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1968 News for Corp. Counsel 1 (1968)

handle is hein.barjournals/nwsccptc1968 and id is 1 raw text is: No. 21, March, 1968 CPURA T AXES R~ienamental issue involved was whether or not the fraudulent intentions of the 50% stockholder, offi- cer and director to evade payment of corporate income taxes by diverting funds to his own use may be attrib- uted to the corporation. The Court in Asphalt Indus- tries, Inc. v. Commissioner of Internal Revenue, 384 F.2d 229, (C.A. 3rd Cir. 1967) held, for the purposes of imposing fraud penalties and assessments beyond the three year limitation, that the corporation was not chargeable with the officer's fraudulent suppression of accounting records and his embezzlement of corporate funds notwithstanding such officer dominated corporate affairs and intended to avoid payment of the corporate income taxes. * * * As the states search for additional revenues, the New Jersey Supreme Court, following the trend of recent cases, has, in Roadway Express, Inc. v. Division of Taxation 236 A.2d 577 (December 18, 1967), upheld the constitutionality of the New Jersey franchise tax as applied to an exclusively interstate business even though it is denominated a franchise tax. NO CRYING OVER SPILLED MILK In Co-op Dairy, Inc. v. Dean, 435 P. 2d 470 (De- cember 14, 1967), the Arizona Supreme Court refused to apply the Statute of Frauds to an oral employment contract and declared the Statute of Frauds is an ana- chronism in modern life and we are not disposed to expand its destructive force. In so holding the court enforced the agreement on behalf of a former dairy employee. GROUP INSURANCE Three recent California Supreme Court cases on em- ployee group insurance, Elfstrom v. New York Life Ins. Co.; Walker v. Occidental Life Ins. Co.; and Humphrey v. Equitable Life Assurance Society, 63 Cal. Rptr. at pages 35, 45, and 50 (October 26, 1967), decided in the affirmative the difficult questions of: (a) Is the employer, who is the named insured under a group life insurance policy for the benefit of its employees, the agent of the insurer or not?; (b) Is the employee's at- tempted exercise of a conversion privilege on group life insurance where the policy requires the exercise to be made within 31 days after termination of employment valid where failure to exercise is based on the employer's failure to specifically notify the employee of the effec- tive date of termination of employment?; (c) Is the insurer bound by the terms of the certificate issued to the employee even though the certificate states that the master policy between the insurer and employer is the only effective contract?; and, (d) Is the employee en- titled to the full disability benefits even though the employee retires during the first year of disability? WASTING CORPORATE ASSETS A suit has been filed by two shareholders of U.S. Steel Corporation charging the directors with squander- ing, mismanaging and wasting corporate assets by waiv- ing a tax exemption on machinery enacted by the Penn- sylvania legislature. The suit charges that the directors, present and past, overpaid local Pennsylvania property taxes to the tune of $29 million since 1958. U. S. Steel and several other large Pittsburgh taxpayers voluntarily agreed to continue paying taxes on machinery taxed in 1958 to avert drastic reductions in tax revenues of cer- tain communities and to assure passage of the exemption legislation and its application to future installations, thereby encouraging industrial expansion of long range benefit to the businesses and communities alike. ANOTHER PROPOSED SEC RULE The SEC has proposed a new Securities Exchange Act Rule 10(b)10, which may have substantial impact on the traditional structure of the securities market- place. Because there is no commission rate discount on large volume purchases, members of the Exchange will commonly give-up portions of these commissions to other broker-dealers at the request of an economically influential customer (typically an investment company). These give-ups are said to reward broker-dealers for the sale of mutual fund shares or for providing research services to institutional customers. Under proposed Rule 10(b)10 any give-ups would be required to be paid over to the investment company. In addition, no investment company could direct a broker-dealer to have another broker-dealer perform any part of the transaction unless the compen- sation for such services was paid over to the invest- ment company. Apparently, the SEC feels that the existence of the give-ups helps provide an undesirable emphasis on the investment company advisor as a mar- ket factor. However, in its present form it would appar- ently still be possible for an investment company ad- visor to spread around his full commission business to various broker-dealers to reward fund share sales or investment research. The SEC has also announced that consideration is being given to an alternative proposal of the New York Stock Exchange to regulate the give-up. The NYSE proposal calls for establishment of a volume discount; limitations on the amounts that may be given-up (by percentage); access to the NYSE by non-member brok- er-dealers; and imposition of similar conditions on the regional exchanges. The SEC feels that the NYSE pro- posal would have substantial impact on the regional exchanges. For the full text of both proposals, see Securities Exchange Act (1934) Release No. 8239. At this writ- ing the SEC has not acted on a request to extend the time for receiving comments on the two proposals be- yond March 1, 1968. Digitized from Best Copy Available

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