Court Opinion

ID: 4485672
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:33:52.391614+00
Date Added: 2024-06-11T08:49:14.633308
License: Public Domain

WHITAKER, j., concurring: We are faced in this case with another aspect of the captive insurance problem — the deduction of insurance premiums between brother-sister corporations. The majority purports to decline as in Carnation Co. v. Commissioner, 71 T.C. 400, 413 (1978), affd. 640 F.2d 1010 (9th Cir. 1981), and Clougherty Packing Co. v. Commissioner, 84 T.C. 948, 956 (1985), on appeal (9th Cir., Dec. 13, 1985), to adopt respondent’s “economic family” concept. See Rev. Rul. 77-316, 1977-2 C.B. 53 at 54. However, the majority refers repeatedly with apparent approval to decisions of other courts, including the opinion of the Court of Appeals of the Ninth Circuit affirming our opinion in Carnation, all of which follow Carnation and adopt the economic family concept. The majority also quotes extensively with approval from the testimony of respondent’s experts, Dr. Plotkin and Mr. Stewart, who have fully swallowed respondent’s economic family concept. The dissenting opinion here, as in the prior cases, accuses the majority of having in fact adopted the economic family concept and charges us with failing to follow Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943). I think it unfortunate that we — the majority — have allowed respondent’s buzzword — economic family — to produce so much strained rationalization that we appear to have lost sight of the real issue, whether or not the contracts in question are insurance contracts. It bears emphasizing at the outset that what this Court has so far dealt with is a single affiliated group, including the insurance entity, consisting of one parent corporation and one or more wholly owned subsidiaries. The majority correctly notes (note 12) that our opinion is limited to the consequences of insuring with a wholly owned captive. I suggest what we have decided and all that we have decided in this case and its two predecessors is simply that on the particular facts of these three cases we do not have insurance for tax purposes. Here the only insurance relationship is that which is purportedly created between entities which are related to each other through a single parent with no unrelated persons being insured or having material interests in any of the entities involved. In so doing, we have not “pierced any corporate veil” or done violence to Moline Properties, Inc. There is also another equally compelling basis for our decision. Necessary elements of insurance are risk-shifting and risk-distributing. Helvering v. Le Gierse, 312 U.S. 531 (1941); Commissioner v. Treganowan, 183 F.2d 288 (2d Cir. 1950). These two decisions are fundamental to this insurance issue. In Helvering v. Le Gierse, supra, the Supreme Court recognized that there were two parties to the contract — an insurance company and an insured individual who were distinct legal entities. There was a contract of insurance and a related annuity contract, each of which were legally binding contracts. As Justice Murphy said: Considered together, the contracts wholly fail to spell out any element of insurance risk. It is true that the “insurance” contract looks like an insurance policy, contains all the usual provisions of one, and could have been assigned or surrendered without the annuity. * * * The fact remains that annuity and insurance are opposites; in this combination the one neutralizes the risk customarily inherent in the other. * * * [312 U.S. at 541.] The Second Circuit in Commissioner v. Treganowan, supra, defined risk-shifting as effected by a contract between the insurer and the insured, each of whom gambles on the risk. Risk-distributing on the other hand reduces the potential loss by spreading its cost throughout a group. In Humana as in Carnation and Clougherty, we looked at the facts and at the several corporate entities involved, and found neither risk-shifting nor risk-distributing. We have not invalidated the contracts; we simply found that the contracts involved were not contracts of insurance. The majority here states “Payments to a captive insurance company are equivalent to additions to a reserve for losses. * * * It has long been recognized that sums set aside as an insurance reserve are not deductible.”1 Again that is a correct analysis under these facts. If a single entity, party A, undertakes to indemnify an unrelated entity, party B, from a specific risk, at least superficially the risk has been shifted. But in order for the transaction to be economically sound for both parties, the premium would have to approximate the present value of the risk, equating to a reasonable self-insurance reserve. There has certainly been no distribution of the risk. However such a relationship might be characterized, it is not insurance. In the real world, this hypothetical transaction would not occur. Moreover, given that self-insurance reserves are not deductible, to characterize a contract between a parent and its wholly owned captive subsidiary, with no other insurance business, as insurance, would exalt form over substance. For these two reasons, Carnation and Clougherty were inevitable. One does not need the economic family concept for this result. And given Carnation and Clougherty as correctly decided, the form over substance rationale is alone sufficient to prevent taxpayers from altering the result in the parent-subsidiary circumstance by the simple expedient of creating a sister insurance captive to insure its brother operating company. It requires very little further rationalization to reach the conclusion that in fact, as opposed to form, there is no risk-shifting or risk-distributing no matter where in the affiliated wholly owned group one places the captive insurance subsidiary. I emphasize again that only in these factual contexts have we found that the purported insurance contract does not qualify as such for tax purposes. Whether or not the contract should be recognized as insurance for any other purpose is not an issue before us. In reaching this result we have not collapsed or looked behind the separate corporate existence of any party. As the Supreme Court did in Le Gierse, we have merely applied to the facts before us the accepted definition of insurance and the well known “form over substance” doctrine. That we may someday be called upon to determine how much dilution from 100-percent control or how much insurance business with unrelated entities is necessary to achieve risk-shifting and risk-distributing is a probable fact of life, but it should not interfere with our decision in this case. Sterrett, Chabot, Nims, Parker, Hamblen, Jacobs, and WILLIAMS, JJ., agree with this concurring opinion.  It has been suggested with considerable logic that “The basic concept in a capture program * * * may even have grown out of the early defeats of the self-insurers.” Bradley & Winslow, “Self-Insurance Plans and Captive Insurance Companies — A Perspective on Recent Tax Developments,” 4 Am. J. Tax Policy 217, at 233 (1985).