each petitioner*fn2 is an Indiana corporation licensed to engage in the small loan business in Indiana,*fn3 and each corporation succeeded to a small loan business previously conducted by a partnership. The stock of six of the corporations is owned equally by two brothers, John G. and George O. Nichols. Fifty percent of the stock in the remaining Clinton corporation is owned by their father, William, and twenty-five percent is owned by each brother. George Nichols is the president of six of the corporations, and William is the president of the Clinton business.
During the years in question, approximately ninety percent of the customers of the several Nichols' small loan businesses took out "credit insurance"*fn4 at the time they borrowed money. William and George Nichols, and several of their office managers, were duly appointed agents of Old Republic Life Insurance Company; all were licensed to sell insurance in Indiana. When the customers borrowed money, Nichols' employees filled out the insurance forms, deducted the premiums from the amount borrowed, and paid the net proceeds of the loan to the borrower. Each of the corporations kept the premium income separate from other funds and, periodically, forwarded it to George Nichols. He then paid the premiums, less commissions thereon, to Old Republic. There is no question here of the tax treatment of that commission income to George Nichols and other members of the Nichols family.
The Commissioner advised petitioners that, so far as pertinent here,*fn5 deductions claimed by them as business expenses in the credit insurance activity were disallowed.In their petition to the Tax Court, petitioners claimed that their "credit insurance" activity was beneficial to their small loan business, stabilized them in competition and justified the small expense they incurred in accommodating the Old Republic agents in their offices.
The Tax Court held that the small loan businesses could not deduct any expenses attributable to the credit insurance business.*fn6 The question is whether the Tax Court erred in its conclusion, on the undisputed evidence, that petitioner corporations were not entitled to deduct the credit insurance expenses as "ordinary and necessary expenses" of the small loan business, pursuant to § 162(a) of the Internal Revenue Code of 1954.*fn7
It is not disputed that under Indiana law petitioners could not themselves be insurance agents*fn8 and were prohibited from receiving from borrowers any other charge in addition to the rate of interest and charges authorized under the Small Loans Act of Indiana.*fn9
The testimony is uncontroverted that petitioners' competitors in this highly competitive field furnished credit insurance to customers. There is testimony, too, to the effect that the petitioners' officers made a business judgment that it was beneficial for petitioners to offer these facilities free of charge to the insurance business in order reasonably to meet competition.
The Tax Court found on the testimony that "the availability of credit insurance for customers was advantageous to the petitioner corporations," being convenient for the customers to have "onestop" service for borrowing and for insurance which customers expected to have available, and also advantageous in reducing petitioners' risks of bad debt losses. These findings are not challenged.
There was also evidence that the actual cost of sales of credit insurance was insignificant, that most of the customers wanted and asked for credit insurance, and that the clerical work involved amounted to very little.*fn10
We think that the undisputed testimony and findings support petitioners' arguments that the cost of providing credit insurance was insignificant, that customers wanted credit insurance and competition demanded it, and, therefore, that the business judgment in making credit insurance available was sound.
There are separate taxable entities involved here: the petitioner corporations, and the individual members of the Nichols family receiving insurance commissions. It is irrelevant that there is a common interest because the separate entities may lawfully resort to any available legal methods to diminish their tax liabilities, and that without ...