අල්ලපු ගෙදර ඇන්ටි - Download
In United Parcel Service of America, Inc. v. Commissioner,150 the Tax Court concluded that a captive arrangement that UPS created to cover damage or loss to packages it collected and shipped for its customers was a sham. In the transaction, UPS was liable for the first $100 of loss from damage or loss to packages it collected and shipped for its customers.
A customer could purchase additional coverage from UPS by paying 25 cents per $100 of additional liability.
UPS created and capitalized OPL, a Bermuda based captive, late in 1983. On December 3 1, 1983, UPS distributed shares of OPL to its shareholders, which were current and former employees as well as families, trusts and estates of former employees. The distributions were taxable dividends to the shareholders. UPS retained a small portion of the OPL shares.
UPS restructured its excess value charge program beginning 1984. It transferred excess value amounts, less claims paid in excess of $100, each month to NUF, a wholly owned subsidiary of AIG and a domestic insurance company. NUF reinsured the EVC coverage with OPL. NUF retained a $1 million fronting service fee for agreeing to reinsure the coverage to OPL.
UPS continued the functions and activities related to the EVC coverage and remained liable for the damage or loss of packages up to the lesser of $100 or their declared value. UPS did not charge NUF or OPL for the extensive services that it provided with respect to the EVCs.
UPS argued that it restructured the EVC arrangement for bona fide non-tax business considerations. UPS indicated that in 1983 it was concerned that continuing to receive the EVC income could be illegal under the insurance law of various states. The Tax Court, however, concluded that if UPS believed that it had to divest itself of a highly profitable business because of concerns that it was pursuing illegal activities it would have scrutinized the merit of its concerns more carefully than it did.
The Tax Court examined the amount that UPS paid to transfer the coverage in the reinsurance because the lack of an arms length price is an indicator that an arrangement is a sham, according to the court. The court concluded that UPS did not pay an arms length amount because it could have obtained the coverage elsewhere for considerably less than it paid.
It held that UPS earned the excess value charges it received from its customers for the excess value coverage and denied the deduction under section 162 for amounts paid to NUF. In addition, the court added interest, and imposed severe penalties.
The Eleventh Circuit reversed and remanded the Tax Court’s decision. The appellate court concluded that the EVC transfer had both economic effect and a business purpose. The arrangement had economic effect because there was a genuine insurance policy between UPS and National Union. The court stated that although “the odds of losing money on the policy were slim, National Union had assumed liability for the losses of UPS’s excess-value shipper’s, again a genuine obligation.”154 The reinsurance did not “completely foreclose the risk of loss because reinsurance treaties, like all agreements, are susceptible to default.”
The court concluded that “altering the form of an existing, bona fide business” to do the job in a more tax effective way is a genuine business purpose. A business purpose is present if a taxpayer chooses among alternative ways to acquire capital and applies the most tax-effective manner, for example. In UPS, there was a “real business that served the genuine need for customers to enjoy loss coverage and for UPS to lower its liability exposure.”
The Eleventh Circuit remanded the case to the Tax Court to address the Service’s alternative argument that section 482 or 845 should apply to reallocate the amount of income (or other items) transferred to National Union to reflect an arms length transaction.
