AMERCO & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 24 January 1991 |
| Docket Number | 4330-89.1,Docket Nos. 5100-88 |
| Citation | 96 T.C. No. 3,96 T.C. 18 |
| Parties | AMERCO AND SUBSIDIARIES, AND REPUBLIC WESTERN INSURANCE COMPANY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P1 is an affiliated group of corporations that filed consolidated returns for the years at issue. P2 is a third-tier, wholly owned subsidiary of the parent of the P1 group. P2 did not participate in P1's consolidated returns.
P2 is a fully licensed property and casualty insurance company. P1 purchased insurance from P2. Unrelated insureds purchased insurance from P2. Unrelated insureds comprised over 50 percent of P2's business during each of the years at issue. R determined deficiencies against P1 and P2, based upon a disregard of the form of certain of P2's insurance transactions. Held, all the transactions at issue constituted “insurance” for purposes of the Federal income tax. Gulf Oil Corp. v. Commissioner, 89 T.C. 1010 (1987), affd. in part, revd. in part, and remanded914 F.2d 396 (3d Cir. 1990); Humana Inc. v. Commissioner, 88 T.C. 197 (1987), affd. in part and revd. in part881 F.2d 247 (6th Cir. 1989); Clougherty Packing Co. v. Commissioner, 84 T.C. 948 (1985), affd. 811 F.2d 1297 (9th Cir. 1987); and Carnation Co. v. Commissioner, 71 T.C. 400 (1978), affd. 640 F.2d 1010 (9th Cir. 1981), distinguished. Held further, R erroneously included in P2's income for 1979 its loss reserve balances for certain insurance coverages as of the beginning of that year. Held further, evidentiary ruling at trial upheld. Michael P. Kelleher, John P. McAllister, George R. Olds, and Brad S. Ostroff, for the petitioners.
Deborah A. Butler and Rebecca W. Wolfe, for the respondent.
By notices of deficiency, respondent determined the following deficiencies in petitioners' Federal income tax:
Tax Court, 1991.
1 Consolidated for trial, briefing, and opinion.
2 A notice of deficiency slightly misstates certain dates of petitioner AMERCO and Subsidiaries' tax years. Those dates are correctly stated herein.
By an amendment to answer in docket No. 5100-88, respondent increased the deficiencies by the following amounts:
The primary issue for decision is the proper characterization, for purposes of the Federal income tax, of certain transactions involving petitioners as well as other parties. Specifically, we must determine whether any, some, or all of the transactions constituted “insurance,” as that term fits into the tax lexicon. Derivatively, assuming we decide the primary issue at least partially in favor of respondent, we must decide whether respondent correctly included in petitioner Republic Western Insurance Company's 1979 income its loss reserve balances as of the beginning of that year with regard to certain insurance coverages purchased in prior years. Finally, we will address the propriety of one of our evidentiary rulings at trial.
Although deficiencies were determined for tax years dating back to 1975, only transactions which occurred between 1979 and 1985 are at issue. 3
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
I THE PLAYERS
A. AMERCO AND SUBSIDIARIES
AMERCO, a Nevada corporation, had its principal office in Las Vegas, Nevada, when it filed its petitions in this case. Its “subsidiaries” are certain subsidiary corporations that joined AMERCO in filing consolidated Federal income tax returns for the years at issue. AMERCO wholly owned each Subsidiary, either directly or through other corporations; members of the L.S. Shoen family held controlling amounts of AMERCO's stock.
AMERCO was a holding company during the years at issue: its principal function was to own its subsidiaries' stock. It had from one to three employees over this period, and owned no significant asset besideS the stock.
AMERCO's subsidiaries generally comprised the U-Haul rental system. 4 U-Haul International, Inc., was administrative clearinghouse to the system; its responsibilities included negotiating and purchasing certain insurance coverages connected with the system. Also included in the U-Haul system were: AMERCO Lease Co., owner of much of the U-Haul rental equipment; U-Haul rental companies, repair shops, manufacturing companies, and miscellaneous service companies; and Movers World, a full-service van line company established in 1984. In total, approximately 250 subsidiary corporations, located throughout the United States, joined AMERCO's consolidated returns for the years at issue.
B. REPUBLIC WESTERN INSURANCE COMPANY
Republic Western Insurance Company (hereinafter Republic Western), an Arizona corporation, had its principal place of business in Phoenix, Arizona, when it filed its petition in this case. It is a third-tier, wholly owned subsidiary of AMERCO. Republic Western filed its own Federal income tax returns for the years at issue; i.e., it did not participate in AMERCO and Subsidiaries' consolidated returns.
Republic Western was incorporated in 1973. It was not, however, AMERCO's (and its predecessor corporation's) initial insurance subsidiary. In the late 1950s Frontier Insurance Agency, a licensed insurance broker, was formed. Frontier represented the U-Haul companies, as well as other insureds. In 1968 Frontier was replaced by Ponderosa Insurance Agency. In 1969 Oxford Life Insurance Company was acquired, as a wholly owned subsidiary of Ponderosa. Republic Western joined the AMERCO group as a wholly owned subsidiary of Oxford Life.
Republic Western is a property and casualty insurance company. In 1979 it was licensed in 12 states; by the end of 1985 it was licensed in 45 states and the District of Columbia. Republic Western is not licensed under any state captive insurance company statute.
The following table represents Republic Western's capital and surplus over the period at issue:
+--------------------------------------------------------------+
¦ ¦Paid-in ¦Paid-in ¦Surplus ¦Earned ¦ ¦
+------+----------+----------+----------+----------+-----------¦
¦Year ¦capital ¦surplus ¦notes ¦surplus ¦Total ¦
+------+----------+----------+----------+----------+-----------¦
¦1979 ¦$2,350,000¦$1,000 ¦$7,425,000¦$5,690,862¦$15,466,862¦
+------+----------+----------+----------+----------+-----------¦
¦1980 ¦2,350,000 ¦1,000 ¦7,425,000 ¦10,097,496¦19,873,496 ¦
+------+----------+----------+----------+----------+-----------¦
¦1981 ¦2,350,000 ¦1,000 ¦7,425,000 ¦15,226,545¦25,002,545 ¦
+------+----------+----------+----------+----------+-----------¦
¦1982 ¦2,350,000 ¦1,000 ¦7,425,000 ¦23,915,025¦33,691,025 ¦
+------+----------+----------+----------+----------+-----------¦
¦1983 ¦2,350,000 ¦10,001,000¦_ ¦32,457,462¦44,808,462 ¦
+------+----------+----------+----------+----------+-----------¦
¦1984 ¦2,350,000 ¦10,001,000¦_ ¦37,820,459¦50,171,459 ¦
+------+----------+----------+----------+----------+-----------¦
¦1985 ¦2,350,000 ¦10,001,000¦_ ¦39,431,468¦51,782,468 ¦
+--------------------------------------------------------------+
Republic Western held A. M. Best Company ratings of “A” (excellent) for 1980 through 1984, and “B+” (very good) for 1985. It was not eligible to be rated for 1979. 5
Republic Western owns a subsidiary, Republic Claims Service Company. Republic Claims Service provides claims adjustment services with regard to policies insured or reinsured by Republic Western.
From 1979 through 1985 Republic Western and Republic Claims Service had the following numbers of employees:
+---------------------------------------------------+
¦Year ¦Republic Western ¦Republic Claims Service ¦
+------+------------------+-------------------------¦
¦1979 ¦10 ¦59 ¦
+------+------------------+-------------------------¦
¦1980 ¦12 ¦63 ¦
+------+------------------+-------------------------¦
¦1981 ¦14 ¦65 ¦
+------+------------------+-------------------------¦
¦1982 ¦19 ¦87 ¦
+------+------------------+-------------------------¦
¦1983 ¦24 ¦84 ¦
+------+------------------+-------------------------¦
¦1984 ¦23 ¦86 ¦
+------+------------------+-------------------------¦
¦1985 ¦43 ¦83 ¦
+---------------------------------------------------+
C. FLEET OWNERS
Fleet owners own the U-Haul rental fleets. They include individuals, partnerships, and corporations. “Company fleet owners” are entities subsidiary to or affiliated with AMERCO. “Independent fleet owners” are unrelated by ownership to AMERCO; they do, however, include some...
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