R.V.I. Guar. Co. v. Comm'r
145 T.C. 209
| Tax Ct. | 2015Background
- R.V.I. Guaranty Co., Ltd. (RVIG) and subsidiary R.V.I. America Insurance Co. (RVIA) issued "residual value insurance" to lessors and finance companies to indemnify declines in leased-asset residual values at lease termination. Policies covered vehicles, commercial real estate, and equipment; premiums were typically paid up front and small relative to insured values.
- RVIA wrote the direct policies (951 policies in force in 2006); RVIG (Bermuda) reinsured almost all of RVIA's risk. RVIA and RVIG were licensed and regulated as insurers, filed statutory statements under SAP, and were rated by major rating agencies.
- The IRS audited and concluded RVI's contracts were not "insurance" for federal income tax purposes (characterizing them as protection against an investment risk), disallowing RVI's use of insurance-company tax accounting under §832 and asserting a deficiency.
- Trial included expert testimony addressing risk transfer, risk distribution, whether the contracts embody insurance risk (vs. speculative/investment risk), and whether the contracts are insurance in the commonly accepted sense.
- The Tax Court examined: (1) whether RVI's contracts are contracts of "insurance" for federal tax purposes (looking to risk shifting, risk distribution, commonly accepted notions of insurance, and whether the risk is an "insurance risk"); and (2) whether more than half of RVI's business was issuing insurance/reinsurance such that RVI qualified as an "insurance company." The Court held the contracts are insurance and RVI was an insurance company for 2006.
Issues
| Issue | Petitioner (RVI) Argument | Commissioner Argument | Held |
|---|---|---|---|
| Whether residual value contracts constitute "insurance contracts" for federal income tax purposes | Contracts transfer meaningful underwriting risk and distribute risk across many insureds, assets, geographies and time; contracts are regulated, accounted for, and treated as insurance by state regulators and auditors | Contracts protect against market/speculative/investment risk (not "pure" insurance risk); losses are often low or remote and payment timing is fixed at lease termination, so no meaningful insurance risk transfer | Held: Contracts are insurance. Court found risk shifting, adequate risk distribution, treatment as insurance in the marketplace and by regulators, and that the contracts involve insurance risk rather than mere investment risk. |
| Whether petitioner qualifies as an "insurance company" for §831(c)/§832 accounting | More than half of petitioner’s business was issuing insurance/reinsuring risks; thus petitioner may use §832 insurance-company tax accounting | If contracts are not insurance, petitioner cannot be treated as an insurance company and cannot use §832 accounting | Held: Because contracts are insurance, petitioner was an insurance company and eligible to compute taxable income under §832. |
Key Cases Cited
- Helvering v. Le Gierse, 312 U.S. 531 (examining insurance as involving risk-shifting and risk-distribution and requiring an actual insurance risk)
- United States v. Home Title Ins. Co., 285 U.S. 191 (holding mortgage guaranty contracts constitute insurance)
- Keller v. Commissioner, 312 U.S. 543 (companion decision clarifying absence of insurance risk when transaction is essentially investment/annuity risk)
- Commonwealth v. Fidelity Land Value Assurance Co., 312 Pa. 425 (167 A. 300) (state court recognizing indemnity against decline in property value as insurance)
- Seattle-First National Bank v. Washington Ins. Guaranty Ass'n, 116 Wn.2d 398 (804 P.2d 1263) (state high court treating residual value contracts as ‘‘casualty insurance’’)
- Wells Fargo Credit Corp. v. Arizona Property & Casualty Ins. Guar. Fund, 165 Ariz. 567 (799 P.2d 908) (state appellate court treating residual-value guarantees as casualty insurance)