811 F.2d 1297 | 9th Cir. | 1987
Lead Opinion
We are presented with another version of a not so novel question: Are amounts paid as “insurance premiums” by a parent corporation to its “captive insurance company”
Differing fact patterns of the captive insurer issue have appeared before several courts, all of which have held that insurance payments from a parent to its wholly-owned captive are not deductible.
I. Facts
The parties have stipulated fully to the facts. Clougherty Packing Company is a California corporation whose principal business is slaughtering and meat processing. It employs over 1,000 workers, for whom California requires Clougherty either to maintain workers' compensation coverage through an authorized insurer or to self-insure after obtaining consent from the California Director of Industrial Relations. Cal.Lab.Code § 3700 (West 1971). Clougherty faced numerous claims, and from 1971 to 1977, it self-insured a portion of its risk and obtained excess liability coverage for the balance from authorized insurers. As a partial self-insurer, Clougherty was required to deposit securities with the state treasurer as collateral for potential claims; the collateral totaled $857,110 in 1977.
In 1976, an outside consultant recommended that Clougherty form a captive insurance company to insure its workers’ compensation liability. Clougherty incorporated two wholly-owned subsidiaries, Lombardy Insurance Corporation in Colorado and Clougherty Packing Company of Arizona, the latter eventually becoming the sole holder of Lombardy stock;
Clougherty then negotiated and reached an agreement for a captive insurance program with Fremont Indemnity Company, an authorized insurance carrier in California unrelated to Clougherty. As of January 1,1978, Clougherty terminated the self-insurance portion of its insurance coverage and purchased all of its workers’ compensation insurance from Fremont. Fremont reinsured with Lombardy the first $100,000 of each claim against Clougherty and ceded to Lombardy 92% of its annual premium. Fremont also charged Clougherty an additional amount equal to five percent of the premium as a fee for providing the captive insurer program. There was no agreement requiring Clougherty to indemnify Fremont, to capitalize Lombardy further, or otherwise to guarantee Lombardy’s obligations. Lombardy engaged in no business other than the reinsuring of Clougherty. The premium charged by Fremont and the reinsurance rate charged by Lombardy were approved by the appropriate state agencies. Fremont remained liable for the payment of insurance claims in the event Lombardy became insolvent or defaulted for any other reason. However, under California law, because Clougherty had purchased an insurance policy from an authorized insurer, Clougherty could not be held liable for covered workers’ compensation claims in the event that Fremont failed to make the required payments. Cal.Lab. Code §§ 3755, 3757 (West 1971).
In calculating its federal income tax liability in its fiscal years ending July 29, 1978, and July 28,1979, Clougherty deducted as necessary business expenses the amounts it paid to Fremont as insurance premiums — $840,000 and $1,457,000 respectively. Of these sums, Lombardy received $772,900 and $1,340,000. In reviewing Clougherty’s tax returns, the Commissioner of Internal Revenue disallowed the portions of premiums received by Lombardy from Fremont and determined income tax deficiencies for Clougherty of $370,944 and $628,202.
Clougherty appealed the Commissioner’s disallowance, and a divided panel of the United States Tax Court sitting en banc affirmed. Clougherty Packing Co. v. Commissioner, 84 T.C. 948 (1985). Eight judges subscribed to the plurality opinion, three wrote separate concurrences, and seven joined in dissent. Clougherty’s timely filing brings the matter before this court.
II. Legal Discussion
A. Standard of Review
Our court has jurisdiction to review decisions of the United States Tax Court. 26 U.S.C. § 7482(a) (1982). We review its decisions on the same basis as decisions following civil bench trials in federal district court. 26 U.S.C. § 7482(a) (1982); Mayors v. Commissioner, 785 F.2d 757, 759 (9th Cir.1986). The parties here have at all times stipulated to the relevant facts; the only questions are those of law. Our review of the Tax Court’s decision is thus de novo. Vukasovich v. Commissioner, 790 F.2d 1409, 1413 (9th Cir.1986). Although the Tax Court’s judgments in its field of expertise are accorded a presumption that they correctly apply the law, we do not apply a rule of special deference to its decisions. Id.
B. The Definition of Insurance
In calculating taxable income, section 162(a) of the Internal Revenue Code, 26 U.S.C. § 162 (1954), permits the deduction from gross income of all ordinary and necessary expenses incurred in carrying on a
The appropriate starting point of our analysis is the meaning of “insurance.” Neither the Internal Revenue Code nor tax regulations provide a definition of insurance. The accepted definition for purposes of federal income taxation dates back to Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996 (1941), in which the Supreme Court stated that “[historically and commonly insurance involves risk-shifting and risk-distributing.” Id. at 539, 61 S.Ct. at 649; see Commissioner v. Treganowan, 183 F.2d 288, 291 (2d Cir.), cert. denied, 340 U.S. 853, 71 S.Ct. 82, 95 L.Ed. 625 (1950); B. Bittker, 5 Federal Taxation of Income, Estates & Gifts ¶ 127.2 at 127-7 (1984) (“under Le Gierse the shifting and distribution of the risk of death are indispensable elements of life insurance”).
Le Gierse provides not only a definition of insurance — the shifting and distributing of risk — but also a rule for delimiting the transaction to be analysed. Where separate agreements are interdependent, they must be considered together so that their overall economic effect can be assessed. Id. Thus, to answer whether risk has shifted between the parties, we do not review the insurance agreement in isolation; rather, we take into account other agreements and relationships that are interdependent with the insurance agreement. Here the Tax Court found, and we agree, that the insurance agreement between Clougherty and Fremont, and the reinsurance contract between Fremont and Lombardy, were interdependent — both were necessary parts of the captive insurance program Fremont agreed to establish for Clougherty. Thus, we consider the agreements together in addressing whether there is risk shifting.
C. Risk Shifting
The earliest pronouncement on the issue of captive insurers came from the Internal Revenue Service in Revenue Ruling 77-316, 1977-2 Cum.Bul. 53. In it the Service reviewed three hypothetical situations involving a wholly-owned captive insuring only its parent and affiliates — in one case directly and in the others through an unrelated intermediate insurer. Situation 2 of the Ruling is identical in substance to the facts presented here.
In concluding that there is no economic shifting of risk between parent and captive insurance subsidiary, the Ruling relies on what has come to be known as the “economic family” concept.
*1302 [T]he insuring parent corporation and its domestic subsidiaries, and the wholly owned “insurance” subsidiary, though separate corporate entities, represent one economic family with the result that those who bear the ultimate economic burden of loss are the same persons who suffer the loss____ [Premiums] remain within the economic family and under the practical control of the respective parent in each situation____ [N]othing has occurred other than a movement of an asset (cash) within each family of related corporations.
Id. at 77:375. According to the Ruling’s description, the economic family theory appears to treat a corporation and its affiliates as a single overall entity and then assess whether the insurance arrangement shifts the risk of loss away from that entity. Under that theory, because an “insured” loss remains within the corporate family there is no risk shifting and no insurance results. The Ruling states that its conclusion recognizes the separate tax status of subsidiary corporations, as required by Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), “but also examines the economic reality of each situation described.” Rev.Rul. 77-316 at 77:376.
The doctrine of Moline Properties seems relatively straight-forward: “[S]o long as [its] purpose is the equivalent of business activity ... the corporation remains a separate taxable entity.” 319 U.S. at 439, 63 S.Ct. at 1134. While Moline Properties concerned an attempt by the sole shareholder of a corporation to report on his personal return income attributable to the corporation, the rule it enunciates applies as well to a corporation and its subsidiaries. National Carbide Corp. v. Commissioner, 336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779 (1949). Exceptions exist in areas where Congress has evinced an intent to the contrary or where the corporate form is but a sham. 319 U.S. at 439, 63 S.Ct. at 1134. Congress, however, has remained silent with respect to the taxation of captive insurers and the Tax Court found that Clougherty had a valid business purpose for incorporating Lombardy.
Clougherty argues forcefully that the economic family concept espoused in the Ruling violates Moline Properties. Evidently, the Tax Court below sensed a tension between the economic family concept and Moline Properties. It expressed concern that the concept “might foster a theory which would be extended to other areas of the tax law.” Clougherty, 84 T.C. at 959. The court, however, found it unnecessary to use the term “economic family” in deciding the case because it could be decided “within the parameters of Carnation.” Id. at 956. Given that our holding in Carnation Co. v. Commissioner, 640 F.2d 1010 (9th Cir.), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 381 (1981), aff'g 71 T.C. 400 (1978), explicitly refers to the Ruling, it seems odd that the Tax Court uses Carnation as a means of avoiding reliance on the Ruling.
Carnation was the first judicial review of the captive insurer question and the only review of the question undertaken by this circuit. In that case, Carnation purchased an insurance policy from an unrelated insurance carrier, which then reinsured 90% of its liability with Carnation’s wholly-owned subsidiary. In accepting this arrangement, however, the insurer required Carnation to agree to increase at the insurer’s request the subsidiary’s capitalization, which at the time was substantially less than the annual premium ceded to the subsidiary. We agreed with the Tax Court’s assessment that the agreements between Carnation, its captive and the unrelated carrier were interdependent. Considering the agreements together, we held that, to the extent the unrelated insurer reinsured with Carnation’s subsidiary, the economic
The operative facts of Carnation are identical to those presented here except for one that Clougherty claims to be of critical significance. Clougherty insists that it was the capitalization agreement that neutralized any risk shifting in Carnation and that the absence of any such agreement requires that we reach an opposite result in this case. For support, Clougherty points to the Tax Court’s opinion in Carnation, and particularly the express statement that the capitalization agreement counteracted the reinsurance agreement. 71 T.C. at 409. In our opinion affirming the Tax Court we appear to have endorsed that statement. 640 F.2d at 1013. In our very next paragraph, however, we noted the identity between the facts in Carnation and those in Situation 2 of Revenue Ruling 77-316. Id. at 1013. Because Situation 2 does not include a capitalization agreement, our statement that the fact situations were identical would seem to suggest strongly that our holding did not hinge on the capitalization agreement.
The dissenters below and several tax commentators argue that either our statement regarding the identity in facts between Carnation and Situation 2 is wrong or else Carnation depends on the validity of the Revenue Ruling, which they claim violates Moline Properties. Clougherty, 84 T.C. at 965-66; e.g., Liles, Captive Insurance Companies: Further Confusion over Economic Families?, 26 Tax Mgmt. (BNA) 226, 229 (1985). We addressed the latter point in Carnation, albeit briefly, when we said “[w]e reject Carnation’s contention that [Situation 2 of] this ruling conflicts with recognition of the separate status of corporations.” 640 F.2d at 1013.
Several courts outside of this circuit have addressed the captive insurance issue, and none has found that a policy provided by a wholly-owned subsidiary that exists solely for the purpose of providing insurance to its parent constitutes insurance, or that such a conclusion violates Moline Properties. The Tenth Circuit has twice addressed this issue. In Beech Aircraft Corp. v. United States, 797 F.2d 920 (10th Cir.1986), aff'g U.S.Tax Cas. (CCH) ¶ 9803, 54 A.F.T.R.2d (P-H) ¶ 84-5392 (D.Kan. 1984), the parent insured directly with its captive subsidiary, while in Stearns-Roger Corp. v. United States, 774 F.2d 414 (10th Cir.1985), aff'g 577 F.Supp. 833 (D.Colo.1984), the parent insured some of its liabilities directly with its captive, and some indirectly using an unrelated third-party insurer which reinsured with the captive. In both cases, the trial court found there was no risk shifting and the Tenth Circuit affirmed. Two recent lower court decisions that reviewed captive insurer arrangements reached the same result. Mobil Oil Corp. v. United States, 8 Ct.Cl. 555 (1985); Humana Inc. & Subsidiaries v. Commissioner, T.C.M. (P-H) ¶ 85,426 (1985). Both cases involved direct two-party insurance agreements between parent and wholly-owned captive.
Clougherty contends that the cases involving only direct insurance between parent and captive are distinguishable because in the transaction before us there was an intermediate insurer, Fremont, which assumed the risk of Lombardy’s insolvency. As for Stearns-Roger, Clougherty argues that the district court expressly embraced the “erroneous” economic family theory in its decision and that in any event the case is distinguishable because the parent had a separate agreement to indemnify the subsidiary for its losses.
The only case that has allowed the deduction of premiums paid directly or indirectly to a captive insurer is Crawford Fitting Co. v. United States, 606 F.Supp. 136 (N.D.Ohio 1985). It is not, however, factually
Despite the judicial consensus, Clougherty has as allies in its challenge to the Commissioner’s position a number of tax commentators as well as seven dissenters on the Tax Court. See, e.g., Bradley & Winslow, Self-Insurance Plans and Captive Insurance Companies—A Perspective on Recent Tax Developments, 4 Am.J.Tax Pol’y 217, 250-51 (1985); Liles, supra, 26 Tax Mgmt. (BNA) at 226. In large part, the criticism continues unabated because the courts have failed to articulate to the satisfaction of captive insurer proponents how the conclusion of no risk shifting is attained without, as the dissent below puts it, “crashing head-on into the holding in Moline Properties.” 84 T.C. at 967. There is some merit to the complaint that judicial discussions have often glossed over the interplay of the risk shifting analysis with the Moline Properties recognition of separate taxable entities. We agree that an explanation of the rationale underlying the conclusion reached by a majority of the Tax Court is warranted. We do not, however, agree that the conclusion violates Mo-line Properties.
To begin with, we seriously doubt that the use of an economic family concept in defining insurance runs afoul of the Supreme Court’s holding in Moline Properties. The Moline Properties rule that a corporation with a valid business purpose “remains a separate taxable entity,” 319 U.S. at 439, 63 S.Ct. at 1134, has consistently been invoked where there is a question whether a corporate entity should be afforded separate tax status and the answer determines whether the tax consequences that would ordinarily attach to a corporate entity are to be enjoyed or suffered by the corporation or by its owners. E.g., Zmuda v. Commissioner, 731 F.2d 1417, 1420-21 (9th Cir.1984); Kleinsasser v. United States, 707 F.2d 1024, 1027 (9th Cir.1983); Britt v. United States, 431 F.2d 227, 234-35 (5th Cir.1970); see National Inv. Corp. v. Hoey, 144 F.2d 466, 468 (2d Cir.1944) (L. Hand, J.) (Moline Properties “merely declares that to be a separate jural person for purposes of taxation, a corporation must engage in some industrial, commercial, or other activity besides avoiding taxation.”). The Commissioner does not challenge the propriety of affording Lombardy separate status for tax purposes; whatever tax liabilities are incurred by Lombardy will be assessed to it and not to its parent. Instead, the Commissioner’s position is that the Moline Properties rule may not be lifted out of its usual context — cases involving the question which of two related éntities should receive a tax benefit or assume a tax burden — and mechanically applied as the basis for deciding an entirely different type of question — what constitutes “insurance.” Thus, he argues, Mo-line Properties does not bar the Service from considering related entities as a single economic family when assessing whether an insurance policy shifts the risk of loss
In reaching our holding, we do not disturb the separate legal status of the various corporate entities involved, either by treating them as a single unit or otherwise. Rather, we examine the economic consequences of the captive insurance arrangement to the “insured” party to see if that party has, in fact, shifted the risk. In doing so, we look only to the insured’s assets, i.e., those of Clougherty, to determine whether it has divested itself of the adverse economic consequences of a covered workers’ compensation claim. Viewing only Clougherty’s assets and considering only the effect of a claim on those assets, it is clear that the risk of loss has not been shifted from Clougherty.
A workers’ compensation claim against Clougherty of less than $100,000 is covered under the reinsurance agreement between Fremont and Lombardy. Fremont first pays the claim under the primary insurance policy and then seeks reimbursement under its reinsurance agreement with Lombardy. There is no recourse against Clougherty. Accordingly, there is no immediate effect of a claim on Clougherty’s assets.
The effect on Clougherty of a covered loss, however, does not stop here. Clougherty is the sole shareholder of the company that owns 100% of the Lombardy stock. As a result of reimbursing Fremont for the loss, Lombardy’s income and net worth fall dollar for dollar by the amount of the loss. Because Lombardy does no business other than insuring Clougherty, the value of Lombardy stock declines by exactly the same amount. The decline affects the owners of Lombardy stock irrespective of who those shareholders are and what corporate relationship they have with Lombardy. As indirect owner of every share of Lombardy stock, Clougherty suffers a loss in the value of one of its assets equal to the full amount of the claim paid by Lombardy. Under the captive insurer program, every such claim reduces the value of Clougherty’s assets by exactly the same amount that it would if Clougherty self-insured in the ordinary sense.
It is true that Lombardy bears a risk of loss from a claim against Clougherty because Lombardy suffers a loss when a claim is paid. But it is also true that Clougherty has not divested itself of its risk of loss from such a claim even though it is paid by Lombardy — and it is the effect on Clougherty’s assets that is determinative here. Le Gierse requires that an insurance agreement negate any effect of a covered loss on the insured party’s assets. We thus look at that party’s assets and not at those of its captive subsidiary or some aggregation of the two. Because a covered claim still affects Clougherty’s assets, its captive insurance arrangement does not succeed in shifting its risk of loss. Therefore, under Le Gierse the arrangement is not insurance.
The risk shifting requirement of Le Gierse accurately describes the essence of
Clougherty argues that even if insuring directly with a captive insurer does not shift the parent’s risk of loss, insuring through an unrelated intermediate insurer does. According to this argument, Clougherty has shifted its risk because Fremont remains liable in the event Lombardy defaults or becomes insolvent. It is true that in the event of Lombardy’s insolvency, all of Clougherty’s subsequent workers’ compensation claims would be paid by Fremont and would have no direct or indirect effect upon Clougherty’s assets. However, the risk of Lombardy’s insolvency does not affect the risk-shifting inquiry for several reasons.
First, the chance that Lombardy will default is extremely small. In view of the capitalization requirements imposed by the State of Colorado, insolvency could ordinarily occur only after Lombardy had paid far more than the number of claims that could reasonably be anticipated. Second, in reviewing the captive insurer program, we should use the same business assumption that the parties used in undertaking it, namely, that Lombardy will pay all of the claims it agreed to pay. The arrangements for payment of claims by Fremont in the event of insolvency constitute only a secondary aspect of the underlying transaction. Third, it is the payments made to Lombardy that are at issue here. Those payments were made as compensation for Lombardy’s assumption of the risk of Clougherty’s workers’ compensation claims, not for its assumption of the risk of its own insolvency. Fremont is the one that assumes that risk and is paid separately for so doing. The risk that Lombardy will become insolvent is irrelevant to the question whether the amounts paid to Lombardy are insurance premiums. Fourth, Clougherty’s argument would lead to a perverse and absurd result. Every insured party faces the theoretical risk that its insurance carrier will become insolvent and that its losses will not be covered (except where state law provides for outside compensation). That risk cannot be eliminated. If the existence of insolvency risk determined whether insurance existed, then no one who purchased an insurance policy would be able to deduct the premiums he paid: The purchaser would always retain the risk that his insurance company would become insolvent. (The result would be the same whether the policy were purchased directly or through an intermediate insurer, since in the latter case both insurers could theoretically become insolvent.) In short, Clougherty’s argument makes no practical sense.
III. Conclusion
The parent of a captive insurer retains an economic stake in whether a covered loss occurs. Accordingly, an insurance agreement between parent and captive does not shift the parent’s risk of loss and is not an agreement for “insurance.” Premiums paid by the parent to the captive, whether directly or through an unrelated insurer, may not be deducted by the parent as insurance premiums. Revenue Ruling 77-316, and our opinion in Carnation, both of which concern captives insuring their parents, reach the correct result — a result that does not conflict with Moline Properties. Because Clougherty is the parent of its captive insurer Lombardy, the amounts paid by Clougherty to Fremont and then to Lombardy are not insurance premiums. As such, they may not be deducted as necessary business expenses under 26 U.S.C. § 162(a). The decision of the Tax Court is
AFFIRMED.
. A “captive insurance company” is a corporation organized for the purpose of insuring the liabilities of its owner. At one extreme is the case presented here, where the insured is both the sole shareholder and only customer of the captive. There may be other permutations involving less than 100% ownership or more than a single customer, although at some point the term “captive” is no longer appropriate.
. Id.; Stearns-Roger Corp. v. United States, 577 F.Supp. 833, (D.CoIo.1984), aff'd, 774 F.2d 414 (10th Cir.1985); Beech Aircraft Corp. v. Commissioner, 84-2 U.S.Tax Cas. (CCH) 9803, 54 A.F. T.R.2d (P-H) ¶ 84-5392 (D.Kan.1984), aff'd, 797 F.2d 920 (10th Cir.1986); Clougherty Packing Co. v. Commissioner, 84 T.C. 948 (1985); Humana, Inc. & Subsidiaries v. Commissioner, T.C.M. (P-H) ¶ 85,426 (1985); Mobil Oil Corp. v. United States, 8 Cl.Ct. 555 (1985). Cf. Crawford Fitting Co. v. United States, 606 F.Supp. 136 (N.D.Ohio 1985) (deductions allowed for amounts paid to captive insurer that was owned by individuals rather than by parent corporation); see text infra at 1303-04.
. That Clougherty was only indirectly the sole shareholder of Lombardy does not affect our analysis of the captive insurer question, nor does either party suggest it should. The analy
. Notwithstanding Clougherty’s argument to the contrary, nothing in Consumer Life Insurance Co. v. United States, 430 U.S. 725, 97 S.Ct. 1440, 52 L.Ed.2d 4 (1977), requires us to consider a definition of insurance other than the one enunciated by the Court in Le Gierse.
. While the Supreme Court in Le Gierse expressly stated that insurance must exhibit both the shifting and the distributing of risk, the resolution of that case depended only on the absence of risk shifting. Here, too, we need not consider whether Clougherty’s captive insurer arrangement exhibited risk distribution because we conclude that Clougherty did not shift its risk.
. In fact, Le Gierse died less than a month after entering into the insurance and annuity contracts.
. [D]omestic corporation Y and its domestic subsidiaries paid amounts as casualty insurance premiums to M, an unrelated domestic insurance company. This insurance was placed with M under a contractual arrangement that provided that M would immediately transfer 95 percent of the risks under reinsurance agreements to S2, the wholly-owned foreign "insurance” subsidiary of Y. However, the contractual arrangement for reinsurance did not relieve M of its liability as the primary insurer of Y and its domestic subsidiaries; nor was there any collateral agreement between M and Y, or any of Y’s subsidiaries, to reimburse M in the event that S2 could not meet its reinsurance obligations.
Rev.Rul. 77-316 at 77:374. The only differences are the percentage of risk reinsured and the site of incorporation of the captive, which are of no consequence.
. The Tax Court also found that, unlike other captive insurer cases where government experts testified in support of the economic family concept, there was no evidence to support that concept here. 84 T.C. at 956; see Stearns-Roger, 577 F.Supp. at 833; Beech Aircraft, 84-2 U.S.Tax Cas. (CCH) at ¶ 9803. It is not clear to us why any such evidentiary foundation was considered a prerequisite to addressing the economic family theory.
. One factual difference of note was that the captive in Mobil Oil, while wholly owned, did insure at least some parties other than its parent and affiliates. The claims court, however, found that this difference did not affect the result.
. We distinguish Crawford Fitting on its facts and express no view as to the correctness of its reasoning or result. While the Service argued that the economic family concept applied to the facts in Crawford Fitting, it has indicated its willingness to conclude that insurance exists where a captive insurer has 31 unrelated shareholders, none of whom has a controlling interest, and the captive insures only its 31 shareholders with the limitation that no one policy may exceed five percent of the captive’s total insured risks. Rev.Rul. 78-338, 1978-2 C.B. 107.
. The record suggests that payments are made in the manner stated in the text. However, our analysis would be the same whether Clougherty pays claims and then seeks reimbursement from Fremont or Lombardy, Fremont pays them and collects from Lombardy, or Lombardy pays them directly. As we explain in text infra, the critical fact is not which party initially pays claims but rather whether Clougherty avoids the impact of the economic costs. Under any of the methods of paying claims, Clougherty ultimately suffers an adverse economic impact.
. Clougherty also argued below that the risk of loss can shift in noninsurance transactions involving related taxpayers, e.g., sales or loans from a parent company to its subsidiary, and
Concurrence Opinion
concurring:
Under the compulsion of our decision in Carnation Co. v. Commissioner, 640 F.2d 1010 (9th Cir.), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 381 (1981), I concur only in the result reached in Judge Reinhardt’s exhaustive opinion.
In my view, the dissent of Judge Gerber of the Tax Court, 84 T.C. 948 (1985), joined by six of his colleagues, and the decision in Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), provide the correct reasoning and the correct result under the facts of this case.
It is conceded and undisputed by all that the arrangement is not a subterfuge, there is no illegality, and no intent to evade. In short, it looks like insurance, feels like insurance, and smells like insurance, but under the holding, it isn’t!
Clougherty should be entitled to deduct the premiums as a necessary business expense.
