The Service and courts generally require that to qualify as insurance an arrangement must shift and distribute covered risks and satisfy certain other requirements. The Seventh Circuit stated in Sears, Roebuck & Co. v. Commissioner, however, that risk shifting and distribution are not required by statute and that it is a “blunder” to treat a phrase in an opinion as if it were statutory language. It questioned the need to shift risk for corporate coverage to qualify as insurance for tax purposes.
Other factors—Risk shifting and distribution are not the only factors that courts examine to determine whether a transaction or contract qualifies as insurance. In a series of cases involving wholly owned insurance companies, the Tax Court examined whether a transaction involves the presence of an insurance risk, and whether it involves “commonly accepted notions of insurance,” in addition to whether the insurance risk, if present, is shifted and distributed.
Impact of nontraditional factors—The U.S. Supreme Court stated that it is not necessary for insurance coverage to incorporate traditional characteristics of an insurance contract for the coverage to qualify as insurance for tax purposes. It held in Haynes v. United States25 that coverage provided by a telephone company qualified as health insurance although the “employees paid no fixed periodic premiums, there was no definite fund created to assure payment of the disability benefits, and the amount and duration of the benefits varied with the length of service.” The Court stated that payment of fixed premiums at regular intervals and the presence of a definite fund are not required for coverage to qualify as insurance. The Court concluded that there is nothing in the statute or legislative history that limits health insurance to the characteristics of a normal insurance contract.
