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The Seventh Circuit affirmed the Tax Court’s holding that the transaction between Sears and Allstate qualified as insurance. However, instead of asking “ ‘[w]hat is the definition of insurance?[,]’” the court examined whether “there [was] adequate reason to recharacterize the transaction[.]” The appellate court indicated that the Internal Revenue Code does not define insurance and that in Le Gierse the Supreme Court “mentions the combination of risk shifting and risk distribution.” The court added, however, that it would be a “blunder to treat “a phrase in an opinion as if it were statutory language[.]”
The Supreme Court “was not writing a definition for all seasons and had no reason to, as the holding of Le Gierse is only that paying the ‘underwriter’ more than it promises to return in the
event of a casualty is not insurance by any standard.”The Seventh Circuit recognized that a loss incurred by Sears and covered by Allstate would have less financial impact on Sears than a loss incurred Sears but covered by an independent insurer. However, the court questioned whether risk-shifting is necessarily a requisite of insurance. It reasoned, in part,
[i]f retrospectively rated policies, called ‘insurance’ by both issuers and regulators, are insurance for tax purpose and the Commissioner’s lawyer conceded for purposes of this case that they are—then it is impossible to see how risk shifting can be a sine qua non of ‘insurance.’
