Howard V. More - Page 14




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            income derived in the ordinary course of a trade or business” and                          
            is, thus, not portfolio income.  According to its plain meaning,                           
            we believe that the phrase “made in the ordinary course of a                               
            trade or business” contemplates not only that the investment                               
            occur at a time when the taxpayer is conducting a trade or                                 
            business of reinsuring risks but also contemplates that the                                
            investment be an ordinary and necessary part of the business of                            
            reinsuring risks.                                                                          
                  Additionally, we interpret subdivision (ii)(C) in light of                           
            the workings of the insurance industry.  Like insurance                                    
            companies, Lloyd’s generates income from the underwriting of                               
            insurance risks and from the investment of premiums received on                            
            the insurance policies underwritten.  The underwriting component                           
            generally generates losses, while the investment component                                 
            generates profits.  While the income generated by the investment                           
            component of a reinsurance business would otherwise be considered                          
            portfolio income, we believe that under subdivision (ii)(C), if                            
            this income is derived in the ordinary course of a trade or                                
            business of reinsuring risks, it is excluded from the definition                           
            of portfolio income.  Insofar as this income is considered to be                           
            part and parcel of the business activity of reinsuring risks, the                          
            income is not characterized as portfolio income.                                           
                  It is unclear from the record whether petitioner acquired                            
            all of the pledged stock before his underwriting activities                                
            began.  We note that at least some of the pledged stock was                                




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