Court Opinion

ID: 4485362
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:21.813036+00
Date Added: 2024-06-11T14:54:06.039855
License: Public Domain

Hamblen, J, concurring: I concur in the result reached in this opinion. However, I do not agree with the basis on which this result was reached and believe this opinion has obscured the longstanding analysis of Helvering v. Le Gierse, 312 U.S. 531 (1941). Helvering v. Le Gierse, supra at 539, describes a true insurance arrangement as requiring "risk-shifting and risk-distribution.” The Court found in that instance that there was no risk-shifting because: Here the total consideration was prepaid and exceeded the face value of the "insurance” policy. The excess financed loading and other incidental charges. Any risk that the prepayment would earn less than the amount paid to respondent as an annuity was an investment risk similar to the risk assumed by a bank; it was not an insurance risk as explained above. [Helvering v. Le Gierse, supra at 542.] Subsequently, this Court in Carnation Co. v. Commissioner, 71 T.C. 400 (1978), affd. 640 F.2d 1010 (9th Cir. 1981), had the opportunity to examine Helvering v. Le Gierse, supra, in the context of a wholly owned subsidiary which reinsured 90 percent of the insurance risk assumed by an unrelated third party insurance company. In Carnation Co. v. Commissioner, supra, the parent corporation had entered into an agreement with the subsidiary which permitted the subsidiary to receive an additional $2,880,000 capital contribution on demand. Clearly, the implication was that, if the premiums paid were inadequate to cover the insurance risks, the insured would, in effect, make up at least a portion of the deficiency through additional capital contributions. We found that the agreement to provide additional capital contributions bound Carnation to an investment risk which neutralized the insurance risk. Carnation Co. v. Commissioner, supra at 409.1 Consequently, we held that there was no risk-shifting to the extent of the reinsurance arrangement. While I agree with the analysis in Carnation Co. v. Commissioner, supra, I cannot agree that the conclusion of that case is controlling here. Unlike the situation in Carnation Co. v. Commissioner, supra, there was no requirement that petitioner contribute additional sums to Lombardy. The findings of fact (supra p. 953) specifically state: There was no agreement or understanding between petitioner, its wholly owned subsidiary in Arizona, Hall, or Fremont that petitioner would indemnify Fremont, that it would pay additional capital into Lombardy, or that it would take any steps, direct or indirect, to assure that Lombardy would perform its obligations under its reinsurance agreement with Fremont. Under the circumstances, I simply cannot agree that no risk-shifting was involved here to the extent of the reinsurance. Petitioner paid sums which were ultimately received by Lombardy, and Lombardy assumed the risk that these sums would not be sufficient to cover all of its liability. While ostensibly rejecting the "economic family” concept, the opinion in this case seems to me to rely on a similar analysis in order to support the conclusion that there was no risk-shifting. The economic family concept is described in Rev. Rul. 77-316, 1977-2 C.B. 53, 54, which provides in pertinent part: the insuring parent corporation and its domestic subsidiaries, and the wholly owned "insurance” subsidiary, though separate corporate entities, represent one economic family with the result that those who bear the ultimate economic burden of loss are the same persons who suffer the loss. To the extent that the risks of loss are not retained in their entirety by * * * or reinsured with * * * insurance companies that are unrelated to the economic family of insureds, there is no risk-shifting or risk-distribution, and no insurance, the premiums for which are deductible under section 162 of the Code. In the situation where the insurer is wholly owned by the insured, either directly or indirectly, I can see little difference between the economic family concept described in the revenue ruling and the conclusion in this case that (p. 958): When petitioner sustains losses covered by its workers’ compensation insurance, 92 percent is sustained by Lombardy. Accordingly, because petitioner, through its wholly owned Arizona corporation, owns all of Lombardy, it has not shifted the risk of sustaining such losses to unrelated parties in exchange for insurance premiums because the premiums were paid to the wholly owned subsidiary of its wholly owned subsidiary. In any event, both analyses appear to be directly contrary to the holding of Moline Properties v. Commissioner, 319 U.S. 436 (1943), and may not, in my opinion, be sustained on that basis alone.2 The Moline Properties issue is unnecessarily injected into this case via the economic family concept analogy. My conclusion in this case is that the insurance arrangement with Lombardy did effectively shift the insured risk from petitioner to Lombardy. However, the arrangement is not a true insurance arrangement because there is no risk distribution. Risk distribution may be described as: a method of dispelling the danger of a potential loss by spreading its cost throughout a group. By diffusing the risks through a mass of separate risk shifting contracts, the insurer casts his lot with the law of averages, [Commissioner v. Treganowan, 183 F.2d 288, 291 (2d Cir. 1950). Emphasis added.] Clearly, there is no risk distribution here because there is only one insured and, consequently, there can be no spreading of the exposure.3  Finally, the opinion notes that it will save for another day resolution of the insurance issue where a subsidiary insures risks other than those of its parent. I respectfully submit, however, that this merely begs the question, because one issue will be there, as it is here, whether a distribution as well as a shifting of risk has occurred. Accordingly, I would apply here the insurance definition in Helvering v. Le Gierse, supra, and resolve the issue on that basis. Hopefully, we can then put to rest the economic family concept, at least in this Court.4   This opinion states that the agreement to provide additional capital was only one factor of several which were considered in the determination made in Carnation Co. v. Commissioner, 71 T.C. 400 (1978), affd. 640 F.2d 1010 (9th Cir. 1981). However, review of that opinion discloses to me no other factor articulated as a basis for the opinion.   Although any employee entitled to compensation may enforce the liability of any insurer under sec. 3753 of the California Labor Code, it is the employer’s obligation to the employees, i.e., the risk, under sec. 3600 of the California Labor Code, which is insured.   “Indeed the Internal Revenue Service has clarified its position in Rev. Rul. 77-316,1977-2 C.B. 53, and eliminated the application of the economic family concept where there are numerous insured shareholders, none of whom owns a controlling interest in the insurance corporation. See Rev. Rul. 80-120, 1980-1 C.B. 41; Rev. Rul. 78-338, 1978-2 C.B. 107.