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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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