Background
Whether
a contract issued by an insurance company qualifies as insurance
fundamentally influences the tax treatment of the insurer,
policyholders, and beneficiaries. The definition of insurance company,
for example, depends directly on the status of the contracts that a
company issues because an insurance company is a “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.”
A
trade or business cannot deduct a payment for coverage as an insurance
premium under section 162(a) unless the payment relates to an insurance
transaction. A beneficiary of a life insurance policy can exclude
proceeds of the policy if the contract qualifies as life insurance and
the payments are made by reason of the death of the insured. Although it
generally is clear whether a given transaction qualifies as insurance,
the status of a transaction is unclear or subject to dispute between
taxpayers and the government in certain contexts.
(b) Helvering v. Le Gierse
The Internal Revenue Code does not define “insurance.” The Tax Court stated that “insurance 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.” The Supreme Court stated in Helvering v. Le Gierse, the landmark case involving the definition of insurance, that “historically and commonly insurance involves risk-shifting and risk-distributing.”
Le Gierse, the beneficiary of her mother’s insurance policy, was an executor of her mother’s estate and attempted to exclude the proceeds of the insurance policy from Federal estate tax. Le Gierse’s mother acquired a single premium life insurance policy with a death benefit of $25,000, for $22,946, at age 80. Her mother did not have to take a physical examination or answer questions that a woman applicant for life insurance generally had to answer.
