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Indemnity. As a valid insurance company under Colorado law,
Health Care Indemnity's assets cannot be reached by its
shareholders except in conformity with the statute.
Health Care Indemnity was fully capitalized and no
agreement ever existed under which the subsidiaries or
Humana Inc. would contribute additional capital to Health
Care Indemnity. The hospital subsidiaries and Humana Inc.
never contributed additional amounts to Health Care
Indemnity nor took any steps to insure Health Care
Indemnity's performance. It is also undisputed that the
policies purchased by the hospital subsidiaries and Humana
Inc. were insurance policies as commonly understood in the
industry. The hospital subsidiaries and Humana Inc. entered
into bona fide arms length contracts with Health Care
Indemnity. Health Care Indemnity was formed for legitimate
business purposes. Health Care Indemnity and the hospital
subsidiaries conduct legitimate businesses and are devoid of
sham. No suggestion has been made that the premiums were
overstated or understated. Health Care Indemnity did not
file its income tax returns on a consolidated basis with
Humana Inc. and its subsidiaries. Humana Inc.'s insured
subsidiaries own no stock in Health Care Indemnity, nor vice
versa. [Humana, Inc. v. Commissioner, 881 F.2d at 253;
citation omitted.]
The Court of Appeals specifically adopted the balance sheet
and net worth analysis described in Clougherty Packing Co. v.
Commissioner, 811 F.2d at 1305,11 to analyze whether risks had
11 In Clougherty Packing Co. v. Commissioner, 811 F.2d 1297
(9th Cir. 1987), affg. 84 T.C. 948 (1985), the taxpayer parent
incorporated a Colorado captive insurance company to reinsure a
portion of the workers' compensation risks primarily insured by a
third party insurance carrier. In affirming our decision that
risks had not shifted to the captive insurer, the Court of
Appeals for the Ninth Circuit neither adopted nor rejected
respondent's economic family concept, stating as follows:
In reaching our holding, we do not disturb the
separate legal status of the various corporate entities
involved, either by treating them as a single unit or
otherwise. Rather, we examine the economic
consequences of the captive insurance arrangement to
(continued...)
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