Rent-A-Center, Inc. v. Commissioner

RENT-A-CENTER, INC. AND AFFILIATED SUBSIDIARIES,
PETITIONERS v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket Nos. 8320–09, 6909–10, Filed January 14, 2014.
21627–10.

P, a domestic corporation, is the parent of numerous wholly
owned subsidiaries including L, a Bermudian corporation. P
conducted its business through stores owned and operated by
its subsidiaries. The other subsidiaries and L entered into
contracts pursuant to which each subsidiary paid L an
amount, determined by actuarial calculations and an alloca-
tion formula, relating to workers’ compensation, automobile,
and general liability risks, and, in turn, L reimbursed a por-
tion of each subsidiary’s claims relating to these risks. P’s
subsidiaries deducted, as insurance expenses, the payments to
L. In notices of deficiency issued to P, R determined that the
payments were not deductible. Held: P’s subsidiaries’ pay-
ments to L are deductible, pursuant to I.R.C. sec. 162, as
insurance expenses.

Val J. Albright and Brent C. Gardner, Jr., for petitioners.
R. Scott Shieldes and Daniel L. Timmons, for respondent.
FOLEY, Judge: Respondent determined deficiencies of
$14,931,159, $13,409,628, $7,461,039, $5,095,222, and
$2,828,861 relating, respectively, to Rent-A-Center, Inc.
(RAC), and its subsidiaries’ 2003, 1 2004, 2005, 2006, and
2007 (years in issue) consolidated Federal income tax
returns. The issue for decision is whether payments to
Legacy Insurance Co., Ltd. (Legacy), were deductible, pursu-
ant to section 162, 2 as insurance expenses.

FINDINGS OF FACT

RAC, a publicly traded Delaware corporation, is the parent
of a group of approximately 15 affiliated subsidiaries (collec-
1 Respondent,
in his amended answer, asserted an additional $2,603,193
deficiency relating to 2003.
2 Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code) in effect for the years in issue, and all Rule ref-
erences are to the Tax Court Rules of Practice and Procedure.

1

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 2 142 UNITED STATES TAX COURT REPORTS (1)

tively, petitioner). During the years in issue, petitioner was
the largest domestic rent-to-own company. Through stores
owned and operated by RAC’s subsidiaries, petitioner rented,
sold, and delivered home electronics, furniture, and appli-
ances. The stores were in all 50 States, the District of
Columbia, Puerto Rico, and Canada. From 1993 through
2002, petitioner’s company-owned stores increased from 27 to
2,623. During the years in issue, RAC’s subsidiaries owned
between 2,623 and 3,081 stores; had between 14,300 and
19,740 employees; and operated between 7,143 and 8,027
insured vehicles.
I. Petitioner’s Insurance Program
In 2001, American Insurance Group (AIG), in response to
a claim against RAC’s directors and officers (D&O), withdrew
a previous offer to renew RAC’s D&O insurance policy. To
address this problem, RAC engaged Aon Risk Consultants,
Inc. (Aon), which convinced AIG to renew the policy.
Impressed with Aon’s insurance expertise and concerned
about its growing insurance costs, petitioner engaged Aon to
analyze risk management practices and to broker workers’
compensation, automobile, and general liability insurance.
With Aon’s assistance, petitioner developed a risk manage-
ment department and improved its loss prevention program.
Prior to August 2002, Travelers Insurance Co. (Travelers)
provided petitioner’s workers’ compensation, automobile, and
general liability coverage through bundled policies. Pursuant
to a bundled policy, an insurer provides coverage and con-
trols the claims administration process (i.e., investigating,
evaluating, and paying claims). Travelers paid claims as they
arose and withdrew amounts from petitioner’s bank account
to reimburse itself for any claims less than or equal to peti-
tioner’s deductible (i.e., a portion of an insured claim for
which the insured is responsible). Pursuant to a predeter-
mined formula, each store was allocated, and was responsible
for paying, a portion of Travelers’ premium costs.
In 2001, after receiving a $3 million invoice from Travelers
for ‘‘claim handling fees’’, petitioner became dissatisfied with
the cost and inefficiency associated with its bundled policies.
On August 5, 2002, petitioner, with the assistance of Aon,
obtained unbundled workers’ compensation, automobile, and

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 3

general liability policies from Discover Re. Pursuant to an
unbundled policy, an insurer provides coverage and a third-
party administrator manages the claims administration
process. Discover Re underwrote the policies; multiple
insurers provided coverage; 3 and Specialty Risk Services,
Inc. (SRS), 4 a third-party administrator, evaluated and paid
claims. Petitioner and its staff of licensed adjusters had
access to SRS’ claims management system and monitored
SRS to ensure the proper handling of claims. This arrange-
ment gave petitioner greater control over the claims adminis-
tration process.
Petitioner, pursuant to the Discover Re policies’
deductibles, was liable for a specific amount of each claim
against its workers’ compensation, automobile, and general
liability policies (e.g., pursuant to its 2002 workers’ com-
pensation policy, petitioner was liable for the first $350,000
of each claim). Petitioner’s retention of a portion of the risk
resulted in lower premiums.
II. Legacy’s Inception
Between 1993 and 2002, petitioner rapidly expanded and
became increasingly concerned about its growing risk
management costs. In 2002, after analyzing petitioner’s
insurance program, Aon suggested that petitioner form a
wholly owned insurance company (i.e., a captive). Aon rep-
resentatives informed David Glasgow, petitioner’s director of
risk management, about the financial and nonfinancial bene-
fits of forming a captive. Aon convincingly explained that a
captive could help petitioner reduce its costs, improve effi-
ciency, obtain otherwise unavailable coverage, and provide
accountability and transparency. Mr. Glasgow presented the
proposal to petitioner’s senior management, who concurred
with Mr. Glasgow’s recommendation to further explore the
formation of a captive. Petitioner’s senior management
directed Aon to conduct a feasibility study (i.e., relying on
petitioner’s workers’ compensation, automobile, and general
3 The following insurers provided coverage: U.S. Fidelity & Guarantee

Co., Fidelity & Guaranty Insurance Co., Discover Property and Casualty
Insurance Co., St. Paul Fire & Marine Co. of Canada, and Fidelity Guar-
anty Insurance Underwriters Inc.
4 SRS was affiliated with the Hartford Insurance Co., a well-established

insurer, and did not have a contract with Discover Re.

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 4 142 UNITED STATES TAX COURT REPORTS (1)

liability loss data) and to prepare loss forecasts and actuarial
studies. Petitioner engaged KPMG to analyze the feasibility
study, review tax considerations, and prepare financial
projections.
Aon, in the feasibility study, recommended that the captive
be capitalized with no less than $8.8 million. Before deciding
where to incorporate the captive, RAC analyzed projected
financial data and reviewed multiple locations. On December
11, 2002, RAC incorporated, and capitalized with $9.9 mil-
lion, 5 Legacy, a wholly owned Bermudian subsidiary. 6
Legacy opened an account with Bank of N.T. Butterfield and
Son, Ltd., and, on December 20, 2002, filed a class 1 insur-
ance company registration application with the Bermuda
Monetary Authority (BMA), which regulated Bermuda’s
financial services sector. A class 1 insurer may insure only
the risk of its shareholders and affiliates; must be capitalized
with at least $120,000; and must meet a minimum solvency
margin calculated by reference to the insurer’s net pre-
miums, general business assets, 7 and general business liabil-
ities. See Insurance Act, 1978, secs. 4B, 6, Appleby (2008)
(Berm.); Insurance Returns and Solvency Regulations, 1980,
Appleby, Reg. 10(1), Schedule I, Figure B (Berm.). During the
years in issue, the BMA had the authority to modify pre-
scribed requirements through both prospective and retro-
active directives for special allowances. See Insurance Act,
1978, sec. 56.
Legacy planned to insure petitioner’s liabilities for the
period beginning in 2002 and ending December 31, 2003 (pro-
posed period). Aon informed petitioner that coverage pro-
5 RAC contributed $9.9 million of cash and received 120,000 shares of

Legacy capital stock with a par value of $1.
6 Legacy elected, pursuant to sec. 953(d), to be treated as a domestic cor-

poration for Federal income tax purposes. In addition, Legacy engaged Aon
Insurance Managers (Bermuda), Ltd., to monitor Legacy’s compliance with
Bermudian regulations and to provide management, financial, and admin-
istrative services.
7 The Bermuda Insurance Act, the Insurance Accounts Regulations, and

the Insurance Returns and Solvency Regulations reference ‘‘general busi-
ness’’, ‘‘admitted’’, and ‘‘relevant’’ assets. See Insurance Act, 1978, sec. 1,
Appleby (2008) (Berm.); Insurance Accounts Regulations, 1980, Appleby,
Schedule III, Pt. 1, 13 (Berm.); Insurance Returns and Solvency Regula-
tions, 1980, Appleby, Reg. 10(3), 11(4) (Berm.). For purposes of this Opin-
ion, there is no significant difference among these terms.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 5

vided by unrelated insurers would be more costly than Aon’s
estimate of Legacy’s premiums and that some insurers would
not be willing to offer coverage. In response to a quote
request, Discover Re stated that it was not in the market to
provide the coverage Legacy contemplated. Discover Re esti-
mated, however, that its premium (i.e., if it were to write one
relating to the proposed period) would be approximately $3
million more than Legacy’s.
III. Petitioner’s Policies
During the years in issue, petitioner obtained unbundled
workers’ compensation, automobile, and general liability poli-
cies from Discover Re. Pursuant to these policies, Discover
Re provided petitioner with coverage above a predetermined
threshold relating to each line of coverage. In addition,
Legacy wrote policies that covered petitioner’s workers’ com-
pensation, automobile, and general liability claims below the
Discover Re threshold. Petitioner, depending on the amount
of a covered loss, could seek payment from Legacy, Discover
Re, or both companies.
The annual premium Legacy charged petitioner was
actuarially determined using Aon loss forecasts and was allo-
cated to each RAC subsidiary that owned covered stores.
RAC was a listed policyholder pursuant to the Legacy poli-
cies. No premium was attributable to RAC, however, because
it did not own stores, have employees, or operate vehicles.
RAC paid the premiums relating to each policy, 8 estimated
petitioner’s total insurance costs (i.e., Legacy policies, Dis-
cover Re policies, third-party administrator fees, overhead,
etc.), and established a monthly rate relating to each store’s
portion of these costs. The monthly rate was based on three
factors: each store’s payroll, each store’s number of vehicles,
and the total number of stores. At the end of each year, RAC
adjusted the allocations to ensure that its subsidiaries recog-
nized their actual insurance costs. SRS administered all
claims relating to petitioner’s workers’ compensation, auto-
8 From
December 31, 2002, through September 12, 2003, Legacy incurred
a $4,861,828 liability relating to claim reimbursements due petitioner. This
amount was netted against petitioner’s September 12, 2003, premium pay-
ment (i.e., petitioner paid a net premium of $37,938,472 rather than the
$42,800,300 gross premium).

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 6 142 UNITED STATES TAX COURT REPORTS (1)

mobile, and general liability coverage. During the years in
issue, the terms of Legacy’s coverage varied, Legacy progres-
sively covered greater amounts of petitioner’s risk, and
Legacy did not receive premiums from any unrelated entity.
From December 31, 2002, through December 30, 2007,
Legacy earned net underwriting income of $28,761,402. See
infra p. 10.
A. Legacy’s Deferred Tax Assets
Pursuant to the Legacy policies, coverage began on
December 31 of each year. Because petitioner was a calendar
year accrual method taxpayer, these policies created tem-
porary timing differences between income recognized for tax
purposes and income recognized for financial accounting
(book) purposes. 9 For example, on December 31, 2002, when
Legacy’s second policy became effective, Legacy recognized,
for tax purposes, the full amount of the premium (i.e.,
$42,800,300) relating to the taxable year ending December
31, 2002. See sec. 832(b)(4). For book purposes, however,
Legacy in 2002 recognized only 1/365 of the premium (i.e.,
$117,261), and the remaining $42,683,039 constituted a
reserve. This timing difference created a deferred tax asset
(DTA) because in 2002 Legacy ‘‘prepaid’’ its tax liability
relating to income it recognized, for book purposes, in 2003.
Each day Legacy recognized a portion of its premium income
(i.e., $117,261) for book purposes and reduced its reserve by
the same amount. On December 30, 2003, the reserve was
fully depleted. Upon the issuance of a new policy on
December 31, 2003, a new DTA was created because Legacy
recognized, for tax purposes, in 2003 the full amount of the
premium; a corresponding tax liability was incurred; the pre-
mium reserve increased; and most of the premium income
attributable to the 2003 policy was recognizable, for book
purposes, in 2004.
9 Each
premium was generally paid in September of the year following
the year in which the policy became effective. Use of the recurring item
exception allowed petitioner to claim a premium deduction relating to the
year in which the policy became effective, rather than the following year
when the premium was actually paid. See sec. 461(h)(3)(A)(iii). On August
28, 2007, petitioner filed Form 3115, Application for Change in Accounting
Method, requesting permission to revoke its use of the recurring item ex-
ception.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 7

1. Bermuda’s Minimum Solvency Margin Requirement
Pursuant to the Bermuda Insurance Act, an insurance
company must maintain a minimum solvency margin. See
Insurance Act, 1978, sec. 6. More specifically, a class 1
insurer’s general business assets must exceed its general
business liabilities by the greatest of : $120,000; 10% of the
insurer’s loss and loss expense provisions plus other insur-
ance reserves; or 20% of the first $6 million of net premiums
plus 10% of the net premiums which exceed $6 million. See
Insurance Returns and Solvency Regulations, 1980, Appleby,
Reg. 10(1), Schedule I, Figure B. DTAs generally may be
treated as general business assets only with the BMA’s
permission.

2. Legacy Receives Permission To Treat DTAs as General
Business Assets Through 2003
In the minimum solvency margin calculation set forth in
its insurance company registration application, Legacy
treated DTAs as general business assets. On March 11, 2003,
Legacy petitioned the BMA for the requisite permission to do
so. The following letter from RAC accompanied the request:
We write to confirm to you that Rent-A-Center, Inc., * * * will guar-
antee the payment to Legacy Insurance Company, Ltd. (the ‘‘Company’’),
* * * of all amounts reflected on the projected balance sheets of the
Company previously delivered to you as deferred tax assets arising from
timing differences in the amounts of taxes payable for tax and financial
accounting purposes. This guaranty of payment will take effect in the
event of any change in tax laws that would require recognition of an
impairment of the deferred tax asset, and will be effective to the extent
of the amount of the impairment.

On March 13, 2003, the BMA granted Legacy permission
to treat DTAs as general business assets on its statutory bal-
ance sheet through December 31, 2003. 10 The BMA also
informed Legacy that from December 31, 2002, through
March 13, 2003, it ‘‘wrote insurance business without being
in receipt of its Certificate of Registration and was therefore
in violation of the [Bermuda Insurance] Act as it engaged in
insurance business without a license.’’ Despite this violation,
the BMA registered Legacy as a class 1 insurer effective
10 See infra pp. 9–10.

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 8 142 UNITED STATES TAX COURT REPORTS (1)

December 20, 2002 (i.e., the date Legacy filed its insurance
registration request and before it issued policies relating to
the years in issue).
3. The Parental Guaranty: Facilitating the Treatment of
DTAs as General Business Assets Through 2006
In response to the recurring DTA issue, Legacy requested
that RAC guarantee DTAs relating to subsequent years. On
September 17, 2003, RAC’s board of directors authorized the
execution of a guaranty of ‘‘the obligations of Legacy to
comply with the laws of Bermuda.’’ On the same day, RAC’s
chairman and chief executive officer executed a parental
guaranty and sent it to Legacy’s board of directors. The
parental guaranty provided:
The undersigned, Rent-A-Center, Inc. a Delaware corporation (‘‘Rent-A-
Center’’) is sole owner of 100% of the issued and outstanding shares in
your share capital and as such DOES HEREBY GUARANTEE financial
support for you, Legacy Insurance Co., Ltd., * * * and for your business,
as more particularly set out below, which is to say:
Under the [Bermuda] Insurance Act * * * and related Regulations (the
‘‘Act’’), Legacy Insurance Co., Ltd., must maintain certain solvency and
liquidity margins and, in order to ensure continued compliance with the
Act, it is necessary to support Legacy Insurance Co., Ltd. with a guar-
antee of its liabilities under the Act (the ‘‘Liabilities’’) not to exceed
Twenty-Five Million US dollars (US $25,000,000).
Accordingly, Rent-A-Center DOES HEREBY GUARANTEE to you the
payment in full of the Liabilities of Legacy Insurance Co., Ltd. and fur-
ther to indemnify and hold harmless Legacy Insurance Co., Ltd. from
the Liabilities up to the maximum dollar amount [$25,000,000] indicated
in the foregoing paragraph.

Seeking regulatory approval to treat DTAs as general busi-
ness assets in subsequent years, Legacy, on October 30,
2003, petitioned the BMA and attached the parental guar-
anty.
On November 12, 2003, the BMA issued a directive which
‘‘approved the Parental Guarantee from Rent-A-Center, Inc.
dated 17th September, 2003 up to an aggregate amount of
$25,000,000 for utilization as part of * * * [Legacy]’s capital-
ization’’. This approval was granted for the years ending
December 31, 2003, 2004, 2005, and 2006. Legacy used the
parental guaranty only to meet the minimum solvency

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 9

margin (i.e., to treat DTAs as general business assets). 11 On
December 30, 2006, RAC unilaterally canceled the parental
guaranty because Legacy met the minimum solvency margin
without it.

B. Legacy’s Ownership of RAC Treasury Shares
Legacy purchased RAC treasury shares during 2004, 2005,
and 2006. The BMA approved the purchases and allowed
Legacy to treat the shares as general business assets for pur-
poses of calculating its liquidity ratio (i.e., its ratio of general
business assets to liabilities). Pursuant to Bermuda solvency
regulations, an insurer fails to meet the liquidity ratio if the
value of its general business assets is less than 75% of its
liabilities. See Insurance Returns and Solvency Regulations,
1980, Appleby, Reg. 11(2). During the years in issue, Legacy
met its liquidity ratio and did not resell the shares.
C. Legacy’s Financial Reports
For each policy period, Legacy’s auditor, Arthur Morris &
Co. (Arthur Morris), prepared, and provided to RAC and the
BMA, reports and financial statements. In these reports and
statements, Arthur Morris calculated Legacy’s DTAs, 12 min-
imum solvency margin, 13 premium-to-surplus ratio, 14 and
net underwriting income. 15 During each of the years in
issue, Legacy’s total statutory capital and surplus equaled or
exceeded the BMA minimum solvency margin. In calculating
total statutory capital and surplus, Arthur Morris took into
account the following four components: contributed surplus,
statutory surplus, capital stock, and other fixed capital (i.e.,
assets deemed to be general business assets). During 2003,
2004, and 2005, Legacy included portions of the parental
guaranty as general business assets. During the years in
11 See
infra pp. 9–10.
12 See
supra p. 6.
13 See supra p. 7.
14 Premium-to-surplus ratio is one measure of an insurer’s economic per-

formance. On Legacy’s reports and statements, Arthur Morris referred to
Legacy’s premium-to-surplus ratio as the ‘‘premium to statutory capital &
surplus ratio’’. For purposes of this Opinion, there is no significant dif-
ference between these terms.
15 Net underwriting income equals gross premiums earned minus under-

writing expenses.

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 10 142 UNITED STATES TAX COURT REPORTS (1)

issue, the amounts of Legacy’s DTAs exceeded the portions of
Legacy’s parental guaranty treated as general business
assets. See table infra. Arthur Morris calculated Legacy’s
statutory surplus by adding statutory surplus at the begin-
ning of the year and income for the year, subtracting divi-
dends paid and payable, and making other adjustments
relating to changes in assets.
The following table summarizes key details relating to Leg-
acy’s policies:
Parental Minimum Net
Policy guaranty Total statutory solvency Premium-to- underwriting
period Premium DTAs asset capital & surplus margin surplus ratio income

2003 $42,800,300 $5,840,613 $4,805,764 $5,898,192 $5,898,192 8.983:1 $1,587,542
2004 50,639,000 6,275,326 4,243,823 7,036,573 7,036,572 7.695:1 (982,000)
2005 54,148,912 7,659,009 3,987,916 8,379,436 8,379,435 6.369:1 8,411,912
2006 53,365,926 8,742,425 -0- 10,014,206 9,284,601 6.326:1 8,810,926
2007 63,345,022 9,689,714 -0- 12,428,663 10,888,698 5.221:1 10,933,022
2008 64,884,392 9,607,661 -0- 23,712,022 11,278,359 2.538:1 18,391,392

IV. Procedural History
Respondent sent petitioner, on January 7, 2008, a notice of
deficiency relating to 2003; on December 22, 2009, a notice
of deficiency relating to 2004 and 2005; and on August 5,
2010, a notice of deficiency relating to 2006 and 2007 (collec-
tively, notices). In these notices, respondent determined that
petitioner’s payments to Legacy were not deductible pursuant
to section 162. On April 6, 2009, March 22, 2010, and Sep-
tember 29, 2010, respectively, petitioner, whose principal
place of business was Plano, Texas, timely filed petitions
with the Court seeking redeterminations of the deficiencies
set forth in the notices. After concessions, the remaining
issue for decision is whether payments to Legacy were
deductible.

OPINION

In determining whether payments to Legacy were deduct-
ible, our initial inquiry is whether Legacy was a bona fide
insurance company. See Harper Grp. v. Commissioner, 96
T.C. 45, 59 (1991), aff ’d, 979 F.2d 1341 (9th Cir. 1992);
AMERCO v. Commissioner, 96 T.C. 18, 40–41 (1991), aff ’d,
979 F.2d 162 (9th Cir. 1992). We respect the separate taxable
treatment of a captive unless there is a finding of sham or
lack of business purpose. See Moline Props., Inc. v. Commis-
sioner, 319 U.S. 436, 439 (1943); Harper Grp. v. Commis-

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 11

sioner, 96 T.C. at 57–59. Respondent contends that Legacy
was a sham entity created primarily to generate Federal
income tax savings.
I. Legacy Was Not a Sham.
A. Legacy Was Created for Significant and Legitimate
Nontax Reasons.
After successfully resolving petitioner’s D&O insurance
problem, Aon evaluated petitioner’s risk management depart-
ment. Petitioner, with Aon’s assistance, improved risk
management practices, switched from bundled to unbundled
policies, and hired SRS as a third-party administrator. Aon
proposed that petitioner form a captive, and petitioner deter-
mined that a captive would allow it to reduce its insurance
costs, obtain otherwise unavailable insurance coverage, for-
malize and more efficiently manage its insurance program,
and provide accountability and transparency relating to
insurance costs. Petitioner engaged KPMG to prepare finan-
cial projections and evaluate tax considerations referenced in
the feasibility study. Federal income tax consequences were
considered, but the formation of Legacy was not a tax-driven
transaction. See Moline Props., Inc. v. Commissioner, 319
U.S. at 439; Britt v. United States, 431 F.2d 227, 235–236
(5th Cir. 1970); Bass v. Commissioner, 50 T.C. 595, 600
(1968). To the contrary, in forming Legacy, petitioner made
a business decision premised on a myriad of significant and
legitimate nontax considerations. See Jones v. Commissioner,
64 T.C. 1066, 1076 (1975) (‘‘A corporation is not a ‘sham’ if
it was organized for legitimate business purposes or if it
engages in a substantial business activity.’’); Bass v. Commis-
sioner, 50 T.C. at 600.
B. There Was No Impermissible Circular Flow of Funds.
Respondent further contends that Legacy was ‘‘not an inde-
pendent fund, but an accounting device’’. In support of this
contention, respondent cites a purported ‘‘circular flow of
funds’’ through Legacy, RAC, and RAC’s subsidiaries.
Respondent’s expert, however, readily acknowledged that he
found no evidence of a circular flow of funds, nor have we.
Legacy, with the approval of the BMA, purchased RAC
treasury shares but did not resell them. Furthermore, peti-

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 12 142 UNITED STATES TAX COURT REPORTS (1)

tioner established that there was nothing unusual about the
manner in which premiums and claims were paid. Finally,
respondent contends that the netting of premiums owed to
Legacy during 2003 is evidence that Legacy was a sham. We
disagree. This netting was simply a bookkeeping measure
performed as an administrative convenience.
C. The Premium-to-Surplus Ratios Do Not Indicate That
Legacy Was a Sham.
Respondent emphasizes that, during the years in issue,
Legacy’s premium-to-surplus ratios were above the ratios of
U.S. property and casualty insurance companies and Ber-
muda class 4 insurers 16 (collectively, commercial insurance
companies). On cross-examination, however, respondent’s
expert admitted that his analysis of commercial insurance
companies contained erroneous numbers. Furthermore, he
failed to properly explain the profitability data he cited and
did not include relevant data relating to Legacy. Moreover,
his comparison, of Legacy’s premium-to-surplus ratios with
the ratios of commercial insurance companies, was not
instructive. Commercial insurance companies have lower pre-
mium-to-surplus ratios because they face competition and, as
a result, typically price their premiums to have significant
underwriting losses. They compensate for underwriting
losses by retaining sufficient assets (i.e., more assets per
dollar of premium resulting in lower premium-to-surplus
ratios) to earn ample amounts of investment income. Cap-
tives in Bermuda, however, have fewer assets per dollar of
premium (i.e., higher premium-to-surplus ratios) but gen-
erate significant underwriting profits because their pre-
miums reflect the full dollar value, rather than the present
value, of expected losses. Simply put, the premium-to-surplus
ratios do not indicate that Legacy was a sham.
D. Legacy Was a Bona Fide Insurance Company.
Petitioner presented convincing, and essentially uncontra-
dicted, evidence that Legacy was a bona fide insurance com-
pany. As respondent concedes, petitioner faced actual and
16 A class 4 insurance company may carry on insurance business, includ-

ing excess liability business or property catastrophe reinsurance business.
See Insurance Act, 1978, sec. 4E.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 13

insurable risk. Comparable coverage with other insurance
companies would have been more expensive, and some insur-
ance companies (e.g., Discover Re) would not underwrite the
coverage provided by Legacy. In addition, RAC established
Legacy for legitimate business reasons, including: increasing
the accountability and transparency of its insurance oper-
ations, accessing new insurance markets, and reducing risk
management costs. Furthermore, Legacy entered into bona
fide arm’s-length contracts with petitioner; charged actuari-
ally determined premiums; was subject to the BMA’s regu-
latory control; met Bermuda’s minimum statutory require-
ments; paid claims from its separately maintained account;
and, as respondent’s expert readily admitted, was adequately
capitalized. See Humana Inc. & Subs. v. Commissioner, 881
F.2d 247, 253 (6th Cir. 1989), aff ’g in part, rev’g in part and
remanding 88 T.C. 197, 206 (1987); Harper Grp. v. Commis-
sioner, 96 T.C. at 59. Moreover, the validity of claims Legacy
paid was established by SRS, an independent third-party
administrator, which also determined the validity of claims
pursuant to the Discover Re policies. See Harper Grp. v.
Commissioner, 96 T.C. at 59. Finally, RAC’s subsidiaries did
not own stock in, or contribute capital to, Legacy.
II. The Payments to Legacy Were Deductible Insurance
Expenses.
The Code does not define insurance. The Supreme Court,
however, has established two necessary criteria: risk shifting
and risk distribution. See Helvering v. Le Gierse, 312 U.S.
531, 539 (1941). In addition, the arrangement must involve
insurance risk and meet commonly accepted notions of insur-
ance. See Harper Grp. v. Commissioner, 96 T.C. at 58;
AMERCO v. Commissioner, 96 T.C. at 38. These four criteria
are not independent or exclusive, but establish a framework
for determining ‘‘the existence of insurance for Federal tax
purposes.’’ See AMERCO v. Commissioner, 96 T.C. at 38.
Insurance premiums may be deductible. A taxpayer may not,
however, deduct amounts set aside in its own possession to
compensate itself for perils which are generally the subject
of insurance. See Clougherty Packing Co. v. Commissioner, 84
T.C. 948, 958 (1985), aff ’d, 811 F.2d 1297 (9th Cir. 1987). We
consider all of the facts and circumstances to determine

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 14 142 UNITED STATES TAX COURT REPORTS (1)

whether an arrangement qualifies as insurance. See Harper
Grp. v. Commissioner, 96 T.C. at 57. Respondent contends
that payments to Legacy represent amounts petitioner set
aside to self-insure its risks.
A. The Policies at Issue Involved Insurance Risk.
Respondent concedes that petitioner faced insurable risk
relating to all three types of risk: workers’ compensation,
automobile, and general liability. Petitioner entered into con-
tracts with Legacy and Discover Re to address these three
types of risk. Thus, insurance risk was present in the
arrangement between petitioner and Legacy.
B. Risk Shifting
We must now determine whether the policies at issue
shifted risk between RAC’s subsidiaries and Legacy. This
requires a review of our cases relating to captive insurance
arrangements.
1. Precedent Relating to Parent-Subsidiary Arrangements
In 1978, we analyzed parent-subsidiary captive arrange-
ments for the first time. See Carnation Co. v. Commissioner,
71 T.C. 400 (1978), aff ’d, 640 F.2d 1010 (9th Cir. 1981). In
Carnation, the parties entered into two insurance contracts:
an agreement between Carnation and an unrelated insurer,
and a reinsurance agreement between the captive and the
unrelated insurer. Id. at 402–404. The unrelated insurer
expressed concern to Carnation about the captive’s financial
stability and requested a letter of credit or other guaranty.
Id. at 404. Carnation refused to issue a letter of credit or
other guaranty but did execute an agreement to provide,
upon demand, $2,880,000 of additional capital to the captive.
Id. at 402–404. We held, relying on Le Gierse, that the
parent-subsidiary arrangement was not insurance because
the three agreements (i.e., the two insurance contracts and
the agreement to further capitalize the captive), when consid-
ered together, were void of insurance risk. Id. at 409. The
Court of Appeals for the Ninth Circuit affirmed and con-
cluded that our application of Le Gierse was appropriate
given the interdependence of the three agreements. See
Carnation Co. v. Commissioner, 640 F.2d at 1013. Further-
more, the Court of Appeals held that ‘‘[t]he key was that

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 15

* * * [the unrelated insurer] refused to enter into the
reinsurance contract with * * * [the captive] unless Carna-
tion’’ executed the capitalization agreement. See id.
In Clougherty, our next opportunity to analyze a parent-
subsidiary captive arrangement, the parties entered into two
insurance contracts: an agreement between Clougherty and
an unrelated insurer, and a reinsurance agreement between
the captive and the unrelated insurer. Clougherty Packing
Co. v. Commissioner, 84 T.C. at 952. We concluded that ‘‘the
operative facts [17] in the instant case * * * [were] indistin-
guishable from the facts in Carnation’’, analyzed Clougherty’s
balance sheet, and held that risk did not shift to the captive:
We found in Carnation, as we find here, that to the extent the risk
was not shifted, insurance does not exist and the payments to that
extent are not insurance premiums. The measure of the risk shifted is
the percentage of the premium not ceded. This is nothing more than a
recharacterization of the payments which petitioner seeks to deduct as
insurance premiums. [Id. at 956, 958–959.]

The Commissioner urged us to adopt his economic family
theory, which posits that
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 unre-
lated to the economic family of insureds, there is no risk-shifting or risk-
distributing, and no insurance, the premiums for which are deductible
under section 162 of the Code. [Rev. Rul. 77–316, 1977–2 C.B. 53, 54.]

In rejecting the Commissioner’s economic family theory, we
emphasized that ‘‘[w]e have done nothing more in Carnation
and here but to reclassify, as nondeductible, portions of the
payments which the taxpayers deducted as insurance pre-
miums but which were received by the taxpayer’s captive
insurance subsidiaries.’’ See Clougherty Packing Co. v.
Commissioner, 84 T.C. at 960.
17 Our
Opinion emphasized that the ‘‘operative’’ facts related to the
‘‘interdependence of all of the agreements’’ as confirmed by the ‘‘execution
dates’’. See Clougherty Packing Co. v. Commissioner, 84 T.C. 948, 957
(1985), aff ’d, 811 F.2d 1297 (9th Cir. 1987).

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 16 142 UNITED STATES TAX COURT REPORTS (1)

The Court of Appeals for the Ninth Circuit affirmed our
decision in Clougherty and applied a balance sheet and net
worth analysis, pursuant to which a determination of
whether risk has shifted depends on whether a covered loss
affects the balance sheet and net worth of the insured. See
Clougherty Packing Co. v. Commissioner, 811 F.2d at 1305.
In defining insurance, the Court of Appeals stated that ‘‘a
true insurance agreement must remove the risk of loss from
the insured party.’’ Id. at 1306. The Court of Appeals elabo-
rated:
[W]e examine the economic consequences of the captive insurance
arrangement to the ‘‘insured’’ party to see if that party has, in fact,
shifted the risk. In doing so, we look only to the insured’s assets, i.e.,
those of Clougherty, to determine whether it has divested itself of the
adverse economic consequences of a covered workers’ compensation
claim. Viewing only Clougherty’s assets and considering only the effect
of a claim on those assets, it is clear that the risk of loss has not been
shifted from Clougherty. [Id. at 1305.]

Furthermore, the Court of Appeals explained that the bal-
ance sheet and net worth analysis does not ignore separate
corporate existence:
Moline Properties requires that related corporate entities be afforded
separate tax status and treatment. It does not require that the Commis-
sioner, in determining whether a corporation has shifted its risk of loss,
ignore the effect of a loss upon one of the corporation’s assets merely
because that asset happens to be stock in a subsidiary. Because we only
consider the effect of a covered claim on Clougherty’s assets, our analysis
in no way contravenes Moline Properties. [Id. at 1307.]

Finally, the Court of Appeals concluded that ‘‘[t]he parent of
a captive insurer retains an economic stake in whether a cov-
ered loss occurs. Accordingly, an insurance agreement
between parent and captive does not shift the parent’s risk
of loss and is not an agreement for ‘insurance.’ ’’ Id.
2. Precedent Relating to Brother-Sister Arrangements,
In Humana Inc. & Subs. v. Commissioner, 88 T.C. at 206,
we were faced with two distinct issues: the deductibility of
premiums paid by a parent to a captive (parent-subsidiary
arrangement) and the deductibility of premiums paid by
affiliated subsidiaries to a captive (brother-sister arrange-
ment). Humana, Inc. (Humana), operated a hospital network
and, in 1976, was unable to renew its existing policies

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 17

relating to workers’ compensation, malpractice, and general
liability. Id. at 200. Humana’s insurance broker could not
obtain comparable coverage and recommended that Humana
establish a captive insurance company. Id. Humana subse-
quently incorporated, and capitalized with $1 million, a Colo-
rado captive. Id. at 201–202. The captive provided coverage
relating to Humana and its subsidiaries’ workers’ compensa-
tion, malpractice, and general liability. Id. at 202–204.
Humana paid the captive a monthly premium which was
allocated among itself and each operating subsidiary. Id. at
203.
We held that the parent-subsidiary premiums were not
deductible because Humana did not shift risk to the captive.
See id. at 206–207. The brother-sister arrangement, however,
presented an issue of first impression. See id. at 208. We
rejected the Commissioner’s economic family theory and held
‘‘that it is more appropriate to examine all of the facts to
decide whether or to what extent there has been a shifting
of the risk from one entity to the captive insurance com-
pany.’’ See id. at 214. We extended our rationale from Carna-
tion and Clougherty (i.e., recharacterizing a captive insurance
arrangement as self-insurance) to brother-sister arrange-
ments and stated that declining to do so ‘‘would exalt form
over substance and permit a taxpayer to circumvent our
holdings by simple corporate structural changes.’’ See id. at
213. The report on which we relied, prepared by Irving
Plotkin, stated: ‘‘ ‘A firm placing its risks in a captive insur-
ance company in which it holds a sole or predominant owner-
ship position, is not relieving itself of financial uncertainty.’ ’’
Id. at 210 (fn. ref. omitted). In addition, the report stated:
‘‘True insurance relieves the firm’s balance sheet of any potential
impact of the financial consequences of the insured peril. For the price
of the premiums, the insured rids itself of any economic stake in
whether or not the loss occurs. * * * [However] as long as the firm deals
with its captive, its balance sheet cannot be protected from the financial
vicissitudes of the insured peril.’’ [Id. at 211–212; alteration in original;
fn. ref. omitted.]

After quoting extensively from the report and analyzing the
facts, ‘‘[w]e conclude[d] that there was not the necessary
shifting of risk from the operating subsidiaries of Humana
Inc. to * * * [the captive] and, therefore, the amounts

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 18 142 UNITED STATES TAX COURT REPORTS (1)

charged by Humana Inc. to its subsidiaries did not constitute
insurance.’’ See id. at 214.
Seven Judges concurred with the opinion of the Court’s
parent-subsidiary holding but disagreed with the brother-
sister holding. See Humana Inc. & Subs. v. Commissioner, 88
T.C. at 219 (Ko¨rner, J., concurring and dissenting). They
found the opinion of the Court’s rationale ‘‘disingenuous and
entirely unconvincing’’ and asserted that the opinion of the
Court had implicitly adopted the Commissioner’s ‘‘economic
family’’ theory. Id. at 223. After emphasizing that the
subsidiaries had no ownership interest in the captive, paid
premiums for their own insurance, and would not be affected
(i.e., their balance sheets and net worth) by the payment of
an insured claim, the dissent further stated:
The theory of Helvering v. Le Gierse, 312 U.S. 531 (1941), may have been
adequate to sustain the holdings in Carnation and Clougherty, where
only a parent and its insurance subsidiary were involved. It cannot be
stretched to cover the instant brother-sister situation, where there was
nothing—equity ownership or otherwise—to offset the shifting of risk
from the hospital subsidiaries to * * * [the captive]. If the majority is
to accomplish the fell deed here, ‘‘a decent respect to the opinions of
mankind requires that they should declare the causes which impel them’’
to such a result. [Id. at 224; fn. ref. omitted.]

The Court of Appeals for the Sixth Circuit affirmed our
decision relating to the parent-subsidiary arrangement, but
reversed our decision relating to the brother-sister arrange-
ment. 18 See Humana Inc. & Subs. v. Commissioner, 881 F.2d
at 251–252. The Court of Appeals for the Sixth Circuit
adopted the Court of Appeals for the Ninth Circuit’s balance
sheet and net worth analysis and held that the subsidiaries’
payments to the captive were deductible. Id. at 252 (‘‘[W]e
look solely to the insured’s assets, * * * and consider only
the effect of a claim on those assets[.]’’ (citing Clougherty
Packing Co. v. Commissioner, 811 F.2d at 1305)). In rejecting
our holding relating to the brother-sister arrangement, the
Court of Appeals stated that ‘‘the tax court incorrectly
extended the rationale of Carnation and Clougherty in
holding that the premiums paid by the subsidiaries of
18 We
need not defer to the Court of Appeals for the Sixth Circuit’s hold-
ing because this matter is appealable to the Court of Appeals for the Fifth
Circuit, which has not addressed this issue. See Golsen v. Commissioner,
54 T.C. 742, 757 (1970), aff ’d, 445 F.2d 985 (10th Cir. 1971).

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 19

Humana Inc. to * * * [the captive], as charged to them by
Humana Inc., did not constitute valid insurance agreements’’
and concluded that ‘‘[n]either Carnation nor Clougherty
* * * provide[s] a basis for denying the deductions in the
brother-sister * * * [arrangement].’’ Id. at 252–253. In
response to our rationalization that ‘‘[i]f we decline to extend
our holdings in Carnation and Clougherty to the brother-
sister factual pattern, we would exalt form over substance
and permit a taxpayer to circumvent our holdings by simple
corporate structural changes’’, the Court of Appeals stated:
Such an argument provides no legal justification for denying the deduc-
tion in the brother-sister context. The legal test is whether there has
been risk distribution and risk shifting, not whether Humana Inc. is a
common parent or whether its affiliates are in a brother-sister relation-
ship to * * * [the captive]. We do not focus on the relationship of the
parties per se or the particular structure of the corporation involved. We
look to the assets of the insured. * * * If Humana changes its corporate
structure and that change involves risk shifting and risk distribution,
and that change is for a legitimate business purpose and is not a sham
to avoid the payment of taxes, then it is irrelevant whether the changed
corporate structure has the side effect of also permitting Humana Inc.’s
affiliates to take advantage of the Internal Revenue Code § 162(a) (1954)
and deduct payments to a captive insurance company under the control
of the Humana parent as insurance premiums. [Id. at 255–256.]

The Court of Appeals held that ‘‘[t]he test to determine
whether a transaction under the Internal Revenue Code
§ 162(a) * * * is legitimate or illegitimate is not a vague and
broad ‘economic reality’ test. The test is whether there is risk
shifting and risk distribution.’’ Id. at 255. The Court of
Appeals further addressed our analysis and stated:
The tax court cannot avoid direct confrontation with the separate cor-
porate existence doctrine of Moline Properties by claiming that its deci-
sion does not rest on ‘‘economic family’’ principles because it is merely
reclassifying or recharacterizing the transaction as nondeductible addi-
tions to a reserve for losses. The tax court argues in its opinion that such
‘‘recharacterization’’ does not disregard the separate corporate status of
the entities involved, but merely disregards the particular transactions
between the entities in order to take into account substance over form
and the ‘‘economic reality’’ of the transaction that no risk has shifted.
The tax court misapplies this substance over form argument. The sub-
stance over form or economic reality argument is not a broad legal doc-
trine designed to distinguish between legitimate and illegitimate trans-
actions and employed at the discretion of the tax court whenever it feels
that a taxpayer is taking advantage of the tax laws to produce a favor-
able result for the taxpayer. * * * The substance over form analysis,

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 20 142 UNITED STATES TAX COURT REPORTS (1)

rather, is a distinct and limited exception to the general rule under
Moline Properties that separate entities must be respected as such for
tax purposes. The substance over form doctrine applies to disregard the
separate corporate entity where ‘‘Congress has evinced an intent to the
contrary’’ * * *
[Humana Inc. & Subs v. Commissioner, 881 F.2d at 254.]

In short, we do not look to the parent to determine whether
premiums paid by the subsidiaries to the captive are deduct-
ible. Id. at 252. The policies shifted risk because claims paid
by the captive did not affect the net worth of Humana’s
subsidiaries. See id. at 252–253.
3. Brother-Sister Arrangements May Shift Risk.
We find persuasive the Court of Appeals for the Sixth Cir-
cuit’s critique of our analysis of the brother-sister arrange-
ment in Humana. First, our extension of Carnation and
Clougherty to brother-sister arrangements was improper. As
the Court of Appeals correctly concluded: ‘‘Carnation dealt
solely with the parent-subsidiary issue, not the brother-sister
issue. Likewise, Clougherty dealt only with the parent-sub-
sidiary issue and not the brother-sister issue. Nothing in
either Carnation or Clougherty lends support for denying the
deductibility of the payments in the brother-sister context.’’
Id. at 253–254.
Second, the opinion of the Court’s extensive reliance on
Plotkin’s report to analyze the brother-sister arrangement
was inappropriate. The report in Humana addressed parent-
subsidiary, rather than brother-sister, arrangements. See
Humana Inc. & Subs. v. Commissioner, 88 T.C. at 209; see
also supra pp. 16–20. In the instant cases, Plotkin explicitly
addressed brother-sister arrangements and stated:
Even though the brother, the captive, and the parent are in the same
economic family, to the extent that a brother has no ownership interest
in the captive, the results of the parent-captive analysis do not apply.
It is not the presence or absence of unrelated business, nor the number
of other insureds (be they affiliates or non-affiliates), but it is the
absence of ownership, the captive’s capital, and the number of statis-
tically independent risks (regardless of who owns them) that enables the
captive to provide the brother with true insurance as a matter of
economics and finance.

We agree. Humana’s subsidiaries had no ownership interest
in the captive. See Humana Inc. & Subs. v. Commissioner, 88

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 21

T.C. at 201–202. Thus, the parent-subsidiary analysis
employed by the opinion of the Court was incorrect.
Third, we did not properly analyze the facts and cir-
cumstances. See id. at 214. The balance sheet and net worth
analysis provides the proper analytical framework to deter-
mine risk shifting in brother-sister arrangements. See
Humana Inc. & Subs. v. Commissioner, 881 F.2d at 252;
Clougherty Packing Co. v. Commissioner, 811 F.2d at 1305.
Instead, we implicitly employed a substance-over-form
rationale to recharacterize Humana’s subsidiaries’ payments
as amounts set aside for self-insurance and referenced, but
did not apply, the balance sheet and net worth analysis.
Indeed, we did not ‘‘examine the economic consequences of
the captive insurance arrangement to the ‘insured’ party to
see if that party * * * [had], in fact, shifted the risk.’’ See
Clougherty Packing Co. v. Commissioner, 811 F.2d at 1305.
4. The Legacy Policies Shifted Risk.
In determining whether Legacy’s policies shifted risk, we
narrow our scrutiny to the arrangement’s economic impact on
RAC’s subsidiaries (i.e., the insured entities). See Humana
Inc. & Subs. v. Commissioner, 881 F.2d at 252–253;
Clougherty Packing Co. v. Commissioner, 811 F.2d at 1305
(‘‘[W]e examine the economic consequences of the captive
insurance arrangement to the ‘insured’ party to see if that
party has, in fact, shifted the risk. In doing so, we look only
to the insured’s assets[.]’’). In direct testimony respondent’s
expert, however, emphasized that petitioner’s ‘‘captive pro-
gram * * * [did] not involve risk shifting that * * * [was]
comparable to that provided by a commercial insurance pro-
gram.’’ We decline his invitation to premise our holding on
a specious comparability analysis. Simply put, the risk either
was, or was not, shifted.
The policies at issue shifted risk from RAC’s insured
subsidiaries to Legacy, which was formed for a valid business
purpose; was a separate, independent, and viable entity; was
financially capable of meeting its obligations; and reimbursed
RAC’s subsidiaries when they suffered an insurable loss. See
Sears, Roebuck & Co. v. Commissioner, 96 T.C. 61, 100–101
(1991), aff ’d in part, rev’d in part, 972 F.2d 858 (7th Cir.
1992); AMERCO v. Commissioner, 96 T.C. at 41. Moreover,
a payment from Legacy to RAC’s subsidiaries did not reduce

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 22 142 UNITED STATES TAX COURT REPORTS (1)

the net worth of RAC’s subsidiaries because, unlike RAC, the
subsidiaries did not own stock in Legacy. Indeed, on cross-
examination, respondent’s expert conceded that the balance
sheets and net worth of RAC’s subsidiaries were not affected
by a covered loss and that the policies shifted risk:
[Petitioner’s counsel]: But if the loss gets paid, whose balance sheet
gets affected in that case?
[Respondent’s expert]: What’s hanging me up is that I don’t know
whether—I guess you’re right, because * * * [RAC’s subsidiary] will
treat the payment from—the payment that it expects from Legacy as an
asset, so the loss would hit Legacy’s [balance sheet].
[Petitioner’s counsel]: But it wouldn’t hit * * * [RAC’s subsidiary’s]
balance sheet.
[Respondent’s expert]: I would think that’s right. * * *
[Petitioner’s counsel]: Why is that not risk-shifting?
[Respondent’s expert]: That’s an—why is that not risk-shifting?
[Petitioner’s counsel]: Yes. Why is that not risk-shifting? Why hasn’t
[RAC’s subsidiary] shifted its risk to Legacy? Its insurance risk—why
hasn’t it shifted to Legacy in that scenario?
[Respondent’s expert]: I mean, I would say from an accounting
perspective, it has managed to have—is it—if we’re going to respect all
these [corporate] forms, then it will have shifted that risk.

5. The Parental Guaranty Did Not Vitiate Risk Shifting.
Legacy, in March 2003, petitioned the BMA and received
approval, through December 31, 2003, to treat DTAs as gen-
eral business assets. On September 17, 2003, RAC issued the
parental guaranty to Legacy, which petitioned, and received
permission from, the BMA to treat DTAs as general business
assets through December 31, 2006. Respondent contends that
the parental guaranty abrogated risk shifting between
Legacy and RAC’s subsidiaries. We disagree. First, and most
importantly, the parental guaranty did not affect the balance
sheets or net worth of the subsidiaries insured by Legacy.
Petitioner’s expert, in response to a question the Court posed
during cross-examination, convincingly countered respond-
ent’s contention:
[The Court]: * * * [W]hat impact does the corporate structure have on
the effect of the parental guarantee?
[Petitioner’s expert]: I think it has a great impact on it. None of the
subs, as I understand it, are entering in or [are] a part of that guar-
antee. Only the subs are effectively insureds under the policy. They are
the only ones who produce risks that could be covered. The guarantee
in no way vitiates the completeness of the transfer of their uncertainty,
their risk, to the insuring subsidiary.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 23

Even if one assumes that the guarantee increases the capital that the
captive could use to pay losses, none of those payments would go to the
detriment of the sub as a separate legal entity.

Second, the cases upon which respondent relies are distin-
guishable. Respondent cites Malone & Hyde, Inc. v. Commis-
sioner, 62 F.3d 835, 841 (6th Cir. 1995) (holding that a
reinsurance arrangement was not bona fide because the cap-
tive was undercapitalized and the parent guaranteed the
captive’s obligations to an unrelated insurer), rev’g T.C.
Memo. 1993–585; Carnation Co. v. Commissioner, 71 T.C. at
404, 409 (holding that a reinsurance arrangement lacked
insurance risk where the captive was undercapitalized and,
at the insistence of an unrelated primary insurer, the parent
agreed to provide additional capital); and Kidde Indus., Inc.
v. United States, 40 Fed. Cl. 42, 49–50 (1997) (holding that
a reinsurance arrangement lacked risk shifting because the
parent indemnified the captive’s obligation to pay an unre-
lated primary insurer). Unlike the agreements in these cases,
the parental guaranty did not shift the ultimate risk of loss;
did not involve an undercapitalized captive; and was not
issued to, or requested by, an unrelated insurer. Cf. Malone
& Hyde, Inc. v. Commissioner, 62 F.3d at 841–843; Carnation
Co. v. Commissioner, 71 T.C. at 404, 409; Kidde Indus., Inc.,
40 Fed. Cl. at 49–50.
Third, RAC guaranteed Legacy’s ‘‘liabilities under the Act
[i.e., the Bermuda Insurance Act and related regulations]’’,
pursuant to which Legacy was required to maintain ‘‘certain
solvency and liquidity margins’’. RAC did not pay any money
pursuant to the parental guaranty and Legacy’s ‘‘liabilities
under the Act’’ did not include Legacy’s contractual obliga-
tions to RAC’s affiliates or obligations to unrelated insurers.
For purposes of calculating the minimum solvency margin,
Legacy treated a portion of the parental guaranty as a gen-
eral business asset. See supra pp. 9–10. In sum, by providing
the parental guaranty to the BMA, Legacy received permis-
sion to treat DTAs as general business assets and ensured its
continued compliance with the BMA’s solvency require-
ments. 19 The parental guaranty served no other purpose and
19 Legacy
used a portion of the parental guaranty as a general business
asset. See supra pp. 9–10. Legacy’s DTAs always exceeded the amount of
Continued

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 24 142 UNITED STATES TAX COURT REPORTS (1)

was unilaterally revoked by RAC, in 2006, when Legacy met
the BMA’s solvency requirements without reference to DTAs.
C. The Legacy Policies Distributed Risk.
Risk distribution occurs when an insurer pools a large
enough collection of unrelated risks (i.e., risks that are gen-
erally unaffected by the same event or circumstance). See
Humana Inc. & Subs. v. Commissioner, 881 F.2d at 257. ‘‘By
assuming numerous relatively small, independent risks that
occur randomly over time, the insurer smoothes out losses to
match more closely its receipt of premiums.’’ Clougherty
Packing Co. v. Commissioner, 811 F.2d at 1300. This dis-
tribution also allows the insurer to more accurately predict
expected future losses. In analyzing risk distribution, we look
at the actions of the insurer because it is the insurer’s, not
the insured’s, risk that is reduced by risk distribution. See
Harper Grp. v. Commissioner, 96 T.C. at 57. A captive may
achieve adequate risk distribution by insuring only subsidi-
aries within its affiliated group. See Humana Inc. & Subs. v.
Commissioner, 881 F.2d at 257; Rev. Rul. 2002–90, 2002–2
C.B. 985.
Legacy insured three types of risk: workers’ compensation,
automobile, and general liability. During the years in issue,
RAC’s subsidiaries owned between 2,623 and 3,081 stores;
had between 14,300 and 19,740 employees; and operated
between 7,143 and 8,027 insured vehicles. RAC’s subsidiaries
operated stores in all 50 States, the District of Columbia,
Puerto Rico, and Canada. RAC’s subsidiaries had a sufficient
number of statistically independent risks. Thus, by insuring
RAC’s subsidiaries, Legacy achieved adequate risk distribu-
tion. See Humana Inc. & Subs. v. Commissioner, 881 F.2d at
257.
D. The Arrangement Constituted Insurance in the Com-
monly Accepted Sense.
Legacy was adequately capitalized, regulated by the BMA,
and organized and operated as an insurance company. Fur-
thermore, Legacy issued valid and binding policies, charged
and received actuarially determined premiums, and paid

the parental guaranty treated as a general business asset. See supra pp.
9–10.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 25

claims. In short, the arrangement between RAC’s subsidi-
aries and Legacy constituted insurance in the commonly
accepted sense. See Harper Grp. v. Commissioner, 96 T.C. at
60.

Conclusion
The payments by RAC’s subsidiaries to Legacy are, pursu-
ant to section 162, deductible as insurance expenses.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decisions will be entered under Rule 155.
Reviewed by the Court.
THORNTON, VASQUEZ, WHERRY, HOLMES, BUCH, and NEGA,
JJ., agree with this opinion of the Court.
GOEKE, J., did not participate in the consideration of this
opinion.

BUCH, J., concurring: To the extent respondent is arguing
that a captive insurance arrangement between brother-sister
corporations cannot be insurance as a matter of law, we need
not reach that issue. In Rev. Rul. 2001–31, 2001–1 C.B. 1348,
1348, the Internal Revenue Service stated that it would ‘‘no
longer invoke the economic family theory with respect to cap-
tive insurance transactions.’’ And in Rauenhorst v. Commis-
sioner, 119 T.C. 157, 173 (2002), we held that we may treat
as a concession a position taken by the IRS in a revenue
ruling that has not been revoked. Because Rev. Rul. 2001–
31 has not been revoked, we could treat the economic family
argument as conceded.
At the same time the IRS abandoned the economic family
theory, it made clear that it would ‘‘continue to challenge cer-
tain captive insurance transactions based on the facts and
circumstances of each case.’’ Rev. Rul. 2001–31, 2001–1 C.B.
at 1348. Then, in a series of revenue rulings, the IRS shed
light on the facts and circumstances it deemed relevant. See
Rev. Rul. 2005–40, 2005–2 C.B. 4; Rev. Rul. 2002–91, 2002–
2 C.B. 991; Rev. Rul. 2002–90, 2002–2 C.B. 985; Rev. Rul.
2002–89, 2002–2 C.B. 984.

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 26 142 UNITED STATES TAX COURT REPORTS (1)

The concise opinion of the Court sets forth facts and cir-
cumstances supporting its conclusion. I write separately to
respond to points made in Judge Lauber’s dissent.
I. Legacy’s Policies
Taking into account the nature of risks that Legacy
insured, Legacy was sufficiently capitalized.
A. Long-Tail Coverage
During each of the years in issue Legacy insured three
types of risk: workers’ compensation, automobile, and general
liability. Policies relating to these risks are generally referred
to as long-tail coverage because ‘‘claims may involve damages
that are not readily observable or injuries that are difficult
to ascertain.’’ See Acuity v. Commissioner, T.C. Memo. 2013–
209, at *8–*9. Workers’ compensation insurance, which gen-
erated between 66% and 73% of Legacy’s premiums 1 during
the years in issue, ‘‘is generally long tail coverage because of
the inherent uncertainty in determining the extent of an
injured worker’s need for medical treatment and loss of
wages for time off work.’’ Id. An insurer pays out claims
relating to long-tail coverage over an extended period.
B. Rent-A-Center’s Insurance Program
Rent-A-Center did not obtain insurance solely from Legacy;
Rent-A-Center also obtained insurance from multiple unre-
lated third parties. Legacy was responsible for only a portion
of each claim (e.g., the first $350,000 of each workers’ com-
pensation claim during 2003). To the extent that a claim
exceeded Legacy’s coverage, a third-party insurer was
responsible for paying the excess amount. Rent-A-Center
obtained coverage from unrelated third-party insurers for
claims of up to approximately $75 million. Therefore, extraor-
dinary losses would not affect Legacy’s ability to pay claims
because they would be covered by unrelated third parties.

1 Legacy’s premiums attributable to workers’ compensation liability were

$28,586,597 in 2003; $35,392,000 in 2004; $36,463,579 in 2005;
$39,086,374 in 2006; and $45,425,032 in 2007.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 27

C. Allocation Formula
Premiums were actuarially determined. At trial respondent
conceded that Aon ‘‘produced reliable and professionally pro-
duced and competent actuarial studies.’’ Legacy relied on
these studies to set premiums. Once Legacy determined the
premium, Rent-A-Center allocated it to each operating sub-
sidiary in the same manner that it allocated premiums
relating to unrelated insurers. In a captive arrangement, a
parent may allocate a premium among its subsidiaries. See
Humana Inc. & Subs. v. Commissioner, 881 F.2d 247, 248
(6th Cir. 1989) (‘‘Humana Inc. allocated and charged to the
subsidiaries portions of the amounts paid representing the
share each bore for the hospitals each operated.’’), aff ’g in
part, rev’g in part and remanding 88 T.C. 197 (1987); Kidde
Indus., Inc. v. United States, 40 Fed. Cl. 42, 45 (1997)
(‘‘National determined the premiums that it charged Kidde
based in part on underwriting data supplied by Kidde’s divi-
sions and subsidiaries * * * Kidde used these same data to
allocate the total premiums among its divisions and subsidi-
aries.’’).
II. The Parental Guaranty
Citing a footnote in Humana, see Lauber op. p. 39, Judge
Lauber’s dissenting opinion asserts that the existence of a
parental guaranty is enough to justify disregarding the cap-
tive insurance arrangement. That footnote, however,
addresses only situations in which there is both inadequate
capitalization and a parental guaranty, concluding: ‘‘These
weaknesses alone provided a sufficient basis from which to
find no risk shifting and to decide the cases in favor of the
Commissioner.’’ Humana Inc. & Subs. v. Commissioner, 881
F.2d at 254 n.2 (emphasis added). Here, the fact finder did
not find inadequate capitalization. And the mere existence of
a parental guaranty is not enough for us to disregard the
captive insurer; we must look to the substance of that guar-
anty.
As the opinion of the Court finds, the parental guaranty
was created to convert deferred tax assets into general busi-
ness assets for regulatory purposes. See op. Ct. p. 22. The cir-
cumstances relating to its issuance, including that the
parental guaranty was issued to Legacy and that it was lim-

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 28 142 UNITED STATES TAX COURT REPORTS (1)

ited to $25 million—or, less than 10% of the total premiums
paid to Legacy—support the conclusion that it was created
solely to encourage the Bermuda Monetary Authority to
allow Legacy to treat DTAs as general business assets.
In contrast, the cases that have found that a parental
guaranty eliminates any risk shifting involved either a
blanket indemnity or a capitalization agreement that
resulted in a capital infusion in excess of premiums received.
And even then, the indemnity or capitalization agreement
was coupled with an undercapitalized captive. Accordingly,
those cases are distinguishable from the situation presented
here.
Malone & Hyde, Inc. v. Commissioner, 62 F.3d 835 (6th
Cir. 1995), rev’g T.C. Memo. 1993–585, involved an insurance
subsidiary established to provide reinsurance for the parent
and its subsidiaries. After incorporating the captive, Malone
& Hyde entered into an agreement with a third-party insurer
to insure both its own and its subsidiaries’ risks. Id. at 836.
The third-party insurer then reinsured the first $150,000 of
coverage per claim with the captive. Id. Because the captive
was thinly capitalized—it had no assets other than $120,000
of paid-in capital—Malone & Hyde executed ‘‘hold harmless’’
agreements in favor of the third-party insurer. Id. These
agreements provided that if the captive defaulted on its
obligations as reinsurer, then Malone & Hyde would com-
pletely shield the third-party insurer from liability. Id. In
deciding whether the risk had shifted, the court held that
‘‘[w]hen the entire scheme involves either undercapitalization
or indemnification of the primary insurer by the taxpayer
claiming the deduction, or both, these facts alone disqualify
the premium payments from being treated as ordinary and
necessary business expenses to the extent such payments are
ceded by the primary insurer to the captive insurance sub-
sidiary.’’ Id. at 842–843. In short, Malone & Hyde, Inc. had
a thinly capitalized captive insurer and a blanket indemnity.
Here, neither of those facts is present.
The facts in Kidde Indus., Inc. are quite similar to those
in Malone & Hyde, Inc. Kidde incorporated a captive and
entered into an insurance agreement with a third-party
insurer who in turn entered into a reinsurance agreement
with the captive. Kidde Indus., Inc., 40 Fed. Cl. at 45. As in
Malone & Hyde, Inc., the captive was significantly under-

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 29

capitalized, and Kidde executed an indemnification agree-
ment to provide the third-party insurer with the ‘‘level of
comfort’’ needed before it would issue the policies. Id. at 48.
Again, the court held that Kidde retained the risk of loss and
could not deduct the premiums. Id.
Carnation Co. v. Commissioner, 71 T.C. 400 (1978), aff ’d,
640 F.2d 1010 (9th Cir. 1981), involved slightly different
facts. A captive reinsured 90% of the third-party insurer’s
liabilities under Carnation’s policy. Id. at 403. As part of this
arrangement, the third-party insurer ceded 90% of the pre-
miums to the captive and the captive paid the third-party
insurer a 5% commission based on the net premiums ceded.
Id. Carnation provided $3 million of capital to the captive—
an amount that was well in excess of the total annual pre-
miums paid to the captive—because the third-party insurer
had concerns about the captive’s capitalization. Id. at 404.
The Court held that the reinsurance agreement and the
agreement to provide additional capital counteracted each
other and voided any insurance risk. Id. at 409. In affirming
the Tax Court, the Court of Appeals for the Ninth Circuit
held that, in considering whether the risk had shifted, the
key was that the third-party insurer would not have issued
the policies without the capitalization agreement. Carnation
Co. v. Commissioner, 640 F.2d at 1013.
Those cases are distinguishable because they all involved
undercapitalized captives. As explained previously, the
opinion of the Court found that Legacy was adequately
capitalized. Further, in each of the three cases above, the
parent provided either indemnification or additional capital-
ization in order to persuade a third-policy insurer to issue
insurance policies. Here, Discover Re provided insurance
before Legacy’s inception and continued providing coverage
after Legacy was formed. The parental guaranty was issued
to Legacy for the singular purpose of allowing Legacy to treat
the DTAs as general business assets. Additionally, the guar-
anty amounted to only $25 million. This small fraction of the
$264 million in premiums for policies written by Legacy
during the years in issue does not rise to the level of protec-
tion provided by the total indemnities in Malone & Hyde,
Inc. and Kidde Indus., Inc.
When we consider the totality of the facts, the parental
guaranty appears to have been immaterial. This conclusion

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 30 142 UNITED STATES TAX COURT REPORTS (1)

is bolstered by the facts that the parental guaranty was uni-
laterally withdrawn by Rent-A-Center in 2006 and that Rent-
A-Center never contributed any funds to Legacy pursuant to
that parental guaranty.
III. Consolidated Groups
Judge Lauber’s dissent refers to a hodgepodge of facts
about how Rent-A-Center operated its consolidated group as
evidence that Legacy’s status as a separate entity should be
disregarded. Examples of the facts cited in that dissent are
that Legacy had no employees and that payments between it
and other members of the Rent-A-Center consolidated group
were handled through journal entries. See Lauber op. p. 44.
In the real world of large corporations, these practices are
commonplace. For ease of operations, including running pay-
roll, companies create a staff leasing subsidiary and lease
employees companywide. Or they hire outside consultants to
handle the operations of a specialty business such as a cap-
tive insurer. Legacy, like Humana, hired an outside manage-
ment company to handle its business operations. Compare
op. Ct. note 6 (Legacy engaged Aon to provide management
services) with Humana Inc. & Subs. v. Commissioner, 88
T.C. at 205 (Humana engaged Marsh & McLennan to provide
management services). And it is unrealistic to expect mem-
bers of a consolidated group to cut checks to each other.
Rent-A-Center and Legacy did what is commonplace—they
kept track of the flow of funds through journal entries. So
long as complete and accurate records are maintained, the
commingling of funds is not enough to require the dis-
regarding of a separate business. See, e.g., Kahle v. Commis-
sioner, T.C. Memo. 1991–203 (finding that the taxpayer
‘‘maintained complete and accurate records’’ notwithstanding
the commingling of business and personal funds).
Corporations filing consolidated returns are to be treated
as separate entities, unless otherwise mandated. Gottesman
& Co. v. Commissioner, 77 T.C. 1149, 1156 (1981). It may be
advantageous for a corporation to operate through various
subsidiaries for a multitude of reasons. These reasons may
include State law implications, creditor demands, or simply
convenience, but ‘‘so long as that purpose is the equivalent
of business activity or is followed by the carrying on of busi-

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 31

ness by the corporation, the corporation remains a separate
taxable entity.’’ Moline Props., Inc. v. Commissioner, 319 U.S.
436, 438–439 (1943). Even the consolidated return regula-
tions make clear that an insurance company that is part of
a consolidated group is treated separately. See sec. 1.1502–
13(e)(2)(ii)(A), Income Tax Regs. (‘‘If a member provides
insurance to another member in an intercompany trans-
action, the transaction is taken into account by both mem-
bers on a separate entity basis.’’). Thus, if a corporation gives
due regard to the separate corporate structure, we should do
the same.
IV. Conclusion
The issue presented in these cases is ultimately a matter
of when, not whether, Rent-A-Center is entitled to a deduc-
tion relating to workers’ compensation, automobile, and gen-
eral liability losses. 2 Because the IRS has conceded in its
rulings that insurance premiums paid between brother-sister
corporations may be insurance and the Court determined
that, under the facts and circumstances of these cases as
found by the Judge who presided at trial, the policies at issue
are insurance, Rent-A-Center is entitled to deduct the pre-
miums as reported on its returns. See op. Ct. pp. 13–25.
FOLEY, GUSTAFSON, PARIS, and KERRIGAN, JJ., agree with
this concurring opinion.

HALPERN, J., dissenting:
‘‘‘The principle of judicial parsimony’ (L. Hand, J., in
Pressed Steel Car Co. v. Union Pacific Railroad Co., * * *
[240 F. 135, 137 (S.D.N.Y. 1917)]), if nothing more, condemns
a useless remedy.’’ Sinclair Ref. Co. v. Jenkins Petroleum
Process Co., 289 U.S. 689, 694 (1933). While usually invoked
by a court to justify a stay in discovery on other issues when
one issue is dispositive of a case, 8A Charles Allen Wright,
2 If the Court had determined that the policies were not insurance, then

Rent-A-Center would nevertheless have been entitled to deduct the losses
as they were paid or incurred. See sec. 162. By forming Legacy and giving
due regard to its separate structure, Rent-A-Center achieved some accel-
eration of deductions relating to losses that would otherwise be deductible,
along with other nontax benefits. See op. Ct. p. 11.

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 32 142 UNITED STATES TAX COURT REPORTS (1)

Arthur R. Miller & Richard L. Marcus, Federal Practice and
Procedure, sec. 2040, at 198 n.7 (3d ed. 2010), I think the
principle should guide us in declining to overrule Humana
Inc. & Subs. v. Commissioner, 88 T.C. 197 (1987), aff ’d in
part, rev’d in part and remanded, 881 F.2d 247 (6th Cir.
1989), to the extent that it holds that a captive insurance
arrangement between brother-sister corporations cannot be
insurance as a matter of law.
These cases are before the Court Conference for review, see
sec. 7460(b), because we perceive that Judge Foley’s report is
in part overruling Humana, although Judge Foley does not
in so many words say so. He says: ‘‘We find persuasive the
Court of Appeals for the Sixth Circuit’s critique of our anal-
ysis the brother-sister arrangement in Humana.’’ See op. Ct.
p. 20. The Court of Appeals said: ‘‘We reverse the tax court
on * * * the brother-sister issue.’’ Humana Inc. & Subs. v.
Commissioner, 881 F.2d at 257. Under our Conference proce-
dures, the Conference may not adopt a report overruling a
prior report of the Court absent the affirmative vote of a
majority of the Judges entitled to vote on the case. Six of the
sixteen Judges entitled to vote on these cases join Judge
Foley, for a total of seven clearly affirmative votes. Six
Judges voted ‘‘no’’. Three Judges voted ‘‘concur in result’’, and
those votes, under our procedures, are counted as affirmative
votes. Whether the Court has in fact overruled a portion of
Humana undoubtedly will be unclear to many readers of this
report. The resulting confusion is unnecessary. Moreover, by
putting his report overruling Humana before the Conference,
Judge Foley has put before the Conference his subsidiary
findings of fact and his ultimate finding that the brother-
sister payments were correctly characterized as insurance
premiums. That has attracted two side opinions, one
characterizing Judge Foley’s opinion as ‘‘concise’’ (Judge
Buch), see concurring op. p. 26, and emphasizing evidence in
the record that supports his findings and the other character-
izing his ultimate findings as ‘‘conclusory’’ (Judge Lauber) see
Lauber op. p. 38, and contending ‘‘the undisputed facts of the
entire record warrant the opposite conclusion * * *, [that]
the Rent-A-Center arrangements do not constitute ‘insurance’
for Federal income tax purposes.’’ Whether I describe Judge
Foley’s analysis as concise or as conclusory, simply put, there
is insufficient depth to it to persuade me to join his findings

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 33

(i.e., that there is risk shifting, that there is risk distribution,
and, in general, that there is a bona fide insurance arrange-
ment). I do agree with Judge Lauber that ‘‘[w]hether the
facts and circumstances, evaluated in the aggregate, give rise
to ‘insurance’ presents a question of proper characterization.
It is thus a mixed question of fact and law.’’ See Lauber op.
p. 38. Nevertheless, had Judge Foley steered clear of
Humana, I believe that we could have avoided Conference
consideration and have left it to the appellate process (if
invoked) to determine whether Judge Foley’s findings are
persuasive.
And I believe that Judge Foley could have steered clear of
Humana. As both Judges Buch and Lauber point out, the
Commissioner has given up on arguing that captive insur-
ance arrangement between brother-sister corporations cannot
be insurance as a matter of law. See, e.g., Rev. Rul. 2001–
31, 2001–C.B. 1348. Judge Foley ignores that ruling and its
progeny when, pursuant to Rauenhorst v. Commissioner, 119
T.C. 157, 173 (2002), he could have relied on the Commis-
sioner’s concessions to steer clear of revisiting Humana. I
agree with Judge Foley that Humana is not dispositive of the
brother-sister insurance question in these cases, but not
because I would overrule Humana on that issue; rather, I see
no reason to address Humana in the light of the Commis-
sioner’s present administrative position. While I agree with
Judge Foley that the facts and circumstances test provides
the proper analytical framework, I otherwise dissent from his
opinion.
LAUBER, J., agrees with this dissent.

LAUBER, J., dissenting: These cases, like Humana Inc. &
Subs. v. Commissioner, 88 T.C. 197 (1987), aff ’d in part,
rev’d in part and remanded, 881 F.2d 247 (6th Cir. 1989),
involve what I will refer to as a ‘‘classic’’ captive insurance
company. In these cases, as in Humana, the captive has no
outside owners and insures no outside risks. Rather, it is
wholly owned by the parent of the affiliated group and it
‘‘insures’’ risks only of the parent and the operating subsidi-
aries, which stand in a brother-sister relationship to it.

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 34 142 UNITED STATES TAX COURT REPORTS (1)

In Humana we held that purported ‘‘insurance’’ premiums
paid to a captive by other members of its affiliated group—
whether by the parent or by the sister corporations—were
not deductible for Federal income tax purposes. An essential
requirement of ‘‘insurance’’ is the shifting of risk from
insured to insurer. Helvering v. Le Gierse, 312 U.S. 531, 539
(1941). We held in Humana that ‘‘there was not the nec-
essary shifting of risk’’ from the operating subsidiaries to the
captive, and hence that none of the purported ‘‘premiums’’
constituted amounts paid for ‘‘insurance.’’ 88 T.C. at 214. The
Court of Appeals for the Sixth Circuit affirmed as to amounts
paid to the captive by the parent, but reversed as to amounts
paid to the captive by the sister corporations. 881 F.2d at
257.
The opinion of the Court (majority) adopts the reasoning
and result of the Sixth Circuit, overrules Humana in part,
and holds that amounts charged to the captive’s sister cor-
porations constitute deductible ‘‘insurance premiums.’’ I dis-
sent both from the majority’s decision to overrule Humana
and from its holding that amounts charged to the sister cor-
porations constituted payments for ‘‘insurance’’ under the
totality of the facts and circumstances.
I. Background
The captive insurance issue has a rich history to which the
majority refers only episodically. It has been clear from the
outset of our tax law that taxpayers (other than insurance
companies) cannot deduct contributions to an insurance
reserve. Steere Tank Lines, Inc. v. United States, 577 F.2d
279, 280 (5th Cir. 1978); Spring Canyon Coal Co. v. Commis-
sioner, 43 F.2d 78, 80 (10th Cir. 1930). Thus, if a unitary
operating company maintains a reserve for self-insurance,
amounts it places in that reserve are not deductible as
‘‘insurance premiums.’’
One strategy by which taxpayers sought to avoid this non-
deductibility rule was to place their self-insurance reserve
into a captive insurance company. In cases involving ‘‘classic’’
captives—i.e., captives that have no outside owners and
insure no outside risks—the courts have uniformly held that
this strategy does not work. Employing various legal theo-
ries, every court to consider the question has held that

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 35

amounts paid by a parent to a classic captive do not con-
stitute ‘‘insurance premiums.’’ 1
Insurance and tax advisers soon devised an alternative
strategy for avoiding the bar against deduction of contribu-
tions to a self-insurance reserve—namely, adoption of or
conversion to a holding company structure. In essence, an
operating company would drop its self-insurance reserve into
a captive; drop its operations into one or more operating
subsidiaries; and have the purported ‘‘premiums’’ paid to the
captive by the sister companies instead of by the parent. In
Humana, we held that this strategy did not work either, rea-
soning that ‘‘we would exalt form over substance and permit
a taxpayer to circumvent our holdings [involving parent-cap-
tive payments] by simple corporate structural changes.’’ 88
T.C. at 213. In effect, we concluded in Humana that conver-
sion to a holding-company structure—without more—should
not enable a taxpayer to accomplish indirectly what it cannot
accomplish directly, achieving a radically different and more
beneficial tax result when there has been absolutely no
change in the underlying economic reality.
While the Commissioner had success litigating the parent-
captive pattern, he had surprisingly poor luck litigating the
brother-sister scenario. The Tenth Circuit, like our Court,
agreed that brother-sister payments to a classic captive are
not deductible as ‘‘insurance premiums.’’ 2 By contrast, the
1 See
Beech Aircraft Corp. v. United States, 797 F.2d 920 (10th Cir.
1986); Stearns-Roger Corp. v. United States, 774 F.2d 414, 415–416 (10th
Cir. 1985); Humana Inc. & Subs. v. Commissioner, 88 T.C. 197, 207 (1987),
aff ’d in part, rev’d in part and remanded, 881 F.2d 247 (6th Cir. 1989);
Clougherty Packing Co. v. Commissioner, 84 T.C. 948 (1985), aff ’d, 811
F.2d 1297, 1307 (9th Cir. 1987); Carnation Co. v. Commissioner, 71 T.C.
400 (1978), aff ’d, 640 F.2d 1010, 1013 (9th Cir. 1981). On the other hand,
the courts have held that parent-captive payments may constitute ‘‘insur-
ance premiums’’ where the captive has a sufficient percentage of outside
owners or insures a sufficient percentage of outside risks. See, e.g., Sears,
Roebuck & Co. v. Commissioner, 96 T.C. 61 (1991) (approximately 99.75%
of insured risks were outside risks), supplemented by 96 T.C. 671 (1991),
aff ’d in part and rev’d in part, 972 F.2d 858 (7th Cir. 1992); Harper Grp.
v. Commissioner, 96 T.C. 45 (1991) (approximately 30% of insured risks
were outside risks), aff ’d, 979 F.2d 1341 (9th Cir. 1992); AMERCO v. Com-
missioner, 96 T.C. 18 (1991) (between 52% and 74% of insured risks were
outside risks), aff ’d, 979 F.2d 162 (9th Cir. 1992).
2 See Beech Aircraft Corp., 797 F.2d at 922; Stearns-Roger Corp., 774
Continued

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 36 142 UNITED STATES TAX COURT REPORTS (1)

Sixth Circuit in Humana reversed our holding to this effect.
And after some initial ambivalence, the Court of Federal
Claims appears to have concluded that brother-sister ‘‘pre-
mium’’ payments are deductible. 3
The Commissioner had even less success persuading courts
to adopt the ‘‘single economic family’’ theory enunciated in
Rev. Rul. 77–316, 1977–2 C.B. 53, upon which his litigating
position was initially based. That theory was approved by the
Tenth Circuit 4 and found some favor in the Ninth Circuit. 5
But it was rejected by our Court 6 as well as by the Sixth and
Federal Circuits. 7
Assessing this track record, the Commissioner made a
strategic retreat. In 2001 the IRS announced that it ‘‘will no
longer invoke the economic family theory with respect to cap-
tive insurance transactions.’’ Rev. Rul. 2001–31, 2001–1 C.B.
1348, 1348. In 2002 the IRS likewise abandoned its position
that there is a per se rule against the deductibility of

F.2d at 415–416.
3 Compare Mobil Oil Corp. v. United States, 8 Cl. Ct. 555, 566 (1985)

(‘‘[B]y deducting the premiums on its tax returns, * * * [the affiliated
group] achieved indirectly that which it could not do directly. It is well set-
tled that tax consequences must turn upon the economic substance of a
transaction[.]’’), with Kidde Indus., Inc. v. United States, 40 Fed. Cl. 42
(1997) (brother-sister payments deductible for years for which parent did
not provide indemnity agreement). See generally Ocean Drilling & Explo-
ration Co. v. United States, 988 F.2d 1135, 1153 (Fed. Cir. 1993) (brother-
sister payments deductible where captive insured significant outside risks).
4 See Beech Aircraft Corp., 797 F.2d 920; Stearns-Roger Corp., 774 F.2d

at 415–416. See generally Humana, 881 F.2d at 251 (‘‘Stearns-Roger, Mobil
Oil, and Beech Aircraft * * * each explicitly or implicitly adopted the eco-
nomic family concept.’’).
5 See Clougherty Packing, 811 F.2d at 1304 (‘‘[W]e seriously doubt that

the use of an economic family concept in defining insurance runs afoul of
the Supreme Court’s holding in Moline Properties.’’); id. at 1305 (finding
‘‘considerable merit in the Commissioner’s [economic family] argument’’
but finding it unnecessary to rely on that theory); Carnation Co., 640 F.2d
at 1013.
6 See Humana, 88 T.C. at 214 (rejecting the Commissioner’s ‘‘economic

family’’ concept); Clougherty Packing, 84 T.C. at 956 (same); Carnation Co.,
71 T.C. at 413 (same).
7 See Malone & Hyde, Inc. v. Commissioner, 62 F.3d 835 (6th Cir. 1995)

(rejecting ‘‘economic family’’ theory but ruling against deductibility of pay-
ments to captive based on facts and circumstances), rev’g T.C. Memo.
1993–585; Ocean Drilling & Exploration Co., 988 F.2d at 1150–1151;
Humana, 881 F.2d at 251.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 37

brother-sister ‘‘premiums,’’ concluding that the characteriza-
tion of such payments as ‘‘insurance premiums’’ should be
governed, not by a per se rule, but by the facts and cir-
cumstances of the particular case. Rev. Rul. 2002–90, 2002–
2 C.B. 985; accord Rev. Rul. 2001–31, 2001–1 C.B. at 1348
(‘‘The Service may * * * continue to challenge certain cap-
tive insurance transactions based on the facts and cir-
cumstances of each case.’’).
II. Overruling Humana
We decided Humana against a legal backdrop very dif-
ferent from that which we confront today. The Commissioner
in Humana urged a per se rule, predicated on his ‘‘single eco-
nomic family’’ theory, against the deductibility of brother-
sister ‘‘insurance premiums.’’ The Commissioner has long
since abandoned both that per se rule and the theory on
which it was based. Given this change in the legal environ-
ment, I see no need for the Court to reconsider Humana,
which in a practical sense may be water under the bridge.
Respondent’s position in the instant cases is consistent
with the ruling position the IRS has maintained for the past
12 years—namely, that characterization of intragroup pay-
ments as ‘‘insurance premiums’’ should be determined on the
basis of the facts and circumstances of the particular case.
See Rev. Rul. 2001–31, 2001–1 C.B. at 1348. The majority
adopts this approach as the framework for its legal analysis.
See op. Ct. pp. 13-14 (‘‘We consider all of the facts and cir-
cumstances to determine whether an arrangement qualifies
as insurance.’’). The Court need not overrule Humana to
decide (erroneously in my view) that respondent should lose
under the facts-and-circumstances approach that respondent
is now advancing. In Humana, ‘‘we emphasize[d] that our
holding * * * [was] based upon the factual pattern presented
in * * * [that] case,’’ noting that in other cases ‘‘factual pat-
terns may differ.’’ 88 T.C. at 208. That being so, the Court
today could rule for petitioners on the basis of what the
majority believes to be the controlling ‘‘facts and cir-
cumstances,’’ distinguishing Humana rather than overruling
it. Principles of judicial restraint counsel that courts should
decide cases on the narrowest possible ground.

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 38 142 UNITED STATES TAX COURT REPORTS (1)

III. The ‘‘Facts and Circumstances’’ Approach
Although I do not believe it necessary or proper to overrule
Humana, the continuing vitality of that precedent does not
control the outcome. These cases can and should be decided
in respondent’s favor under the ‘‘facts and circumstances’’
approach that he is currently advancing. In Rev. Rul. 2002–
90, 2002–2 C.B. at 985, the IRS concluded that brother-sister
payments were correctly characterized as ‘‘insurance pre-
miums’’ where the assumed facts included the following (P =
parent and S = captive):
P provides S adequate capital * * *. S charges the 12 [operating]
subsidiaries arms-length premiums, which are established according to
customary industry rating formulas. * * * There are no parental (or
other related party) guarantees of any kind made in favor of S. * * *
In all respects, the parties conduct themselves in a manner consistent
with the standards applicable to an insurance arrangement between
unrelated parties.

The facts of the instant cases, concerning both ‘‘risk
shifting’’ and conformity to arm’s-length insurance standards,
differ substantially from the facts assumed in Rev. Rul.
2002–90, supra. The instant facts also differ substantially
from the facts determined in judicial precedents that have
characterized intragroup payments as ‘‘insurance premiums.’’
Whether the facts and circumstances, evaluated in the aggre-
gate, give rise to ‘‘insurance’’ presents a question of proper
characterization. It is thus a mixed question of fact and law.
The majority makes certain findings of basic fact, which I
accept for purposes of this dissenting opinion. In many
instances, however, the majority makes no findings of basic
fact to support its conclusory findings of ultimate fact. In
other instances, the majority does not mention facts that
tend to undermine its ultimate conclusions. In my view, the
undisputed facts of the entire record warrant the opposite
conclusion from that reached by the majority and justify a
ruling that the Rent-A-Center arrangements do not con-
stitute ‘‘insurance’’ for Federal income tax purposes.
A. Risk Shifting
1. Parental Guaranty
Rent-A-Center, the parent, issued two types of guaranties
to Legacy, its captive. First, it guaranteed the multi-million-

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 39

dollar ‘‘deferred tax asset’’ (DTA) on Legacy’s balance sheet,
which arose from timing differences between the captive’s
fiscal year and the parent’s calendar year. Normally, a DTA
cannot be counted as an ‘‘asset’’ for purposes of the (rather
modest) minimum solvency requirements of Bermuda insur-
ance law. The parent’s guaranty was essential in order for
Legacy to secure an exception from this rule.
Second, the parent subsequently issued an all-purpose
guaranty by which it agreed to hold Legacy harmless for its
liabilities under the Bermuda Insurance Act up to $25 mil-
lion. These liabilities necessarily included Legacy’s liabilities
to pay loss claims of its sister corporations. This all-purpose
$25 million guaranty was eliminated at yearend 2006, but it
was in existence for the first three tax years at issue.
When approving the brother-sister premiums in Rev. Rul.
2002–90, 2002–2 C.B. at 985, the IRS explicitly excluded
from the hypothesized facts the existence of any parental or
related-party guaranty executed in favor of the captive.
Numerous courts have likewise ruled that the existence of a
parental guaranty, indemnification agreement, or similar
instrument may negate the existence of ‘‘insurance’’ purport-
edly supplied by a captive. See, e.g., Malone & Hyde, Inc. v.
Commissioner, 62 F.3d 835, 842–843 (6th Cir. 1995) (finding
no ‘‘insurance’’ where parent guaranteed captive’s liabilities),
rev’g T.C. Memo. 1993–585; Humana, 881 F.2d at 254 n.2
(presence of parental indemnification or recapitalization
agreement may provide a sufficient basis on which to find no
‘‘risk shifting’’); Carnation Co. v. Commissioner, 71 T.C. 400,
402, 409 (1978) (finding no ‘‘insurance’’ where parent agreed
to supply captive with additional capital), aff ’d, 640 F.2d
1010 (9th Cir. 1981); Kidde Indus., Inc. v. United States, 40
Fed. Cl. 42, 50 (1997) (finding no ‘‘insurance’’ where parent
issued indemnification letter).
By guaranteeing Legacy’s liabilities, Rent-A-Center agreed
to step into Legacy’s shoes to pay its affiliates’ loss claims.
In effect, the parent thus became an ‘‘insurer’’ of its subsidi-
aries’ risks. The majority cites no authority, and I know of
none, for the proposition that a holding company can ‘‘insure’’
the risks of its wholly owned subsidiaries. The presence of
this parental guaranty argues strongly against the existence
of ‘‘risk shifting’’ here.

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 40 142 UNITED STATES TAX COURT REPORTS (1)

The majority asserts that Rent-A-Center’s parental guar-
anty ‘‘did not vitiate risk shifting’’ and offers three rationales
for this conclusion. See op. Ct. pp. 22–24. None of these
rationales is convincing. The majority notes that the parent
‘‘did not pay any money pursuant to the parental guaranty’’
and suggests that the guaranty was really designed only to
make sure that Legacy’s DTAs were counted in calculating
its Bermuda minimum solvency margin. See id. p. 23. The
fact that the parent was never required to pay on the guar-
anty is irrelevant; it is the existence of a parental guaranty
that matters in determining whether a captive is truly pro-
viding ‘‘insurance.’’ And whatever may have prompted the
issuance of the guaranty, the fact is that it literally covers
all of Legacy’s liabilities up to $25 million. The DTAs never
got above $9 million during 2003–06. See id. p. 10. Legacy’s
‘‘liabilities’’ obviously included Legacy’s liability to pay the
insurance claims of its sister companies.
The majority contends that the judicial precedents cited
above ‘‘are distinguishable’’ because the guaranty issued by
Rent-A-Center ‘‘did not shift the ultimate risk of loss; did not
involve an undercapitalized captive; and was not issued to,
or requested by, an unrelated insurer.’’ See id. p. 23. The
majority’s first asserted distinction begs the question because
it assumes that risk has been shifted to Legacy, which is the
proposition that must be proved. The majority’s second
asserted distinction is a play on words. While Legacy for
most of the period at issue was not ‘‘undercapitalized’’ from
the standpoint of Bermuda’s (modest) minimum solvency
rules, it was very poorly capitalized in comparison with real
insurance companies. See infra pp. 41–43. Moreover, the
Court of Appeals for the Sixth Circuit in Humana indicated
that a parental guaranty alone, without regard to the cap-
tive’s capitalization, can ‘‘provide[] a sufficient basis from
which to find no risk shifting.’’ 881 F.2d at 245 n.2. The
majority’s third asserted distinction is a distinction without
a difference. While Rent-A-Center’s guaranty was not
requested by ‘‘an unrelated insurer,’’ it was demanded by
Legacy’s nominal insurance regulator as a condition of
meeting Bermuda’s minimum solvency requirements.
As the ‘‘most important[ ]’’ ground for deeming the guar-
anty irrelevant, the majority asserts that the parental guar-
anty ‘‘did not affect the balance sheets or net worth of the

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 41

subsidiaries insured by Legacy.’’ See op. Ct. p. 22. The
majority here reprises its argument that the ‘‘net worth and
balance sheet analysis’’ must be conducted at the level of the
operating subsidiaries. See id. pp. 15-16, 21. Whatever the
merit of that argument generally, as applied to the guaranty
it clearly proves too much. A parental guaranty of a captive’s
liabilities will never affect the balance sheet or net worth of
the sister company that is allegedly ‘‘insured.’’ But the Sixth
Circuit, the Federal Circuit, and this Court have all held that
the existence of a parental guaranty may negate the exist-
ence of ‘‘insurance’’ within an affiliated group.
2. Inadequate Capitalization
When blessing the brother-sister premium payments in
Rev. Rul. 2002–90, supra, the Commissioner hypothesized
that the parent had supplied the captive with ‘‘adequate cap-
ital.’’ Numerous judicial opinions have likewise held that risk
cannot be ‘‘shifted’’ to a captive unless the captive is suffi-
ciently capitalized to absorb the risk. See, e.g., Beech Aircraft,
797 F.2d at 922 n.1 (no ‘‘insurance’’ where captive was
undercapitalized); Carnation Co., 71 T.C. at 409 (same).
The majority bases its conclusion that Legacy was ‘‘ade-
quately capitalized’’ on the fact that Legacy ‘‘met Bermuda’s
minimum statutory requirements’’ once the parental guar-
anty of the DTA is counted. See op. Ct. p. 13. The fact that
a captive meets the minimum capital requirements of an off-
shore financial center is not dispositive as to whether the
arrangements constitute ‘‘insurance’’ for Federal income tax
purposes. Indeed, the Sixth Circuit in Malone & Hyde held
that intragroup payments were not ‘‘insurance premiums’’
even though the captive met ‘‘the extremely thin minimum
capitalization required by Bermuda law.’’ 62 F.3d at 841.
In fact, Legacy’s capital structure was extremely question-
able during 2003–06. The only way that Legacy was able to
meet Bermuda’s extremely thin minimum capitalization
requirement was by counting as general business assets its
DTAs, and those DTAs could be counted only after Rent-A-
Center issued its parental guaranty. The DTAs were essen-
tially a bookkeeping entry. Without treating that book-
keeping entry as an ‘‘asset,’’ Legacy would have been under-
capitalized even by Bermuda’s lax standards.

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 42 142 UNITED STATES TAX COURT REPORTS (1)

The extent of Legacy’s undercapitalization is evidenced by
its premium-to-surplus ratio, which was wildly out of line
with the ratios of real insurance companies. The premium-to-
surplus ratio provides a good benchmark of an insurer’s
ability to absorb risk by drawing on its surplus to pay
incurred losses. In this ratio, ‘‘premiums written’’ serves as
a proxy for the losses to which the insurer is exposed. Expert
testimony in these cases indicated that U.S. property/cas-
ualty insurance companies, on average, have something like
a 1:1 premium-to-surplus ratio. In other words, their surplus
roughly equals the annual premiums for policies they write.
By contrast, Legacy’s premium-to-surplus ratio—ignoring the
parental guaranty of its DTA—was 48:1 in 2003, 19:1 in
2004, 11:1 in 2005, and in excess of 5:1 in 2006 and 2007.
In other words, Legacy’s surplus covered only 2% of pre-
miums for policies written in 2003 and only 5% of premiums
for policies written in 2004, whereas commercial insurance
companies have surplus coverage in the range of 100%. Even
if we allow the parental guaranty to count toward Legacy’s
surplus, its premium-to-surplus ratio was never better than
5:1.
Legacy’s assets were undiversified and modest. It had a
money market fund into which it placed the supposed ‘‘pre-
miums’’ received from its parent. This fund was in no sense
‘‘surplus’’; it was a mere holding tank for cash used to pay
‘‘claims.’’ Apart from this money market fund, Legacy
appears to have had no assets during the tax years at issue
except the following: (a) the guaranties issued by its parent;
(b) the DTA reflected on its balance sheet; and (c) Rent-A-
Center treasury stock that Legacy purchased from its parent.
For Federal tax purposes, the parental guaranties cannot
count as ‘‘assets’’ in determining whether Legacy was ade-
quately capitalized. They point in the precisely opposite
direction.
The DTA and treasury stock have in common several fea-
tures that make them poor forms of insurance capital. First,
neither yields income. The DTA was an accounting entry
that by definition cannot yield income, and the Rent-A-
Center treasury stock paid no dividends. No true insurance
company would invest 100% of its ‘‘reserves’’ in non-income-
producing assets. With no potential to earn income, the
‘‘reserves’’ could not grow to afford a cushion against risk.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 43

Moreover, neither the DTA nor the treasury stock was
readily convertible into cash. The DTA had no cash value.
The treasury stock by its terms could not be sold or alien-
ated, although the parent agreed to buy it back at its issue
price. In effect, Legacy relied on the availability of cash from
its parent, via repurchase of treasury shares, to pay claims
in the event of voluminous losses. 8
Finally, Legacy’s assets were, to a large degree, negatively
correlated with its insurance risks. During 2004–06, Legacy
purchased $108 million of Rent-A-Center treasury stock,
while ‘‘insuring’’ solely Rent-A-Center risks. Thus, if outsized
losses occurred, those losses would simultaneously increase
Legacy’s liabilities and reduce the value of the Rent-A-Center
stock that was Legacy’s principal asset. No true insurance
company invests its reserves in assets that are both
undiversified and negatively correlated to the risks that it is
insuring.
In sum, when one combines the existence of the parental
guaranty, Legacy’s extremely weak premium-to-surplus ratio,
the speculative nature and poor quality of the assets in Leg-
acy’s ‘‘insurance reserves,’’ and the fact that Legacy without
the parental guaranty would not even have met ‘‘the
extremely thin minimum capitalization required by Bermuda
law,’’ Malone & Hyde, 62 F.3d at 841, the absence of ‘‘risk
shifting’’ seems clear. Under the totality of the facts and cir-
cumstances, I conclude that there has been no transfer of
risk to the captive and hence that the Rent-A-Center
arrangements do not constitute ‘‘insurance’’ for Federal
income tax purposes.
B. Conformity to Insurance Industry Standards
When blessing the brother-sister premiums in Rev. Rul.
2002–90, supra, the IRS hypothesized that ‘‘the parties [had]
conduct[ed] themselves in a manner consistent with the
standards applicable to an insurance arrangement between
unrelated parties.’’ Our Court has similarly ruled that trans-
actions in a captive-insurance context must comport with
8 Because
Legacy ‘‘insured’’ losses only below a defined threshold, there
was a cap on the size of any individual loss that it might have to pay. See
op. Ct. p. 5. However, the number of individual loss events within that
tranche could exceed expectations.

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 44 142 UNITED STATES TAX COURT REPORTS (1)

‘‘commonly accepted notions of insurance.’’ Harper Grp. v.
Commissioner, 96 T.C. 45, 58 (1991), aff ’d, 979 F.2d 1341
(9th Cir. 1992). Because risk shifting is essential to ‘‘insur-
ance,’’ Helvering v. Le Gierse, 312 U.S. at 539, the absence
of risk shifting alone would dictate that the Rent-A-Center
payments are not deductible as ‘‘insurance premiums.’’ How-
ever, there are a number of respects in which Rent-A-Center,
its captive, and the allegedly ‘‘insured’’ subsidiaries did not
conduct themselves in a manner consistent with accepted
insurance industry norms. These facts provide additional
support for concluding that these arrangements did not con-
stitute ‘‘insurance.’’
Several facts discussed above in connection with ‘‘risk
shifting’’ show that the Rent-A-Center arrangements do not
comport with normal insurance industry practice. These
include the facts that Legacy was poorly capitalized; that its
premium-to-surplus ratio was way out of line with the ratios
of true insurance companies; and that is ‘‘reserves’’ consisted
of assets that were non-income-producing, illiquid,
undiversified, and negatively correlated to the risks it was
supposedly ‘‘insuring.’’ No true insurance company would act
this way.
It appears that Legacy had no actual employees during the
tax years at issue. It had no outside directors, and it had no
officers apart from people who were also officers of Rent-A-
Center, its parent. Legacy’s ‘‘operations’’ appear to have been
conducted by David Glasgow, an employee of Rent-A-Center,
its parent. ‘‘Premium payments’’ and ‘‘loss reimbursements’’
were effected through bookkeeping entries made by account-
ants at Rent-A-Center’s corporate headquarters. Legacy was
in practical effect an incorporated pocketbook that served as
a repository for what had been, until 2003, Rent-A-Center’s
self-insurance reserve.
Legacy issued its first two ‘‘insurance policies’’ before
receiving a certificate of registration from Bermuda insur-
ance authorities. According to those authorities, Legacy was
therefore in violation of Bermuda law and ‘‘engaged in the
insurance business without a license.’’ (Bermuda evidently
agreed to let petitioners fix this problem retroactively.)
For the first three months of its existence, Legacy was in
violation of Bermuda’s minimum capital rules because the
DTA was not cognizable in determining capital adequacy.

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 (1) RENT-A-CENTER, INC. v. COMMISSIONER 45

Only upon the issuance of the parental guaranty in March
2003, and the acceptance of this guaranty by Bermuda
authorities, was Legacy able to pass Bermuda’s capital ade-
quacy test.
There was no actuarial determination of the premium pay-
able to Legacy by each operating subsidiary based on the
specific subsidiary’s risk profile. Rather, an outside insurance
adviser estimated the future loss exposure of the affiliated
group, and Rent-A-Center, the parent, determined an aggre-
gate ‘‘premium’’ using that estimate. The parent paid this
‘‘premium’’ annually to Legacy. The parent’s accounting
department subsequently charged portions of this ‘‘premium’’
to each subsidiary, in the same manner as self-insurance
costs had been charged to those subsidiaries before Legacy
was created. In other words, in contrast to the facts assumed
in Rev. Rul. 2002–90, supra, there was in these cases no
determination of ‘‘arms-length premiums * * * established
according to customary industry rating formulas.’’ To the
contrary, the entire arrangement was orchestrated exactly as
it had been orchestrated before 2003, when the Rent-A-
Center group maintained a self-insurance reserve for the
tranche of risks purportedly ‘‘insured’’ by Legacy.
From Legacy’s inception in December 2002 through May
2004, Legacy did not actually pay ‘‘loss claims’’ submitted by
the supposed ‘‘insureds.’’ Rather, the parent’s accounting
department netted ‘‘loss reimbursements’’ due to the subsidi-
aries from Legacy against ‘‘premium payments’’ due to
Legacy from the parent. Beginning in July 2004, the parent
withdrew a fixed, preset amount of cash via weekly bank
wire from Legacy’s money market account. These weekly
withdrawals depleted Legacy’s money market account to near
zero just before the next annual ‘‘premium’’ was due. This
modus operandi shows that Rent-A-Center regarded Legacy
not as an insurer operating at arm’s length but as a bank
account into which it made deposits and from which it made
withdrawals.
These facts, considered in their totality, lead me to dis-
agree with the majority’s conclusory assertions that ‘‘Legacy
entered into bona fide arm’s length contracts with * * *
[Rent-A-Center]’’; that Legacy ‘‘charged actuarially deter-
mined premiums’’; that Legacy ‘‘paid claims from its sepa-
rately maintained account’’; and that Legacy ‘‘was adequately

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 46 142 UNITED STATES TAX COURT REPORTS (1)

capitalized.’’ See op. Ct. p. 13. In my view, the totality of the
facts and circumstances could warrant the conclusion that
Legacy was a sham. At the very least, the totality of the facts
and circumstances makes clear that the arrangements here
did not comport with ‘‘commonly accepted notions of insur-
ance,’’ Harper Grp., 96 T.C. at 58, and that the Rent-A-
Center group of companies did not ‘‘conduct themselves in a
manner consistent with the standards applicable to an insur-
ance arrangement between unrelated parties,’’ Rev. Rul.
2002–90, 2001–2 C.B. at 985. The departures from accepted
insurance industry practice, combined with the absence of
risk shifting to the captive from the alleged ‘‘insureds,’’ con-
firms that these arrangements did not constitute ‘‘insurance’’
for Federal income tax purposes.
COLVIN, GALE, KROUPA, and MORRISON, JJ., agree with
this dissent.

f

VerDate Mar 15 2010 08:17 Jun 02, 2015 Jkt 000000 PO 00000 Frm 00046 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BV864A~1.142\RENT-A~1 JAMIE