AMERCO, Inc. v. C.I.R.

• Citation: 979 F.2d 162
• Decision Date: 05 November 1992
• Docket Number: No. 91-70732,91-70732
• Parties: -6048, 61 USLW 2311, 92-2 USTC P 50,571 AMERCO, INC.; Republic Insurance, Petitioners-Appellees, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 162

979 F.2d 162

70 A.F.T.R.2d 92-6048, 61 USLW 2311,

92-2 USTC P 50,571

AMERCO, INC.; Republic Insurance, Petitioners-Appellees, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellant.

No. 91-70732.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 9, 1992.

Decided Nov. 5, 1992.

John A. Dudeck, Jr. and Gary R. Allen, U.S. Dept. of Justice, Tax Div., Appellate Section, Washington, D.C., for respondent-appellant.

Michael F. Kelleher, William F. Hanrahan, John P. McAllister and Dominick C. Colangelo, Groom & Nordberg, Chtd., Washington, D.C., for petitioners-appellees.

Appeal from a Decision of the United States Tax Court.

Before POOLE, FERNANDEZ, and G. NELSON, Circuit Judges.

FERNANDEZ, Circuit Judge:

AMERCO and a number of its subsidiaries (AMERCO Group) purchased insurance policies from Republic Western Insurance Company (Republic) and deducted the premiums for income tax purposes. Republic was a subsidiary of AMERCO. The Commissioner of Internal Revenue (Commissioner) determined that because of the relationships among the parties the transactions did not constitute insurance. A notice of deficiency was issued by the Commissioner, and AMERCO petitioned the Tax Court for a redetermination. The Tax Court found that the transactions were insurance. ¹ It, therefore, held against the Commissioner, who now appeals. We affirm.

BACKGROUND

The AMERCO Group constitutes the U-Haul system. AMERCO itself is a holding company which owns the stock of a number of subsidiaries. Among those subsidiaries are U-Haul International, Inc., the administrative clearing house, AMERCO Lease Co., which owns much of the U-Haul rental equipment, and numerous other rental companies, repair shops, manufacturing companies and service companies. Approximately 250 of these joined in AMERCO's consolidated returns for the tax years in question--1979-85.

Republic was incorporated in 1973. It is a third tier wholly owned subsidiary of AMERCO. It is a property and casualty insurance company, licensed in most states and the District of Columbia. Republic issued insurance policies to members of the AMERCO Group and to unrelated parties. Those policies were issued at normal commercial The Tax Court found that based upon gross premiums insurance written for the AMERCO Group itself, related business, was from 26 percent to 48 percent of Republic's total insurance business. Insurance written for others, unrelated business, constituted the remaining 74 percent to 52 percent.

                rates and were divided into a number of categories by the Tax Court.   They included:  (1) corporate policies issued to members of the AMERCO Group;  (2) workers' compensation policies issued to members of the AMERCO Group;  (3) U-Haul rental system policies, which covered members of the AMERCO Group, independent fleet owners, and truck rental customers;  (4) SafeMove and SafeStor policies, which covered U-Haul rental customers;  and (5) policies which covered risks entirely unconnected with the U-Haul system
                

The Commissioner took the position that the transactions between the AMERCO Group and Republic could not be insurance because Republic is a wholly owned subsidiary of AMERCO and is, therefore, a member of the same economic family as the AMERCO Group. As a result, the Commissioner contended, there could be no risk-shifting or risk-distributing and, absent those, insurance could not exist. The Commissioner takes the same position before us.

JURISDICTION AND STANDARD OF REVIEW

The Tax Court had jurisdiction pursuant to 26 U.S.C. § 6213. We have jurisdiction pursuant to 26 U.S.C. § 7482.

Whether the transactions constitute insurance is a question of law subject to de novo review. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1299 (9th Cir.1987) (based upon stipulated facts it is a question of law whether payments to a captive insurer constitute deductible insurance premiums). Whether certain insurance policies issued by Republic are related or unrelated business is a question of fact reviewed for clear error. See Pomarantz v. Commissioner, 867 F.2d 495, 497 (9th Cir.1988). Although a presumption exists that the Tax Court correctly applied the law, no special deference is given to Tax Court decisions. Clougherty, 811 F.2d at 1299.

DISCUSSION

It is common ground that insurance premiums constitute ordinary and necessary business expenses which can be deducted in arriving at taxable income. See 26 U.S.C. § 162; Treas.Reg. § 1.162-1(a) (as amended in 1988). On the other hand, amounts placed by a company into a self insurance reserve fund cannot be deducted; any deductions must await an actual payment out of that reserve. See Clougherty, 811 F.2d at 1300.

The question before us is an intermediate one: Can insurance premiums paid to a wholly owned subsidiary be deducted or are they more like amounts paid into a self insurance reserve? In order to answer that question it is necessary to determine the nature of insurance, and, more particularly, its nature for income tax purposes. Then, we must see if transactions between members of a corporate family and a subsidiary insurance company can meet that definition.

A. Definition of Insurance.

In setting forth definitions of insurance, we do not start afresh. Rather, we look to a line of cases starting with Helvering v. Le Gierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996 (1941). In Le Gierse, an estate tax case, the Supreme Court described insurance as follows:

We think the fair import of subsection (g) [the estate tax section] is 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. Historically and commonly insurance involves risk-shifting and risk-distributing. That life insurance is desirable from an economic and social standpoint as a device to shift and distribute risk of loss from premature death is unquestionable. That these elements of risk-shifting and risk-distributing are essential to a life insurance contract is agreed by courts and commentators.

312 U.S. at 539, 61 S.Ct. at 649.

We have often referred to this definition, with particular emphasis on the risk-shifting and risk-distributing aspect. See Clougherty, 811 F.2d at 1301; Carnation Co. v. Commissioner, 640 F.2d 1010, 1012 (9th Cir.), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 381 (1981). In this case, the Tax Court identified three principles at the heart of the Le Gierse definition: "(1) [t]hat an insurance transaction must involve 'insurance risk;' (2) that insurance involves risk-shifting and risk-distributing; and (3) that, in the absence of a statutory definition, 'insurance' is to be defined in its commonly accepted sense." 96 T.C. at 38. It supplemented these with the reflection that "matters of Federal income taxation must be resolved with principles of Federal income taxation borne in mind." Id. We agree with this formulation, which supplements what we have said before. While the Tax Court avoided calling this a definition, we do not think that the three articulated principles places it at odds with our prior cases. Rather, they underscore the fact that many considerations can come into play when one attempts to decide whether a deduction of a purported insurance premium will be allowed.

Here, as in other cases, the focus is on risk-shifting and risk-distributing, but that does not mean that additional factors could not be important at times. Here, as the Tax Court determined, there was an insurance risk involved--the AMERCO Group undoubtedly faced potential hazards from its operations which constituted insurable risks. By the same token, there could be no real doubt that Republic was engaged in the insurance business in the commonly accepted sense. The Commissioner does not contest those determinations. Thus, we must turn to an analysis of risk-shifting and risk-distributing.

B. Risk-Shifting and Risk-Distributing.

Courts have not spilled a great deal of ink in defining risk-shifting as opposed to risk-distributing. That is probably because in most instances the facts which demonstrated that one did not exist also demonstrated that the other did not. See Carnation, 640 F.2d at 1013. Nevertheless, it is fair to say that " '[r]isk-shifting' means one party shifts his risk of loss to another, and 'risk-distributing' means that the party assuming the risk distributes his potential liability, in part, among others. An arrangement without the elements of risk-shifting and risk-distributing lacks the fundamentals inherent in a true contract of insurance." Beech Aircraft Corp. v. United States, 797 F.2d 920, 922 (10th Cir.1986); see also Robert E. Keeton and Alan I. Widiss, Insurance Law § 1.3(b)(2) (1988).

(1) Risk-Shifting.

In the germinal case of Le Gierse, the Court described a classic situation where no risk-shifting could take place. There the 80-year-old insured purchased both an insurance policy on her life and an annuity. The premiums were fixed in a way that assured she would retain all of the risk of her own untimely death. The insurance company assumed none of the risk attendant upon that event, and the only result of the combined transactions would have been to remove assets from her taxable estate. Not surprisingly, the Court found that no insurance existed, even though the company itself was, no doubt, an insurance company which had written an insurance policy. In effect, there was no risk-shifting, and, for that matter, no risk-distributing.

We confront the same sort of problem when a parent purchases insurance from its wholly owned subsidiary, and that subsidiary is a captive insurance company. By "captive insurance company" we mean one which is organized for the purpose of insuring the liabilities of the parent and its affiliates. See Clougherty, 811 F.2d at 1298 n. 1.

Since at least 1977 the Commissioner has taken the position that where the only insurance written by a...