 R.V.I. GUARANTY CO., LTD. AND SUBSIDIARIES, PETITIONER
  v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
         Docket No. 27319–12.        Filed September 21, 2015.

        P sold contracts for which the company’s name is an
     acronym—‘‘residual value insurance.’’ The parties insured
     under these contracts included leasing companies, manufac-
     turers, and financial institutions. The assets insured included
     passenger vehicles, commercial real estate, and commercial
     equipment. The insured parties were the lessors of these
     assets or provided financing for such leases. When pricing a
     lease, a lessor must estimate what residual value the asset
     will have when it is returned to him at the end of the lease.
     P insured against the risk that the actual value of the asset
     upon termination of the lease would be significantly lower
     than the expected value. R concluded that P’s policies do not
     constitute insurance for Federal income tax purposes. This
     conclusion was based chiefly on a determination that the les-
     sors were purchasing protection against an investment risk,
     not an insurance risk.
        1. Held: The risks insured by the policies P sold cover an
     insurance risk.
        2. Held, further, the policies P sold constitute contracts of
     ‘‘insurance’’ for Federal income tax purposes.

  Dennis L. Allen, M. Kristan Rizzolo, and Daniel H.
Schlueter, for petitioner.
  Laurie A. Nasky and John Anthony Guarnieri, for
respondent.
   LAUBER, Judge: During 2006 petitioner R.V.I. Guaranty
Co., Ltd., & Subsidiaries (RVI or petitioner) sold contracts for
which the company’s name is an acronym—‘‘residual value
insurance.’’ The parties insured under these contracts
included leasing companies, manufacturers, and financial
institutions. The assets insured included passenger vehicles,
commercial real estate, and commercial equipment. The
insured parties were the lessors of these assets or provided
financing for such leases.
                                                                        209
210           145 UNITED STATES TAX COURT REPORTS                       (209)


  When pricing a lease, a lessor must estimate what residual
value the asset will have when it is returned to him at the
end of the lease. RVI insured against the risk that the actual
value of the asset upon termination of the lease would be
significantly lower than the expected value. Typically, the
insured value was set slightly below the expected residual
value; if the asset’s actual value at the end of the lease was
lower than the insured value, RVI would pay the difference.
  On audit, the Internal Revenue Service (IRS or
respondent) concluded that the policies RVI offers do not con-
stitute ‘‘insurance’’ for Federal income tax purposes. This
conclusion was based chiefly on a determination that the les-
sors were purchasing protection against an investment risk,
not an insurance risk. Concluding that petitioner was there-
fore not an ‘‘insurance company’’ entitled to compute its tax-
able income using the insurance accounting rules set forth in
section 832, the IRS determined a deficiency of $55,197,620
for the 2006 taxable year. 1
  Petitioner timely petitioned for redetermination of this
deficiency. After concessions, 2 the sole issue for decision is
whether the RVI policies constitute contracts of ‘‘insurance’’
for Federal income tax purposes. We hold that they do.
                           FINDINGS OF FACT

   Some of the facts have been stipulated and are so found.
The stipulations of facts and the attached exhibits are incor-
porated by this reference. At the time petitioner filed its peti-
tion, its principal place of business was in Connecticut.
   R.V.I. Guaranty Co. Ltd. (RVIG) is incorporated in Ber-
muda. At all times since its incorporation, it has been reg-
istered and regulated as an insurance company in compliance
with the requirements of the Bermuda Insurance Act of
1978. RVIG is the common parent of an affiliated group of
corporations that includes R.V.I. America Insurance Com-
  1 Allstatutory references are to the Internal Revenue Code as in effect
for the tax year at issue. All Rule references are to the Tax Court Rules
of Practice and Procedure. We round all dollar amounts to the nearest dol-
lar.
  2 The parties have filed a stipulation of settled issues resolving the other

two allegations of error set forth in the petition, namely, the ‘‘alternative
insurance adjustments’’ issue described in paragraph 4.b and the ‘‘imputed
interest’’ issue described in paragraph 4.c.
(209)   R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER         211


pany (RVIA). RVIA was incorporated in 1994 as a property
and casualty (P&C) insurance company. It began business in
1995 and is domiciled in Connecticut.
  During 2006 RVIA engaged exclusively in the business of
issuing policies of residual value insurance. RVIA reinsured
with RVIG almost all of the risk represented by these poli-
cies. Bermuda law requires insurance companies to meet
specified requirements governing solvency, liquidity, min-
imum capital, and surplus. RVIG met or exceeded all of these
requirements during 2006.
  In 1999 RVIG elected under section 953(d) to be treated as
a domestic corporation for Federal income tax purposes. That
election was in effect during 2006 and has not been revoked.
RVI filed a consolidated Federal income tax return for 2006
on Form 1120–PC, U.S. Property and Casualty Insurance
Company Income Tax Return, using a calendar fiscal year.
The Policies
   Petitioner issued residual value insurance policies to unre-
lated insureds engaged in the business of leasing assets or
financing asset leases. At the inception of any lease, the
lessor anticipates that the leased property will depreciate
during the lease term to a probable ‘‘residual value’’ due to
normal wear and tear. Numerous factors, however, can cause
property to decline in value more precipitously than
expected. These factors may include excess wear and tear, as
well as macro-economic events like recession, high interest
rates, or price deflation. The residual value of an asset may
also be adversely affected by risks to which that particular
property is subject. For example, commercial real estate
might drop in value because of urban blight in a particular
neighborhood or the bursting of a national real estate bubble.
Industrial equipment might drop in value because of techno-
logical change or local factory closings. Passenger vehicles
might drop in value because of high oil prices or a shift in
consumer preferences toward battery-powered cars.
   To protect against such risks, the lessor or finance com-
pany could purchase a policy of residual value insurance. In
recent years, such policies have been issued by numerous
well-established insurance companies, including American
International Group (AIG), Chubb Group of Insurance
212        145 UNITED STATES TAX COURT REPORTS           (209)


Companies, Royal Insurance Company of America, ACE
Group, QBE Group, and Great American Insurance Group.
During the tax period in issue, RVIA was a leading issuer of
residual value insurance policies (RVI policy or policies).
   Each RVI policy indemnified the insured against loss in
the event that assets insured under the policy had an actual
value at lease termination lower than the insured value that
the policy specified for those assets. Typically, the insured
value was slightly below the expected residual value. The
insured thus retained the risk for the initial layer of loss
(between the expected residual value and the insured value),
and RVIA indemnified the insured against the remaining
risk of loss (between the insured value and a lower actual
residual value).
   A simple example may illustrate the mechanics of a typical
RVI policy. Assume that an automobile with an initial pur-
chase price of $20,000 is leased for three years and that its
expected residual value upon lease termination is $10,000.
RVIA might insure that automobile for 90% of the expected
residual value, yielding an insured value of $9,000. If, at
lease termination, the automobile had an actual residual
value of $8,500, the RVI policy would indemnify the lessor
for $500, assuming the lessor satisfied all terms and condi-
tions of coverage. The lessor would bear the $1,000 initial
layer of loss.
   RVI policies typically called for a single premium payable
at inception of the contract. The premiums charged depended
on how much risk RVIA assumed, i.e., on the magnitude of
the gap between the expected residual value and the insured
value. Generally speaking, petitioner expected losses on its
policies to be quite low, and it priced the insurance accord-
ingly. The policy premium rarely exceeded $4 for each $100
of insurance protection provided and (depending on the type
of property) could be as low as 50 cents for each $100 of cov-
erage.
   The RVI policies included standard terminology and policy
provisions typical of insurance policies generally, including
the requirement of an ‘‘insurable interest’’ and provisions
governing claims, exclusions, payment of losses, and condi-
tions to coverage. For RVIA to have liability under a con-
tract, the insured had to meet various conditions precedent,
e.g., paying the premium, having an ownership interest in
(209)    R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                213


the covered property, providing written notice of a claim, and
complying with the terms of endorsements regarding return
conditions. Upon payment of a loss RVIA was subrogated to
any rights of recovery the insured might have against third
parties concerning that property.
    RVIA sometimes included in its policies other limitations
on loss, such as a policy deductible. By accepting terms that
limited RVIA’s risk of loss, an insured could often reduce its
premium. For example, the insured might elect to exclude
from coverage assets of volatile value, or might accept strict
‘‘return conditions’’ requiring the covered property to be in
excellent condition at lease termination.
    Certain RVI policies provided for ‘‘pooling.’’ Under
‘‘pooling,’’ a single policy would cover multiple assets under
leases terminating within a specific period (say one year). A
‘‘loss’’ would be deemed to occur if the aggregate residual
value of those assets was less than their aggregate insured
value.
    RVIA wrote three basic types of policies—‘‘FASB,’’ ‘‘pri-
mary,’’ and ‘‘hybrid.’’ 3 An FASB policy was one under which
the insured value of the covered property was set at a level
to provide the lessor with enough insurance coverage to
enable it to use ‘‘direct financing lease’’ accounting. See
Statement of Financial Accounting Standards No. 13 (a lease
may be classified as a ‘‘financing lease’’ if the present value
of the lease payments and any guaranteed portion of the
residual value exceeds 90% of the value of the asset). Under
a ‘‘financing lease’’ the lessor can accelerate income into the
lease’s earlier years for financial accounting purposes. A pri-
mary policy was one under which the insured value was not
set at a level tied to ‘‘financing lease’’ accounting. A hybrid
policy was one under which each insured asset was subject
to both primary and FASB coverage.
    RVIG’s business in 2006 consisted principally of reinsuring
the risks represented by RVIA’s policies of residual value
insurance. As measured by net unearned premiums, 97.5% of
RVIG’s business at year end 2006 was attributable to RVIA
risks. RVIG also reinsured risks under residual value policies
  3 FASB refers to the Financial Accounting Standards Board, the organi-

zation responsible for establishing Generally Accepted Accounting Prin-
ciples (GAAP) in the United States.
214          145 UNITED STATES TAX COURT REPORTS                     (209)


issued by other insurance companies. Reinsurance of risks
arising under other types of contracts represented less than
1% of RVIG’s business.
   RVIA grouped its policies into three business segments:
passenger vehicles, commercial real estate, and commercial
equipment. ‘‘Commercial equipment’’ included aircraft, indus-
trial equipment, and rail cars. At year end 2006 RVIA had
951 policies in force insuring 714 unrelated insureds. The
assets covered by these policies included 754,532 passenger
vehicles, 2,097 real estate properties, and 1,387,281 pieces of
commercial equipment. Within each business segment, RVIA
insured a wide variety of assets, i.e., many different makes
and models of automobile, various kinds of buildings in
diverse geographical locations, and many different types of
industrial equipment. The passenger vehicles comprised 20
different types of automobile (including pickup trucks,
sedans, SUVs, and sports cars) and approximately 50 dif-
ferent vehicle models. The commercial real estate comprised
15 different types of properties (including retail stores, ware-
houses, industrial buildings, office buildings, and motels) in
seven different geographic regions. And the commercial
equipment comprised 30 different types of equipment,
including aircraft, rail cars, construction equipment, and
shipping containers.
   Each business segment accounted for roughly one-third of
RVIA’s business as measured by remaining unearned pre-
miums at year end 2006. 4 The terms of the leases to which
the covered assets were subject varied considerably within
business segments and from one segment to another. The
lease terms for vehicles were typically one to five years; the
  4 As measured by remaining unearned premiums, the passenger vehicle
segment accounted for 31.9%, the commercial real estate segment for
34.6%, and the commercial equipment segment for 33.5% of RVIA’s busi-
ness. Total unearned premiums for these three segments at year end 2006
were $47.5 million, $51.6 million, and $50 million, respectively. As meas-
ured by premiums earned during 2006, the passenger vehicle segment ac-
counted for 58.8%, the commercial real estate segment for 12.6%, and the
commercial equipment segment for 28.6% of RVIA’s business. The percent-
ages for the latter two segments were smaller as measured by earned pre-
miums because the insured assets were leased for longer terms, with the
result that the premium was ‘‘earned’’ more slowly. Total earned premiums
for the three segments during 2006 were $27.6 million, $5.9 million, and
$13.4 million, respectively.
(209)     R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                    215


lease terms for real estate were much longer, often 28 years;
the lease terms for commercial equipment varied greatly.
Even where assets (such as vehicles) were subject to the
same lease term (such as three years), the policies insuring
them could end in different years because initiated at dif-
ferent times.
   The events that could cause losses under RVI policies
varied considerably. Certain macro-economic events, such as
recessions, high unemployment, or unexpectedly high
interest rates, could affect various insured assets similarly.
But many events that could cause loss were uncorrelated.
For example, technological obsolescence of a type of commer-
cial aircraft probably would not affect the value of an office
building. And risks within a given business segment were
often uncorrelated. For example, the loss of a major tenant
in a Chicago office building likely would not affect the value
of a building leased to a restaurant in New York. 5
   At year end 2006 the total insured value of RVIA-insured
property was roughly $9.1 billion in the passenger vehicle
segment, $2.1 billion in the commercial real estate segment,
and $4.9 billion in the commercial equipment segment.
Divided by type of policy, the total insured value of property
covered under FASB policies was about $5.0 billion, under
primary policies was about $3.7 billion, and under hybrid
policies was about $7.4 billion. (All amounts ignore reinsur-
ance).
   Petitioner paid significant claims under the RVI policies
and incurred significant insurance losses. On an absolute
dollar basis, RVIA paid more than $150 million in claims
through 2013, which included more than $28 million in
claims on FASB policies. 6 An insurance company’s ratio of
  5 In 2007 RVIA sustained a substantial loss on a policy covering an office

building in El Paso, Texas, after the building’s lead tenant, El Paso Nat-
ural Gas, moved to Houston. The risk causing this loss was uncorrelated
with risks that could affect the value of buildings that RVIA insured in
other locations, much less the value of motels and convenience stores com-
ing off lease 15 years later.
  6 Respondent objected to the admissibility of financial information for

2007–2013 as post-dating the tax year in issue and ‘‘irrelevant for that rea-
son.’’ The Court overruled this objection. A loss under an RVI policy is pay-
able only at the end of a lease, and many of the insured assets were sub-
ject to very long leases. By definition, therefore, many RVI policies in ex-
                                                Continued
216            145 UNITED STATES TAX COURT REPORTS                                                (209)


paid losses (including related loss adjustment expenses) to
earned premiums is generally called its ‘‘loss ratio.’’ From
RVIA’s inception through 2006, its cumulative loss ratio was
27.7%. From RVIA’s inception through the end of 2013, its
cumulative loss ratio increased to about 34%. Its annual loss
ratios from 2000 through 2013 were as follows:
        Year                                                                         Loss ratio
        2000   ...................................................................     1.0%
        2001   ...................................................................     0.9%
        2002   ...................................................................     0.3%
        2003   ...................................................................     1.3%
        2004   ...................................................................    64.2%
        2005   ...................................................................    48.6%
        2006   ...................................................................    33.2%
        2007   ...................................................................    20.4%
        2008   ...................................................................    97.9%
        2009   ...................................................................    11.5%
        2010   ...................................................................    27.1%
        2011   ...................................................................    18.1%
        2012   ...................................................................     0.2%
        2013   ...................................................................    30.7%

Regulation of Petitioner
   The residual value policies were treated as ‘‘insurance’’ for
insurance regulatory purposes during 2006 by all States in
which RVIA sold products, including Connecticut, New York,
Pennsylvania, Ohio, Texas, Illinois, and Georgia. RVIA was
required to be (and was) licensed to sell insurance in each
State in which it issued policies. It was required to pay to
those States insurance premium taxes, which totaled
$639,764 for 2006. It was required to file with the insurance
department of each State quarterly or annual ‘‘statutory
financial statements.’’ These statements were required to be
prepared in accordance with ‘‘statutory accounting principles’’
(SAP) prescribed by the National Association of Insurance
Commissioners (NAIC). RVIA was additionally required by
Connecticut, its State of domicile, to meet minimum capital
and surplus requirements, which it met for 2006.
istence in 2006 could not have come to a payout resolution, and could not
possibly have had a loss, as of year end 2006. Yet many of these policies
could (and did) experience significant losses upon lease termination. In
order to display accurately RVIA’s loss experience under the policies it
held during 2006, it is necessary to consider the complete terms of these
contracts.
(209)     R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                    217


   Under the SAP, an insurer may not treat a contract as
‘‘insurance’’ in its statutory financial statements unless it
assumes a significant insurance risk under the contract and
faces a reasonable possibility of incurring a significant loss.
See Statement of Standard Accounting Practice 62R. 7 RVIA
determined that it was required to account for its policies as
insurance—and it did in fact account for those policies as
insurance—in its statutory financial statements, including
those it prepared for 2006. RVIA’s independent auditor, BDO
Seidman LLP (BDO), examined its 2006 statutory financial
statements and issued an unqualified opinion that they were
fairly stated in accordance with SAP.
   The Connecticut Insurance Department examined RVIA’s
2006 statutory financial statements for compliance with SAP.
During this examination, an actuary from the department
met with an actuary appointed by RVIA to review its annual
actuarial report prepared by PricewaterhouseCoopers LLP
(PwC). Following this review, the department raised no ques-
tions concerning RVIA’s accounting for its residual value
policies as ‘‘insurance.’’ 8
   RVIG was licensed to sell insurance and reinsurance in
Bermuda. It likewise accounted for the residual value policies
as ‘‘insurance’’ in its statutory filings. RVIG’s independent
auditor, Arthur Morris & Co., examined its 2006 statutory
  7 The  Statements of Standard Accounting Practice (SSAP) provide guid-
ance for the completion of an insurer’s statutory financial statements. The
SSAP are issued by NAIC and published in its Accounting Practices and
Procedures Manual. SSAP 62R, cited in the text, was originally drafted to
establish rules of accounting for reinsurance. However, the evidence at
trial established that practitioners regularly apply its principles to direct
insurance as well.
   8 RVIA was required by Connecticut, and by each other State in which

it was licensed, to secure an annual actuarial report addressing the rea-
sonableness of its reserves for unpaid losses, loss adjustment expenses,
and unearned premiums. The PwC actuarial report opined that RVIA’s re-
serves complied with Connecticut insurance law and with accepted actu-
arial standards. Petitioner’s expert, Michael E. Angelina, explained that,
if underwriting risk had not been present, ‘‘I would expect the various re-
ports to have highlighted this issue. This has been my past experience
with the large accounting firms and regulatory agencies.’’ Kent E. Barrett,
one of respondent’s experts, testified that if BDO or PwC had believed that
the RVI policies did not constitute ‘‘insurance’’ for SAP purposes, they
would have had an obligation to say so. Neither BDO nor PwC raised any
question on this point.
218          145 UNITED STATES TAX COURT REPORTS                     (209)


financial statements and issued an unqualified opinion that
they were fairly stated in accordance with Bermuda insur-
ance law. An independent actuary reviewed its reserves for
unpaid losses and loss adjustment expenses and opined that
those reserves complied with Bermuda law and accepted
insurance practice.
   Petitioner received ‘‘insurance strength ratings’’ in 2006
from the major insurance rating agencies. Fitch Ratings gave
petitioner an A+ strength rating. Moody’s Investors Services
gave it an A3 rating. Standard & Poor’s Insurer Credit
Report gave it an A rating.
Tax Return and Notice of Deficiency
  On its 2006 consolidated return, petitioner reported its
income and expenses consistently with the requirements of
section 832 governing computation of ‘‘insurance company
taxable income.’’ The IRS issued a notice of deficiency dis-
allowing petitioner’s use of insurance company accounting. It
determined that:
  residual value insurance policies that insure against market decline are
  not insurance contracts for Federal income tax purposes. It is further
  determined that [petitioner must] calculate its annual taxable income
  using IRC sections 451 and 461 instead of IRC section 832; this
  accounting method change is required since [petitioner] no longer quali-
  fies as an insurance company since [it] does not meet the requirements
  of IRC section 831(c).[9]

Expert Testimony
  Both parties offered extensive expert testimony at trial.
This testimony addressed various characteristics of ‘‘insur-
ance’’ as applied to petitioner’s residual value policies. These
characteristics include risk shifting, risk distribution, com-
monly accepted notions of insurance, and the presence of
insurance risk.
  Risk Shifting and Risk Distribution
 Petitioner offered, and the Court recognized, Michael E.
Angelina, executive director of the Academy of Risk Manage-
ment and Insurance at St. Joseph’s University, as an expert
  9 During the examination, the IRS issued Technical Advice Memo-

randum 201149021 (Aug. 30, 2011) outlining its position concerning these
issues.
(209)     R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                     219


on the topics of insurance, risk management, and actuarial
science. Professor Angelina opined that ‘‘insurance at its root
has two fundamental attributes: risk shifting and risk dis-
tribution.’’ He characterized the risks against which peti-
tioner insured as ‘‘low-frequency/high severity risks,’’ analo-
gizing them to earthquakes, major hurricanes, and other
‘‘catastrophic risks.’’ He explained that petitioner distributed
these risks in the same way that other P&C companies dis-
tribute catastrophic risk, e.g., by ‘‘underwriting its risks to
avoid over-concentration in any one segment (passenger
vehicle, commercial real estate, and commercial equipment)
or geographic area.’’ He explained that petitioner also
engaged in ‘‘temporal distribution’’ of its risks by insuring
different forms of property, with lease terms of varying
length, under policies terminating in different years. This
‘‘enabled RVI to avoid a ‘run on the bank’ scenario in
extreme economic downturns.’’ 10
   Petitioner offered, and the Court recognized, Robert S.
Miccolis as an expert on insurance and actuarial science,
particularly in the field of mortgage guaranty insurance. Mr.
Miccolis is an actuary with Deloitte Consulting LLP and
president-elect of the Casualty Actuarial Society. He opined
that, for approximately 98% of the RVI policies, it was
‘‘reasonably self-evident’’ that risk was transferred from the
insured to RVIA.
   Petitioner offered, and the Court recognized, Nancy L.
Litwinski, a certified public accountant (C.P.A.), as an expert
in insurance accounting and the application of statutory
accounting principles by insurance companies and state regu-
lators. Ms. Litwinski testified that RVIA’s policies were
consistently treated as insurance for SAP purposes by RVIA,
by its independent auditors, and by the Connecticut Insur-
ance Department. This treatment, she testified, was based on
the determination that the residual value policies constituted
‘‘insurance’’ under SAP.
  10 Professor Angelina noted that ‘‘the presence of systemic risk does not

mean an insurer has failed to pool risk. * * * [T]he ability to diversify risk
at the more expected levels may have adverse consequences in tail sce-
narios where there is no ability to diversify. This was clearly evident in
2008 during the mortgage crisis as some mortgage guarantee insurers
were not able to recover from their systemic failure.’’
220           145 UNITED STATES TAX COURT REPORTS                      (209)


   Respondent offered, and the Court recognized, Charles
Cook, a managing director of MBA Actuaries LLC, as an
expert in insurance and actuarial science. Mr. Cook com-
pared petitioner’s policies to ‘‘property catastrophe coverages
such as windstorm or flood.’’ He opined that no meaningful
risk of loss was transferred from the policyholder because
RVIA ‘‘did not appear to be exposed to significant loss.’’ He
opined that petitioner’s risk of loss, especially under the
FASB policies, was ‘‘remote.’’ Mr. Cook agreed that petitioner
did distribute risk geographically, temporally, and among
diverse business segments. But he concluded that its risk
distribution and diversification were less beneficial to it than
is typical for insurers because the risks it assumed were
more highly correlated.
   In analyzing risk transfer, Mr. Cook limited his review to
losses that had occurred as of year end 2006. In opining that
petitioner’s risk of loss was ‘‘remote,’’ he relied on the fact
that many policies had experienced no losses as of that date.
On cross-examination, it was pointed out that many of these
policies could not possibly have experienced a loss as of year
end 2006 because losses were payable only upon lease termi-
nation and many policies still had multiple years to run.
Upon review of petitioner’s post-2006 experience, Mr. Cook
acknowledged that many policies for which he had computed
a loss ratio of ‘‘zero’’ actually experienced significant losses. 11
Mr. Cook ultimately conceded these errors, acknowledging
that his method of computing loss ratios systematically
understated the true extent of petitioner’s losses.
   Respondent offered, and the Court recognized, Kent E.
Barrett, a C.P.A. at Veris Consulting, as an expert with
respect to International Financial Reporting Standards
(IFRS), GAAP, and SAP. Mr. Barrett opined that petitioner’s
FASB policies had only a remote chance of loss and did not
transfer significant underwriting risk. In making this assess-
ment, Mr. Barrett relied on the fact that most of the policies
   11 For example, for the policy that RVIA issued to U.S. Bank in 2005,

for which Mr. Cook computed a loss ratio of ‘‘zero,’’ RVIA ultimately paid
more than $12 million in claims after receiving only $8 million in pre-
miums, producing a loss ratio in excess of 150% for the first declaration
period alone. Moreover, of this $12 million in losses, $8 million was attrib-
utable to the policy’s FASB coverage. This contradicted Mr. Cook’s asser-
tion that RVI’s risk of loss under its FASB policies was ‘‘remote.’’
(209)    R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER           221


on RVIA’s books during 2006 ‘‘had experienced no claim pay-
ments of significance as of the end of 2006.’’
  Commonly Accepted Notions of Insurance
   Professor Angelina testified that the RVI policies have all
the indicia of standard insurance policies and are treated as
‘‘insurance’’ by State regulators and other participants in the
insurance marketplace. In formal respects, the policies ‘‘have
standard sections encompassing declarations, insuring agree-
ments, definitions, exclusions, conditions, and miscellaneous
provisions.’’ The policies have standard provisions that
‘‘define the duties of an insured after loss, how losses are to
be settled, and if any remediating elements need to be
reflected in the final loss settlement.’’ RVIA maintained
actuarially sound insurance reserves for its policies and
accounted for all transactions using proper insurance
accounting.
   Mr. Barrett did not dispute these points. But he opined
that the RVI policies differ from typical insurance policies in
certain ways. The risk against which petitioner insures is not
a fortuitous ‘‘insured event,’’ like a car accident, a hurricane,
or a fire. Rather, petitioner insures against a greater-than-
anticipated decline in the economic value of property over
time. As a corollary of this observation, Mr. Barrett noted
that RVIA does not face what he called ‘‘timing risk,’’
namely, the uncertainty that arises under most insurance
policies as to when a covered loss will occur. Under the RVI
policies, a ‘‘loss’’ will occur (if at all) only on the last day of
the policy term, a date that is known in advance. Finally,
Mr. Barrett characterized as nontraditional certain contract
terms that RVIA offered to its policyholders.
  Insurance Risk
   Professor Angelina opined that the RVI policies cover an
insurance risk and not simply an investment risk. He noted
that losses on RVI policies can vary from zero to the full
insured value. The premium RVIA charged was typically no
more than 4% of the insured value and (for certain contracts)
ranged as low as 0.5% of the insured value. Professor
Angelina opined that RVIA was thus subject to underwriting
risk, namely, the risk that the premiums received (and
income earned thereon) will be insufficient to cover claims
222         145 UNITED STATES TAX COURT REPORTS                (209)


made under the policy. This can arise from an inaccurate
assessment of future risks, from an overconcentration of
risks in a particular loss-exposed area, or from macro-eco-
nomic or industry-specific factors wholly outside the under-
writer’s control.
   Mr. Miccolis opined that the risks assumed by petitioner
resemble the risks assumed under policies of mortgage guar-
anty insurance, which are generally regarded as involving
‘‘insurance risk.’’ In both cases, the insurer assumes a signifi-
cant risk of loss ‘‘arising out of a financial transaction which
is caused by an unexpected decline in the value of property
after coverage begins.’’ In both cases, the loss suffered by the
insurer can be caused by local conditions in specific markets
or by ‘‘macro-economic conditions, such as general unemploy-
ment, interest rates, and the state of the credit markets.’’
The insured under a mortgage guaranty contract seeks
protection against a possible investment loss—namely,
diminution in the value of its loan asset—but that fact does
not negate the existence of ‘‘insurance risk’’ under such poli-
cies. Mr. Miccolis opined that the same conclusion should fol-
low for residual value insurance.
   On cross-examination, Mr. Miccolis agreed that mortgage
guaranty insurance differs from residual value insurance in
one respect. Under the former, the insurer’s payment obliga-
tion is triggered by the homeowner’s default, a fortuitous
event; under the latter, the insurer’s payment obligation
arises because property has declined in value as of a par-
ticular time. But despite this distinction, Mr. Miccolis testi-
fied that the two types of insurance are essentially similar:
in both cases, what truly drives the insurer’s loss is an
underlying decline in the economic value of the insured’s
property or collateral.
   Respondent offered, and the Court recognized, Etti
Baranoff, an associate professor of finance and insurance at
Virginia Commonwealth University, as an expert in risk
management, insurance, and financial economics. She opined
that the RVI policies are not contracts of insurance because
they cover ‘‘speculative risk’’ as opposed to ‘‘insurance risk.’’
   According to Dr. Baranoff, the ‘‘foundation of insurance is
that it is a product responding to the management of pure
risk only.’’ A transaction involves ‘‘pure risk,’’ she testified, if
the only possible outcomes, from the insured’s point of view,
(209)   R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER         223


are ‘‘loss’’ or ‘‘no loss.’’ A homeowner considering the pur-
chase of fire insurance, for example, faces the possibility of
a fire (resulting in a loss) or the possibility of no fire
(resulting in no loss). The homeowner cannot enjoy a gain
with respect to the risk insured against.
   A lessor considering the purchase of an RVI policy, by con-
trast, faces three possible outcomes: ‘‘loss,’’ ‘‘neutral,’’ or
‘‘gain.’’ The covered assets could depreciate below the
expected residual value (resulting in a loss); they could
depreciate to the expected residual value (yielding a neutral
outcome); or they could depreciate less than expected or actu-
ally appreciate (resulting in a gain). Because the uncertain-
ties to which the insured property is subject might generate
either a loss or a gain, Dr. Baranoff characterized RVI’s poli-
cies as involving ‘‘speculative risk,’’ like a stock investment,
as opposed to ‘‘pure risk.’’ She analogized the insured under
an RVI policy to an investor who, desiring to hedge his bets,
purchases an option allowing him to ‘‘put’’ his stock to
another investor if the stock declines to a specified price by
a specified date.
   Dr. Baranoff relied in her report on textbooks that note the
distinction between ‘‘pure risk’’ and ‘‘speculative risk.’’
During cross-examination, petitioner’s counsel pointed out
that certain of the texts she cited state that speculative risks
can be insured. See, e.g., George E. Rejda & Michael J.
McNamara, Principles of Risk Management and Insurance 5
(12th ed. 2014) (‘‘Some insurers will insure institutional port-
folio investments and municipal bonds against loss.’’). In
response, Dr. Baranoff reiterated her position that ‘‘pure
risk’’ is the only possible subject of insurance, dismissing
Professor Rejda’s statement to the contrary as ‘‘an
uncarefully written sentence.’’ On balance, we found her
testimony argumentative and unpersuasive.
   Disagreeing with Dr. Baranoff, Professor Angelina opined
that insurance can cover certain speculative risks. ‘‘[T]here
are many financial risks,’’ he testified, ‘‘that now are com-
monly insured, such as trade credit insurance, mortgage
guaranty insurance, and municipal bond insurance to name
a few.’’ The Court regarded Professor Angelina as a credible
witness and found his testimony helpful.
224        145 UNITED STATES TAX COURT REPORTS             (209)


                           OPINION

I. Burden of Proof
  The Commissioner’s determinations in a notice of defi-
ciency are generally presumed correct, and the taxpayer
bears the burden of proving those determinations erroneous.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner does not contend that the burden of proof shifts to
respondent under section 7491(a) as to any issue of fact.
II. Petitioner’s Status as an ‘‘Insurance Company’’
   Insurance companies are subject to the corporate income
tax imposed by section 11. See secs. 801(a)(1) (life insurance
companies), 831(a) (other insurance companies). The taxable
income of insurance companies, however, is computed under
special rules. For P&C companies, those rules are set forth
in section 832, captioned ‘‘Insurance Company Taxable
Income.’’ In order to match income with anticipated loss
expenses, section 832 provides (among other things) that pre-
miums are generally taken into income not as received but
only as ‘‘earned.’’ See Bituminous Cas. Corp. v. Commis-
sioner, 57 T.C. 58, 77 (1971) (observing that if ‘‘premiums
were to be taxed as received and the deductions allowed only
as they later became fixed, the result would be to tax very
large sums of money as income when in fact those amounts
will never really become income because they will have to be
paid out to policyholders’’).
   To compute its taxable income under this special regime,
the taxpayer must be an ‘‘insurance company.’’ For this pur-
pose, ‘‘the term ‘insurance company’ means any company
more than half of the business of which during the taxable
year is the issuing of insurance or annuity contracts or the
reinsuring of risks underwritten by insurance companies.’’
Sec. 816(a) (life insurance companies, cross-referenced in sec-
tion 831(c), other insurance companies); see sec. 1.801–3(a),
Income Tax Regs. (‘‘[I]t is the character of the business actu-
ally done in the taxable year which determines whether a
company is taxable as an insurance company[.]’’).
   Neither the Internal Revenue Code nor the Treasury Regu-
lations define the term ‘‘insurance’’ or ‘‘insurance contract.’’
The meaning of these terms for Federal income tax purposes
has thus been developed chiefly through a process of
(209)   R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER          225


common-law adjudication. In the seminal case addressing
this subject, the United States Supreme Court noted that
‘‘[h]istorically and commonly insurance involves risk-shifting
and risk-distributing.’’ Helvering v. Le Gierse, 312 U.S. 531,
539 (1941). In addition to requiring risk transfer and risk
distribution, the courts have considered whether the trans-
action constitutes insurance ‘‘in its commonly accepted sense’’
and whether the risk transferred is an ‘‘insurance risk.’’ E.g.,
Black Hills Corp. v. Commissioner, 101 T.C. 173, 182 (1993),
aff ’d, 73 F.3d 799 (8th Cir. 1996). These factors establish a
framework for determining ‘‘the existence of insurance for
Federal tax purposes.’’ AMERCO & Subs. v. Commissioner,
96 T.C. 18, 38 (1991), aff ’d, 979 F.2d 162 (9th Cir. 1992). We
conclude that the RVI policies met all of these requirements
during 2006 and that petitioner was therefore taxable as an
‘‘insurance company.’’
  A. Risk Shifting
   Insurance is an arrangement that must be examined from
the perspective of both the insurer and the insured. Harper
Grp. v. Commissioner, 96 T.C. 45, 57 (1991), aff ’d, 979 F.2d
1341 (9th Cir. 1992). From the insured’s perspective, insur-
ance is a risk transfer device, that is, a mechanism by which
the insured obtains protection from financial loss by paying
the insurer a premium. Ibid.; Black Hills Corp., 101 T.C. at
182–183. By paying a premium, the insured externalizes his
risk of loss by shifting that risk to the insurer.
   We have no difficulty concluding that the lessors and
finance companies that purchased the RVI policies trans-
ferred to petitioner a meaningful risk of loss. As Professor
Angelina explained, these companies faced a significant busi-
ness risk: if the values of the leased assets declined more
precipitously than expected by the end of the lease term,
their lease pricing formula could generate a substantial eco-
nomic loss. Absent the RVI policy, the insured would bear
the entire risk associated with loss-causing events. By pur-
chasing the policy, the insured transferred to RVIA that risk
of loss, to the extent of the assets’ insured values. RVIA was
indisputably a well-capitalized company fully capable of
paying claims and absorbing the risks transferred to it. See
Harper Grp., 96 T.C. at 59 (finding risk transfer where the
insurer ‘‘not only was financially capable of satisfying claims
226           145 UNITED STATES TAX COURT REPORTS                      (209)


made against it, but it in fact paid such claims’’). The RVI
policies thus transferred the ‘‘impact of a potential loss’’ to
the insurer from the insured. See Gulf Oil Corp. v. Commis-
sioner, 89 T.C. 1010, 1036 (1987), aff ’d, 914 F.2d 396 (3d Cir.
1990).
   RVIA accounted for its policies under SAP. These rules
forbid an insurer in its statutory financial statements to
treat a contract as ‘‘insurance’’ unless the insurer assumes a
significant risk under the contract and faces a reasonable
possibility of incurring a significant loss. See SSAP 62R. By
issuing an unqualified opinion that RVIA’s statutory finan-
cial statements were fairly stated under SAP, its external
auditor agreed that it bore a significant insurance risk.
Citing insurance accounting standards, Mr. Miccolis found it
‘‘reasonably self-evident’’ that risk was transferred under
98% of RVIA’s policies. See FASB 113; SSAP 62R; Reinsur-
ance Attestation Supplement 20–1, Risk Transfer Testing
Practice Note. 12 The PwC actuarial report opined that
RVIA’s reserves complied with Connecticut insurance law
and with accepted actuarial standards, and the Connecticut
Insurance Department agreed with this assessment.
   Respondent’s experts conceded that the RVI policies did
shift some risk of loss. After being recalled, Mr. Cook
informed the Court of his conclusion that RVIA’s real estate
segment, which accounted for 34.6% of its business during
2006, did transfer sufficient risk of loss. And Mr. Barrett
acknowledged that the FASB policies, which respondent
views most skeptically, transferred to RVIA ‘‘some amount of
risk.’’ As he explained, this was necessarily the case because
lessors purchased FASB policies in order to obtain direct
financing lease accounting, which requires the lessor to shift
to the insurer a sufficient level of risk with respect to the
  12 The Risk Transfer Testing Practice Note, cited in the text, was origi-

nally issued in the reinsurance context. However, the evidence at trial es-
tablished that practitioners regularly apply its principles to direct insur-
ance as well. Under this principles-based standard, risk transfer is charac-
terized as ‘‘reasonably self-evident’’ when: (i) potential loss under the
agreement is much greater than the premium, (ii) the agreement contains
standardized terms and conditions typical for the type of coverage, and (iii)
the agreement does not include impermissible provisions regarding rein-
surance.
(209)   R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER         227


guaranteed portion of the residual value. See Statement of
Financial Accounting Standards No. 13.
   The thrust of respondent’s position is that the RVI policies
did not transfer enough risk of loss because losses were rel-
atively unlikely to occur. This argument is unpersuasive on
both theoretical and evidentiary grounds. Both parties’
experts analogized the RVI policies to ‘‘catastrophic’’ insur-
ance coverage, which insures against earthquakes, major
hurricanes, and other low-frequency, high-severity risks. An
insurer may go many years without paying an earthquake
claim; this does not mean that the insurer is failing to pro-
vide ‘‘insurance.’’ Mr. Barrett acknowledged that, under
many catastrophic coverages, the odds of a loss occurring
may be quite low. He was aware of no instance in which an
insurance regulator had determined that the risk of loss on
a policy of direct insurance was too ‘‘remote’’ for the product
to be treated as ‘‘insurance.’’ And respondent offers no plau-
sible metric by which a court could make this assessment.
   In opining that insufficient risk of loss was transferred to
RVIA, respondent’s experts relied on the fact that, as of year
end 2006, many of RVIA’s policies had experienced no losses.
But in computing a ‘‘loss ratio’’ of zero for these policies,
respondent’s experts committed a methodological error.
Whereas RVIA received all premiums at policy inception, a
loss could occur only upon lease termination; many of its
policies in force at year end 2006 had 3, 5, or 25 years to run.
By definition, no loss could possibly have occurred under
such policies as of year end 2006, but major losses could (and
did) occur subsequently. The absence of losses prior to 2007,
therefore, was not a logical basis upon which to ground an
opinion that petitioner had assumed no meaningful risk of
loss under these policies. Mr. Cook ultimately conceded this
error, acknowledging that his method of computing loss
ratios systematically understated the true extent of peti-
tioner’s losses.
   RVIA’s actual loss experience demonstrates that it bore a
significant risk of loss. From inception through 2006, RVIA’s
cumulative loss ratio was about 28%; from inception through
2013, its cumulative loss ratio was about 34%. As one would
expect with catastrophic-type coverage, RVIA’s loss ratio in
some years was extremely low. But in other years it was as
high as 49%, 64%, and (during the 2008 financial crisis) 98%.
228        145 UNITED STATES TAX COURT REPORTS             (209)


On an absolute dollar basis, RVIA paid more than $150 mil-
lion in claims through 2013. Even if we consider only the
FASB policies, the segment on which respondent’s experts
focus, RVIA paid more than $28 million in claims through
2013. All in all, we conclude that the level of risk transferred
to RVIA under these policies was more than sufficient to
treat them as ‘‘insurance contracts’’ for Federal income tax
purposes.
  B. Risk Distribution
   From the insurer’s perspective, insurance is a risk-distribu-
tion device, that is, a mechanism by which the insurer pools
multiple risks of multiple insureds in order to take advan-
tage of ‘‘the law of large numbers.’’ This statistical phe-
nomenon is reflected in the financial world by the diversifica-
tion of investment portfolios. It is embodied in the day-to-day
world by the adage, ‘‘Don’t put all your eggs in one basket.’’
Clougherty Packing Co. v. Commissioner, 811 F.2d 1297,
1300 (9th Cir. 1987), aff ’g 84 T.C. 948 (1985).
   Many insureds who pay premiums will not incur losses.
Insuring many independent risks in return for numerous
premiums thus serves to distribute risk, in effect spreading
a portion of the insurer’s potential liability among his
insureds. See Black Hills Corp., 101 T.C. at 183; Harper
Grp., 96 T.C. at 59; AMERCO, 96 T.C. at 40–41. Distributing
risk allows the insurer to reduce the possibility that a single
costly claim will exceed the amount taken in as a premium
and set aside for the payment of that claim.
   RVIA insured a vast array of different risk exposures.
During 2006 it had 951 policies in force covering 714 dif-
ferent insured parties. Besides being spread among
numerous unrelated insureds, its risks were distributed in at
least four ways: across business segments (passenger vehicle,
commercial equipment, and real estate), across asset types
within each segment, across geographic locations (for real
estate), and across lease duration.
   RVIA’s policies during 2006 covered 754,532 passenger
vehicles, 2,097 individual real estate properties, and
1,387,281 commercial equipment assets. The passenger
vehicles comprised 20 different types of automobile (including
pickup trucks, sedans, SUVs, and sports cars) and approxi-
mately 50 different vehicle models. The commercial real
(209)     R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                      229


estate comprised 15 different types of properties (including
retail stores, warehouses, industrial buildings, office
buildings, and motels) in seven different geographic regions.
And the commercial equipment comprised 30 different types
of equipment, including aircraft, rail cars, construction equip-
ment, and shipping containers.
   Petitioner’s insured assets were also distributed across
lease terms. The policies in effect during 2006 covered assets
with lease terms ranging from 1 to 28 years. Even within the
same business segment, an event (like a real estate crash)
could cause losses for some insureds yet have no adverse
impact on RVIA with respect to leases terminating many
years later. This temporal distribution reduced petitioner’s
risk because it meant that the assets it insured would be
exposed to different loss-causing events occurring at different
times. 13
   Respondent’s expert Mr. Cook acknowledged that peti-
tioner achieved pooling, diversification, and distribution of
risk. His report made a very limited claim, namely, that the
risk-distribution benefits petitioner enjoyed were ‘‘less than
is usual for an insurer.’’ By the end of his testimony, how-
ever, he expressly acknowledged that he was not raising the
absence of risk distribution as a reason why RVIA’s policies
fail to qualify as ‘‘insurance.’’
   Undeterred, respondent contends that the RVI policies do
not sufficiently distribute risk because some systemic risks,
like major recessions, could cause insured assets to decline in
value simultaneously. Like most insurers, RVIA did face cer-
tain systemic risks, but many of the risks against which it
insured were uncorrelated. Examples of risks that affected
different insured assets differently include regional economic
downturns, rising fuel prices, over-supply of particular
assets, technological improvements, vehicle recalls, regional
industrial migration, acts of terrorism, high interest rates,
decreased availability of financing, and regulatory changes
   13 Respondent’s expert Mr. Cook explained: ‘‘[T]he passage of time has a

significant effect on depreciation rates and market effects, and the periods
of time are even longer on commercial equipment and real estate. The time
spread is a valuable part of the diversification. * * * It’s one of the
reason[s] we didn’t find the diversification to be so inferior as to not be in-
surance. * * * [T]he temporal distribution was one of the good things we
saw.’’
230           145 UNITED STATES TAX COURT REPORTS                       (209)


like restrictive building codes. Indeed, even systemic risks
like major recessions were mitigated by the temporal dis-
tribution of RVIA’s risks over lease terms as long as 28
years.
   Many insurers face systemic risks. Mortgage guaranty
insurance, municipal bond insurance, and financial guaranty
insurance all provide coverage against risk of loss attrib-
utable to adverse macro-economic conditions, such as reces-
sions, high unemployment, high interest rates, or seizing up
of credit markets. As Professor Angelina noted, some mort-
gage guaranty insurers during 2008–2009 ‘‘were not able to
recover from their systemic failure,’’ yet respondent concedes
that the product these companies offer is ‘‘insurance.’’ RVIA
adequately distributed systemic risks, as other providers of
catastrophic coverage do, by spreading its risks temporally,
geographically, and across asset classes.
   The legal requirement for ‘‘insurance’’ is that there be
meaningful risk distribution; perfect independence of risks is
not required. See Rent-A-Center, Inc. & Subs. v. Commis-
sioner, 142 T.C. 1, 24 (2014) (‘‘Risk distribution occurs when
an insurer pools a large enough collection of unrelated risks
(i.e., risks that are generally unaffected by the same event or
circumstance’’).); Harper Grp., 96 T.C. at 55, 59–60 (finding
sufficient risk distribution where insurer insured numerous
unrelated insureds even though the risks ‘‘were not statis-
tically independent * * *, but rather were highly cor-
related’’); Gulf Oil Corp., 89 T.C. at 1025 n.9 (stating that
sufficient risk distribution may exist if risks are independent
‘‘to some minimum extent’’). We have no difficulty con-
cluding, as respondent’s expert Mr. Cook ultimately did, that
the RVI policies accomplish sufficient risk distribution to be
classified as ‘‘insurance’’ for Federal tax purposes. 14
   14 Respondent errs in contending that the ‘‘pooling’’ provisions of certain

RVI policies negate risk distribution. These pooling provisions simply ag-
gregate covered exposures; they do not negate risk distribution among the
covered insureds. Equally erroneous is respondent’s contention that RVIA’s
‘‘deferred premium’’ provisions negate risk distribution. The deferred por-
tion of the premium acted like a deductible; RVIA still collected the bal-
ance of the premium, which could be used to pay claims of other insureds.
In any event, as Mr. Cook noted, fewer than 24 of RVIA’s 951 policies in
force during 2006 provided for deferred premiums.
(209)   R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER         231


  C. Commonly Accepted Notions of Insurance
   As the Supreme Court has observed, the absence of a
statutory definition of ‘‘insurance’’ from the Internal Revenue
Code ‘‘strengthens the assumption that Congress used the
word ‘insurance’ in its commonly accepted sense.’’ Le Gierse,
312 U.S. at 540; see AMERCO, 96 T.C. at 38. To determine
whether an arrangement constitutes insurance in its com-
monly accepted sense, we have considered such factors as: (1)
whether the insurer is organized, operated, and regulated as
an insurance company by the States in which it does busi-
ness; (2) whether the insurer is adequately capitalized; (3)
whether the insurance policies are valid and binding; (4)
whether the premiums are reasonable in relation to the risk
of loss; and (5) whether premiums are duly paid and loss
claims are duly satisfied. See Harper Grp., 96 T.C. at 60;
Securitas Holdings, Inc. v. Commissioner, T.C. Memo. 2014–
225, at *27.
   The first factor has particular significance because ‘‘Con-
gress has delegated to the states the exclusive authority
(subject to exception) to regulate the business of insurance.’’
AMERCO, 96 T.C. at 42 (citing the McCarran-Ferguson Act,
59 Stat. 33, as amended, 15 U.S.C. secs. 1011–1015 (1998)).
We have repeatedly emphasized the significance of State
insurance regulation in determining whether an entity
should be recognized as an ‘‘insurance company.’’ See Sears,
Roebuck & Co. v. Commissioner, 96 T.C. 61, 101 (1991), aff ’d
in part, rev’d in part, 972 F.2d 858 (7th Cir. 1992); Harper
Grp., 96 T.C. at 60; AMERCO, 96 T.C. at 42; Securitas
Holdings, T.C. Memo. 2014–225, at *5–*6. It is undisputed
that RVIA was organized, operated, and regulated as an
‘‘insurance company’’ by every State in which it did business,
and that RVIG was organized, operated, and regulated as an
‘‘insurance company’’ by its country of domicile, Bermuda.
   The RVI policies likewise satisfy the other factors we have
deemed relevant. RVIA and RVIG met the minimum capital
requirements of their respective regulators, and both were
adequately capitalized. The RVI policies were valid and
binding: when covered losses occurred, the insureds filed
claims and RVIA paid those claims, amounting to $150 mil-
lion through 2013. The premiums charged were negotiated at
arm’s length between RVIA and its various insureds, none of
232           145 UNITED STATES TAX COURT REPORTS                     (209)


which was related to petitioner by ownership. The RVI poli-
cies took the form of insurance and contained standard provi-
sions typical of insurance policies generally, including the
requirement of an ‘‘insurable interest.’’ See Allied Fid. Corp.
v. Commissioner, 572 F.2d 1190, 1193 (7th Cir. 1978)
(requiring the insured to have an ‘‘insurable interest’’ in the
covered assets), aff ’g 66 T.C. 1068 (1976).
    Respondent does not seriously challenge any of these
points. Rather, he argues that the RVI policies do not qualify
as insurance because they differ in certain respects from
insurance policies with which most people are familiar. First,
he notes that RVI policies do not pay immediately upon the
happening of a ‘‘fortuitous event,’’ like a car crash, but upon
a contract’s reaching its termination date. But the fact that
a loss must persist to the end of a lease term does not make
the events that cause the loss—recessions, interest rate
spikes, or bank failures—any less random or fortuitous. The
payment terms of the RVI policies are dictated by the under-
lying business transaction: RVIA is insuring against loss
under a lease, and whether a loss has occurred cannot be
known until the lease ends. This feature of the RVI policies,
while perhaps atypical, does not impugn their status as
‘‘insurance.’’ See Commissioner v. Treganowan, 183 F.2d 288,
291 (2d Cir. 1950) (contract may qualify as ‘‘life insurance’’
even though it lacks standard features of many life insurance
policies), rev’g 13 T.C. 159 (1949); G.C.M. 39,154 (September
20, 1983) (‘‘[D]espite the fact that the surety bonds written
by the taxpayer possess certain unique characteristics not
shared by many other types of insurance contracts, they
nevertheless, constitute ‘insurance contracts’ for purposes of
subchapter L[.]’’).
    Respondent’s insistence that ‘‘[f]ortuity is essential for
* * * risk pooling and the law of large numbers’’ 15 betrays
the narrow and esoteric sense in which he employs the term
‘‘fortuity.’’ As we have explained previously, losses under RVI
policies are caused by fortuitous events outside of its control.
  15 Respondent appears to base this argument, not on the testimony of his

expert witnesses, but on a passage in a scholarly article published in 2003.
See Edward D. Kleinbard, ‘‘Competitive Convergence in the Financial
Services Markets,’’ 81 Taxes 225, 238 (2003). We do not read Professor
Kleinbard as using the term ‘‘fortuity’’ in the narrow sense urged by re-
spondent.
(209)   R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER         233


And its policies clearly do pool risks to take advantage of the
law of large numbers. Indeed, as Professor Angelina
explained, the fact that losses under RVI policies occur only
upon lease termination actually enhances risk pooling by
‘‘enabl[ing] RVI to avoid a ‘run on the bank’ scenario in
extreme economic downturns.’’ Reduced to its essentials,
respondent’s argument is that a loss is ‘‘fortuitous’’ only if
payment occurs immediately or shortly after the loss-causing
event occurs. Respondent cites no authority for the propo-
sition that this feature is an essential ingredient of ‘‘insur-
ance’’ for State regulatory purposes or for Federal income tax
purposes.
   Respondent next argues that RVI policies fail to satisfy
what he calls ‘‘the timing risk requirement.’’ Under typical
casualty policies, respondent notes, ‘‘claims are triggered by
an insurable event that is uncertain as to if and when it may
occur.’’ By contrast, a loss under an RVI policy will occur (if
at all) at lease termination, a date that both parties know in
advance.
   This argument is really a different way of phrasing
respondent’s previous argument, and it is unpersuasive for
the same reasons. RVIA is in fact subject to an array of
timing risks—e.g., whether a recession, oil price rise, or other
loss-causing event will occur before or after a particular lease
expires. It is uncertain under RVI’s policies, as under insur-
ance policies generally, whether or when these fortuitous
events will occur. The only uncertainty absent from RVI’s
policies is the date on which it will be determined whether
a loss has occurred. But as noted previously, this is simply
a function of the underlying business transaction.
   Until lease termination, the lessee possesses the covered
asset and makes lease payments. It is not until the property
is returned to the lessor, with a value below the expected
residual value, that the lessor realizes a concrete economic
loss. As Mr. Miccolis explained at trial: ‘‘[T]he lessor doesn’t
have a loss, doesn’t have a financial impact until the prop-
erty is turned in at the end of the lease.’’ Because the eco-
nomic loss does not materialize until lease termination, it is
neither noteworthy nor odd that RVI defers payment of
claims until that time.
   Municipal bond insurance operates similarly. The bond
issuer may seek bankruptcy protection long before the matu-
234          145 UNITED STATES TAX COURT REPORTS                    (209)


rity date of the covered bond, but the bond insurer does not
pay immediately upon the happening of that ‘‘fortuitous
event.’’ Rather, the insurer pays for loss of interest on the
covered bond only at the interest due date, and it pays for
loss of principal only at the bond’s scheduled maturity date.
See, e.g., Oppenheimer AMT-Free Muns. v. ACA Fin. Guar.
Corp., 971 N.Y.S.2d 95, 97–99 (App. Div. 2013). As under
RVI policies, therefore, a loss-causing event may occur at any
time during the policy term, yet the insurer is obligated to
pay loss claims only at specified dates that are known both
to insurer and insured in advance. Despite the absence of
what respondent would call ‘‘timing risk,’’ the Internal Rev-
enue Code provides that municipal bond insurance policies
can qualify as ‘‘insurance’’ for Federal income tax purposes.
See sec. 832(e)(6). We see no reason why residual value
insurance should be treated differently.
   Finally, respondent notes that some RVI policies call for
nonrefundable premiums, a feature respondent regards as
atypical of insurance policies generally. But this feature, like
the payment terms discussed previously, is an outgrowth of
the underlying business transaction. An RVI policy will pay
out, if at all, only upon lease termination. In certain cir-
cumstances—for example, if inflation develops during a long-
term lease—the lessor may become confident that the
residual value of his leased asset will exceed its insured
value at lease termination. To prevent the insured from
taking a self-serving ‘‘wait and see’’ attitude in this setting,
RVIA may rationally choose to disallow premium refunds
upon mid-stream policy cancellations. This type of pricing
decision does not preclude the RVI policies from constituting
‘‘insurance’’ for Federal income tax purposes. 16
   In sum, we find that the RVI policies give rise to insurance
‘‘in its commonly accepted sense.’’ Le Gierse, 312 U.S. at 540.
We agree with respondent that these policies have unique
features, but these features correspond to, and are driven by,
the characteristics and business needs of the underlying
leasing transactions. We do not see why an insurer’s tai-
loring its policy terms to the risks it undertakes to insure
  16 The IRS has recognized that there are other types of insurance, such

as surety insurance, for which the policy may be made noncancellable and
for which the premium therefore is nonrefundable. See G.C.M. 39,154.
(209)    R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER          235


should prevent its policies from qualifying as ‘‘insurance.’’
The arrangements between RVIA and its insureds ‘‘are
characterized as insurance for essentially all nontax purposes
* * * [and a] special rule for tax purposes is not justified by
either statute or case law.’’ Sears, Roebuck, 96 T.C. at 101.
  D. Insurance Risk
    Though we have often noted that insurance presupposes
‘‘insurance risk,’’ our precedents shed little light on the con-
tours of the latter term. We have said that ‘‘[i]nsurance risk
is involved when an insured faces some loss-producing
hazard (not an investment risk), and an insurer accepts a
payment, called a premium, as consideration for agreeing to
perform some act if and when that hazard occurs.’’ Black
Hills Corp., 101 T.C. at 182. Many of our prior cases involved
captive insurance arrangements in which the casualty risks
involved were indisputably ‘‘insurance risks.’’ Thus, while
reciting that ‘‘ ‘[i]nsurance risk’ is required’’ and ‘‘investment
risk is insufficient,’’ AMERCO, 96 T.C. at 39, our precedents
do not comprehensively explain how to distinguish the one
from the other.
    In ascertaining whether the risk covered by the RVI poli-
cies is an ‘‘insurance risk,’’ we will examine the arrangement
‘‘from the perspective of both the insured and the insurer.’’
Harper Grp., 96 T.C. at 57. The Supreme Court undertook
the former inquiry in Le Gierse, where an 80-year-old woman
purchased an annuity contract bundled with a single pre-
mium life insurance policy. The insured died one month later
and her estate claimed that the life insurance proceeds were
exempt from estate tax under section 302 of the Revenue Act
of 1926, 44 Stat. at 70. The Court sustained the IRS’ chal-
lenge to that claim.
    Noting that the term ‘‘insurance’’ was defined neither by
statute nor by regulation, the Court reasoned that ‘‘the
amounts must be received as the result of a transaction
which involved an actual ‘insurance risk’ at the time the
transaction was executed.’’ Le Gierse, 312 U.S. at 538–539.
Considering the annuity and life insurance contracts
together, the Court found that they ‘‘wholly fail to spell out
any element of insurance risk’’ because ‘‘annuity and insur-
ance are opposites; in this combination the one neutralizes
the risk customarily inherent in the other.’’ Id. at 541.
236          145 UNITED STATES TAX COURT REPORTS                      (209)


Because ‘‘the total consideration was prepaid and exceeded
the face value of the ‘insurance’ policy,’’ the only risk effec-
tively present from the company’s viewpoint ‘‘was an invest-
ment risk similar to the risk assumed by a bank.’’ Id. at
542. 17
   In the instant case, the RVI policies clearly involved, from
the insurer’s perspective, an ‘‘insurance risk’’ rather than a
financial risk of the sort assumed by a bank. As Professor
Angelina explained, RVIA was at risk for ‘‘significant under-
writing losses that were not related to [its] investment
returns.’’ Depending upon the occurrence of fortuitous events,
RVIA’s loss under a contract could vary from zero to the full
insured value. Because the premium it charged was rarely
more than 4% of the insured value, it was clearly exposed to
underwriting risk, namely, the risk that the premiums
charged would not be enough to cover claims paid. In con-
trast to Le Gierse, petitioner’s business model depended not
simply on its investment returns, but on the ability of its
underwriters to price adequately the residual value risks
borne by its insureds in order to derive a sufficient pool of
premiums to cover the aggregate insured losses. This is the
same pricing risk assumed by insurance companies gen-
erally.
   Respondent nevertheless contends that the RVI policies do
not involve ‘‘insurance risk’’ from the perspective of the
insured party. In respondent’s view, the lessors and finance
companies purchased the RVI policies to protect themselves
against investment losses, namely, greater-than-expected
decline in the market value of the assets they owned and
leased. Respondent analogizes this behavior to a stock inves-
tor’s purchase of a put option, which enables him to ‘‘put’’ the
stock to another investor if the stock falls below a specified
price before a specified date. From the insured’s standpoint,
therefore, respondent asserts that the RVI policies involve no
‘‘insurance risk,’’ but simply an ‘‘investment risk.’’ See Black
Hills Corp., 101 T.C. at 182.
  17 In the companion case of Keller v. Commissioner, 312 U.S. 543, 545
(1941), the Court likewise found no ‘‘insurance risk’’ where the only risk
borne by the insurer was the risk of computational error or the ‘‘risk that
the funds might not earn enough to cover profitably the annuity payable
to the decedent.’’
(209)   R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER         237


   We find this argument unpersuasive for several reasons.
For more than 80 years, the States have regulated as ‘‘insur-
ance’’ contracts that provide coverage against decline in the
market values of particular assets. In 1933 the Pennsylvania
Supreme Court held that an insurer’s indemnification
against loss from a decline in value of real estate involved an
insurance risk. See Commonwealth ex rel. Schnader v. Fid.
Land Value Assur. Co., 167 A. 300, 301 (Pa. 1933). The
insurance company there ‘‘insure[d] against a well-known
risk, to which all landowners are subject, depreciation from
the price paid.’’ Ibid. The company argued that it ‘‘makes
contracts merely to buy real estate, and that such contracts
are not insurance.’’ Id. at 302. The court rejected this argu-
ment, holding that the company ‘‘was clearly engaged in the
business of insurance’’ in providing its guaranty against
decline in the value of property. See id. at 303. ‘‘An insurer
guarantees against loss by an event that may or may not
happen. The event specifically contemplated here * * * is
depreciation in value of certain land below the price paid; the
loss to be indemnified is the amount of that depreciation.’’ Id.
at 302.
   New York and Connecticut have by statute defined
residual value policies as a form of ‘‘insurance’’ since 1989.
See N.Y. Ins. Law secs. 1102, 1113(a)(22) (McKinney 2015);
Conn. Gen. Stat. Ann. sec. 38a–92a (West 2012). In 1991 the
Washington Supreme Court reached the same conclusion. See
Seattle-First Nat’l Bank v. Washington Ins. Guar. Ass’n, 804
P.2d 1263 (Wash. 1991). The State of Washington had estab-
lished an insurance guaranty fund to compensate policy-
holders in the event of insolvency of an insurance company
providing insurance coverage. The question was whether con-
tracts that ‘‘compensate[d] a lessor for a drop in the market
value of its leased vehicles’’ constituted ‘‘insurance,’’ thus
enabling policyholders to recover from this fund losses caused
by the insurer’s insolvency. Id. at 1269.
   The court held that the residual value policies constituted
‘‘casualty insurance,’’ which the Washington statute defined
to include insurance ‘‘[a]gainst any other kind of loss * * *
properly the subject of insurance.’’ Id. at 1267–1269 (citing
Washington Revenue Code Annotated section 48.11.070). By
concluding that residual value policies cover a risk of loss
that is ‘‘properly the subject of insurance,’’ the Washington
238         145 UNITED STATES TAX COURT REPORTS             (209)


Supreme Court necessarily determined that such policies
involve ‘‘insurance risk.’’ Accord Wells Fargo Credit Corp. v.
Arizona Prop. & Cas. Ins. Guar. Fund, 799 P.2d 908, 910
(Ariz. Ct. App. 1990) (concluding that policies ‘‘guarantee[ing]
that Wells Fargo would receive a fixed value for its leased
autos at the termination of the lease’’ constituted ‘‘casualty
insurance’’ under Arizona law).
   Consistently with this State law precedent, petitioner’s
regulators and external auditors have uniformly concluded
that its policies involve ‘‘insurance risk.’’ RVIA was incor-
porated as an insurance company in Connecticut in 1994 and
has been continuously licensed to conduct the business of
insurance by its domicile and by all other States in which it
transacts business. Because RVIA sells ‘‘insurance,’’ it is
required to pay to these States insurance premium taxes
(which it has paid) and to meet minimum solvency require-
ments (which it has met).
   During 2006 RVIA was required to file statutory financial
statements prepared in accordance with SAP. These rules
forbid an insurer in its statutory financial statements to
treat a contract as ‘‘insurance’’ unless the insurer assumes a
significant risk under the contract and faces a reasonable
possibility of incurring a significant loss. See SSAP 62R. By
issuing an unqualified opinion that RVIA’s statutory finan-
cial statements were fairly stated under SAP, its external
auditor agreed that it bore a significant ‘‘insurance risk.’’ The
Connecticut Insurance Department examined RVIA’s 2006
statutory financial statements for compliance with SAP and
agreed with this assessment. As Professor Angelina noted, if
there had been no underwriting or insurance risk, ‘‘I would
expect the various reports to have highlighted this issue.
This has been my past experience with the large accounting
firms and regulatory agencies.’’
   As noted earlier, Congress generally has delegated to the
individual States the authority to regulate the business of
insurance. See McCarran-Ferguson Act, Pub. L. No. 79–15,
59 Stat. 33 (1945) (codified as amended at 15 U.S.C. secs.
1011–1015 (2006)); Barnett Bank of Marion Cty., N.A. v. Nel-
son, 517 U.S. 25, 40 (1996) (‘‘Congress ‘moved quickly,’
enacting the McCarran-Ferguson Act ‘to restore the
supremacy of the States in the realm of insurance regula-
tion.’ ’’ (quoting Dep’t of Treasury v. Fabe, 508 U.S. 491, 500
(209)     R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                    239


(1993))). State courts and State regulators have consistently
recognized as ‘‘insurance’’ residual value policies issued, not
only by RVIA, but also by AIG, Chubb Group, ACE Group,
Royal Insurance Company of America, and other well-estab-
lished insurance companies. The uniform conclusion of State
insurance regulators that the RVI policies involve ‘‘insurance
risk,’’ while ‘‘not dispositive of the issue before us, * * *
[does] inform our decision.’’ AMERCO, 96 T.C. at 42.
   Against this consensus of insurance regulators, insurance
auditors, and the insurance marketplace, respondent offers
Dr. Baranoff’s opinion that the RVI policies are not ‘‘insur-
ance’’ because they do not cover a ‘‘pure risk.’’ According to
Dr. Baranoff, ‘‘pure risk’’ exists only in a binary situation
where the only possible outcomes are ‘‘loss’’ or ‘‘no loss.’’ A
lessor who buys an RVI policy, she notes, has the potential
to enjoy a gain on the underlying leasing transaction, e.g., if
the leased assets appreciate rather than depreciate in
value. 18 In her view, the RVI policies thus protect the
insured, not from an ‘‘insurance risk,’’ but from a ‘‘specula-
tive’’ or market risk. Respondent invites us to adopt this
‘‘pure risk’’ test as a bright-line rule to demarcate ‘‘insurance
risk’’ from ‘‘investment risk.’’
   We decline this invitation. In support of her theory that
‘‘pure risk’’ is the only possible subject of ‘‘insurance,’’ Dr.
Baranoff relies, not on actual experience with the insurance
market, but on citations from textbooks designed for college
business students. While these authors note the distinction
between ‘‘pure risk’’ and other types of risk, they do not sup-
port her contention that ‘‘pure risk’’ is the only possible sub-
ject of ‘‘insurance.’’ Rather, they state (correctly) that insur-
ance is ‘‘generally’’ or ‘‘normally’’ targeted to pure risks. 19 In
  18 While the covered assets could conceivably appreciate in value from

lease inception, RVIA would never pay a claim in that event. The RVI poli-
cies indemnified the insured against economic loss if the actual residual
value of the asset at lease expiration was less than its insured value. RVIA
did not insure against reduction in value attributable to normal wear and
tear and did not cover the initial layer of an insured’s loss. In short, RVIA
would pay a claim, as a fire insurance company would pay a claim, only
where the insured had suffered a sizable economic loss. This is important
because insurance generally acts only to indemnify the insured. See
Epmeier v. United States, 199 F.2d 508 (7th Cir. 1952).
  19 See Mark S. Dorfman, Introduction to Risk Management and Insur-
                                                Continued
240          145 UNITED STATES TAX COURT REPORTS                      (209)


a later edition of his text, which Dr. Baranoff does not cite,
Professor Rejda notes that while insurers ‘‘generally con-
centrate’’ on insuring pure risk, there are ‘‘certain excep-
tions.’’ ‘‘Some insurers,’’ he explains, ‘‘will insure institutional
portfolio investments and municipal bonds against loss.’’
Rejda & McNamara, supra, at 5. Other scholars describe the
difference between ‘‘pure risks’’ and ‘‘speculative risks’’ as
‘‘[t]o a large extent * * * semantic,’’ concluding that
‘‘[n]othing in the nature of speculative risk unequivocally
precludes the writing of insurance.’’ C. Arthur Williams, Jr.,
Michael L. Smith, & Peter C. Young, Risk Management and
Insurance 8, 384 (8th ed. 1998).
    Confronted on cross-examination with the statements of
insurance scholars that insurance can cover speculative
risks, Dr. Baranoff insisted that those statements are actu-
ally consistent with her view that insurance covers ‘‘pure
risk’’ only. She dismissed Professor Rejda’s most recent state-
ment to the contrary as ‘‘an uncarefully written sentence.’’ In
the end, Dr. Baranoff was unable to explain how her view
lined up with those of the authors she cited, and we found
her testimony unpersuasive.
    During trial and in post-trial briefs, the parties and their
experts extensively cited two standard treatises on insurance
law, 1 Couch on Insurance 3d (2015) and The New Appleman
on Insurance Law (2015). Neither of these treatises uses the
term ‘‘pure risk’’ when defining the meaning of ‘‘insurance’’
at common law. Judicial precedent likewise suggests no
limitation that would restrict ‘‘insurance’’ to the binary situa-
tion of ‘‘loss or no loss.’’ Most cases require only that the
insured shift to the insurer the risk from a ‘‘hazard,’’ a ‘‘spe-

ance 8 (8th ed. 2005) (‘‘Most speculative loss exposures are not subject to
insurance.’’ (Emphasis added.)); Scott E. Harrington & Gregory R.
Niehaus, Risk Management and Insurance 6–7 (1999) (‘‘Insurance con-
tracts generally are not used to * * * finance losses associated with price
risks.’’ (Emphasis added.)); George E. Rejda, Principles of Risk Manage-
ment and Insurance 6 (8th ed. 2003) (‘‘[P]rivate insurers generally insure
only pure risks * * * [and] speculative risks generally are not considered
insurable.’’ (Emphasis added.)); Emmett Vaughan & Therese Vaughan,
Fundamentals of Risk and Insurance 6–7 (11th ed. 2014) (‘‘The distinction
between pure risk and speculative risks is an important one because nor-
mally only pure risks are insurable.’’ (Emphasis added.)).
(209)       R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                    241


cific contingency,’’ or some ‘‘direct or indirect economic
loss.’’ 20
   Respondent’s ‘‘pure risk’’ position lacks practical as well as
theoretical support, for if we accepted his submission several
familiar types of insurance would seem to be disqualified as
such. As early as 1932, the Supreme Court held that mort-
gage guaranty insurance constitutes ‘‘insurance’’ for Federal
income tax purposes. See United States v. Home Title. Ins.
Co., 285 U.S. 191, 195 (1932) (‘‘The guaranty of payment of
the principal and interest of mortgage loans constitutes
insurance.’’); Bowers v. Lawyers’ Mortg. Co., 285 U.S. 182,
189 (1932) (‘‘Undoubtedly the guaranties contained in the
policies and participation certificates were in legal effect con-
tracts of insurance.’’). The Internal Revenue Code explicitly
recognizes both ‘‘mortgage guaranty insurance’’ and ‘‘lease
guaranty insurance’’ as ‘‘insurance’’ for Federal income tax
purposes. See sec. 832(b)(1)(E), (c)(13), (e)(3) (specifying rules
for computation of ‘‘insurance company taxable income’’ by ‘‘a
company which writes mortgage guaranty insurance’’); sec.
  20 See, e.g., Epmeier, 199 F.2d at 510 (noting that insurer indemnifies in-
sured ‘‘against loss arising from certain specified contingencies or perils’’);
Black Hills Corp., 101 T.C. at 182 (noting that insurer agrees ‘‘to perform
some act if and when * * * [a specified] hazard occurs’’); AMERCO, 96
T.C. at 38 (noting that insured ‘‘faces some hazard’’ and insurer agrees ‘‘to
perform some act if or when the loss event occurs’’); Allied Fidelity Corp.,
66 T.C. at 1074 (defining insurance as an agreement to protect insured
‘‘against a direct or indirect economic loss arising from a defined contin-
gency’’). A few of our cases have found as a fact that ‘‘pure risk’’ existed
in a particular case, or have summarized expert testimony noting that in-
surance typically covers ‘‘pure risk.’’ See Sears, Roebuck, 96 T.C. at 65, 92–
93; AMERCO, 96 T.C. at 33–34; Humana Inc. v. Commissioner, 88 T.C.
197, 209 (1987), aff ’d in part, rev’d in part, 881 F.2d 247 (6th Cir. 1989).
In none of these cases were we asked to decide whether ‘‘pure risk’’ is the
only possible subject of ‘‘insurance’’ for Federal income tax purposes or to
determine whether a particular contract failed to qualify as ‘‘insurance’’ be-
cause it provided coverage for something other than a ‘‘pure risk.’’ In
AMERCO, 979 F.2d at 167, the Court of Appeals for the Ninth Circuit re-
butted one of the IRS’ arguments by stating that insurance risk exists
where ‘‘[t]he only possible outcomes are loss or no loss.’’ That statement
was dictum because the existence of ‘‘insurance risk’’ was not at issue in
AMERCO. The Ninth Circuit affirmed our Court’s finding of fact that
‘‘there was an insurance risk involved’’ because ‘‘the AMERCO Group un-
doubtedly faced potential hazards from its operations which constituted in-
surable risks.’’ Id. at 165.
242         145 UNITED STATES TAX COURT REPORTS              (209)


832(e)(6) (same, for ‘‘a company which writes lease guaranty
insurance’’).
   Mortgage guaranty insurance protects a mortgage lender
from the risk that his collateral may decline in value and be
insufficient to cover the remaining loan balance in the event
of foreclosure. Residual value and mortgage guaranty insur-
ance thus cover substantially the same risk: unexpected
decline in the market value of the insured’s interest in prop-
erty. As Mr. Miccolis explained, both forms of insurance ‘‘pro-
vide protection against a contingent financial loss arising out
of a financial transaction which is caused by an unexpected
decline in the value of property after coverage begins.’’ The
two types of insurance, he noted, involve risks and risk
characteristics that ‘‘are comparable with respect to sub-
stance, causation, events, conditions, and financial impact.’’
In both cases, the value of the covered assets may be
adversely affected by fortuitous events specific to the par-
ticular property as well as by macro-economic conditions
such as interest rates, unemployment, inflation, deflation,
and unstable credit markets. These are the same risk expo-
sures that Dr. Baranoff cites in support of her position that
the RVI policies cover an uninsurable ‘‘speculative risk.’’
   Municipal bond insurance, which gained prominence in the
United States during the 1970s, likewise provides coverage
against speculative risk. See generally 120 Cong. Rec. 28114,
28115 (1974). The Internal Revenue Code explicitly recog-
nizes municipal bond insurance as ‘‘insurance’’ for Federal
income tax purposes. See sec. 832(e)(6) (specifying rules for
computation of ‘‘insurance company taxable income’’ by ‘‘a
company which writes * * * insurance on obligations the
interest on which is excludable from gross income under sec-
tion 103’’). This form of insurance protects the bondholder
against loss of profit on his investment by guaranteeing that
he will receive payment of interest and repayment of prin-
cipal if the issuer fails to pay. As in the case of residual
value insurance, the insured does not face a binary situation
of ‘‘loss or no loss,’’ but has the possibility of gain or loss on
his bond investment. And losses under municipal bond poli-
cies, as under mortgage guaranty and residual value policies,
may be linked to macro-economic factors as well as factors
specific to the particular insured asset.
(209)      R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                243


   Respondent insists that these two types of coverage differ
from residual value coverage in terms of the ‘‘triggering
event.’’ Under a mortgage guaranty policy, for example, the
insurer’s payment obligation is triggered by the homeowner’s
default, which respondent views as a random and ‘‘fortu-
itous’’ event. Because default is ‘‘an occurrence from which
the insured cannot profit,’’ respondent views mortgage guar-
anty coverage as involving ‘‘pure risk’’ even though the collat-
eral securing the loan (a home) represents an investment
that can rise or fall in value. Under a residual value policy,
by contrast, the event that triggers the insurer’s payment
obligation is simply a decline in the value of the insured
property as of a certain date, namely, lease expiration.
   We think respondent is confusing the events that may
trigger a payment obligation with the events that actually
cause the loss. The homeowner’s default does not necessarily
cause a loss; if the homeowner defaults because he has
become unemployed, but the home is worth substantially
more than the outstanding mortgage balance, the mortgagee
upon foreclosure will experience no loss and will make no
claim on the insurer. Under mortgage guaranty insurance,
what actually causes the loss are the events responsible for
the decline in the value of the house that serves as collateral
for the loan. The same is true for residual value insurance.
   In any event, we find respondent’s attempt to distinguish
between a ‘‘pure risk’’ and a ‘‘speculative risk’’ in this setting
essentially metaphysical in nature. The textbooks that Dr.
Baranoff cites describe municipal bond and mortgage guar-
anty insurance as covering ‘‘speculative risks,’’ even though
respondent insists that the triggering event is a ‘‘pure risk.’’
See, e.g., Rejda & McNamara, supra, at 5; S.S. Huebner, et
al., Property and Liability Insurance 366–367 (4th ed. 1996)
(describing municipal bond insurance as providing coverage
against speculative risk). Aristotle noted that there are at
least four distinct senses in which one thing may be said to
‘‘cause’’ another. Physics, bk. II, ch. 3. Respondent’s efforts to
split hairs by disentangling the causes of ‘‘loss’’ are philo-
sophically interesting. 21 But we do not think they carry
  21 Onemight describe the homeowner’s default as the ‘‘but for’’ cause of
the mortgage guarantor’s loss, whereas the bursting of a national real es-
                                              Continued
244           145 UNITED STATES TAX COURT REPORTS          (209)


much weight in determining whether the RVI policies con-
stitute ‘‘insurance’’ for Federal income tax purposes.
   Finally, respondent urges that we find the RVI policies to
entail mere ‘‘investment risk’’ by analogizing its policyholders
to investors who have purchased put options to protect their
stock. The problem with this argument is that the insureds
are not investors and the policies are not derivative products.
Investors invariably purchase stock in the hope that it will
appreciate in value, enabling them to sell the shares for a
capital gain. The assets petitioner insured are not invest-
ment assets; in the hands of the lessors or finance compa-
nies, they are ordinary business assets in the nature of
inventory or equipment. The insureds do not acquire these
assets expecting them to appreciate in value and be sold to
generate gain. To the contrary, the insureds typically expect
these assets to decline in value, but believe that they can
nevertheless be leased profitably if the lessor’s lease-pricing
formula works as expected.
   The insureds purchase insurance from RVIA to protect
against the risk that unexpected events will wreak havoc
with these lease-pricing formulas and generate an ordinary
business loss instead of a profit. This is not an investment
risk; it is a risk at the very heart of the lessor’s business
model. In comparison with typical stock investors, therefore,
the insureds under the RVI policies are at the opposite end
of the bell curve.
   Analogizing the RVI policies to put options, moreover, is
little more than a simile. In the real world, put options are
typically settled for cash rather than by actual transfer of the
underlying shares. At a conceptual level, many insurance
products could be likened to put options. A mortgage guar-
anty policy, for example, could be said to give the policy-
holder the right to put the mortgage loan to the insurer
unless the insurer pays the insured the difference between
the remaining balance of the loan (the strike price) and its
value on the exercise date. Even a fire insurance policy could
be likened to a put on the fire-damaged house that is settled
by the insurer’s payment of the damage claim.
   The parties agree that the RVI policies are not and cannot
be taxable for Federal income tax purposes as derivative
tate bubble might be the ‘‘efficient’’ cause.
(209)     R.V.I. GUARANTY CO. & SUBS. v. COMMISSIONER                     245


products. These policies were priced, sold, and regulated as
insurance products. For financial and securities regulatory
purposes, the policies cannot be treated as put options
because (among other reasons) they are regulated by the
States as ‘‘insurance.’’ See 17 C.F.R. sec. 1.3(xxx)(4)(i)(A)
(2014); id. sec. 240.3a69–1(a)(1).
   The courts have long held that a product can be ‘‘insur-
ance’’ even though competing products exist in the financial
marketplace. In 1931 the Court of Appeals for the Second
Circuit rejected the argument that a mortgage guaranty con-
tract was not ‘‘insurance’’ because ‘‘banking corporations may
also sell mortgages with their guaranty.’’ Home Title Ins. Co.
v. United States, 50 F.2d 107, 111 (2d Cir. 1931) (concluding
that the State’s recognition and regulation of the issuer as an
insurance company ‘‘should turn the scales, if the question
hangs in doubt’’), aff ’d, 285 U.S. 191 (1932). And in 1933 the
Pennsylvania Supreme Court rejected the argument that a
contract guaranteeing the value of land could not be ‘‘insur-
ance’’ because it resembled ‘‘a real estate option.’’ See Fid.
Land Value Assur. Co., 167 A. at 302. When it comes to miti-
gating risk, there may be more than one way to skin the cat.
The existence of other strategies does not mean that the
strategy chosen is not ‘‘insurance’’ or that product purchased
involves no ‘‘insurance risk.’’ 22
   For all these reasons, we reject respondent’s contention
that the RVI policies involve an uninsurable ‘‘investment
risk.’’ These policies were designed and marketed as insur-
ance products. Similar products were sold in the insurance
market by other major insurance companies. These policies
were undergirded by insurance strength ratings from the
major insurance rating agencies. For more than 80 years the
  22 In Chief Counsel Advisory 201511021, 2015 WL 1094778 (Mar. 13,

2015), the IRS concluded that contracts under which a captive insurer in-
demnified its manufacturing affiliates against ‘‘loss of earnings’’ attrib-
utable to foreign currency swings did not constitute ‘‘insurance’’ for Federal
income tax purposes. The IRS noted, among other things, that the con-
tracts ‘‘provide[d] a reasonable approximation’’ of the loss suffered by the
affiliates, rather than ‘‘measur[ing] the actual loss suffered by the change
in exchange rate.’’ Cf. sec. 998 (providing for the tax treatment of certain
foreign currency transactions). We express no view on whether these con-
tracts would constitute ‘‘insurance’’ under the analysis set forth in this
Opinion.
246        145 UNITED STATES TAX COURT REPORTS             (209)


courts have recognized that contracts insuring against the
risk that property will decline in value can involve ‘‘insur-
ance risk.’’ The types of events that cause losses under these
policies closely resemble the events that cause losses under
policies of mortgage guaranty and municipal bond insurance.
Most importantly, every State in which petitioner does busi-
ness recognizes these policies as involving insurance risk and
regulates them as ‘‘insurance.’’ Respondent is correct that
these policies have some features that are atypical of what
might be called ‘‘standard’’ insurance policies. But these dif-
ferences are driven by the economics of the underlying busi-
ness transaction and do not nullify the existence of ‘‘insur-
ance risk.’’
  E. Conclusion
   Our analysis of insurance risk, risk transfer, risk distribu-
tion, and the commonly accepted notions of insurance con-
vinces us that the RVI policies are ‘‘insurance contracts’’ for
Federal income tax purposes. Because more than half of peti-
tioner’s business during 2006 consisted of issuing ‘‘insurance
contracts,’’ petitioner was for that year an ‘‘insurance com-
pany’’ within the meaning of section 831(c) and was required
to compute its ‘‘insurance company taxable income’’ under
section 832.
   To reflect the foregoing and the parties’ concessions,
                      Decision will be entered under Rule 155.

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