Opinion ID: 2383999
Heading Depth: 1
Heading Rank: 3

Heading: Facts Relating to the Dismissal Motion

Text: Wal-Mart's claims arise out of its purchase from the insurer-defendants of some 350,000 corporate-owned life insurance (COLI) policies, under which Wal-Mart was named as the beneficiary. Those COLI policies, which insured the lives of Wal-Mart's employees, were purchased as part of a plan whereby the insurers granted Wal-Mart loans that were used to pay the premiums on the policies. Wal-Mart would then deduct the interest payments on those loans from its income for purposes of reducing its federal income taxes. [4] During the 1980s and early 1990s, many large corporate employers besides Wal-Mart had purchased COLI policies under similar tax-reducing COLI plans. In August 1993, Wal-Mart retained the broker-defendants to advise it about using COLI policies to obtain tax benefits. After proposals from several insurance companies were received, the broker-defendants recommended that Wal-Mart purchase COLI policies from AIG and Hartford. The broker-defendants also recommended that Wal-Mart create and use a Georgia grantor trust as the vehicle to purchase the policies, so that Georgia law would govern any insurable interest issues that might arise after the policies were purchased. The broker-defendants advised Wal-Mart that Georgia law would provide a favorable result if any employee(s) challenged whether Wal-Mart had a legally valid insurable interest in the lives of its workers. Between 1993 and 1995, Wal-Mart purchased approximately 350,000 COLI policies from the insurer-defendants, and retained Marsh, Inc. to administer and service those policies. Wal-Mart sought  and obtained  assurances from both the insurer defendants and the broker defendants that: (i) the policies complied with the Internal Revenue Code, (ii) future changes to the tax law were unlikely to impact the policies adversely, and (iii) Wal-Mart had a valid insurable interest in the lives of its employees. Through 1995, Wal-Mart claimed the federal tax deductions as contemplated under the COLI plan. In 1996, however, the legal landscape changed. As part of the Health Insurance Portability and Accountability Act (HIPAA), Congress prospectively disallowed interest deductions for loans used to fund COLI plans. HIPAA also provided for transitional relief that allowed taxpayer companies to take deductions in 1997 and 1998 for up to a maximum of 20,000 COLI policies. HIPAA did not, however, disallow any deductions that were taken before January 1, 1996. In response to the HIPAA legislation, Wal-Mart immediately began unwinding its COLI policies, although it took whatever deductions for 1997 and 1998 were allowed under HIPAA's transitional relief provision. [5] Of importance to Wal-Mart's claims is that HIPAA eliminated the deductibility of interest payments for loans funding COLI policies prospectively, but did not disallow deductions taken before 1996; i.e., retrospectively. In 1997, nonetheless, the United States Internal Revenue Service (IRS) brought several lawsuits in which it sought to disallow retrospectively COLI-related tax deductions that the defendants in those cases had taken before 1996. In those lawsuits the IRS characterized the COLI programs as sham transactions. Wal-Mart was not included among the companies that were named as defendants in the IRS lawsuits. The first of the IRS cases, Winn-Dixie Stores Inc. v. C.I.R., [6] was decided by the United States Tax Court on October 19, 1999. In that case, the Tax Court disallowed deductions that were taken in 1993 for the interest that had accrued on Winn-Dixie's COLI policies. After the Winn-Dixie decision, two other federal courts retrospectively disallowed COLI tax deductions that had been taken before 1996. [7] After those adverse decisions were handed down, Wal-Mart negotiated a settlement with the IRS. In that settlement, which was concluded in 2002, most of the COLI-related tax deductions that Wal-Mart had claimed before 1996 were retrospectively disallowed. [8] Separate and apart from the tax deductibility issue, beginning in 2001 Wal-Mart found itself confronted with lawsuits brought by the estates of deceased employees, wherein the estates claimed that Wal-Mart had no legally valid insurable interest in its employees' lives. In August 2002, in one of these lawsuits, Mayo v. Hartford Life Ins. Co., the Court held that Texas law, rather than Georgia law, governed the insurable interest question, and that under Texas law Wal-Mart had no valid insurable interest in the lives of its Texas employees. [9] Similar lawsuits challenging Wal-Mart's insurable interest in the employees' lives were pending in other jurisdictions at the time Wal-Mart filed its Court of Chancery action on September 3, 2002. [10]