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deductibility of amounts paid or incurred for insurance under
section 162.” Sec. 1.461-4(g)(5)(ii), Income Tax Regs. The
arrangements between petitioners and Western General involved an
insurance risk (namely, the risk of loss associated with the
liability assumed by the seller of an EWA), the shifting of that
risk from each petitioner to Western General (as the parties have
stipulated that the risk of loss under the EWA’s passed from
petitioners to Western General once petitioners made payment to
Western General), and the distribution or pooling of that risk
(since the record establishes that Western General assumed the
risks of multiple sellers of EWA’s). Thus we believe petitioners
purchased “insurance” from Western General for purposes of
section 162. Cf. Sears, Roebuck & Co. v. Commissioner, 96 T.C.
61, 100-101 (1991), affd. in part, revd in part and remanded on
another issue 972 F.2d 858 (7th Cir. 1992). We also note that
applicable State law requires retail automobile dealers, such as
petitioners, that sell vehicle service contracts incident to
automobile sales either to purchase insurance covering their
liabilities under such contracts or to become insurers subject to
the provisions of the California Insurance Code and regulation by
the California Department of Insurance. See Cal. Ins. Code sec.
116(c) (West 1993); Clemens v. American Warranty Corp., 238 Cal.
Rptr. 339, 344-345 (Ct. App. 1987). Petitioners state on brief
that they are not in the insurance business.
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