dissenting:
I respectfully dissent. Although I agree with the majority’s recitation of the facts as well as its interpretation of the applicable legal standard, I find that its reversal of the tax court is contrary to the great weight of the evidence that was before the lower court. The majority, as well as the tax court below, correctly finds that the *1021question before the Court is whether UPS’s insurance arrangements with NUF and OPL are valid under the sham-transaction doctrine. Under the sham-transaction doctrine, UPS’s transaction ceases to merit tax respect when it has no “economic effects other than the creation of tax benefits,” Kirchman v. Comm’r, 862 F.2d 1486, 1492 (11th Cir.1989), or has no business purpose and its sole motive is tax avoidance. See Karr v. Comm’r, 924 F.2d 1018, 1023 (11th Cir.1991). Thus the question before the Court is not strictly whether UPS had a tax avoidance motive when it formulated the scheme in question, but rather whether there was some legitimate, substantive business reason for the transaction as well. There clearly was not.
As the tax court articulated in great detail in its well-reasoned 114-page opinion, the evidence in this case overwhelmingly demonstrates that UPS’s reinsurance arrangement with NUF and OPL had no economic significance or business purpose outside of UPS’s desire to avoid federal income tax, and was therefore a sham transaction. First, the tax court based its decision upon evidence that the scheme in question was subjectively motivated by tax avoidance. For example, the evidence showed that tax avoidance was the initial and sole reason for the scheme in question, that UPS held off on the plan for some time to analyze tax legislation on the floor of the United States House of Representatives, and that a letter sent to AIG Insurance from UPS detailing the scheme claimed that AIG would serve in merely a “fronting” capacity and would bear little or no actual risk. The evidence thus showed that this scheme was hatched with only tax avoidance in mind.
Second, the tax court based its decision on overwhelming evidence that UPS’s scheme had no real economic or business purpose outside of tax avoidance. For example, the evidence showed that NUF’s exposure to loss under the plan (except in the very unlikely event of extreme catastrophe) was infinitesimal, and that UPS nevertheless continued to fully bear the administrative costs of the EVC program. NUF was only liable for losses not covered by another insurance policy held by UPS, yet UPS still collected the EVC’s and deposited the money into UPS bank accounts, still processed EVC claims, and continued to pay all EVC claims out of UPS bank accounts (while collecting the accrued interest for itself). All NUF really did in the scheme was collect over $1 million in fees and expenses before passing the EVC income on to OPL, which was of course wholly owned by UPS shareholders. In essence, NUF received an enormous fee from UPS in exchange for nothing.
Moreover, the tax court systematically rejected every explanation of the scheme, put forth by UPS. UPS claimed that the scheme was meant to avoid violation of state insurance laws, yet the evidence showed no real concern for such laws and that in fact UPS was well aware that federal preemption of these state laws likely made its old EVC plan legal. UPS claimed that it intended OPL to become a full-line insurer someday, yet the evidence, showed that it was nevertheless unnecessary to specifically use EVC income for such a capital investment. UPS claimed that elimination of the EVC income allowed it to increase its rates, yet one of its own board members testified that this explanation was untrue. I also note that UPS’s claim that OPL was a legitimate insurance company fails in light of the fact that OPL was charging a substantially inflated rate for EVCs. Evidence in the tax court showed that in an arms-length transaction with a legitimate insurance company, EVC rates would have been approximately half those charged by UPS (and in turn passed on to OPL), providing further *1022evidence that the transaction was a sham. In sum, UPS failed to show any legitimate business reason for giving up nearly $100 million in EVC income in 1984.
For these reasons, I would affirm the holding of the tax court and find that UPS’s arrangement with NUF and OPL was a sham transaction subject to federal tax liability.