- 51 -
There are compelling economic reasons for structuring the
VSC arrangement differently from the preneed funeral arrangement.
The purpose of the VSC arrangement, from the contract holder's
perspective, is to insure a risk. Pooling serves the function of
distributing that risk among all the Dealership's contract
holders. Risk distribution is useful because it reduces the
deviation of actual losses from expected losses as a percentage
of both the expected losses and the resources in the pool. See
Sears, Roebuck & Co. v. Commissioner, 96 T.C. 61, 66, 101,
modified 96 T.C. 671 (1991), affd. in part and revd. in part 972
F.2d 858 (7th Cir. 1992). This reduction in "relative risk"
achieved through pooling enables the Dealership and Travelers to
charge less for assuming the contract holder's risk. Using a
structure similar to the preneed funeral arrangement would
preclude risk distribution and cost the contract holder much more
without providing him any greater security.9
The refund provision under the VSC is also probative
evidence that petitioners' theory mischaracterizes the
relationship among the parties. The amount of the Dealership's
9 It is important to distinguish two senses of the word
“pooling”. Risk distribution (“pooling” in the insurance sense)
does not occur simply by holding money received from different
customers in a combined trust account, where each customer
retains exclusive rights to a specific portion of the combined
fund (“pooling” of the sort that appears to have occurred in
Angelus Funeral Home and Miele).
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