b'TABLE OF CONTENTSTAXexample, court and Internal Revenue Service (IRS)3.Risk distributing means that the party assuming rulings hold that the risk of noncollection from a debtorthe risk distributed has potential liability, in part, under a guarantee qualifies as an insurance risk. 3Inamong others. 8contrast, an arrangement covering losses for an event4.By diffusing the risks through a mass of that has already occurred or business costs that areseparate risk shifting contracts, the insurer certain to be incurred, is not viewed by the IRS as ancasts its lots with the law of averages. The insurance risk. 4 process of risk distribution, therefore, is the very essence of insurance. 9Risk shifting5.The concept of risk-distributing emphasizes the Risk shifting occurs if a person facing the possibilitypooling aspect of insurance: that it is the nature of an economic loss transfers some or all of theof an insurance contract to be a part of a larger financial consequences of the potential loss to thecollection of coverages, combined to distribute insurer, such that a loss by the insured does notrisk between insureds. 10affect the insured because the loss is offset by payment from the insurer. 5 In Rev. Rul. 2005-40, 2005-27 I.R.B. 4 (2005), the IRS ruled that a potential insured that enters into a Risk distribution single arrangement with a single counterparty has not shifted the risk amount among other insureds or Risk distribution allows the insurer to reduce thepolicyholders, and that therefore the arrangement possibility that a single costly claim will exceed thedid not constitute insurance for US federal income amount in premiums it has taken in by assumingtax purposes. 11Two Tax Court cases have been numerous relatively small independent risks thatinterpreted to stand for the proposition that risk occur randomly over time. The standard has beendistribution can be achieved through insuring many articulated by courts in numerous ways: risks but with only one or two insureds, analyzing risk distribution from the insurers perspective. 121.Risk distribution necessarily entails a pooling ofThe Tax Court in these cases focused not on the premiums, so that a potential insured is not innumber of insurance risks, but the number of significant part paying for its own risks. 6 independent risk exposures (e.g., Rent-A-Center 2.Risk distribution involves spreading the risk of loss among policyholders. 78Beech Aircraft Corp. v. United States, 797 F.2d 920 (10th Cir. 1986).9Commissioner v. Treganowan, 183 F.2d 288 (2nd Cir. 1950).3See Home Title Ins. Co., 50 F.2d 107 (2nd Cir. 1931), affd 28510AMERCO and Subsidiaries v. Commissioner, 96 T.C. 18 (1991), U.S. 181 (1932); FSA 2000009006 (Nov. 8, 1999). affd 979 F.2d 162 (9th Cir. 1992). 4See Rev. Rul. 89-96, 1989-2 C.B. 114 and Rev. Rul. 2007-47,11See also Benyamin Avrahim, et ux., 149 T.C. 144 (2017).2007-40 I.R.B. 127.12See Rent-A-Center, Inc. v. Commissioner, 142 T.C. No. 1 (2014) 5See Rev. Proc. 2005-40, 2005-27 I.R.B. 4 (2005).and Securitas Holdings, Inc. v. Commissioner, T.C.6Humana, Inc. v. Commissioner, 881 F.2d 247 (6th Cir. 1989).Memo 2014-025. 7 Ocean Drilling & Exploration Co. v. United States, 988 F.2d 1135 (Fed. Cir. 1993).MAYER BROWN |151'