Carnation Company v. Commissioner of Internal Revenue

Carnation appeals the Tax Court’s determination that its agreement with American Home Assurance Company (American Home) to the extent reinsured with a Carnation subsidiary was not “insurance” for tax purposes, and that payments made thereunder were not deductible as a business expense. We affirm.

I. FACTS

In August 1971, Carnation incorporated Three Flowers Assurance Co., Ltd. (Three Flowers) as its wholly owned Bermuda subsidiary. It created Three Flowers to insure and reinsure various multiple line risks, including its own and those of its subsidiaries. Three Flowers wrote insurance only for Carnation and its subsidiaries.

Early in September, Carnation made an initial capital contribution of $120,000.

On September 22, 1971, Carnation purchased a blanket insurance policy from American Home. On that day, Three Flowers contracted to reinsure 90% of American Home’s liability under Carnation’s policy. American Home ceded to Three Flowers 90% of the premium received from Carnation and Three Flowers paid American Home 5% commission plus reimbursement for premium losses.

As a result of the reinsurance contract, American Home was required to pay Carnation’s claims and seek…