Sears, Roebuck and Co. And Affiliated Corporations, Cross-Appellee v. Commissioner of Internal Revenue, Cross-Appellant

correctly granted sum- ed the district court sympathize with Mr. his While we claim. in District’s favor year mary judgment the Park without for a DeVito—he was waiting post-termi- grounds. for his while he was other his do not believe that hearing nation —we present- wait, light circumstances CONCLUSION and the fact in the record of this case ed correctly the district court We believe adequate pre- received that Mr. DeVito summary judgment favor granted long that deprivation hearing, was so Mr. DeVito’s claim Park District on a constitutional viola- point reached the process his due Park District violated correctly the district court tion. We think Amendment to rights under Fourteenth in favor of the granted summary judgment there- Constitution. We the United States Park District. fore concluded, Mr. district court also Affirm. incorrectly, that if there says even DeVito part of nefarious action on the was some Mr. employees, of its

the Park District or Mr. De- claim must fail because

DeVito’s remedy in the adequate state

Vito had an The district court

form of mandamus. brought could have stated that Mr. DeVito SEARS, Af- AND CO. and ROEBUCK compel action to the Park a mandamus Corporations, Petitioner- filiated comply procedure with its own District to Cross-Appellee, Appellant, Opinion timely Memorandum in a fashion. v. argues that persuasively Mr. at 8. DeVito specific only compel mandamus is used INTERNAL OF COMMISSIONER act, mandamus does not lie duty or REVENUE, Respondent-Appellee, interfere with the where the order would Cross-Appellant. discretionary People act. exercise of a See 91-3038, 91-3688. Nos. 777, Ill.App.3d Ill.Dec. Schyve, 112 410-411, 1260, Appeals, 407, 445 N.E.2d 1263-64 United States Court Roush, (1983), affirmed, People v. Seventh Circuit. 349, Ill.Dec. 462 N.E.2d 468 Ill.2d Argued April 1992. (1984) (court beyond authority went Aug. Decided 1992. steps the defendants prescribing the exact duties). executing had to take Rehearing Denial of As Amended on duty grant Mr. DeVito a Park District’s 14, 1992. Oct. hearing was not discre post-termination own Personnel tionary Park District’s —the Mr. DeVito was Policy Manual indicates However, hearing. the exact

entitled to a hearing, by the Park Dis

timing of such a admission, discretionary was be

trict’s own Policy Personnel

cause the Park District’s post- specify a time for

Manual does seems, hearings. Therefore

termination argues, the district

as Mr. DeVito an Illinois court incorrect and

court was post-termination ordered his

could not have place any particular

hearing to take issue, judgment on this

time. We reserve the district court was Whether

however. dispo to our

right wrong is not relevant already case as we have decid-

sition of this Conway (argued),

Michael M. Frederic Hickman, W. Michael R. Schlessinger, Pat- Heffernan, rick A. Ferguson, Bradford L. Litwin, Sutter, Burton H. Hopkins & Chica- Ill., go, petitioner-appellant, cross-appellee. Jr., I.R.S., Abraham Shashy, N.M. Gary Allen, R. (argued), David I. Pincus John A. Dudeek, Jr., Mary F. (argued), Clark Dept, Justice, Div., of Section, Appellate D.C., Washington, for respondent-appellee, cross-appellant. Jr., Gregory, Allen,

Francis M. Dennis L. George Abramowitz, Sutherland, R. Asbill Brennan, Washington, D.C., & amicus curi- Mortgage ae Companies Ins. of America. Johnson, Carolyn J. National Ass’n of Com’rs, Mo., Ins. City, Kansas amicus curi- ae National Ass’n of Ins. Com’rs. Hickman, Frederic Bromley, W. Richard Sutter, Hopkins Ill., Chicago, & Robert L. Zeman, McNally, Patrick J. National Ass’n Insurers, Independent Plaines, Ill., of Des amicus curiae National Ass’n Indepen- dent Insurers. BAUER, Judge,

Before Chief EASTERBROOK, Judge, Circuit NOLAND, Judge.* Senior District EASTERBROOK, Judge. Circuit Sears, Several subsidiaries Roebuck & One, Co. sell insurance. Allstate Insurance CO., underwrote some of the risks of the parent corporation. Two others wrote insurance, mortgage promising lend- ers if borrowers defaulted. Because Sears and all other members of the group return, file a consolidated tax dis- putes consequences about the tax of these transactions affect the taxes of the entire * Noland, 12, 1992, August press Hon. James E. District Southern was in the date Indiana, sitting by designation. opinion Judge This Noland's death. issues; Judge Judge of Internal Rev- both group. The Chief Nims and Commissioner the, group with deficiencies assessed Jacobs would have ruled for Sears on

enue both years million for the tax exceeding issues. Whalen concluded that the $2.5 group Whether owes this majority things 1980-82. had backward: that Sears proper the money depends on character- prevailed mortgage should have on the in- kinds of transaction. ization of the two subsidiary surance issue but lost on the join issue. We Chief Nims and gross deduct from its An insurer Judge Jacobs. amount established as a reserve income an 832. Until 1986 it for losses. 26 U.S.C. § I reserve; today entire

could deduct the recognition reserve in must discount this Allstate is a substantial underwrit payable a dollar tomorrow is the fact that er, collecting premi more than billion in $5 today. less than a dollar Tax Re- worth annually possessing ums more than $2 2085, form Act of 1986 Stat. capital surplus. During years billion (1986). These transactions occurred issue, charged approxi Allstate Sears any and in event we deal with before mately per year million $14 several than the the existence rather size of the kinds of insurance. Some of All 99.75% deduction. Allstate created and deducted premiums state’s came from customers policies reserves to cover casualties on Sears, places other than which 10% 15% issued to The Commissioner disal- Sears. of its insurance with Allstate. The Com (and lowed these deductions made some “[pjolicies missioner’s brief concedes that adjustments), reasoning related that by compara issued to Sears Allstate were shuffling money corporate from one policies ble to issued to unrelated insureds. pocket another cannot be “insurance.” execution, modification, respect to the With disagreed. distinguished The Tax Court performance poli and renewal of all of the (which policies captive subsidiaries write issue, cies in Allstate and Sears observed corporation parent for the but few or no formalities similar to those followed with others) companies fide insurance from bona respect policies by to the insurance issued corporate parents with their that deal addition, Allstate to In unrelated insureds. siblings at market terms. 96 T.C. 61 premium charged by rates Allstate to (1991). Sears were determined means of the underwriting underwriting principles proce

The two subsidiaries mort- same gage insurance estimated losses as of the in determining dures that were used underlying premium time loans went into charged de- rates to unrelated in sureds, equivalent fault. The Commissioner contended that and were the of arm’s- length these insurers could not establish deduct- rates.” The Tax Court made similar findings, although reserves until the lenders nearly concisely. ible loss obtained so good mortgaged property, title to be- Allstate, founded has been sell- policies cause the insurance made a tender ing Every- insurance to Sears since 1945. precedent of title a condition to the insur- one, Commissioner, including the has taken obligation pay. The Tax ers’ Court prototypical non-captive Allstate as conclusion, agreed rejecting this subsidiary. surance 1977 the Inter- Until argument insurers’ that the Internal Reve- respected nal Revenue Service transactions permits nue them to loss re- Code deduct non-captive par- between insurers and their law, serves state as these re- In year ents. the Commissioner decid- serves were. wholly subsidiary ed that a owned cannot parent’s if judges split operations, of the Tax Court four “insure” its even the Korner, Shields, Hamblen, ways. Judges subsidiary’s policies identical in terms Swift, Gerber, Parr, Colvin, Wright, par- price and and to those available from third Halpern 77-316,1977-2 Ex- joined Judge opinion for ties. Rev.Rul. C.B. 53. Cohen’s Judges amples given ruling revenue all majority. Chabot and Parker captives would that had no have ruled for the Commissioner on dealt with customers This risk has been shifted. After issu- family. whether .the corporate outside approach Rev.Rul. family” to be- continued “economic ruling Service ing the 77-316, engaged sup- in “solicita- sometimes which the Service that subsidiaries lieve outside acceptance inquiry of substantial sheet” plements “balance tion par- to their provide insurance could insurance risks” which a transaction under 1979). (Oct. 12, inBut corpora- G.C.M. 38136 up ents. sides of a it shows both course, reversed the General Counsel tion’s balance sheet. 1984), (June 27, and the Com- G.C.M. the Tax has ever judge No wholly missioner later announced family” ap “economic embraced the IRS’s should be subsidiaries owned proach, is hard to reconcile with 88-72, 1988-2 C.B. treated alike. Rev.Rul. respects tax law doctrine 89-61, 31, clarified, 1989-1 C.B. Rev.Rul. CIR, Properties, Inc. v. forms. Molien this is decide task is to whether 75. Our 436, 1132, 87 L.Ed. 1499 U.S. 63 S.Ct. 319 details, disregard We therefore correct. may (1943). Although the Commissioner in the Tax Court’s found which be intra-corporate transactions recharacterize Commissioner, we deem Like opinion. independent of their lack substance Allstate of the risks immaterial the nature Gregory Helvering, v. effects, 293 tax cf. negotiated, parties accepted, the terms (1935); 465, 266, L.Ed. 79 596 55 S.Ct. U.S. precise deductions taken. and the Cir.1988)— CIR, 861 F.2d 494 (7th v. Yosha up a re more than If did no set Sears disregarding captive insur supports which losses, not deduct this it could serve for family” “economic ance subsidiaries —the v. States from income. United reserve that transactions approach asserts 239, Comp., 481 U.S. Dynamics General corporate must among group of a members (1987). 1732, L.Ed.2d 226 95 107 S.Ct. circuit, Even the ninth disregarded. be companies may insurance Firms other than favorably citing 77-316 Rev.Rul. which paid expenses only when deduct business to the Commissioner’s come the closest has accrued; under is deductible a reserve by implying back position, has drawn “insur taxpayer only if issued 832 busi doing substantial outside subsidiaries just a name for is ance.” “Self-insurance” captives lumped with true be ness cannot bearing risks the lack of insurance —for CIR, v. Carnation Co. pot. single a into Commissioner, According to the oneself. Clougherty Cir.1981); (9th F.2d 1010 640 subsidiary self-insur a is “insurance” from CIR, 1297, 1298 n. 811 F.2d Packing Co. from Moving funds name. ance another Cir.1987). 1 nothing, even if does pocket to another one purposes? for tax What is “insurance” If separately incorporated. is pocket Le Gierse a definition. lacks Code dollar, loses pays out a Parent Subsidiary shifting of risk the combination mentions Nothing depends the same dollar. distribution, a blunder it is risk customers; Subsidiary has other whether if it as were opinion an phrase a treat correspondence one-to-one there is still a Corp. language. Zenith Radio statutory wealth. payments and Parent’s between 443, 460-62, 98 States, 437 U.S. v. United in the although may engage Allstate So (1978). 2450-51, 337 L.Ed.2d 2441, 57 S.Ct. insurance, risks, and thus write pooling Insur- v. Consumer United States Cf. Life shifting of purchase the did not Sears 740-41, 97 S.Ct. Co., 430 U.S. 725, buy Un risks, thus did insurance. (1977). The 1448-49, L.Ed.2d from both insurance is less the transaction for all writing a definition was not risk-shifting it “involves sides —unless to, the hold- no reason and had seasons risk-dis perspective] and the client’s [from only paying is ing of Le Gierse underwriter’s]”, Hel tributing [from promises than “underwriter” more Gierse, Le 312 U.S. vering v. casualty of a in the event return (1941) is not 646, 649, L.Ed. 996 S.Ct. — it insurance Life any standard. insurance Rev of the Internal purposes for insurance estate, making a decedent’s outside passes asks us to Commissioner enue Code. The (taxable) assets to turn advantageous to decide family’s assets pool proceeds. into the estate insurance provide Less replacement income or a substitute death, than month before her elderly bequests (which for to their heirs why bought policy woman persons denominated life natural buy insurance). life Inves- insurance. named a death bene- tors can against .The “insure” large risks one $25,000 premium fit of and carried a line of business more cheaply than do cor- $23,000. part package, As porations, “in- without the moral hazard and beneficiary surer” to buy an adverse loading selection and they costs: $4,000. annuity for If contract the benefi- diversify portfolios of stock. Instead ciary immediately, died the insurer corporations was spread insure to the costs of $2,000 lived, good; if she premi- casualties over experience time. Bad enough ums were more than to fund the centrated in single year, might promised annuity payment and death (and bene- bankruptcy cause its associated trans- being spread, fit. So no risks were costs), trans- actions paid can be for over several ferred, pooled, whatever. As years. the Court generally See Mayers David & Clif- observed, risk; there was no Smith, Jr., ford W. Corporate On the De- buyer policy expected soon, to die Insurance, mand (1982). 55 J. Bus. 281 expected and the issuer to turn pro- Much insurance sold corporations is ex- heirs, keeping ceeds over to the an adminis- perience-rated. An insurer price sets a trative fee for the service removing of the based on that recent predicted firm’s Gierse, assets from the estate. losses, Le plus like a loading and administrative Yosha, Gregory and shows that charge. substance Sometimes the retrospec- prevails empty Sears, by over forms. tively rated, meaning price that the final trast, had insurable risks. The Commis- set the casualties have occurred. after deny sioner does not if Sears had Retrospective policies have minimum and purchased from Hartford or Aetna the premiums, maximum buyer so the does not policies purchased Allstate, same from risk, bear all of the but upper the these would genuine have been “insur- lower bounds are set so that almost of were, ance.” Forms there but empty the time the insured firm pays the full usually ones—and taxes depend form, on costs of the generates. losses it expe- Both as the Commissioner trumpets whenever rating rience retrospective rating at- enlarges this E.g., the revenue. tempt Howell v. charge to the firm the full cost of its States, (7th United 775 F.2d 887 Cir.1985). run, own risks over long a run as short meaning Distinctions with little pop- year as one retrospective rating. with The example, ulace—for p.m. income at 11:59 buys client some time-shifting (very little in on 31 December versus income at 12:01 the retrospective case of rating) good and a a.m. January wages on plus prom- deal of administration. Insurers are ex- pension ise of higher a versus wages perts used evaluating losses, at settling purchase to annuity produce large litigating against) dif- injured persons, and so — ferences in tax. corporation on. A buys thus loss-evalua- tion and services, loss-administration at casualty Doubtless a that leads Allstate comparative insurers have a advan- to bring reimburse Sears does not cash into tage, more buys than it loss distribution. corporate treasury way same If retrospectively policies, rated called “in- payment from Hartford A would. favor- surance” both issuers regulators, experience able loss for Sears cuts All- are purposes insurance for tax costs, —and state’s and thus augments lawyer Commissioner’s pur- conceded for group’s aggregate wealth, by more than poses they of this case that are—then it is the same reduction produce losses would impossible to see shifting how risk can be a policy. Hartford issued the Yet the qua sine non of “insurance.” push Commissioner does not this as far as he Corporate liability could. is limited “shifting Commissioner insists that Corporations assets. accordingly third-party risk to insureds” is an essential do not protect insure to their ingredient insurance, wealth and of but what does this income, future do, persons as natural or to mean? Take term life insurance. One

863 whim, and events that affect each serves age $450 at 30 persons thousand good or. ill therefore do not a death benefit size for one-year policy with for of these $200,000. year directly normal two to Sears’s balance sheet. In a of translate die, expects to surprise so the insurer that the will does not us persons therefore $400,000. $450,000 Of Court, disburse accepting receive while Commis than given year may die course more captives true do not view that sioner’s predict. But as tables insurance, the actuarial believes that insurance af write large the law of pool increases size from business out filiates substantial over, ratio of actual and the numbers takes genuine E.g., group insurers. side converges on one. expected loss CIR, 1010, 1025- Corp. Oil v. 89 T.C. Gulf expected variance absolute size (1987) (dictum), part, aff’d in relevant 27 creases, the ratio decreases. (3d Cir.1990); F.2d v. AMERCO (52% CIR, (1991) writing 96 T.C. 18 to 74% shuck buyers of insurance Risk-averse parties); Harper Group unrelated v. for match risks. risk. Risk-neutral insurers CIR, (1991) (30% writing for per- 96 T.C. 45 risk. Each party gets extra No third So, too, unaffected; ap parties). unrelated courts dying is chance of son’s consequences peals are shared. have allowed the Commissioner death financial economics Stiglitz, professor “captive” cases as self-insur Joseph E. recharacterize Stanford, leading students of extending principle one without insurance, expert and an witness business. risk and outside firms substantial saying Sears, things nicely put States, Corp. United Beech Aircraft risk so much does not shift Cir.1986); (10th Stearns-Roger F.2d risk. diminishes pooling transforms and States, 774 F.2d Corp. v. United Posner, Analy- A. Economic See Richard Cir.1985). that frater court has held One (4th 1992). Insurance ed. Law sis genuine “insur corporations write nal of investors and companies, with diversified other, although they do no for each ance” claims, effectively potential oodles of group. Hu corporate outside business gains. The everyone risk-neutral. So (6th CIR, Cir. F.2d Inc. v. mana charge to loading willingly sureds 1989). The inves- their financial variance. reduce recharacterize transactions Power to profit. make a in the underwriters tors no to is warrant economic substance lack pooling an im- Convergence through is in the disregard form substance both puts aspect Allstate portant of insurance. up given has cases. The Tax Court bulk of larger pool, performing in a risks Sears’s formula, listing instead find effort to a in functions of the standard insurance one risk, risk shift- such as insurance criteria not. captive does way that a insurer a distribution, presence of ing, risk with furnishes Sears More: Allstate as insurance commonly accepted forms services hedging and administration same case); (this 99-101 96 T.C. at trade. It es- to all other customers. it furnishes by Judge (opinion at 57-58 Harper, 96 T.C. taxes, reserves, partici- pays state tablishes “facts and cir- describing this as a Jacobs (for insol- risk-sharing pools pates in state AMERCO, test); at 38 96 T.C. cumstances” on, insurers), just as would and so vent rejecting any uni- by Judge Korner (opinion company. States unrelated were an Sears remarking consid- that the fied “test” insur- as “real” recognize transaction or exclusive. independent “are not erations mandatory-insurance purposes of ance for informing each Instead, as read them we policies pur- (several were of laws fully consist- and, to the extent other for comply such laws chased to excess- ent, confining potential each other’s fleet, com- workers’ auto Sears’s es.”). Texas). per- Allstate’s From pensation Lists with- is a “test.” set of criteria No way. every this is real insurance spective means metes, bounds, weights, or required by out the reserves maintain It must identify neces- do not resolving conflicts manage- (not prudent mention law to state conditions; they never sufficient sary re- these ment). cannot withdraw Sears prescribe concrete Perhaps results. respects list though even they are occasionally expect is we can when the statute is as recharacterized capital. contributions to silent and both sides dispute of a have solid E.g., National Farmers Union Service points. For right Commissioner to Corp. States, United 400 F.2d 483 say that Sears buy does not Cir.1968); Crosby Gage Valve & Co. v. the same sense as natural person buys CIR, (1st 380 F.2d Cir.1967). Hartford insurance, auto and that it transfers less is a ITT, subsidiary Allstate risk when buying a policy from Allstate Suppose Sears. Sears buy to were from than when buying the same policy from Hartford the policies same it obtained from Nationwide. right Sears is say that Allstate, and Allstate were serve ITT’s Allstate sells product Sears passes needs. Then even the Commissioner would for insurance in industry, identical to concede that ITT both and Sears had “in- what Allstate sells other clients and surance,” yet nothing of substance would having consequences economic differing given differ—not Commissioner’s from a self-insurance Perhaps reserve. cession that Allstate policies wrote disputes of this do kind little more than standard commercial terms at competitive illustrate the conundrums inherent in an premiums. A trier of may, did, fact effort to collect a tax from corporations, as conclude that Allstate furnished Sears opposed to a tax by measured changes insurance. in wealth investors mea- sured their withdrawals for consump- tion, so as to encourage investment). II experts who during labored this trial to PMI Mortgage Company, Insurance define “insurance” all would agreed have part another group, Sears writes dispute is an artifact corpo- mortgage insurance. Mortgage PMI In tax, rate income divorcing taxa- surance and its own subsidiary, PMI Insur tion from persons’ wealth, real income, or ance Company (collectively PMI), insure consumption is bound to combine tricky against lenders the risk that will borrowers problems definitional with odd incentives. pay. The Tax opinion Court’s marshals Suppose we ask not “What is insur facts, 73-85, 96 T.C. at which are un ance?” but “Is adequate there reason to necessary to length. recount at Two domi transaction?”, recharacterize this given the (1) nate: The insured risk is a borrower’s norm that respects tax law the both form in payment. (2) default Mortgage insurers of the transaction and the form of the insist that the lender to try collect from corporate structure. put from follows borrowers or collateral; realize on the until

ting the way matter this that the decision the lender has foreclosed on or otherwise of the Tax Court must be affirmed. For obtained title to property securing the whether a possesses transaction substance (which loan also fixes the amount of the independent of consequences tax is an is loss), the insurer does pay. The last of sue something the Commissioner fact— statement is a simplification. Sometimes harps on prevails when she in the Tax PMI compromises with lender in ad E.g., Yosha, Court. 861 F.2d at 499 (citing vance foreclosure, of but the does cases). The transaction between Sears and require PMI to until the lender has Allstate has some substance independent good title. of tax effects. It increases the size of pool Allstate’s and so Lenders reduces the ratio must tell PMI about defaults expected between losses; and actual and puts steps they have taken to collect.. risk; Allstate’s reserves at PMI assigns establishes reserves for losses when claims administration persons to following (a) with a one of the occurs: proper- comparative advantage at that ty task. These has been conveyed to the lender but not effects are no less real than those of (b) loans sold party; to third the property is in and payments interest within corporate process foreclosure; (c) of the loan groups the Commissioner usually has been in default —which for four months or departure holding “is a radical majority’s of the number PMI also estimates more. things of ac- these three statement method of from annual one loans for which reported. Such prede- counting, not been section 832 and its has occurred reported but not incurred property for and casual- reserves have cessors staples of the insur- (IBNR) casualties reporting companies to use ty insurance business, does the Commissioner and investment income for underwriting and re- of IBNR the establishment not contest purposes 1921.” tax since Federal income reported an serves, identical provided that at 114-15. 96 T.C. a loss reserve deduct- support event would ac- The “annual statement method 832. under ible referred counting” Whalen to which will of these events Obviously not all prescribed by the National Association Bor- obligations on insurance. to lead Commissioners, compris- body Insurance payments up on overdue may catch rowers has regulators that ing state insurance Property sold at loans. their retire support of amicus curiae in filed a brief as proceeds ade- generate foreclosure statement re- The NAIC’s annual Sears. outstanding balance of cover the quate to to casualty insurers property quires PMI, Insurers, including there- the loan. pre- things certain into income take to reflect reserves discount their fore mortgage insurer A scribes reserves. PMI dis- (and industry’s). experience cate- reserves the three include must things out. heavily, as turned too counted used, plus re- PMI gories of losses re- year-end PMI established For The losses. Commission- serves for IBNR dis- The amounts million. serves of $35.9 complied PMI er concedes that of these years on account in later bursed agencies requirements. Federal NAIC’s So million. $51.5 loans came defaulted Housing Administra- as the Federal such the Com- small. But its reserve was too loans account engaged guaranteeing reserves that PMI’s tion believes missioner limited purposes. exactly as did. big for She reserves PMI too tax loss were for million PMI $19.5 reserve regulators the loss deduction believe for other 1982, making comparable cuts all, understating its loss erred, if at her sustained years, and regu- surprise here. State No reserves. “insurer held that The court decisions. and preserve assess strive to lators has until the insured incur a loss cannot estimates Accurate solvency of insurers. wit, loss, to economic the defined suffered task, the former losses are essential mort- to the takes title the lender after latter contribute high estimates claim for property submits gaged additional to obtain by requiring insurers time, By 114. T.C. at loss.” poli- writing of new capital or curtail “reserve”; course, need for a there is no generous Regulators therefore favor cies. obligation. is a payment current tax losses, federal while the estimates taxes approach does affect court’s ma- low estimates. prefers collector steady substan- state but in a of insurers this when stressed of the Tax Court jority with taxes of those tially increases the follow PMI could not concluding that losses) by growing growing businesses of State objectives “The method: NAIC’s the losses when the time postponing ob- not identical regulation ... are be deducted. State income taxation. jectives, of Federal on two decision this' contests Sears regulators are concerned insurance limit first, 832 does grounds: § insurer_ In con- solvency of have to casualties deductions loss are concerned trast, statutes Federal tax second, being payable; point reached income of taxable the determination deciding when erred Tax Court 110. 96 T.C. basis.” on an annual Judge obligation attaches. insurer’s tax “[fjederal what about Generalities by Chief respect (joined in Whalen not control with” do concerned statutes Jacobs) agreed Judge Nims ordinary no 832 is Section cases. concrete concluding that argument, former expressly rule. links 832, then, federal taxes to “gross § income” is a version of the NAIC’s annual statement: net income. “premiums earned Both the earned”

(a) and “losses go In the case of incurred” property casualty] into de- [a termining “gross company income”—which insurance ... the term is to “taxable be “computed on the basis of gross income” means the the underwriting income as de- (b)(1) investment fined in exhibit of the subsection less annual state- the deduc- ment approved by the (c). tions subsection National allowed Association of Insurance Commissioners”. State insur- (b)(1) “gross term income” means preferences commissioners’ about re- the sum of—

serves thus are not some intrusion on fed- eral policy; tax using their annual state- (A) gross the combined amount earned ment is federal tax law. See Brown v. year, during the taxable from invest- Helvering, 193, 201, 291 U.S. 54 S.Ct. ment income and from underwriting (1934): 78 L.Ed. 725 deductions “[T]he provided subsection, income as in this allowed for additions to the reserves of computed on the basis the under- companies are technical in char- writing and investment exhibit of the acter and are specifically provided for in approved by annual statement the Na- the Revenue Acts. These technical re- tional Association of Insurance Com- required serves are made by be missioners. ... insurance laws of the several States.” True enough, the definition of loss re- (b)(3) The term “underwriting income” 832(b)(5) serves in does not refer to the premiums means the earned on insurance annual statement. (b)(5) Yet subsection during contracts year taxable less losses component are a (b)(1) of subsection losses incurred expenses incurred. income, which is computed to be according to the NAIC’s statement. It is scarcely (b)(5)(A)The term possible “losses to use the incurred” statement when deter- means losses incurred during mining one but taxable not the Although other. year on insurance computed impossible contracts is not nothing impos- —almost follows: sible in (b)(5) divorcing tax losses law— from the (i) paid To annual statement during computations losses the taxable would year, make no salvage sense in deduct terms of the struc- reinsurance ture of the statute or during genesis. recovered year. taxable Subsec- (b)(5) tion prescribes a of toting method (ii) up obtained, To the result so add all losses derived almost verbatim from the

unpaid losses ... outstanding at the annual statement used in when Con- end of year the taxable and deduct all gress provision. enacted the unpaid losses ... outstanding at the end of the preceding year. taxable If annual statements depart were to quotation This includes changes made in from an approximate effort actual “loss- 1988, but do these not affect the current es” (b)(1) then (b)(5) subsections might dispute. 832(b)(1)(A) Section requires an come into conflict. This occurred when insurer to use “the underwriting and states insurers up to mark vestment exhibit annual statement loss reserves a percentage. The Com- approved by the National Association of missioner objected to the deduction of Insurance Commissioners” to determine losses, its these up marked issuing regulations “gross Contrary income.” to usual notions in 1943 and 1944 requiring insurers to use “gross income,” concept this experience, 832 § and not prescribed formulas - does not denote all rules, inflows revenue. state as the basis of loss reserves. Instead it “premiums refers to (a earned” Modified regulations versions of these premium not is “earned” period until the still in force but present no longer the for which purchases occurs) coverage insurers conflicting state and federal less “losses incurred.” purposes For of demands. In 1950 the NAIC came ’round

867 than the deductible or view, chang- turns to be less out point of Commissioner’s carrier, from his own the collects victim feder- so that both statement ing its annual pursue not to the other driv- which decides require insurers governments state al and may years the take before er’s carrier. ... unpaid losses “only actual reserve to quantified and the the loss is amount of which, upon the based in amounts stated Yet reserves negligent driver identified. expe- company’s the case and in each facts regu- for such a meet the case established cases, represent a fair with similar rience actual, case-based loss- latory definition amount the of the reasonable estimate and es, insurer be insane of an not and it would Treas. pay.” to be company will reserves for such casualties. to establish 1.832-4(b). The Tye,W. Con- Reg. Charles An health insured Or consider insurance. Company and Form Insurance vention 31. Medi- a attack on December has heart (1951), Problems, Tax L.Rev. required over the next cal care will be dispute the history of this and the narrates policy years), months the PMI used actual of its resolution. details pay receipt obligation the to conditions reserves, generate its loss to cases at rates usual and a bill physician’s losses; it com- underestimated the event (with vicinity provision customary in the requirements the plied with both NAIC’s high or the if the fee for arbitration seems Having regulations. Treasury’s and the again unnecessary). Once medical services ap- annual statement the NAIC’s followed services have may time before be some the loss to deduct PMI is entitled proach, agreeable rates and billed been rendered computed. so reserves follow that Does it to the carrier. worth, we believe it is For what the bill wait till it receives insurer must under the prevail to be entitled PMI would At oral establishing a ar- reserve? before requirements of the independent regulation an- for the gument Commissioner counsel reg NAIC’s annual statement. can- “yes,” but Commissioner swered losses” but unpaid says “actual ulation collapses it, for this answer not mean that these be any requirement losses omits and bills “reserves” distinction between immediately payable. Once quantified Harco return mail. Cf. Hold- payable by quantified, an accrual-basis obligation is States, F.2d ings, Inc. United Yet taxpayer may deduct it. Cir.1992). de may insurers suppose that regulation conclusion the Tax Court’s Just so any old accrual-basis to losses denied duct It has mortgage insurance. about Supreme supposition taxpayer, loss, does quantification fused Dynamics when General confirmed title, with lender tenders until the not occur for its employer paying holding that an Per- loss. of the covered the occurrence an insur medical without employees’ care speak of a bor- artificial to haps it seems not deduct IBNR could er’s intermediation payments few make a to rower’s failure context, cost of medi (in expenses up, catch The borrower a “loss.” employees already rendered cal services may reimburse property the sale of not have employer did for which immediate casu- not an Default is lender. hand). bills between a collision sense that alty in the (and peo- in estab- cars issues standard crushes some automobiles Consider two portend it does policy spot, A of auto insur- lishing ple) reserves. on the high probability its outlays requires the issuer Yet acid An accident infarction does. myocardial in a collision. is at fault sured insur- leaves the default May the insurer test is whether during December. occurs sup- Let us payment. liability responsible er its reserves? add to only, for 1982 issues a obliged PMI legally pose that fixed, is not insurer for the pay- four last omits the and the borrower determines pay until a court neglects to The year. lender (or ments of the under- fault was at policy-holder substitute) (or purchase policy the firm renew concedes), then and even so writer forecloses lender Eventually loss for 1983. pay if the on to called may not be 868

and sends PMI a bill. pay? Must PMI The Tax Court is free to consider the Commis- answer is yes; the default is the event argument, sioner’s which it did need triggering coverage (Nei- under policy. before, reach that PMI’s returns for 1980 ther the Commissioner nor the Tax Court and 1981 did not use proper case-based disagrees representations with PMI’s about method of approximating its loss reserves. its obligations under policy.) Thus to statutory state its “gross income” 1982 NOLAND, Senior Judge, District accurately, PMI must take into income the concurring in part and dissenting part. premiums during earned 1982 and exclude join IWhile the majority’s opinion on the a reserve for losses attributable to those premiums insurance issue, finding the premiums, including the bills that will same well-reasoned, to be I respect- must straggle in during years future on account fully dissent on the mortgage guarantee of defaults began in 1982. The Tax insurance issue for the reason stated Court’s observation that federal law calls Judge Mary Ann fifty- Cohen’s for “determination of taxable income on an (53) three page majority opinion1 (approxi- basis”, annual 110, 96 T.C. at turns out to mately (12) pages twelve of which were support PMI, once seewe that default is issue). dedicated to this As Judge Cohen the event triggering coverage under the states her opinion: leaving hook, insurer on the waiting “In to see common things out, understanding, how turn an even insurance agreement never contract is receives protect another penny premi- ums. insured a third-party beneficiary) against a direct or indirect economic loss Corporate taxation teems with artificial arising from a defined contingency.” Al and formal distinctions, and the taxation of lied Fidelity Corp. Commissioner, v. insurers has more than share them. 1068, (1976), T.C. 572 F.2d Whether aff'd. 832 attributable to some fine Cir.1978). The contin defined ly honed sense of the economics of the gency in this case was the insured’s loss insurance political business or to pressure on the mortgage loan. It follows that is not for to say. us Provisions of the the insurer cannot incur a loss until the Internal Revenue Code do not conflict with insured has suffered the defined econom policy,” “tax as the Commissioner seems to loss, wit, ic after the lender takes title believe. They are tax policy to be to the mortgaged property and submits a Usually enforced. enlarges the reve claim for loss. — E.g., nue. Holywell Corp. Smith, U.S. -, 112 S.Ct. Sears, 117 L.Ed.2d 196 Roebuck & Co. v. Commissioner, — (1992); CIR, -, INDOPCO v. U.S. (T.C.1991). U.S.T.C. 113-114 Judge 112 S.Ct. (1992). L.Ed.2d 226 analysis An Cohen’s regarding timing Internal Revenue eager Service to dish loss, i.e., out insurer’s event, taxable the medicine of prepared literalism-must be compelling. to swallow it. Sears is entitled to prevail on both branches of this case. judg

ment of the Tax Court is affirmed with

respect to the dispute Allstate and reversed respect to the dispute. PMI The case

is remanded for the redetermination of the

deficiency in opinion. accord with this Judge

1. majority Cohen authored the opinion. issue respect dissented with mortgage to (2) judges Court, Two Judges the Tax guarantee Chabot, Judge issue. Ruwe, Wells and participate did not joined Parker, in the con- by Judge respect concurred with sideration of opinion. Judge the Court’s mortgage Whal- to the insurance issue and dissented en disagreement dissenting opinion authored signaling respect his premiums to the insurance issue. majority Thus, on both only (3) issues. three members of the Tax Court Nims, joined Jacobs, Chief by Judge respect dissented with mortgage guaran- respect curred with premiums to the insurance tee insurance issue.

Case Details

Case Name: Sears, Roebuck and Co. And Affiliated Corporations, Cross-Appellee v. Commissioner of Internal Revenue, Cross-Appellant

Court Name: Court of Appeals for the Seventh Circuit

Date Published: Oct 14, 1992

Citation: 972 F.2d 858

Docket Number: 91-3038, 91-3688

Court Abbreviation: 7th Cir.