209

R.V.I. GUARANTY CO., LTD. AND SUBSIDIARIES, PETITIONER

v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 27319–12. Filed September 21, 2015. 

P sold contracts for which the company’s name is an 

acronym—‘‘residual value insurance.’’ The parties insured 

under these contracts included leasing companies, manufacturers, and financial institutions. The assets insured included 

passenger vehicles, commercial real estate, and commercial 

equipment. The insured parties were the lessors of these 

assets or provided financing for such leases. When pricing a 

lease, a lessor must estimate what residual value the asset 

will have when it is returned to him at the end of the lease. 

P insured against the risk that the actual value of the asset 

upon termination of the lease would be significantly lower 

than the expected value. R concluded that P’s policies do not 

constitute insurance for Federal income tax purposes. This 

conclusion was based chiefly on a determination that the lessors were purchasing protection against an investment risk, 

not an insurance risk. 

1. Held: The risks insured by the policies P sold cover an 

insurance risk. 

2. Held, further, the policies P sold constitute contracts of 

‘‘insurance’’ for Federal income tax purposes. 

Dennis L. Allen, M. Kristan Rizzolo, and Daniel H. 

Schlueter, for petitioner. 

Laurie A. Nasky and John Anthony Guarnieri, for 

respondent. 

LAUBER, Judge: During 2006 petitioner R.V.I. Guaranty 

Co., Ltd., & Subsidiaries (RVI or petitioner) sold contracts for 

which the company’s name is an acronym—‘‘residual value 

insurance.’’ The parties insured under these contracts 

included leasing companies, manufacturers, and financial 

institutions. The assets insured included passenger vehicles, 

commercial real estate, and commercial equipment. The 

insured parties were the lessors of these assets or provided 

financing for such leases. 
210 145 UNITED STATES TAX COURT REPORTS (209) 

1 All statutory references are to the Internal Revenue Code as in effect 

for the tax year at issue. All Rule references are to the Tax Court Rules 

of Practice and Procedure. We round all dollar amounts to the nearest dollar. 2The parties have filed a stipulation of settled issues resolving the other 

two allegations of error set forth in the petition, namely, the ‘‘alternative 

insurance adjustments’’ issue described in paragraph 4.b and the ‘‘imputed 

interest’’ issue described in paragraph 4.c. 

When pricing a lease, a lessor must estimate what residual 

value the asset will have when it is returned to him at the 

end of the lease. RVI insured against the risk that the actual 

value of the asset upon termination of the lease would be 

significantly lower than the expected value. Typically, the 

insured value was set slightly below the expected residual 

value; if the asset’s actual value at the end of the lease was 

lower than the insured value, RVI would pay the difference. 

On audit, the Internal Revenue Service (IRS or 

respondent) concluded that the policies RVI offers do not constitute ‘‘insurance’’ for Federal income tax purposes. This 

conclusion was based chiefly on a determination that the lessors were purchasing protection against an investment risk, 

not an insurance risk. Concluding that petitioner was therefore not an ‘‘insurance company’’ entitled to compute its taxable income using the insurance accounting rules set forth in 

section 832, the IRS determined a deficiency of $55,197,620 

for the 2006 taxable year. 1

Petitioner timely petitioned for redetermination of this 

deficiency. After concessions, 2 the sole issue for decision is 

whether the RVI policies constitute contracts of ‘‘insurance’’ 

for Federal income tax purposes. We hold that they do. 

FINDINGS OF FACT 

Some of the facts have been stipulated and are so found. 

The stipulations of facts and the attached exhibits are incorporated by this reference. At the time petitioner filed its petition, its principal place of business was in Connecticut. 

R.V.I. Guaranty Co. Ltd. (RVIG) is incorporated in Bermuda. At all times since its incorporation, it has been registered and regulated as an insurance company in compliance 

with the requirements of the Bermuda Insurance Act of 

1978. RVIG is the common parent of an affiliated group of 

corporations that includes R.V.I. America Insurance Com-
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 211

pany (RVIA). RVIA was incorporated in 1994 as a property 

and casualty (P&C) insurance company. It began business in 

1995 and is domiciled in Connecticut. 

During 2006 RVIA engaged exclusively in the business of 

issuing policies of residual value insurance. RVIA reinsured 

with RVIG almost all of the risk represented by these policies. Bermuda law requires insurance companies to meet 

specified requirements governing solvency, liquidity, minimum capital, and surplus. RVIG met or exceeded all of these 

requirements during 2006. 

In 1999 RVIG elected under section 953(d) to be treated as 

a domestic corporation for Federal income tax purposes. That 

election was in effect during 2006 and has not been revoked. 

RVI filed a consolidated Federal income tax return for 2006 

on Form 1120–PC, U.S. Property and Casualty Insurance 

Company Income Tax Return, using a calendar fiscal year. 

The Policies 

Petitioner issued residual value insurance policies to unrelated insureds engaged in the business of leasing assets or 

financing asset leases. At the inception of any lease, the 

lessor anticipates that the leased property will depreciate 

during the lease term to a probable ‘‘residual value’’ due to 

normal wear and tear. Numerous factors, however, can cause 

property to decline in value more precipitously than 

expected. These factors may include excess wear and tear, as 

well as macro-economic events like recession, high interest 

rates, or price deflation. The residual value of an asset may 

also be adversely affected by risks to which that particular 

property is subject. For example, commercial real estate 

might drop in value because of urban blight in a particular 

neighborhood or the bursting of a national real estate bubble. 

Industrial equipment might drop in value because of technological change or local factory closings. Passenger vehicles 

might drop in value because of high oil prices or a shift in 

consumer preferences toward battery-powered cars. 

To protect against such risks, the lessor or finance company could purchase a policy of residual value insurance. In 

recent years, such policies have been issued by numerous 

well-established insurance companies, including American 

International Group (AIG), Chubb Group of Insurance 
212 145 UNITED STATES TAX COURT REPORTS (209) 

Companies, Royal Insurance Company of America, ACE 

Group, QBE Group, and Great American Insurance Group. 

During the tax period in issue, RVIA was a leading issuer of 

residual value insurance policies (RVI policy or policies). 

Each RVI policy indemnified the insured against loss in 

the event that assets insured under the policy had an actual 

value at lease termination lower than the insured value that 

the policy specified for those assets. Typically, the insured 

value was slightly below the expected residual value. The 

insured thus retained the risk for the initial layer of loss 

(between the expected residual value and the insured value), 

and RVIA indemnified the insured against the remaining 

risk of loss (between the insured value and a lower actual 

residual value). 

A simple example may illustrate the mechanics of a typical 

RVI policy. Assume that an automobile with an initial purchase price of $20,000 is leased for three years and that its 

expected residual value upon lease termination is $10,000. 

RVIA might insure that automobile for 90% of the expected 

residual value, yielding an insured value of $9,000. If, at 

lease termination, the automobile had an actual residual 

value of $8,500, the RVI policy would indemnify the lessor 

for $500, assuming the lessor satisfied all terms and conditions of coverage. The lessor would bear the $1,000 initial 

layer of loss. 

RVI policies typically called for a single premium payable 

at inception of the contract. The premiums charged depended 

on how much risk RVIA assumed, i.e., on the magnitude of 

the gap between the expected residual value and the insured 

value. Generally speaking, petitioner expected losses on its 

policies to be quite low, and it priced the insurance accordingly. The policy premium rarely exceeded $4 for each $100 

of insurance protection provided and (depending on the type 

of property) could be as low as 50 cents for each $100 of coverage. 

The RVI policies included standard terminology and policy 

provisions typical of insurance policies generally, including 

the requirement of an ‘‘insurable interest’’ and provisions 

governing claims, exclusions, payment of losses, and conditions to coverage. For RVIA to have liability under a contract, the insured had to meet various conditions precedent, 

e.g., paying the premium, having an ownership interest in 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 213

3FASB refers to the Financial Accounting Standards Board, the organization responsible for establishing Generally Accepted Accounting Principles (GAAP) in the United States. 

the covered property, providing written notice of a claim, and 

complying with the terms of endorsements regarding return 

conditions. Upon payment of a loss RVIA was subrogated to 

any rights of recovery the insured might have against third 

parties concerning that property. 

RVIA sometimes included in its policies other limitations 

on loss, such as a policy deductible. By accepting terms that 

limited RVIA’s risk of loss, an insured could often reduce its 

premium. For example, the insured might elect to exclude 

from coverage assets of volatile value, or might accept strict 

‘‘return conditions’’ requiring the covered property to be in 

excellent condition at lease termination. 

Certain RVI policies provided for ‘‘pooling.’’ Under 

‘‘pooling,’’ a single policy would cover multiple assets under 

leases terminating within a specific period (say one year). A 

‘‘loss’’ would be deemed to occur if the aggregate residual 

value of those assets was less than their aggregate insured 

value. 

RVIA wrote three basic types of policies—‘‘FASB,’’ ‘‘primary,’’ and ‘‘hybrid.’’ 3 An FASB policy was one under which 

the insured value of the covered property was set at a level 

to provide the lessor with enough insurance coverage to 

enable it to use ‘‘direct financing lease’’ accounting. See 

Statement of Financial Accounting Standards No. 13 (a lease 

may be classified as a ‘‘financing lease’’ if the present value 

of the lease payments and any guaranteed portion of the 

residual value exceeds 90% of the value of the asset). Under 

a ‘‘financing lease’’ the lessor can accelerate income into the 

lease’s earlier years for financial accounting purposes. A primary policy was one under which the insured value was not 

set at a level tied to ‘‘financing lease’’ accounting. A hybrid 

policy was one under which each insured asset was subject 

to both primary and FASB coverage. 

RVIG’s business in 2006 consisted principally of reinsuring 

the risks represented by RVIA’s policies of residual value 

insurance. As measured by net unearned premiums, 97.5% of 

RVIG’s business at year end 2006 was attributable to RVIA 

risks. RVIG also reinsured risks under residual value policies 
214 145 UNITED STATES TAX COURT REPORTS (209) 

4 As measured by remaining unearned premiums, the passenger vehicle 

segment accounted for 31.9%, the commercial real estate segment for 

34.6%, and the commercial equipment segment for 33.5% of RVIA’s business. Total unearned premiums for these three segments at year end 2006 

were $47.5 million, $51.6 million, and $50 million, respectively. As measured by premiums earned during 2006, the passenger vehicle segment accounted for 58.8%, the commercial real estate segment for 12.6%, and the 

commercial equipment segment for 28.6% of RVIA’s business. The percentages for the latter two segments were smaller as measured by earned premiums because the insured assets were leased for longer terms, with the 

result that the premium was ‘‘earned’’ more slowly. Total earned premiums 

for the three segments during 2006 were $27.6 million, $5.9 million, and 

$13.4 million, respectively. 

issued by other insurance companies. Reinsurance of risks 

arising under other types of contracts represented less than 

1% of RVIG’s business. 

RVIA grouped its policies into three business segments: 

passenger vehicles, commercial real estate, and commercial 

equipment. ‘‘Commercial equipment’’ included aircraft, industrial equipment, and rail cars. At year end 2006 RVIA had 

951 policies in force insuring 714 unrelated insureds. The 

assets covered by these policies included 754,532 passenger 

vehicles, 2,097 real estate properties, and 1,387,281 pieces of 

commercial equipment. Within each business segment, RVIA 

insured a wide variety of assets, i.e., many different makes 

and models of automobile, various kinds of buildings in 

diverse geographical locations, and many different types of 

industrial equipment. The passenger vehicles comprised 20 

different types of automobile (including pickup trucks, 

sedans, SUVs, and sports cars) and approximately 50 different vehicle models. The commercial real estate comprised 

15 different types of properties (including retail stores, warehouses, industrial buildings, office buildings, and motels) in 

seven different geographic regions. And the commercial 

equipment comprised 30 different types of equipment, 

including aircraft, rail cars, construction equipment, and 

shipping containers. 

Each business segment accounted for roughly one-third of 

RVIA’s business as measured by remaining unearned premiums at year end 2006. 4 The terms of the leases to which 

the covered assets were subject varied considerably within 

business segments and from one segment to another. The 

lease terms for vehicles were typically one to five years; the 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 215

5 In 2007 RVIA sustained a substantial loss on a policy covering an office 

building in El Paso, Texas, after the building’s lead tenant, El Paso Natural Gas, moved to Houston. The risk causing this loss was uncorrelated 

with risks that could affect the value of buildings that RVIA insured in 

other locations, much less the value of motels and convenience stores coming off lease 15 years later. 6 Respondent objected to the admissibility of financial information for 

2007–2013 as post-dating the tax year in issue and ‘‘irrelevant for that reason.’’ The Court overruled this objection. A loss under an RVI policy is payable only at the end of a lease, and many of the insured assets were subject to very long leases. By definition, therefore, many RVI policies in exContinued 

lease terms for real estate were much longer, often 28 years; 

the lease terms for commercial equipment varied greatly. 

Even where assets (such as vehicles) were subject to the 

same lease term (such as three years), the policies insuring 

them could end in different years because initiated at different times. 

The events that could cause losses under RVI policies 

varied considerably. Certain macro-economic events, such as 

recessions, high unemployment, or unexpectedly high 

interest rates, could affect various insured assets similarly. 

But many events that could cause loss were uncorrelated. 

For example, technological obsolescence of a type of commercial aircraft probably would not affect the value of an office 

building. And risks within a given business segment were 

often uncorrelated. For example, the loss of a major tenant 

in a Chicago office building likely would not affect the value 

of a building leased to a restaurant in New York. 5

At year end 2006 the total insured value of RVIA-insured 

property was roughly $9.1 billion in the passenger vehicle 

segment, $2.1 billion in the commercial real estate segment, 

and $4.9 billion in the commercial equipment segment. 

Divided by type of policy, the total insured value of property 

covered under FASB policies was about $5.0 billion, under 

primary policies was about $3.7 billion, and under hybrid 

policies was about $7.4 billion. (All amounts ignore reinsurance). 

Petitioner paid significant claims under the RVI policies 

and incurred significant insurance losses. On an absolute 

dollar basis, RVIA paid more than $150 million in claims 

through 2013, which included more than $28 million in 

claims on FASB policies. 6 An insurance company’s ratio of 
216 145 UNITED STATES TAX COURT REPORTS (209) 

istence in 2006 could not have come to a payout resolution, and could not 

possibly have had a loss, as of year end 2006. Yet many of these policies 

could (and did) experience significant losses upon lease termination. In 

order to display accurately RVIA’s loss experience under the policies it 

held during 2006, it is necessary to consider the complete terms of these 

contracts. 

paid losses (including related loss adjustment expenses) to 

earned premiums is generally called its ‘‘loss ratio.’’ From 

RVIA’s inception through 2006, its cumulative loss ratio was 

27.7%. From RVIA’s inception through the end of 2013, its 

cumulative loss ratio increased to about 34%. Its annual loss 

ratios from 2000 through 2013 were as follows: 

Year Loss ratio 

2000 ................................................................... 1.0% 

2001 ................................................................... 0.9% 

2002 ................................................................... 0.3% 

2003 ................................................................... 1.3% 

2004 ................................................................... 64.2% 

2005 ................................................................... 48.6% 

2006 ................................................................... 33.2% 

2007 ................................................................... 20.4% 

2008 ................................................................... 97.9% 

2009 ................................................................... 11.5% 

2010 ................................................................... 27.1% 

2011 ................................................................... 18.1% 

2012 ................................................................... 0.2% 

2013 ................................................................... 30.7% 

Regulation of Petitioner 

The residual value policies were treated as ‘‘insurance’’ for 

insurance regulatory purposes during 2006 by all States in 

which RVIA sold products, including Connecticut, New York, 

Pennsylvania, Ohio, Texas, Illinois, and Georgia. RVIA was 

required to be (and was) licensed to sell insurance in each 

State in which it issued policies. It was required to pay to 

those States insurance premium taxes, which totaled 

$639,764 for 2006. It was required to file with the insurance 

department of each State quarterly or annual ‘‘statutory 

financial statements.’’ These statements were required to be 

prepared in accordance with ‘‘statutory accounting principles’’ 

(SAP) prescribed by the National Association of Insurance 

Commissioners (NAIC). RVIA was additionally required by 

Connecticut, its State of domicile, to meet minimum capital 

and surplus requirements, which it met for 2006. 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 217

7The Statements of Standard Accounting Practice (SSAP) provide guidance for the completion of an insurer’s statutory financial statements. The 

SSAP are issued by NAIC and published in its Accounting Practices and 

Procedures Manual. SSAP 62R, cited in the text, was originally drafted to 

establish rules of accounting for reinsurance. However, the evidence at 

trial established that practitioners regularly apply its principles to direct 

insurance as well. 8 RVIA was required by Connecticut, and by each other State in which 

it was licensed, to secure an annual actuarial report addressing the reasonableness of its reserves for unpaid losses, loss adjustment expenses, 

and unearned premiums. The PwC actuarial report opined that RVIA’s reserves complied with Connecticut insurance law and with accepted actuarial standards. Petitioner’s expert, Michael E. Angelina, explained that, 

if underwriting risk had not been present, ‘‘I would expect the various reports to have highlighted this issue. This has been my past experience 

with the large accounting firms and regulatory agencies.’’ Kent E. Barrett, 

one of respondent’s experts, testified that if BDO or PwC had believed that 

the RVI policies did not constitute ‘‘insurance’’ for SAP purposes, they 

would have had an obligation to say so. Neither BDO nor PwC raised any 

question on this point. 

Under the SAP, an insurer may not treat a contract as 

‘‘insurance’’ in its statutory financial statements unless it 

assumes a significant insurance risk under the contract and 

faces a reasonable possibility of incurring a significant loss. 

See Statement of Standard Accounting Practice 62R. 7 RVIA 

determined that it was required to account for its policies as 

insurance—and it did in fact account for those policies as 

insurance—in its statutory financial statements, including 

those it prepared for 2006. RVIA’s independent auditor, BDO 

Seidman LLP (BDO), examined its 2006 statutory financial 

statements and issued an unqualified opinion that they were 

fairly stated in accordance with SAP. 

The Connecticut Insurance Department examined RVIA’s 

2006 statutory financial statements for compliance with SAP. 

During this examination, an actuary from the department 

met with an actuary appointed by RVIA to review its annual 

actuarial report prepared by PricewaterhouseCoopers LLP 

(PwC). Following this review, the department raised no questions concerning RVIA’s accounting for its residual value 

policies as ‘‘insurance.’’ 8

RVIG was licensed to sell insurance and reinsurance in 

Bermuda. It likewise accounted for the residual value policies 

as ‘‘insurance’’ in its statutory filings. RVIG’s independent 

auditor, Arthur Morris & Co., examined its 2006 statutory 
218 145 UNITED STATES TAX COURT REPORTS (209) 

9During the examination, the IRS issued Technical Advice Memorandum 201149021 (Aug. 30, 2011) outlining its position concerning these 

issues. 

financial statements and issued an unqualified opinion that 

they were fairly stated in accordance with Bermuda insurance law. An independent actuary reviewed its reserves for 

unpaid losses and loss adjustment expenses and opined that 

those reserves complied with Bermuda law and accepted 

insurance practice. 

Petitioner received ‘‘insurance strength ratings’’ in 2006 

from the major insurance rating agencies. Fitch Ratings gave 

petitioner an A+ strength rating. Moody’s Investors Services 

gave it an A3 rating. Standard & Poor’s Insurer Credit 

Report gave it an A rating. 

Tax Return and Notice of Deficiency 

On its 2006 consolidated return, petitioner reported its 

income and expenses consistently with the requirements of 

section 832 governing computation of ‘‘insurance company 

taxable income.’’ The IRS issued a notice of deficiency disallowing petitioner’s use of insurance company accounting. It 

determined that: 

residual value insurance policies that insure against market decline are 

not insurance contracts for Federal income tax purposes. It is further 

determined that [petitioner must] calculate its annual taxable income 

using IRC sections 451 and 461 instead of IRC section 832; this 

accounting method change is required since [petitioner] no longer qualifies as an insurance company since [it] does not meet the requirements 

of IRC section 831(c).[9]

Expert Testimony 

Both parties offered extensive expert testimony at trial. 

This testimony addressed various characteristics of ‘‘insurance’’ as applied to petitioner’s residual value policies. These 

characteristics include risk shifting, risk distribution, commonly accepted notions of insurance, and the presence of 

insurance risk. 

Risk Shifting and Risk Distribution 

Petitioner offered, and the Court recognized, Michael E. 

Angelina, executive director of the Academy of Risk Management and Insurance at St. Joseph’s University, as an expert 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 219

10Professor Angelina noted that ‘‘the presence of systemic risk does not 

mean an insurer has failed to pool risk. * * * [T]he ability to diversify risk 

at the more expected levels may have adverse consequences in tail scenarios where there is no ability to diversify. This was clearly evident in 

2008 during the mortgage crisis as some mortgage guarantee insurers 

were not able to recover from their systemic failure.’’ 

on the topics of insurance, risk management, and actuarial 

science. Professor Angelina opined that ‘‘insurance at its root 

has two fundamental attributes: risk shifting and risk distribution.’’ He characterized the risks against which petitioner insured as ‘‘low-frequency/high severity risks,’’ analogizing them to earthquakes, major hurricanes, and other 

‘‘catastrophic risks.’’ He explained that petitioner distributed 

these risks in the same way that other P&C companies distribute catastrophic risk, e.g., by ‘‘underwriting its risks to 

avoid over-concentration in any one segment (passenger 

vehicle, commercial real estate, and commercial equipment) 

or geographic area.’’ He explained that petitioner also 

engaged in ‘‘temporal distribution’’ of its risks by insuring 

different forms of property, with lease terms of varying 

length, under policies terminating in different years. This 

‘‘enabled RVI to avoid a ‘run on the bank’ scenario in 

extreme economic downturns.’’ 10

Petitioner offered, and the Court recognized, Robert S. 

Miccolis as an expert on insurance and actuarial science, 

particularly in the field of mortgage guaranty insurance. Mr. 

Miccolis is an actuary with Deloitte Consulting LLP and 

president-elect of the Casualty Actuarial Society. He opined 

that, for approximately 98% of the RVI policies, it was 

‘‘reasonably self-evident’’ that risk was transferred from the 

insured to RVIA. 

Petitioner offered, and the Court recognized, Nancy L. 

Litwinski, a certified public accountant (C.P.A.), as an expert 

in insurance accounting and the application of statutory 

accounting principles by insurance companies and state regulators. Ms. Litwinski testified that RVIA’s policies were 

consistently treated as insurance for SAP purposes by RVIA, 

by its independent auditors, and by the Connecticut Insurance Department. This treatment, she testified, was based on 

the determination that the residual value policies constituted 

‘‘insurance’’ under SAP. 
220 145 UNITED STATES TAX COURT REPORTS (209) 

11For example, for the policy that RVIA issued to U.S. Bank in 2005, 

for which Mr. Cook computed a loss ratio of ‘‘zero,’’ RVIA ultimately paid 

more than $12 million in claims after receiving only $8 million in premiums, producing a loss ratio in excess of 150% for the first declaration 

period alone. Moreover, of this $12 million in losses, $8 million was attributable to the policy’s FASB coverage. This contradicted Mr. Cook’s assertion that RVI’s risk of loss under its FASB policies was ‘‘remote.’’ 

Respondent offered, and the Court recognized, Charles 

Cook, a managing director of MBA Actuaries LLC, as an 

expert in insurance and actuarial science. Mr. Cook compared petitioner’s policies to ‘‘property catastrophe coverages 

such as windstorm or flood.’’ He opined that no meaningful 

risk of loss was transferred from the policyholder because 

RVIA ‘‘did not appear to be exposed to significant loss.’’ He 

opined that petitioner’s risk of loss, especially under the 

FASB policies, was ‘‘remote.’’ Mr. Cook agreed that petitioner 

did distribute risk geographically, temporally, and among 

diverse business segments. But he concluded that its risk 

distribution and diversification were less beneficial to it than 

is typical for insurers because the risks it assumed were 

more highly correlated. 

In analyzing risk transfer, Mr. Cook limited his review to 

losses that had occurred as of year end 2006. In opining that 

petitioner’s risk of loss was ‘‘remote,’’ he relied on the fact 

that many policies had experienced no losses as of that date. 

On cross-examination, it was pointed out that many of these 

policies could not possibly have experienced a loss as of year 

end 2006 because losses were payable only upon lease termination and many policies still had multiple years to run. 

Upon review of petitioner’s post-2006 experience, Mr. Cook 

acknowledged that many policies for which he had computed 

a loss ratio of ‘‘zero’’ actually experienced significant losses. 11

Mr. Cook ultimately conceded these errors, acknowledging 

that his method of computing loss ratios systematically 

understated the true extent of petitioner’s losses. 

Respondent offered, and the Court recognized, Kent E. 

Barrett, a C.P.A. at Veris Consulting, as an expert with 

respect to International Financial Reporting Standards 

(IFRS), GAAP, and SAP. Mr. Barrett opined that petitioner’s 

FASB policies had only a remote chance of loss and did not 

transfer significant underwriting risk. In making this assessment, Mr. Barrett relied on the fact that most of the policies 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 221

on RVIA’s books during 2006 ‘‘had experienced no claim payments of significance as of the end of 2006.’’ 

Commonly Accepted Notions of Insurance 

Professor Angelina testified that the RVI policies have all 

the indicia of standard insurance policies and are treated as 

‘‘insurance’’ by State regulators and other participants in the 

insurance marketplace. In formal respects, the policies ‘‘have 

standard sections encompassing declarations, insuring agreements, definitions, exclusions, conditions, and miscellaneous 

provisions.’’ The policies have standard provisions that 

‘‘define the duties of an insured after loss, how losses are to 

be settled, and if any remediating elements need to be 

reflected in the final loss settlement.’’ RVIA maintained 

actuarially sound insurance reserves for its policies and 

accounted for all transactions using proper insurance 

accounting. 

Mr. Barrett did not dispute these points. But he opined 

that the RVI policies differ from typical insurance policies in 

certain ways. The risk against which petitioner insures is not 

a fortuitous ‘‘insured event,’’ like a car accident, a hurricane, 

or a fire. Rather, petitioner insures against a greater-thananticipated decline in the economic value of property over 

time. As a corollary of this observation, Mr. Barrett noted 

that RVIA does not face what he called ‘‘timing risk,’’ 

namely, the uncertainty that arises under most insurance 

policies as to when a covered loss will occur. Under the RVI 

policies, a ‘‘loss’’ will occur (if at all) only on the last day of 

the policy term, a date that is known in advance. Finally, 

Mr. Barrett characterized as nontraditional certain contract 

terms that RVIA offered to its policyholders. 

Insurance Risk 

Professor Angelina opined that the RVI policies cover an 

insurance risk and not simply an investment risk. He noted 

that losses on RVI policies can vary from zero to the full 

insured value. The premium RVIA charged was typically no 

more than 4% of the insured value and (for certain contracts) 

ranged as low as 0.5% of the insured value. Professor 

Angelina opined that RVIA was thus subject to underwriting 

risk, namely, the risk that the premiums received (and 

income earned thereon) will be insufficient to cover claims 
222 145 UNITED STATES TAX COURT REPORTS (209) 

made under the policy. This can arise from an inaccurate 

assessment of future risks, from an overconcentration of 

risks in a particular loss-exposed area, or from macro-economic or industry-specific factors wholly outside the underwriter’s control. 

Mr. Miccolis opined that the risks assumed by petitioner 

resemble the risks assumed under policies of mortgage guaranty insurance, which are generally regarded as involving 

‘‘insurance risk.’’ In both cases, the insurer assumes a significant risk of loss ‘‘arising out of a financial transaction which 

is caused by an unexpected decline in the value of property 

after coverage begins.’’ In both cases, the loss suffered by the 

insurer can be caused by local conditions in specific markets 

or by ‘‘macro-economic conditions, such as general unemployment, interest rates, and the state of the credit markets.’’ 

The insured under a mortgage guaranty contract seeks 

protection against a possible investment loss—namely, 

diminution in the value of its loan asset—but that fact does 

not negate the existence of ‘‘insurance risk’’ under such policies. Mr. Miccolis opined that the same conclusion should follow for residual value insurance. 

On cross-examination, Mr. Miccolis agreed that mortgage 

guaranty insurance differs from residual value insurance in 

one respect. Under the former, the insurer’s payment obligation is triggered by the homeowner’s default, a fortuitous 

event; under the latter, the insurer’s payment obligation 

arises because property has declined in value as of a particular time. But despite this distinction, Mr. Miccolis testified that the two types of insurance are essentially similar: 

in both cases, what truly drives the insurer’s loss is an 

underlying decline in the economic value of the insured’s 

property or collateral. 

Respondent offered, and the Court recognized, Etti 

Baranoff, an associate professor of finance and insurance at 

Virginia Commonwealth University, as an expert in risk 

management, insurance, and financial economics. She opined 

that the RVI policies are not contracts of insurance because 

they cover ‘‘speculative risk’’ as opposed to ‘‘insurance risk.’’ 

According to Dr. Baranoff, the ‘‘foundation of insurance is 

that it is a product responding to the management of pure 

risk only.’’ A transaction involves ‘‘pure risk,’’ she testified, if 

the only possible outcomes, from the insured’s point of view, 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 223

are ‘‘loss’’ or ‘‘no loss.’’ A homeowner considering the purchase of fire insurance, for example, faces the possibility of 

a fire (resulting in a loss) or the possibility of no fire 

(resulting in no loss). The homeowner cannot enjoy a gain 

with respect to the risk insured against. 

A lessor considering the purchase of an RVI policy, by contrast, faces three possible outcomes: ‘‘loss,’’ ‘‘neutral,’’ or 

‘‘gain.’’ The covered assets could depreciate below the 

expected residual value (resulting in a loss); they could 

depreciate to the expected residual value (yielding a neutral 

outcome); or they could depreciate less than expected or actually appreciate (resulting in a gain). Because the uncertainties to which the insured property is subject might generate 

either a loss or a gain, Dr. Baranoff characterized RVI’s policies as involving ‘‘speculative risk,’’ like a stock investment, 

as opposed to ‘‘pure risk.’’ She analogized the insured under 

an RVI policy to an investor who, desiring to hedge his bets, 

purchases an option allowing him to ‘‘put’’ his stock to 

another investor if the stock declines to a specified price by 

a specified date. 

Dr. Baranoff relied in her report on textbooks that note the 

distinction between ‘‘pure risk’’ and ‘‘speculative risk.’’ 

During cross-examination, petitioner’s counsel pointed out 

that certain of the texts she cited state that speculative risks 

can be insured. See, e.g., George E. Rejda & Michael J. 

McNamara, Principles of Risk Management and Insurance 5 

(12th ed. 2014) (‘‘Some insurers will insure institutional portfolio investments and municipal bonds against loss.’’). In 

response, Dr. Baranoff reiterated her position that ‘‘pure 

risk’’ is the only possible subject of insurance, dismissing 

Professor Rejda’s statement to the contrary as ‘‘an 

uncarefully written sentence.’’ On balance, we found her 

testimony argumentative and unpersuasive. 

Disagreeing with Dr. Baranoff, Professor Angelina opined 

that insurance can cover certain speculative risks. ‘‘[T]here 

are many financial risks,’’ he testified, ‘‘that now are commonly insured, such as trade credit insurance, mortgage 

guaranty insurance, and municipal bond insurance to name 

a few.’’ The Court regarded Professor Angelina as a credible 

witness and found his testimony helpful. 
224 145 UNITED STATES TAX COURT REPORTS (209) 

OPINION 

I. Burden of Proof 

The Commissioner’s determinations in a notice of deficiency are generally presumed correct, and the taxpayer 

bears the burden of proving those determinations erroneous. 

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). 

Petitioner does not contend that the burden of proof shifts to 

respondent under section 7491(a) as to any issue of fact. 

II. Petitioner’s Status as an ‘‘Insurance Company’’ 

Insurance companies are subject to the corporate income 

tax imposed by section 11. See secs. 801(a)(1) (life insurance 

companies), 831(a) (other insurance companies). The taxable 

income of insurance companies, however, is computed under 

special rules. For P&C companies, those rules are set forth 

in section 832, captioned ‘‘Insurance Company Taxable 

Income.’’ In order to match income with anticipated loss 

expenses, section 832 provides (among other things) that premiums are generally taken into income not as received but 

only as ‘‘earned.’’ See Bituminous Cas. Corp. v. Commissioner, 57 T.C. 58, 77 (1971) (observing that if ‘‘premiums 

were to be taxed as received and the deductions allowed only 

as they later became fixed, the result would be to tax very 

large sums of money as income when in fact those amounts 

will never really become income because they will have to be 

paid out to policyholders’’). 

To compute its taxable income under this special regime, 

the taxpayer must be an ‘‘insurance company.’’ For this purpose, ‘‘the term ‘insurance company’ means any company 

more than half of the business of which during the taxable 

year is the issuing of insurance or annuity contracts or the 

reinsuring of risks underwritten by insurance companies.’’ 

Sec. 816(a) (life insurance companies, cross-referenced in section 831(c), other insurance companies); see sec. 1.801–3(a), 

Income Tax Regs. (‘‘[I]t is the character of the business actually done in the taxable year which determines whether a 

company is taxable as an insurance company[.]’’). 

Neither the Internal Revenue Code nor the Treasury Regulations define the term ‘‘insurance’’ or ‘‘insurance contract.’’ 

The meaning of these terms for Federal income tax purposes 

has thus been developed chiefly through a process of 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 225

common-law adjudication. In the seminal case addressing 

this subject, the United States Supreme Court noted that 

‘‘[h]istorically and commonly insurance involves risk-shifting 

and risk-distributing.’’ Helvering v. Le Gierse, 312 U.S. 531, 

539 (1941). In addition to requiring risk transfer and risk 

distribution, the courts have considered whether the transaction constitutes insurance ‘‘in its commonly accepted sense’’ 

and whether the risk transferred is an ‘‘insurance risk.’’ E.g., 

Black Hills Corp. v. Commissioner, 101 T.C. 173, 182 (1993), 

aff ’d, 73 F.3d 799 (8th Cir. 1996). These factors establish a 

framework for determining ‘‘the existence of insurance for 

Federal tax purposes.’’ AMERCO & Subs. v. Commissioner, 

96 T.C. 18, 38 (1991), aff ’d, 979 F.2d 162 (9th Cir. 1992). We 

conclude that the RVI policies met all of these requirements 

during 2006 and that petitioner was therefore taxable as an 

‘‘insurance company.’’ 

A. Risk Shifting 

Insurance is an arrangement that must be examined from 

the perspective of both the insurer and the insured. Harper 

Grp. v. Commissioner, 96 T.C. 45, 57 (1991), aff ’d, 979 F.2d 

1341 (9th Cir. 1992). From the insured’s perspective, insurance is a risk transfer device, that is, a mechanism by which 

the insured obtains protection from financial loss by paying 

the insurer a premium. Ibid.; Black Hills Corp., 101 T.C. at 

182–183. By paying a premium, the insured externalizes his 

risk of loss by shifting that risk to the insurer. 

We have no difficulty concluding that the lessors and 

finance companies that purchased the RVI policies transferred to petitioner a meaningful risk of loss. As Professor 

Angelina explained, these companies faced a significant business risk: if the values of the leased assets declined more 

precipitously than expected by the end of the lease term, 

their lease pricing formula could generate a substantial economic loss. Absent the RVI policy, the insured would bear 

the entire risk associated with loss-causing events. By purchasing the policy, the insured transferred to RVIA that risk 

of loss, to the extent of the assets’ insured values. RVIA was 

indisputably a well-capitalized company fully capable of 

paying claims and absorbing the risks transferred to it. See 

Harper Grp., 96 T.C. at 59 (finding risk transfer where the 

insurer ‘‘not only was financially capable of satisfying claims 
226 145 UNITED STATES TAX COURT REPORTS (209) 

12The Risk Transfer Testing Practice Note, cited in the text, was originally issued in the reinsurance context. However, the evidence at trial established that practitioners regularly apply its principles to direct insurance as well. Under this principles-based standard, risk transfer is characterized as ‘‘reasonably self-evident’’ when: (i) potential loss under the 

agreement is much greater than the premium, (ii) the agreement contains 

standardized terms and conditions typical for the type of coverage, and (iii) 

the agreement does not include impermissible provisions regarding reinsurance. 

made against it, but it in fact paid such claims’’). The RVI 

policies thus transferred the ‘‘impact of a potential loss’’ to 

the insurer from the insured. See Gulf Oil Corp. v. Commissioner, 89 T.C. 1010, 1036 (1987), aff ’d, 914 F.2d 396 (3d Cir. 

1990). 

RVIA accounted for its policies under SAP. These rules 

forbid an insurer in its statutory financial statements to 

treat a contract as ‘‘insurance’’ unless the insurer assumes a 

significant risk under the contract and faces a reasonable 

possibility of incurring a significant loss. See SSAP 62R. By 

issuing an unqualified opinion that RVIA’s statutory financial statements were fairly stated under SAP, its external 

auditor agreed that it bore a significant insurance risk. 

Citing insurance accounting standards, Mr. Miccolis found it 

‘‘reasonably self-evident’’ that risk was transferred under 

98% of RVIA’s policies. See FASB 113; SSAP 62R; Reinsurance Attestation Supplement 20–1, Risk Transfer Testing 

Practice Note. 12 The PwC actuarial report opined that 

RVIA’s reserves complied with Connecticut insurance law 

and with accepted actuarial standards, and the Connecticut 

Insurance Department agreed with this assessment. 

Respondent’s experts conceded that the RVI policies did 

shift some risk of loss. After being recalled, Mr. Cook 

informed the Court of his conclusion that RVIA’s real estate 

segment, which accounted for 34.6% of its business during 

2006, did transfer sufficient risk of loss. And Mr. Barrett 

acknowledged that the FASB policies, which respondent 

views most skeptically, transferred to RVIA ‘‘some amount of 

risk.’’ As he explained, this was necessarily the case because 

lessors purchased FASB policies in order to obtain direct 

financing lease accounting, which requires the lessor to shift 

to the insurer a sufficient level of risk with respect to the 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 227

guaranteed portion of the residual value. See Statement of 

Financial Accounting Standards No. 13. 

The thrust of respondent’s position is that the RVI policies 

did not transfer enough risk of loss because losses were relatively unlikely to occur. This argument is unpersuasive on 

both theoretical and evidentiary grounds. Both parties’ 

experts analogized the RVI policies to ‘‘catastrophic’’ insurance coverage, which insures against earthquakes, major 

hurricanes, and other low-frequency, high-severity risks. An 

insurer may go many years without paying an earthquake 

claim; this does not mean that the insurer is failing to provide ‘‘insurance.’’ Mr. Barrett acknowledged that, under 

many catastrophic coverages, the odds of a loss occurring 

may be quite low. He was aware of no instance in which an 

insurance regulator had determined that the risk of loss on 

a policy of direct insurance was too ‘‘remote’’ for the product 

to be treated as ‘‘insurance.’’ And respondent offers no plausible metric by which a court could make this assessment. 

In opining that insufficient risk of loss was transferred to 

RVIA, respondent’s experts relied on the fact that, as of year 

end 2006, many of RVIA’s policies had experienced no losses. 

But in computing a ‘‘loss ratio’’ of zero for these policies, 

respondent’s experts committed a methodological error. 

Whereas RVIA received all premiums at policy inception, a 

loss could occur only upon lease termination; many of its 

policies in force at year end 2006 had 3, 5, or 25 years to run. 

By definition, no loss could possibly have occurred under 

such policies as of year end 2006, but major losses could (and 

did) occur subsequently. The absence of losses prior to 2007, 

therefore, was not a logical basis upon which to ground an 

opinion that petitioner had assumed no meaningful risk of 

loss under these policies. Mr. Cook ultimately conceded this 

error, acknowledging that his method of computing loss 

ratios systematically understated the true extent of petitioner’s losses. 

RVIA’s actual loss experience demonstrates that it bore a 

significant risk of loss. From inception through 2006, RVIA’s 

cumulative loss ratio was about 28%; from inception through 

2013, its cumulative loss ratio was about 34%. As one would 

expect with catastrophic-type coverage, RVIA’s loss ratio in 

some years was extremely low. But in other years it was as 

high as 49%, 64%, and (during the 2008 financial crisis) 98%. 
228 145 UNITED STATES TAX COURT REPORTS (209) 

On an absolute dollar basis, RVIA paid more than $150 million in claims through 2013. Even if we consider only the 

FASB policies, the segment on which respondent’s experts 

focus, RVIA paid more than $28 million in claims through 

2013. All in all, we conclude that the level of risk transferred 

to RVIA under these policies was more than sufficient to 

treat them as ‘‘insurance contracts’’ for Federal income tax 

purposes. 

B. Risk Distribution 

From the insurer’s perspective, insurance is a risk-distribution device, that is, a mechanism by which the insurer pools 

multiple risks of multiple insureds in order to take advantage of ‘‘the law of large numbers.’’ This statistical phenomenon is reflected in the financial world by the diversification of investment portfolios. It is embodied in the day-to-day 

world by the adage, ‘‘Don’t put all your eggs in one basket.’’ 

Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 

1300 (9th Cir. 1987), aff ’g 84 T.C. 948 (1985). 

Many insureds who pay premiums will not incur losses. 

Insuring many independent risks in return for numerous 

premiums thus serves to distribute risk, in effect spreading 

a portion of the insurer’s potential liability among his 

insureds. See Black Hills Corp., 101 T.C. at 183; Harper 

Grp., 96 T.C. at 59; AMERCO, 96 T.C. at 40–41. Distributing 

risk allows the insurer to reduce the possibility that a single 

costly claim will exceed the amount taken in as a premium 

and set aside for the payment of that claim. 

RVIA insured a vast array of different risk exposures. 

During 2006 it had 951 policies in force covering 714 different insured parties. Besides being spread among 

numerous unrelated insureds, its risks were distributed in at 

least four ways: across business segments (passenger vehicle, 

commercial equipment, and real estate), across asset types 

within each segment, across geographic locations (for real 

estate), and across lease duration. 

RVIA’s policies during 2006 covered 754,532 passenger 

vehicles, 2,097 individual real estate properties, and 

1,387,281 commercial equipment assets. The passenger 

vehicles comprised 20 different types of automobile (including 

pickup trucks, sedans, SUVs, and sports cars) and approximately 50 different vehicle models. The commercial real 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 229

13 Respondent’s expert Mr. Cook explained: ‘‘[T]he passage of time has a 

significant effect on depreciation rates and market effects, and the periods 

of time are even longer on commercial equipment and real estate. The time 

spread is a valuable part of the diversification. * * * It’s one of the 

reason[s] we didn’t find the diversification to be so inferior as to not be insurance. * * * [T]he temporal distribution was one of the good things we 

saw.’’ 

estate comprised 15 different types of properties (including 

retail stores, warehouses, industrial buildings, office 

buildings, and motels) in seven different geographic regions. 

And the commercial equipment comprised 30 different types 

of equipment, including aircraft, rail cars, construction equipment, and shipping containers. 

Petitioner’s insured assets were also distributed across 

lease terms. The policies in effect during 2006 covered assets 

with lease terms ranging from 1 to 28 years. Even within the 

same business segment, an event (like a real estate crash) 

could cause losses for some insureds yet have no adverse 

impact on RVIA with respect to leases terminating many 

years later. This temporal distribution reduced petitioner’s 

risk because it meant that the assets it insured would be 

exposed to different loss-causing events occurring at different 

times. 13

Respondent’s expert Mr. Cook acknowledged that petitioner achieved pooling, diversification, and distribution of 

risk. His report made a very limited claim, namely, that the 

risk-distribution benefits petitioner enjoyed were ‘‘less than 

is usual for an insurer.’’ By the end of his testimony, however, he expressly acknowledged that he was not raising the 

absence of risk distribution as a reason why RVIA’s policies 

fail to qualify as ‘‘insurance.’’ 

Undeterred, respondent contends that the RVI policies do 

not sufficiently distribute risk because some systemic risks, 

like major recessions, could cause insured assets to decline in 

value simultaneously. Like most insurers, RVIA did face certain systemic risks, but many of the risks against which it 

insured were uncorrelated. Examples of risks that affected 

different insured assets differently include regional economic 

downturns, rising fuel prices, over-supply of particular 

assets, technological improvements, vehicle recalls, regional 

industrial migration, acts of terrorism, high interest rates, 

decreased availability of financing, and regulatory changes 
230 145 UNITED STATES TAX COURT REPORTS (209) 

14 Respondent errs in contending that the ‘‘pooling’’ provisions of certain 

RVI policies negate risk distribution. These pooling provisions simply aggregate covered exposures; they do not negate risk distribution among the 

covered insureds. Equally erroneous is respondent’s contention that RVIA’s 

‘‘deferred premium’’ provisions negate risk distribution. The deferred portion of the premium acted like a deductible; RVIA still collected the balance of the premium, which could be used to pay claims of other insureds. 

In any event, as Mr. Cook noted, fewer than 24 of RVIA’s 951 policies in 

force during 2006 provided for deferred premiums. 

like restrictive building codes. Indeed, even systemic risks 

like major recessions were mitigated by the temporal distribution of RVIA’s risks over lease terms as long as 28 

years. 

Many insurers face systemic risks. Mortgage guaranty 

insurance, municipal bond insurance, and financial guaranty 

insurance all provide coverage against risk of loss attributable to adverse macro-economic conditions, such as recessions, high unemployment, high interest rates, or seizing up 

of credit markets. As Professor Angelina noted, some mortgage guaranty insurers during 2008–2009 ‘‘were not able to 

recover from their systemic failure,’’ yet respondent concedes 

that the product these companies offer is ‘‘insurance.’’ RVIA 

adequately distributed systemic risks, as other providers of 

catastrophic coverage do, by spreading its risks temporally, 

geographically, and across asset classes. 

The legal requirement for ‘‘insurance’’ is that there be 

meaningful risk distribution; perfect independence of risks is 

not required. See Rent-A-Center, Inc. & Subs. v. Commissioner, 142 T.C. 1, 24 (2014) (‘‘Risk distribution occurs when 

an insurer pools a large enough collection of unrelated risks 

(i.e., risks that are generally unaffected by the same event or 

circumstance’’).); Harper Grp., 96 T.C. at 55, 59–60 (finding 

sufficient risk distribution where insurer insured numerous 

unrelated insureds even though the risks ‘‘were not statistically independent * * *, but rather were highly correlated’’); Gulf Oil Corp., 89 T.C. at 1025 n.9 (stating that 

sufficient risk distribution may exist if risks are independent 

‘‘to some minimum extent’’). We have no difficulty concluding, as respondent’s expert Mr. Cook ultimately did, that 

the RVI policies accomplish sufficient risk distribution to be 

classified as ‘‘insurance’’ for Federal tax purposes. 14
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 231

C. Commonly Accepted Notions of Insurance 

As the Supreme Court has observed, the absence of a 

statutory definition of ‘‘insurance’’ from the Internal Revenue 

Code ‘‘strengthens the assumption that Congress used the 

word ‘insurance’ in its commonly accepted sense.’’ Le Gierse, 

312 U.S. at 540; see AMERCO, 96 T.C. at 38. To determine 

whether an arrangement constitutes insurance in its commonly accepted sense, we have considered such factors as: (1) 

whether the insurer is organized, operated, and regulated as 

an insurance company by the States in which it does business; (2) whether the insurer is adequately capitalized; (3) 

whether the insurance policies are valid and binding; (4) 

whether the premiums are reasonable in relation to the risk 

of loss; and (5) whether premiums are duly paid and loss 

claims are duly satisfied. See Harper Grp., 96 T.C. at 60; 

Securitas Holdings, Inc. v. Commissioner, T.C. Memo. 2014– 

225, at *27. 

The first factor has particular significance because ‘‘Congress has delegated to the states the exclusive authority 

(subject to exception) to regulate the business of insurance.’’ 

AMERCO, 96 T.C. at 42 (citing the McCarran-Ferguson Act, 

59 Stat. 33, as amended, 15 U.S.C. secs. 1011–1015 (1998)). 

We have repeatedly emphasized the significance of State 

insurance regulation in determining whether an entity 

should be recognized as an ‘‘insurance company.’’ See Sears, 

Roebuck & Co. v. Commissioner, 96 T.C. 61, 101 (1991), aff ’d 

in part, rev’d in part, 972 F.2d 858 (7th Cir. 1992); Harper 

Grp., 96 T.C. at 60; AMERCO, 96 T.C. at 42; Securitas 

Holdings, T.C. Memo. 2014–225, at *5–*6. It is undisputed 

that RVIA was organized, operated, and regulated as an 

‘‘insurance company’’ by every State in which it did business, 

and that RVIG was organized, operated, and regulated as an 

‘‘insurance company’’ by its country of domicile, Bermuda. 

The RVI policies likewise satisfy the other factors we have 

deemed relevant. RVIA and RVIG met the minimum capital 

requirements of their respective regulators, and both were 

adequately capitalized. The RVI policies were valid and 

binding: when covered losses occurred, the insureds filed 

claims and RVIA paid those claims, amounting to $150 million through 2013. The premiums charged were negotiated at 

arm’s length between RVIA and its various insureds, none of 
232 145 UNITED STATES TAX COURT REPORTS (209) 

15 Respondent appears to base this argument, not on the testimony of his 

expert witnesses, but on a passage in a scholarly article published in 2003. 

See Edward D. Kleinbard, ‘‘Competitive Convergence in the Financial 

Services Markets,’’ 81 Taxes 225, 238 (2003). We do not read Professor 

Kleinbard as using the term ‘‘fortuity’’ in the narrow sense urged by respondent. 

which was related to petitioner by ownership. The RVI policies took the form of insurance and contained standard provisions typical of insurance policies generally, including the 

requirement of an ‘‘insurable interest.’’ See Allied Fid. Corp. 

v. Commissioner, 572 F.2d 1190, 1193 (7th Cir. 1978) 

(requiring the insured to have an ‘‘insurable interest’’ in the 

covered assets), aff ’g 66 T.C. 1068 (1976). 

Respondent does not seriously challenge any of these 

points. Rather, he argues that the RVI policies do not qualify 

as insurance because they differ in certain respects from 

insurance policies with which most people are familiar. First, 

he notes that RVI policies do not pay immediately upon the 

happening of a ‘‘fortuitous event,’’ like a car crash, but upon 

a contract’s reaching its termination date. But the fact that 

a loss must persist to the end of a lease term does not make 

the events that cause the loss—recessions, interest rate 

spikes, or bank failures—any less random or fortuitous. The 

payment terms of the RVI policies are dictated by the underlying business transaction: RVIA is insuring against loss 

under a lease, and whether a loss has occurred cannot be 

known until the lease ends. This feature of the RVI policies, 

while perhaps atypical, does not impugn their status as 

‘‘insurance.’’ See Commissioner v. Treganowan, 183 F.2d 288, 

291 (2d Cir. 1950) (contract may qualify as ‘‘life insurance’’ 

even though it lacks standard features of many life insurance 

policies), rev’g 13 T.C. 159 (1949); G.C.M. 39,154 (September 

20, 1983) (‘‘[D]espite the fact that the surety bonds written 

by the taxpayer possess certain unique characteristics not 

shared by many other types of insurance contracts, they 

nevertheless, constitute ‘insurance contracts’ for purposes of 

subchapter L[.]’’). 

Respondent’s insistence that ‘‘[f]ortuity is essential for 

* * * risk pooling and the law of large numbers’’ 15 betrays 

the narrow and esoteric sense in which he employs the term 

‘‘fortuity.’’ As we have explained previously, losses under RVI 

policies are caused by fortuitous events outside of its control. 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 233

And its policies clearly do pool risks to take advantage of the 

law of large numbers. Indeed, as Professor Angelina 

explained, the fact that losses under RVI policies occur only 

upon lease termination actually enhances risk pooling by 

‘‘enabl[ing] RVI to avoid a ‘run on the bank’ scenario in 

extreme economic downturns.’’ Reduced to its essentials, 

respondent’s argument is that a loss is ‘‘fortuitous’’ only if 

payment occurs immediately or shortly after the loss-causing 

event occurs. Respondent cites no authority for the proposition that this feature is an essential ingredient of ‘‘insurance’’ for State regulatory purposes or for Federal income tax 

purposes. 

Respondent next argues that RVI policies fail to satisfy 

what he calls ‘‘the timing risk requirement.’’ Under typical 

casualty policies, respondent notes, ‘‘claims are triggered by 

an insurable event that is uncertain as to if and when it may 

occur.’’ By contrast, a loss under an RVI policy will occur (if 

at all) at lease termination, a date that both parties know in 

advance. 

This argument is really a different way of phrasing 

respondent’s previous argument, and it is unpersuasive for 

the same reasons. RVIA is in fact subject to an array of 

timing risks—e.g., whether a recession, oil price rise, or other 

loss-causing event will occur before or after a particular lease 

expires. It is uncertain under RVI’s policies, as under insurance policies generally, whether or when these fortuitous 

events will occur. The only uncertainty absent from RVI’s 

policies is the date on which it will be determined whether 

a loss has occurred. But as noted previously, this is simply 

a function of the underlying business transaction. 

Until lease termination, the lessee possesses the covered 

asset and makes lease payments. It is not until the property 

is returned to the lessor, with a value below the expected 

residual value, that the lessor realizes a concrete economic 

loss. As Mr. Miccolis explained at trial: ‘‘[T]he lessor doesn’t 

have a loss, doesn’t have a financial impact until the property is turned in at the end of the lease.’’ Because the economic loss does not materialize until lease termination, it is 

neither noteworthy nor odd that RVI defers payment of 

claims until that time. 

Municipal bond insurance operates similarly. The bond 

issuer may seek bankruptcy protection long before the matu-
234 145 UNITED STATES TAX COURT REPORTS (209) 

16The IRS has recognized that there are other types of insurance, such 

as surety insurance, for which the policy may be made noncancellable and 

for which the premium therefore is nonrefundable. See G.C.M. 39,154. 

rity date of the covered bond, but the bond insurer does not 

pay immediately upon the happening of that ‘‘fortuitous 

event.’’ Rather, the insurer pays for loss of interest on the 

covered bond only at the interest due date, and it pays for 

loss of principal only at the bond’s scheduled maturity date. 

See, e.g., Oppenheimer AMT-Free Muns. v. ACA Fin. Guar. 

Corp., 971 N.Y.S.2d 95, 97–99 (App. Div. 2013). As under 

RVI policies, therefore, a loss-causing event may occur at any 

time during the policy term, yet the insurer is obligated to 

pay loss claims only at specified dates that are known both 

to insurer and insured in advance. Despite the absence of 

what respondent would call ‘‘timing risk,’’ the Internal Revenue Code provides that municipal bond insurance policies 

can qualify as ‘‘insurance’’ for Federal income tax purposes. 

See sec. 832(e)(6). We see no reason why residual value 

insurance should be treated differently. 

Finally, respondent notes that some RVI policies call for 

nonrefundable premiums, a feature respondent regards as 

atypical of insurance policies generally. But this feature, like 

the payment terms discussed previously, is an outgrowth of 

the underlying business transaction. An RVI policy will pay 

out, if at all, only upon lease termination. In certain circumstances—for example, if inflation develops during a longterm lease—the lessor may become confident that the 

residual value of his leased asset will exceed its insured 

value at lease termination. To prevent the insured from 

taking a self-serving ‘‘wait and see’’ attitude in this setting, 

RVIA may rationally choose to disallow premium refunds 

upon mid-stream policy cancellations. This type of pricing 

decision does not preclude the RVI policies from constituting 

‘‘insurance’’ for Federal income tax purposes. 16

In sum, we find that the RVI policies give rise to insurance 

‘‘in its commonly accepted sense.’’ Le Gierse, 312 U.S. at 540. 

We agree with respondent that these policies have unique 

features, but these features correspond to, and are driven by, 

the characteristics and business needs of the underlying 

leasing transactions. We do not see why an insurer’s tailoring its policy terms to the risks it undertakes to insure 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 235

should prevent its policies from qualifying as ‘‘insurance.’’ 

The arrangements between RVIA and its insureds ‘‘are 

characterized as insurance for essentially all nontax purposes 

* * * [and a] special rule for tax purposes is not justified by 

either statute or case law.’’ Sears, Roebuck, 96 T.C. at 101. 

D. Insurance Risk 

Though we have often noted that insurance presupposes 

‘‘insurance risk,’’ our precedents shed little light on the contours of the latter term. We have said that ‘‘[i]nsurance risk 

is involved when an insured faces some loss-producing 

hazard (not an investment risk), and an insurer accepts a 

payment, called a premium, as consideration for agreeing to 

perform some act if and when that hazard occurs.’’ Black 

Hills Corp., 101 T.C. at 182. Many of our prior cases involved 

captive insurance arrangements in which the casualty risks 

involved were indisputably ‘‘insurance risks.’’ Thus, while 

reciting that ‘‘ ‘[i]nsurance risk’ is required’’ and ‘‘investment 

risk is insufficient,’’ AMERCO, 96 T.C. at 39, our precedents 

do not comprehensively explain how to distinguish the one 

from the other. 

In ascertaining whether the risk covered by the RVI policies is an ‘‘insurance risk,’’ we will examine the arrangement 

‘‘from the perspective of both the insured and the insurer.’’ 

Harper Grp., 96 T.C. at 57. The Supreme Court undertook 

the former inquiry in Le Gierse, where an 80-year-old woman 

purchased an annuity contract bundled with a single premium life insurance policy. The insured died one month later 

and her estate claimed that the life insurance proceeds were 

exempt from estate tax under section 302 of the Revenue Act 

of 1926, 44 Stat. at 70. The Court sustained the IRS’ challenge to that claim. 

Noting that the term ‘‘insurance’’ was defined neither by 

statute nor by regulation, the Court reasoned that ‘‘the 

amounts must be received as the result of a transaction 

which involved an actual ‘insurance risk’ at the time the 

transaction was executed.’’ Le Gierse, 312 U.S. at 538–539. 

Considering the annuity and life insurance contracts 

together, the Court found that they ‘‘wholly fail to spell out 

any element of insurance risk’’ because ‘‘annuity and insurance are opposites; in this combination the one neutralizes 

the risk customarily inherent in the other.’’ Id. at 541. 
236 145 UNITED STATES TAX COURT REPORTS (209) 

17 In the companion case of Keller v. Commissioner, 312 U.S. 543, 545 

(1941), the Court likewise found no ‘‘insurance risk’’ where the only risk 

borne by the insurer was the risk of computational error or the ‘‘risk that 

the funds might not earn enough to cover profitably the annuity payable 

to the decedent.’’ 

Because ‘‘the total consideration was prepaid and exceeded 

the face value of the ‘insurance’ policy,’’ the only risk effectively present from the company’s viewpoint ‘‘was an investment risk similar to the risk assumed by a bank.’’ Id. at 

542. 17

In the instant case, the RVI policies clearly involved, from 

the insurer’s perspective, an ‘‘insurance risk’’ rather than a 

financial risk of the sort assumed by a bank. As Professor 

Angelina explained, RVIA was at risk for ‘‘significant underwriting losses that were not related to [its] investment 

returns.’’ Depending upon the occurrence of fortuitous events, 

RVIA’s loss under a contract could vary from zero to the full 

insured value. Because the premium it charged was rarely 

more than 4% of the insured value, it was clearly exposed to 

underwriting risk, namely, the risk that the premiums 

charged would not be enough to cover claims paid. In contrast to Le Gierse, petitioner’s business model depended not 

simply on its investment returns, but on the ability of its 

underwriters to price adequately the residual value risks 

borne by its insureds in order to derive a sufficient pool of 

premiums to cover the aggregate insured losses. This is the 

same pricing risk assumed by insurance companies generally. 

Respondent nevertheless contends that the RVI policies do 

not involve ‘‘insurance risk’’ from the perspective of the 

insured party. In respondent’s view, the lessors and finance 

companies purchased the RVI policies to protect themselves 

against investment losses, namely, greater-than-expected 

decline in the market value of the assets they owned and 

leased. Respondent analogizes this behavior to a stock investor’s purchase of a put option, which enables him to ‘‘put’’ the 

stock to another investor if the stock falls below a specified 

price before a specified date. From the insured’s standpoint, 

therefore, respondent asserts that the RVI policies involve no 

‘‘insurance risk,’’ but simply an ‘‘investment risk.’’ See Black 

Hills Corp., 101 T.C. at 182. 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 237

We find this argument unpersuasive for several reasons. 

For more than 80 years, the States have regulated as ‘‘insurance’’ contracts that provide coverage against decline in the 

market values of particular assets. In 1933 the Pennsylvania 

Supreme Court held that an insurer’s indemnification 

against loss from a decline in value of real estate involved an 

insurance risk. See Commonwealth ex rel. Schnader v. Fid. 

Land Value Assur. Co., 167 A. 300, 301 (Pa. 1933). The 

insurance company there ‘‘insure[d] against a well-known 

risk, to which all landowners are subject, depreciation from 

the price paid.’’ Ibid. The company argued that it ‘‘makes 

contracts merely to buy real estate, and that such contracts 

are not insurance.’’ Id. at 302. The court rejected this argument, holding that the company ‘‘was clearly engaged in the 

business of insurance’’ in providing its guaranty against 

decline in the value of property. See id. at 303. ‘‘An insurer 

guarantees against loss by an event that may or may not 

happen. The event specifically contemplated here * * * is 

depreciation in value of certain land below the price paid; the 

loss to be indemnified is the amount of that depreciation.’’ Id. 

at 302. 

New York and Connecticut have by statute defined 

residual value policies as a form of ‘‘insurance’’ since 1989. 

See N.Y. Ins. Law secs. 1102, 1113(a)(22) (McKinney 2015); 

Conn. Gen. Stat. Ann. sec. 38a–92a (West 2012). In 1991 the 

Washington Supreme Court reached the same conclusion. See 

Seattle-First Nat’l Bank v. Washington Ins. Guar. Ass’n, 804 

P.2d 1263 (Wash. 1991). The State of Washington had established an insurance guaranty fund to compensate policyholders in the event of insolvency of an insurance company 

providing insurance coverage. The question was whether contracts that ‘‘compensate[d] a lessor for a drop in the market 

value of its leased vehicles’’ constituted ‘‘insurance,’’ thus 

enabling policyholders to recover from this fund losses caused 

by the insurer’s insolvency. Id. at 1269. 

The court held that the residual value policies constituted 

‘‘casualty insurance,’’ which the Washington statute defined 

to include insurance ‘‘[a]gainst any other kind of loss * * * 

properly the subject of insurance.’’ Id. at 1267–1269 (citing 

Washington Revenue Code Annotated section 48.11.070). By 

concluding that residual value policies cover a risk of loss 

that is ‘‘properly the subject of insurance,’’ the Washington 
238 145 UNITED STATES TAX COURT REPORTS (209) 

Supreme Court necessarily determined that such policies 

involve ‘‘insurance risk.’’ Accord Wells Fargo Credit Corp. v. 

Arizona Prop. & Cas. Ins. Guar. Fund, 799 P.2d 908, 910 

(Ariz. Ct. App. 1990) (concluding that policies ‘‘guarantee[ing] 

that Wells Fargo would receive a fixed value for its leased 

autos at the termination of the lease’’ constituted ‘‘casualty 

insurance’’ under Arizona law). 

Consistently with this State law precedent, petitioner’s 

regulators and external auditors have uniformly concluded 

that its policies involve ‘‘insurance risk.’’ RVIA was incorporated as an insurance company in Connecticut in 1994 and 

has been continuously licensed to conduct the business of 

insurance by its domicile and by all other States in which it 

transacts business. Because RVIA sells ‘‘insurance,’’ it is 

required to pay to these States insurance premium taxes 

(which it has paid) and to meet minimum solvency requirements (which it has met). 

During 2006 RVIA was required to file statutory financial 

statements prepared in accordance with SAP. These rules 

forbid an insurer in its statutory financial statements to 

treat a contract as ‘‘insurance’’ unless the insurer assumes a 

significant risk under the contract and faces a reasonable 

possibility of incurring a significant loss. See SSAP 62R. By 

issuing an unqualified opinion that RVIA’s statutory financial statements were fairly stated under SAP, its external 

auditor agreed that it bore a significant ‘‘insurance risk.’’ The 

Connecticut Insurance Department examined RVIA’s 2006 

statutory financial statements for compliance with SAP and 

agreed with this assessment. As Professor Angelina noted, if 

there had been no underwriting or insurance risk, ‘‘I would 

expect the various reports to have highlighted this issue. 

This has been my past experience with the large accounting 

firms and regulatory agencies.’’ 

As noted earlier, Congress generally has delegated to the 

individual States the authority to regulate the business of 

insurance. See McCarran-Ferguson Act, Pub. L. No. 79–15, 

59 Stat. 33 (1945) (codified as amended at 15 U.S.C. secs. 

1011–1015 (2006)); Barnett Bank of Marion Cty., N.A. v. Nelson, 517 U.S. 25, 40 (1996) (‘‘Congress ‘moved quickly,’ 

enacting the McCarran-Ferguson Act ‘to restore the 

supremacy of the States in the realm of insurance regulation.’ ’’ (quoting Dep’t of Treasury v. Fabe, 508 U.S. 491, 500 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 239

18While the covered assets could conceivably appreciate in value from 

lease inception, RVIA would never pay a claim in that event. The RVI policies indemnified the insured against economic loss if the actual residual 

value of the asset at lease expiration was less than its insured value. RVIA 

did not insure against reduction in value attributable to normal wear and 

tear and did not cover the initial layer of an insured’s loss. In short, RVIA 

would pay a claim, as a fire insurance company would pay a claim, only 

where the insured had suffered a sizable economic loss. This is important 

because insurance generally acts only to indemnify the insured. See 

Epmeier v. United States, 199 F.2d 508 (7th Cir. 1952). 19See Mark S. Dorfman, Introduction to Risk Management and InsurContinued 

(1993))). State courts and State regulators have consistently 

recognized as ‘‘insurance’’ residual value policies issued, not 

only by RVIA, but also by AIG, Chubb Group, ACE Group, 

Royal Insurance Company of America, and other well-established insurance companies. The uniform conclusion of State 

insurance regulators that the RVI policies involve ‘‘insurance 

risk,’’ while ‘‘not dispositive of the issue before us, * * * 

[does] inform our decision.’’ AMERCO, 96 T.C. at 42. 

Against this consensus of insurance regulators, insurance 

auditors, and the insurance marketplace, respondent offers 

Dr. Baranoff’s opinion that the RVI policies are not ‘‘insurance’’ because they do not cover a ‘‘pure risk.’’ According to 

Dr. Baranoff, ‘‘pure risk’’ exists only in a binary situation 

where the only possible outcomes are ‘‘loss’’ or ‘‘no loss.’’ A 

lessor who buys an RVI policy, she notes, has the potential 

to enjoy a gain on the underlying leasing transaction, e.g., if 

the leased assets appreciate rather than depreciate in 

value. 18 In her view, the RVI policies thus protect the 

insured, not from an ‘‘insurance risk,’’ but from a ‘‘speculative’’ or market risk. Respondent invites us to adopt this 

‘‘pure risk’’ test as a bright-line rule to demarcate ‘‘insurance 

risk’’ from ‘‘investment risk.’’ 

We decline this invitation. In support of her theory that 

‘‘pure risk’’ is the only possible subject of ‘‘insurance,’’ Dr. 

Baranoff relies, not on actual experience with the insurance 

market, but on citations from textbooks designed for college 

business students. While these authors note the distinction 

between ‘‘pure risk’’ and other types of risk, they do not support her contention that ‘‘pure risk’’ is the only possible subject of ‘‘insurance.’’ Rather, they state (correctly) that insurance is ‘‘generally’’ or ‘‘normally’’ targeted to pure risks. 19 In 
240 145 UNITED STATES TAX COURT REPORTS (209) 

ance 8 (8th ed. 2005) (‘‘Most speculative loss exposures are not subject to 

insurance.’’ (Emphasis added.)); Scott E. Harrington & Gregory R. 

Niehaus, Risk Management and Insurance 6–7 (1999) (‘‘Insurance contracts generally are not used to * * * finance losses associated with price 

risks.’’ (Emphasis added.)); George E. Rejda, Principles of Risk Management and Insurance 6 (8th ed. 2003) (‘‘[P]rivate insurers generally insure 

only pure risks * * * [and] speculative risks generally are not considered 

insurable.’’ (Emphasis added.)); Emmett Vaughan & Therese Vaughan, 

Fundamentals of Risk and Insurance 6–7 (11th ed. 2014) (‘‘The distinction 

between pure risk and speculative risks is an important one because normally only pure risks are insurable.’’ (Emphasis added.)). 

a later edition of his text, which Dr. Baranoff does not cite, 

Professor Rejda notes that while insurers ‘‘generally concentrate’’ on insuring pure risk, there are ‘‘certain exceptions.’’ ‘‘Some insurers,’’ he explains, ‘‘will insure institutional 

portfolio investments and municipal bonds against loss.’’ 

Rejda & McNamara, supra, at 5. Other scholars describe the 

difference between ‘‘pure risks’’ and ‘‘speculative risks’’ as 

‘‘[t]o a large extent * * * semantic,’’ concluding that 

‘‘[n]othing in the nature of speculative risk unequivocally 

precludes the writing of insurance.’’ C. Arthur Williams, Jr., 

Michael L. Smith, & Peter C. Young, Risk Management and 

Insurance 8, 384 (8th ed. 1998). 

Confronted on cross-examination with the statements of 

insurance scholars that insurance can cover speculative 

risks, Dr. Baranoff insisted that those statements are actually consistent with her view that insurance covers ‘‘pure 

risk’’ only. She dismissed Professor Rejda’s most recent statement to the contrary as ‘‘an uncarefully written sentence.’’ In 

the end, Dr. Baranoff was unable to explain how her view 

lined up with those of the authors she cited, and we found 

her testimony unpersuasive. 

During trial and in post-trial briefs, the parties and their 

experts extensively cited two standard treatises on insurance 

law, 1 Couch on Insurance 3d (2015) and The New Appleman 

on Insurance Law (2015). Neither of these treatises uses the 

term ‘‘pure risk’’ when defining the meaning of ‘‘insurance’’ 

at common law. Judicial precedent likewise suggests no 

limitation that would restrict ‘‘insurance’’ to the binary situation of ‘‘loss or no loss.’’ Most cases require only that the 

insured shift to the insurer the risk from a ‘‘hazard,’’ a ‘‘spe-
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 241

20See, e.g., Epmeier, 199 F.2d at 510 (noting that insurer indemnifies insured ‘‘against loss arising from certain specified contingencies or perils’’); 

Black Hills Corp., 101 T.C. at 182 (noting that insurer agrees ‘‘to perform 

some act if and when * * * [a specified] hazard occurs’’); AMERCO, 96 

T.C. at 38 (noting that insured ‘‘faces some hazard’’ and insurer agrees ‘‘to 

perform some act if or when the loss event occurs’’); Allied Fidelity Corp., 

66 T.C. at 1074 (defining insurance as an agreement to protect insured 

‘‘against a direct or indirect economic loss arising from a defined contingency’’). A few of our cases have found as a fact that ‘‘pure risk’’ existed 

in a particular case, or have summarized expert testimony noting that insurance typically covers ‘‘pure risk.’’ See Sears, Roebuck, 96 T.C. at 65, 92– 

93; AMERCO, 96 T.C. at 33–34; Humana Inc. v. Commissioner, 88 T.C. 

197, 209 (1987), aff ’d in part, rev’d in part, 881 F.2d 247 (6th Cir. 1989). 

In none of these cases were we asked to decide whether ‘‘pure risk’’ is the 

only possible subject of ‘‘insurance’’ for Federal income tax purposes or to 

determine whether a particular contract failed to qualify as ‘‘insurance’’ because it provided coverage for something other than a ‘‘pure risk.’’ In 

AMERCO, 979 F.2d at 167, the Court of Appeals for the Ninth Circuit rebutted one of the IRS’ arguments by stating that insurance risk exists 

where ‘‘[t]he only possible outcomes are loss or no loss.’’ That statement 

was dictum because the existence of ‘‘insurance risk’’ was not at issue in 

AMERCO. The Ninth Circuit affirmed our Court’s finding of fact that 

‘‘there was an insurance risk involved’’ because ‘‘the AMERCO Group undoubtedly faced potential hazards from its operations which constituted insurable risks.’’ Id. at 165. 

cific contingency,’’ or some ‘‘direct or indirect economic 

loss.’’ 20

Respondent’s ‘‘pure risk’’ position lacks practical as well as 

theoretical support, for if we accepted his submission several 

familiar types of insurance would seem to be disqualified as 

such. As early as 1932, the Supreme Court held that mortgage guaranty insurance constitutes ‘‘insurance’’ for Federal 

income tax purposes. See United States v. Home Title. Ins. 

Co., 285 U.S. 191, 195 (1932) (‘‘The guaranty of payment of 

the principal and interest of mortgage loans constitutes 

insurance.’’); Bowers v. Lawyers’ Mortg. Co., 285 U.S. 182, 

189 (1932) (‘‘Undoubtedly the guaranties contained in the 

policies and participation certificates were in legal effect contracts of insurance.’’). The Internal Revenue Code explicitly 

recognizes both ‘‘mortgage guaranty insurance’’ and ‘‘lease 

guaranty insurance’’ as ‘‘insurance’’ for Federal income tax 

purposes. See sec. 832(b)(1)(E), (c)(13), (e)(3) (specifying rules 

for computation of ‘‘insurance company taxable income’’ by ‘‘a 

company which writes mortgage guaranty insurance’’); sec. 
242 145 UNITED STATES TAX COURT REPORTS (209) 

832(e)(6) (same, for ‘‘a company which writes lease guaranty 

insurance’’). 

Mortgage guaranty insurance protects a mortgage lender 

from the risk that his collateral may decline in value and be 

insufficient to cover the remaining loan balance in the event 

of foreclosure. Residual value and mortgage guaranty insurance thus cover substantially the same risk: unexpected 

decline in the market value of the insured’s interest in property. As Mr. Miccolis explained, both forms of insurance ‘‘provide protection against a contingent financial loss arising out 

of a financial transaction which is caused by an unexpected 

decline in the value of property after coverage begins.’’ The 

two types of insurance, he noted, involve risks and risk 

characteristics that ‘‘are comparable with respect to substance, causation, events, conditions, and financial impact.’’ 

In both cases, the value of the covered assets may be 

adversely affected by fortuitous events specific to the particular property as well as by macro-economic conditions 

such as interest rates, unemployment, inflation, deflation, 

and unstable credit markets. These are the same risk exposures that Dr. Baranoff cites in support of her position that 

the RVI policies cover an uninsurable ‘‘speculative risk.’’ 

Municipal bond insurance, which gained prominence in the 

United States during the 1970s, likewise provides coverage 

against speculative risk. See generally 120 Cong. Rec. 28114, 

28115 (1974). The Internal Revenue Code explicitly recognizes municipal bond insurance as ‘‘insurance’’ for Federal 

income tax purposes. See sec. 832(e)(6) (specifying rules for 

computation of ‘‘insurance company taxable income’’ by ‘‘a 

company which writes * * * insurance on obligations the 

interest on which is excludable from gross income under section 103’’). This form of insurance protects the bondholder 

against loss of profit on his investment by guaranteeing that 

he will receive payment of interest and repayment of principal if the issuer fails to pay. As in the case of residual 

value insurance, the insured does not face a binary situation 

of ‘‘loss or no loss,’’ but has the possibility of gain or loss on 

his bond investment. And losses under municipal bond policies, as under mortgage guaranty and residual value policies, 

may be linked to macro-economic factors as well as factors 

specific to the particular insured asset. 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 243

21One might describe the homeowner’s default as the ‘‘but for’’ cause of 

the mortgage guarantor’s loss, whereas the bursting of a national real esContinued 

Respondent insists that these two types of coverage differ 

from residual value coverage in terms of the ‘‘triggering 

event.’’ Under a mortgage guaranty policy, for example, the 

insurer’s payment obligation is triggered by the homeowner’s 

default, which respondent views as a random and ‘‘fortuitous’’ event. Because default is ‘‘an occurrence from which 

the insured cannot profit,’’ respondent views mortgage guaranty coverage as involving ‘‘pure risk’’ even though the collateral securing the loan (a home) represents an investment 

that can rise or fall in value. Under a residual value policy, 

by contrast, the event that triggers the insurer’s payment 

obligation is simply a decline in the value of the insured 

property as of a certain date, namely, lease expiration. 

We think respondent is confusing the events that may 

trigger a payment obligation with the events that actually 

cause the loss. The homeowner’s default does not necessarily 

cause a loss; if the homeowner defaults because he has 

become unemployed, but the home is worth substantially 

more than the outstanding mortgage balance, the mortgagee 

upon foreclosure will experience no loss and will make no 

claim on the insurer. Under mortgage guaranty insurance, 

what actually causes the loss are the events responsible for 

the decline in the value of the house that serves as collateral 

for the loan. The same is true for residual value insurance. 

In any event, we find respondent’s attempt to distinguish 

between a ‘‘pure risk’’ and a ‘‘speculative risk’’ in this setting 

essentially metaphysical in nature. The textbooks that Dr. 

Baranoff cites describe municipal bond and mortgage guaranty insurance as covering ‘‘speculative risks,’’ even though 

respondent insists that the triggering event is a ‘‘pure risk.’’ 

See, e.g., Rejda & McNamara, supra, at 5; S.S. Huebner, et 

al., Property and Liability Insurance 366–367 (4th ed. 1996) 

(describing municipal bond insurance as providing coverage 

against speculative risk). Aristotle noted that there are at 

least four distinct senses in which one thing may be said to 

‘‘cause’’ another. Physics, bk. II, ch. 3. Respondent’s efforts to 

split hairs by disentangling the causes of ‘‘loss’’ are philosophically interesting. 21 But we do not think they carry 
244 145 UNITED STATES TAX COURT REPORTS (209) 

tate bubble might be the ‘‘efficient’’ cause. 

much weight in determining whether the RVI policies constitute ‘‘insurance’’ for Federal income tax purposes. 

Finally, respondent urges that we find the RVI policies to 

entail mere ‘‘investment risk’’ by analogizing its policyholders 

to investors who have purchased put options to protect their 

stock. The problem with this argument is that the insureds 

are not investors and the policies are not derivative products. 

Investors invariably purchase stock in the hope that it will 

appreciate in value, enabling them to sell the shares for a 

capital gain. The assets petitioner insured are not investment assets; in the hands of the lessors or finance companies, they are ordinary business assets in the nature of 

inventory or equipment. The insureds do not acquire these 

assets expecting them to appreciate in value and be sold to 

generate gain. To the contrary, the insureds typically expect 

these assets to decline in value, but believe that they can 

nevertheless be leased profitably if the lessor’s lease-pricing 

formula works as expected. 

The insureds purchase insurance from RVIA to protect 

against the risk that unexpected events will wreak havoc 

with these lease-pricing formulas and generate an ordinary 

business loss instead of a profit. This is not an investment 

risk; it is a risk at the very heart of the lessor’s business 

model. In comparison with typical stock investors, therefore, 

the insureds under the RVI policies are at the opposite end 

of the bell curve. 

Analogizing the RVI policies to put options, moreover, is 

little more than a simile. In the real world, put options are 

typically settled for cash rather than by actual transfer of the 

underlying shares. At a conceptual level, many insurance 

products could be likened to put options. A mortgage guaranty policy, for example, could be said to give the policyholder the right to put the mortgage loan to the insurer 

unless the insurer pays the insured the difference between 

the remaining balance of the loan (the strike price) and its 

value on the exercise date. Even a fire insurance policy could 

be likened to a put on the fire-damaged house that is settled 

by the insurer’s payment of the damage claim. 

The parties agree that the RVI policies are not and cannot 

be taxable for Federal income tax purposes as derivative 
(209) R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER 245

22 In Chief Counsel Advisory 201511021, 2015 WL 1094778 (Mar. 13, 

2015), the IRS concluded that contracts under which a captive insurer indemnified its manufacturing affiliates against ‘‘loss of earnings’’ attributable to foreign currency swings did not constitute ‘‘insurance’’ for Federal 

income tax purposes. The IRS noted, among other things, that the contracts ‘‘provide[d] a reasonable approximation’’ of the loss suffered by the 

affiliates, rather than ‘‘measur[ing] the actual loss suffered by the change 

in exchange rate.’’ Cf. sec. 998 (providing for the tax treatment of certain 

foreign currency transactions). We express no view on whether these contracts would constitute ‘‘insurance’’ under the analysis set forth in this 

Opinion. 

products. These policies were priced, sold, and regulated as 

insurance products. For financial and securities regulatory 

purposes, the policies cannot be treated as put options 

because (among other reasons) they are regulated by the 

States as ‘‘insurance.’’ See 17 C.F.R. sec. 1.3(xxx)(4)(i)(A) 

(2014); id. sec. 240.3a69–1(a)(1). 

The courts have long held that a product can be ‘‘insurance’’ even though competing products exist in the financial 

marketplace. In 1931 the Court of Appeals for the Second 

Circuit rejected the argument that a mortgage guaranty contract was not ‘‘insurance’’ because ‘‘banking corporations may 

also sell mortgages with their guaranty.’’ Home Title Ins. Co. 

v. United States, 50 F.2d 107, 111 (2d Cir. 1931) (concluding 

that the State’s recognition and regulation of the issuer as an 

insurance company ‘‘should turn the scales, if the question 

hangs in doubt’’), aff ’d, 285 U.S. 191 (1932). And in 1933 the 

Pennsylvania Supreme Court rejected the argument that a 

contract guaranteeing the value of land could not be ‘‘insurance’’ because it resembled ‘‘a real estate option.’’ See Fid. 

Land Value Assur. Co., 167 A. at 302. When it comes to mitigating risk, there may be more than one way to skin the cat. 

The existence of other strategies does not mean that the 

strategy chosen is not ‘‘insurance’’ or that product purchased 

involves no ‘‘insurance risk.’’ 22

For all these reasons, we reject respondent’s contention 

that the RVI policies involve an uninsurable ‘‘investment 

risk.’’ These policies were designed and marketed as insurance products. Similar products were sold in the insurance 

market by other major insurance companies. These policies 

were undergirded by insurance strength ratings from the 

major insurance rating agencies. For more than 80 years the 
246 145 UNITED STATES TAX COURT REPORTS (209) 

courts have recognized that contracts insuring against the 

risk that property will decline in value can involve ‘‘insurance risk.’’ The types of events that cause losses under these 

policies closely resemble the events that cause losses under 

policies of mortgage guaranty and municipal bond insurance. 

Most importantly, every State in which petitioner does business recognizes these policies as involving insurance risk and 

regulates them as ‘‘insurance.’’ Respondent is correct that 

these policies have some features that are atypical of what 

might be called ‘‘standard’’ insurance policies. But these differences are driven by the economics of the underlying business transaction and do not nullify the existence of ‘‘insurance risk.’’ 

E. Conclusion 

Our analysis of insurance risk, risk transfer, risk distribution, and the commonly accepted notions of insurance convinces us that the RVI policies are ‘‘insurance contracts’’ for 

Federal income tax purposes. Because more than half of petitioner’s business during 2006 consisted of issuing ‘‘insurance 

contracts,’’ petitioner was for that year an ‘‘insurance company’’ within the meaning of section 831(c) and was required 

to compute its ‘‘insurance company taxable income’’ under 

section 832. 

To reflect the foregoing and the parties’ concessions, 

Decision will be entered under Rule 155

f 

.