Case Law: Hospital Corporation of America v. Commissioner

Hospital Corporation of America v. Commissioner was ruled on subsequent to Humana and involved similar facts and analysis.  The Tax Court of the United States held that payments made by a subsidiary corporation to a captive insurance company, which was also a subsidiary of the parent, were deductible as insurance.  Hospital Corporation of America ("HCA") owned and operated hospitals commonly held in separate corporate subsidiaries.  HCA formed a Colorado captive insurance company, alter reincorporated in Tennessee.  The subsidiaries of HCA entered into an insurance arrangement with the captive for general and professional liability as well as workers' compensation liabilities.  The court first addressed whether a bona fide insurance transaction existed, and found that based upon the Humana case, the captive insurance company was fully capitalized, provided insurance to the operating subsidiaries, and was formed for a legitimate business purpose.  It seemed notable to the court that the captive was formed in a domestic jurisdiction, as it used this fact to establish that the transaction was a valid insurance contract.

Risk distribution was not disputed by the IRS because of the numerous (over 100) subsidiaries that were insured by the captive.  The court then addressed whether there was risk shiftng and found that "under the balance sheet and net worth analysis adopted by the Court of Appeals for the Sixth Circuit in Humana Inc. v. Commissioner, the sister subsidiaries shifted insurance risks to Parthenon [the captive], except workers' compensation liability covered by the indemnification agreement between HCA and Ideal Mutual..." [Humana, Inc. v. Commissioner, supra. T.C.M. 1997-482 at 30]