Stearns-Roger Corp. v. U.S.

• Decision Date: 30 September 1985
• Docket Number: No. 84-1773,STEARNS-ROGER,84-1773
• Citation: 774 F.2d 414
• Parties: -6099, 85-2 USTC P 9712 CORPORATION, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 414

774 F.2d 414

56 A.F.T.R.2d 85-6099, 85-2 USTC P 9712

STEARNS-ROGER CORPORATION, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 84-1773.

United States Court of Appeals, Tenth Circuit.

Sept. 30, 1985.

Robert E. Benson (John C. Siegesmund, III and Timothy M. Rastello, with him on the brief, Holland & Hart, of counsel), Denver, Colo., for plaintiff-appellant.

Gary R. Allen, Atty., Tax Div., Dept. of Justice, Washington, D.C. (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup and Gayle P. Miller, Attys., Tax Div., Dept. of Justice, Washington, D.C., with him on the brief, Robert N. Miller, U.S. Atty., Denver, Colo., of counsel), for defendant-appellee.

Robert E. Liles, II and Charles E. Taylor of Silverstein and Mullens, Washington, D.C. (Martin, Pringle, Oliver, Triplett & Wallace, Wichita, Kan., of counsel), filed a brief on behalf of amicus curiae Beech Aircraft Corp.

Before McKAY and SETH, Circuit Judges, and JENKINS, District Judge ^*.

SETH, Circuit Judge.

This case is on appeal pursuant to certification by the trial court under Sec. 1292(b). The court had disallowed 577 F.Supp. 833, in an action seeking refunds, deductions taken by Stearns-Roger Corporation as insurance premiums for a four-year period in the amount of about six million dollars.

The payments in question were made by Stearns-Roger to Glendale Insurance Company which it had incorporated under the Colorado Captive Insurance Company Act (Colo.Rev.Stat. Sec. 10-6-101 et seq.). The Act permits such a captive insurance company to insure risks only of the parent company, its subsidiaries, its affiliates and associated companies. Such a company may be organized when the state insurance commissioner is satisfied that there is no alternative source for adequate insurance.

All the stock of Glendale was owned by Stearns-Roger and by one of its wholly owned subsidiaries. Stearns-Roger provided the necessary capital at the outset and provided additional capital later. In addition Stearns-Roger indemnified Glendale up to $3,000,000.00 for losses it might suffer. No occasion arose to use the indemnity agreement, but it was in effect during the years in question.

Glendale insured Stearns-Roger, its fifteen subsidiaries, its affiliates and its participants in projects where Stearns-Roger assumed their risks of loss. The coverage was for errors and omissions, general liability and workers' compensation. Stearns-Roger paid Glendale for its coverage and it deducted on its tax returns these payments as "insurance premiums." There were also some deductions claimed for premiums paid to third party carriers which were disallowed to the extent these were ceded to Glendale.

The trial court found, and it is not challenged, that Glendale was a separate and distinct company; that Stearns-Roger had found it difficult or impossible to obtain the coverage it required from commercial insurance companies; that Glendale was not a sham; it was operated "as a corporate entity distinct from Stearns-Roger"; it had been incorporated for a legitimate business purpose and was not created for the purpose of tax avoidance or evasion.

The losses incurred by Stearns-Roger (or its subsidiaries) covered by the policies issued by Glendale were paid to Stearns-Roger. The payments for coverage were, of course, paid by Stearns-Roger to Glendale. "Insurance" is not defined by the Internal Revenue Code. The issue presented here is whether the payments made to Glendale and sought to be deducted by Stearns-Roger were "insurance premiums" which had they been paid for the typical coverage by a third-party commercial company, would ordinarily have been deductible as business expenses (Sec. 162(a) ).

Self-insurance plans whereby reserves are created or payments made into funds, accounts or trusts do not constitute "insurance" for these purposes. There is no shifting of the risk to others but instead reserves for possible losses are created. Payments so made are not deductible as insurance premiums. Spring Canyon Coal Co. v. Commissioner, 43 F.2d 78 (10th Cir.1930).

In Helvering v. LeGierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996 (1941) the Court held that for there to be "insurance" there must be a shifting of the risk of loss or a spreading of the risk. This statement of the elements of insurance has been applied for tax purposes generally. We are not prepared to use or to write a new definition of "insurance" as appellant suggests.

In the case before us the risk of loss did not leave the parent company. The payments for coverage went from parent to subsidiary but the ultimate burden for losses was always on the parent. Under LeGierse this did not constitute a shifting of the risk. In substance it was self-insurance. Thus the arrangement was not "insurance" for the purposes under consideration. The taxpayer's assets were diminished by any casualty loss.

In Carnation Co. v. Commissioner, 640 F.2d 1010 (9th Cir.1981), the court considered a comparable arrangement between a parent and a subsidiary. The only difference was that the subsidiary reinsured ninety percent of a third party commercial insurance company's liability under policies issued to the parent. Ninety percent of the premiums were remitted by the third party company to the subsidiary. There was in Carnation an agreement by the parent to provide additional capital if required. The Tax Court had held that the premiums to the extent they were ceded to the subsidiary could not be deducted because the risk as to that...