author: ACKER, District Judge.

text:
    Steven CLARK, Plaintiff, v. TENNESSEE VALLEY AUTHORITY and Bear Creek Development Authority, Defendants.
    Civ. A. No. 84-AR-5485-NW.
    United States District Court, N.D. Alabama, Northwestern Division.
    Jan. 7, 1985.
    Charles D. Rosser, Rosser & Munsey, Tuscumbia, Ala., for Steven Clark.
    Herbert S. Sanger, Jr., Gen. Counsel, James E. Fox, Associate Gen. Counsel, Melvin L. Harper, Peter K. Shea, Tennessee Valley Authority, Knoxville, Tenn., for TVA.
    James K. Davis, Fite, Davis & Atkinson, Hamilton, Ala., for Bear Creek.

      William M. Bouldin, Guin, Bouldin & Alexander, Russellville, Ala., for Bear Creek Dev. Auth.
   MEMORANDUM OPINION

ACKER, District Judge.

The court has for consideration the motions for judgment on the pleadings and, in the alternative, for summary judgment, filed by defendants Tennessee Valley Authority (TVA) and Bear Creek Development Authority (BCDA).

The complaint of Steven Clark (Clark), as limited by the pre-trial order of December 20, 1984, charges TVA and BCDA with negligence and wanton misconduct in the maintenance, operation and supervision of the Cedar Creek dam and reservoir by defendants’ alleged failure to warn plaintiff of the safe distance for a boat to maintain in relation to the spillway over which Clark’s boat fell while he was fishing in the reservoir after paying BCDA a fee for issuing Clark a permit to fish there. Clark’s complaint contains no allegation of malicious or willful misconduct by either defendant.

Defendants set up several defenses which they assert are absolute based on the pleadings and the undisputed facts. The court will only discuss the defense with which it agrees, namely, that defendants owed Clark no duty except the duty not willfully or maliciously to injure him, and that as a matter of law defendants did nothing and failed to do nothing constituting willful or malicious conduct toward Clark, and, in fact, did and failed to do nothing which constituted even the wanton misconduct which Clark alleges.

Sections 35-15-1 through 5, Code of Ala. (1975) defines and limits the duties of a recreational land owner in relation to persons using his premises for recreational purposes. Such an owner, whether public or private, owes no duty whatsoever to provide safe premises to users. These statutory provisions recognize only potential liability “which otherwise exists for willful or malicious failure to guard or warn against a dangerous condition, use, structure or activity ...”. (emphasis supplied).

A very recent similar fact situation was addressed by Honorable E.B. Haltom, Jr. in Russell v. Tennessee Valley Authority, 564 F.Supp. 1043 (N.D.Ala.1983). This court simply borrows what Judge Haltom said in that case, and applies it here.

This court agrees with TVA’s argument that the facts presented here would not support an allegation of willful and malicious injury even if alleged.

Judge Haltom’s language fits the instant case like a glove. The instant fact situation contains no hint of any active or knowing failure by either defendant vis-a-vis plaintiff, particularly when the condition which caused plaintiff’s injury was one necessary to the operation of the reservoir, one which was not hidden, and a condition which a person situated as plaintiff was situated, using reasonable skill, could reasonably be expected to avoid. See Wright v. Ala. Power Co., 355 So.2d 322 (Ala.1978); and Driskill v. Ala. Power Co., 374 So.2d 265 (Ala.1979).

Sections 35-15-20 through 28, Code of Ala. (1975) (1984 Supp.) applies to noncommercial public recreational landowners such as defendants, and provides them with even tighter limitations than §§ 35-15-1 through 5, as to their exposure to liability to recreational users. This 1981 piece of legislation recognizes a public policy in Alabama to encourage public owners to allow the opening up and promotion of their facilities without exposing themselves to law suits. This court will not second guess this legislative intent.

There is nothing among the undisputed facts of this case, nor, for that matter, among the disputed facts, which provides Clark a way around this combination of Alabama statutory limitations on defendants’ liability.

Clark argues that the 1981 Act (§ 35-15-20 through 28) repealed the prior Act (§ 35-15-1 through 5) because of alleged inconsistencies between the two acts in light of the repealer clause included in the 1981 Act. The court disagrees and finds that while the two acts perhaps overlap, both provide limitations on defendants’ liability under the facts of this case.

It is unnecessary for the court to decide whether or not the warning signs, which defendants’ affidavits and sworn answers to interrogatories claim were in place near the spillway at the time of the accident, were, in fact, in place at that time or that they were placed in a position effectively to warn persons situated as Clark was situated. However, the court does express its belief that Clark’s deposition testimony on this subject is so weak as compared to the TVA affidavits and photographs, as to invite a directed verdict if the case should go to trial. If the warning signs were in place as defendants’ affidavits and photographs indicate, it is clear that defendants were not guilty of willful, or malicious, or even wanton conduct, and construing the facts most favorably to Clark, constituted mere negligence, for which there can be no liability by TVA or BCDA.

The fact that plaintiff’s complaint alleges only negligence and wanton misconduct, and not willful or malicious conduct, is not without significance. There is a distinction between wantonness and willfulness or maliciousness. Clark has not sought to correct any possible pleading error and apparently recognizes the impossibility under these circumstances of proving “willfulness” or “maliciousness”. The court therefore must take Clark’s pleading, and the pre-trial order which Clark subscribed to, as the court finds them. Clark has failed to allege a cause of action, much less to counter defendants’ Rule 56 motion.

For the foregoing reasons, defendants’ motions for summary judgment and for judgment on the pleadings are due to be granted and will be granted by separate order.


source: Caselaw Access Project

author: ATKINS, District Judge.

license: Public Domain

text:
    CORDIS CORPORATION, Plaintiff, v. MEDTRONIC, INC., Defendant.
    No. 84-2479-CIV.
    United States District Court, S.D. Florida.
    Jan. 10, 1985.

      Lowell L. Garrett, and Richard A. Pettigrew, Mogan, Lewis & Bockius, Miami, Fla., for plaintiff.
    Hal Vogel, Hall & O’Brien, Miami, Fla., for defendant.
   Order GRANTING Cordis’ Motion For Establishment Of Escrow Fund And For Preliminary Injunction

ATKINS, District Judge.

This cause is before the court on plaintiff, Cordis Corporation’s Motion For Establishment Of Escrow Fund And For Preliminary Injunction. Based upon careful consideration of the record and oral arguments in this case, it is hereby

ORDERED AND ADJUDGED that the Motion is GRANTED.

Until final judgment is rendered in this action, Cordis will be permitted to deposit any royalty payments due and owing to Medtronic, Inc. into an interest-bearing escrow account, provided that upon final judgment, all funds accumulated in the escrow account are to be paid over to the prevailing party, and Medtronic, Inc. is enjoined from terminating the License Agreement during the pendency of this action.

The court notes that the circuits are split on the issue of whether to establish escrow accounts for the collection of royalty payments during the pendency of patent infringement suits. I have decided, however, that Precision Shooting Equipment Co. v. Allen, 646 F.2d 313 (7th Cir.1981) and Atlas Chemical Industries, Inc. v. Moraine Products, 509 F.2d 1 (6th Cir.1974) are more faithful to the spirit of Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), where the Supreme Court held that licensee estoppel is no longer valid law.

Under well-established case law, the party requesting a preliminary injunction bears the burden of establishing to the District Court that: 1) It has a substantial likelihood of eventual success on the merits; 2) Irreparable injury will be suffered unless the injunction issues; 3) The threatened injury to the movant outweighs the damage which the injunction may cause the opponent; and 4) The injunction would not be adverse to the public interest. Productos Carnic, S.A. v. Central American Beef and Seafood Trading Co., 621 F.2d 683, 685 (5th Cir.1980); Dallas Cowboy Cheerleaders, Inc. v. Scoreboard Posters, Inc., 600 F.2d 1184, 1187 (5th Cir.1979); Texas v. Seatrain International, S.A., 518 F.2d 175, 179 (5th Cir.1975). The Affidavit of Harry W. Fletcher sets forth the fact that PACESETTER publicly disclosed and/or developed certain devices covered by the claims of U.S. Patent No. 3,902,501 prior to the alleged invention defined by the claims of such patent. If this allegation is proven true, then the patents-in-suit would arguably be invalid under the provisions of 35 U.S.C. § 102(a) and (b). Second, if Cordis fails to make its royalty payments to Medtronic, it will be vulnerable to a patent infringement action, with the prospect of paying treble damages and of being enjoined from manufacture and sale of the licensed products. If Cordis continues to make royalty payments while seeking to invalidate the patents in suit in this action, the royalty payments made to Medtronic cannot be recovered under Troxel Manufacturing Co. v. Schwinn Bicycle, 465 F.2d 1253 (6th Cir.1972). Once the royalty payments are made, there is no legal remedy available for repayment. If there is no legal redress, Cordis would be irreparably damaged. This damage far outweighs any damage Medtronic would suffer by the issuance of an injunction preventing the termination of the license agreement and the establishment of an escrow account for payment of royalties. Finally, the public has a clearly established interest in having invalid patents challenged in Federal courts. Should Cordis be successful, the claimed subject matter of the patents at suit would enter the public domain and Medtronic would no longer be entitled to maintain a legal monopoly in the claimed subject matter. The public interest would clearly be served by providing Cordis with reasonable protection so that it may challenge two patents which it believes invalid.


author: HOEVELER, District Judge.

text:
    Armando GONZALEZ, Plaintiff, v. UNITED STATES of America, Defendant.
    No. 84-2600-Civ-Hoeveler.
    United States District Court, S.D. Florida.
    Jan. 15, 1985.
    Jay R. Moskowitz, Miami, Fla., for plaintiff.
    Steven Kwartin, North Miami, Fla., for defendant.
   ORDER OF DISMISSAL WITHOUT PREJUDICE

HOEVELER, District Judge.

This cause came before the Court for hearing on December 14, 1984, upon the Complaint of Plaintiff Armando Gonzalez for a summary de novo review pursuant to 26 U.S.C.A. § 7429(b)(1) of a termination assessment made by the Internal Revenue Service on or about August 20, 1984.

Agents of the Internal Revenue Service personally delivered to the Plaintiff a Notice of Termination Assessment of Income Tax for the period of January 1, 1984 through July 25, 1984. A Termination Assessment under Section 6851 of the Internal Revenue Code is made for a tax year that either has not ended or for which the due date for filing a tax return has not yet passed. The Notice served upon Mr. Gonzalez assessed a tax against him in the amount of $886,841.40. The Notice from the District Director of the Internal Revenue stated that

under the section 6851 of the I.R.C., you are notified that I have found you designing to quickly place property beyond the reach of the Government by either concealing it or dissipating it, thereby tending to prejudice or render ineffective collection of income tax for the 1984 taxable year.

Workpapers of an Internal Revenue Service agent were attached to the assessment. The papers stated that Metropolitan Dade County police officers, while executing a search warrant, found a large sum of money — $1,784,740.00—in the bedroom closet of the Plaintiff’s residence. According to the agent’s notes, an analysis of Plaintiff’s previously filed tax returns indicated that the monies found were never reported by the Plaintiff.

At the hearing of December 14, 1984 on this cause, several Metro-Dade police detectives testified about an ongoing narcotics investigation and execution of the search warrant on Plaintiff’s residence on or about July 25, 1984, that led to a customs dog’s alert to the $1,784,740.00 contained in large plastic garbage bags in the bedroom of Plaintiff’s residence at 235 N.W. 59th Avenue in Miami, Florida. Detective Mario Biovides testified that a confidential informant had reported to the Metro-Dade police that he had observed approximately five kilograms of cocaine in the Plaintiff’s residence. The Government presented a copy of the affidavit for Search Warrant as Government’s Exhibit 1. The affidavit contained information supporting the informant’s reliability.

Detective Juan Espinosa testified that he was present during the execution of the search warrant when the monies were found. Customs Officer John Mackolin, a “K-9” enforcement officer, testified that his customs dog alerted to the garbage bags that contained the money, indicating that the money had been near or in contact with narcotics.

The Government also presented pictures of the seized currency, Government’s Exhibits 2A and 2B. Of the monies seized, there were six hundred and six one-hundred dollar bills, two thousand and seventy two fifty-dollar bills, seventy six thousand and six hundred fifty five twenty dollar bills, six thousand seven hundred and twenty one ten-dollar bills, and forty-six five-dolIar bills. Detective Schumacher, also of the Metro-Dade police force and present at the execution of the search warrant, testified that the condition and packaging of the bills was similar to money used in the purchase and sale of narcotics. Detective Schumacher testified as having thirteen years of narcotics investigation experience.

The monies seized are presently the subject of a forfeiture action in Dade County State Court, In re: Forfeiture of $1,784,-740.00 in U.S. Currency, Case No. 84-27674, Eleventh Judicial Circuit in and for Dade County, Florida. Thus, Plaintiff contends that the termination assessment issued by the Internal Revenue under 26 U.S.C.A. § 6851 (West Supp.1984) was not reasonable under the circumstances. Plaintiff asserts that the money is presently in the custody of the Metro-Dade police department and beyond the reach of the Plaintiff unless he prevails in that action. Plaintiff feels that the notice of termination is unnecessary because the IRS could intervene in the state forfeiture action and protect its interests. Plaintiff therefore contends that the IRS has not met its burden of proving that the assessment is reasonable under the circumstances as required by 26 U.S.C.A. § 7429(a)(1). Therefore, Plaintiff presented no evidence regarding the reasonableness of the amount of the assessment. Section 7429(a)(2) places the burden of proof with respect to the issue of reasonableness of the amount of the assessment on the taxpayer plaintiff.

The sole issue before the Court is whether the notice of termination issued to Mr. Gonzalez was reasonable under the circumstances. 26 U.S.C.A. § 7429(b)(2)(A) (West Supp.1984). See Loretto v. United States, 440 F.Supp. 1168, 1172 (E.D.Pa.1977). The fact that the monies are presently the subject of a forfeiture action and beyond the reach of the Plaintiff does not demand a conclusion that the notice of termination was unreasonable. In Randahl v. United States of America, Stand.Fed.Tax Rep. (CCH) ¶ 9356 (D.Minn. Jan. 5, 1982), the court stated:

Plaintiff’s principal argument is that it is somehow unfair for the government to be claiming that the money seized is, on one hand, subject to forfeiture, and, on the other hand, due for income taxes. Having considered this argument the court concludes that the mere presence of a forfeiture action does not change the nature of the termination assessment which is, under the circumstances, reasonable. It is not necessary that a taxpayer have an absolute and irrevocable right to retain the gains from apparent criminal activity in order to be taxed. He may lose the tainted money and still be subject to taxes on the profit it represents.

Id. (citation omitted).

The testimony at the hearing indicated that the money seized may have been involved in narcotics transactions. Moreover, Plaintiffs tax returns filed by the Plaintiff for the years 1977 through 1983 revealed that Plaintiffs taxable income never exceeded $31,000.00 (Response 115), with the exception of the 1981 taxable year when the Plaintiff won $245,000.00 in the Puerto Rican lottery and filed an amended tax return reporting those winnings in December 1983.

The Court therefore finds that the making of the termination assessment, in light of the testimony and evidence presented at the hearing and the possibility that money involved in narcotics transactions would not be reported by the Plaintiff as taxable income, was reasonable under the circumstances. “Thus, the Secretary had sufficient reason to find that [Plaintiff] was ‘designing quickly to place [his] property beyond the reach of the Government by either concealing it or dissipating it.’ ” Loretto v. United States, 440 F.Supp. 1168, 1174 (E.D.Pa.1977) (quoting 26 U.S.C.A. § 6851); see Amyx v. United States, 529 F.Supp. 98 (S.D.Ohio 1981).

Accordingly, it is hereby

ORDERED AND ADJUDGED that Plaintiff’s Complaint be and is DISMISSED WITHOUT PREJUDICE to the rights of the Plaintiff to contest the asserted tax liability by way of any available remedy, including a petition in Tax Court or a suit for refund in district court or the United States Claims Court.


author: DOWD, District Judge.

text:
    CRAWFORD FITTING COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
    No. C82-3008.
    United States District Court, N.D. Ohio, E.D.
    Jan. 16, 1985.

      Ernest P. Mansour, David B. Cathcart, Mansour, Gavin, Gerlack & Manos Co., L.P.A., Cleveland, Ohio, for plaintiff.
    Jason P. Green, Trial Atty., Tax Div., Dept, of Justice, Washington, D.C., Thomas Bauer, Asst. U.S. Atty., Akron, Ohio, for defendant.
   MEMORANDUM OPINION

DOWD, District Judge.

This is an income tax refund suit brought by the taxpayer and plaintiff, Crawford Fitting Company, arising from the disallowance of an expense deduction to plaintiff of $20,485.00 for an “insurance premium” paid to a captive insurance company, the Constance Insurance Company. The disallowance of the deduction resulted in an income tax deficiency of $9,423.00 owed by the plaintiff to the defendant. Plaintiff contends that its payment of the insurance premium was deductible as an ordinary and necessary business expense under § 162(a) of the 1954 Internal Revenue Code. Defendant, however, argues that the taxpayer may not deduct the payment as an insurance premium where the risk of loss has not been shifted from or distributed beyond the plaintiffs economic family to an unrelated insurer. Accordingly, defendant argues that the payment made by the plaintiff to the Constance Insurance Company was a contribution of capital to Constance, and therefore, not a deductible premium.

I. PROCEDURAL HISTORY

Plaintiff paid the deficiency assessed against it, filed a timely refund claim, and then timely filed the instant action. Plaintiff sets forth one count in its complaint, in which it states that the government’s disallowance of a business deduction in the amount of $20,485.00 for an insurance premium, resulting in the assessment of $9,243.00, plus interest and penalties, against it, and collection of the same, was erroneous and illegal. Plaintiff argues that it has overpaid its liabilities for income taxes for the year of 1978, and is therefore entitled to recover from the defendant the sum of $9,243.00, plus penalties and interest. The matter is now before the Court on a stipulation of facts by the parties, as follows:

II. FINDINGS OF FACT

By agreement of parties, a stipulation of facts was entered into the record as follows. [All references to exhibits submitted by the parties are omitted.]

1. Crawford Fitting Company (hereinafter referred to as “Crawford”), along with Nupro Company, Whitey Company and Cajon Company (hereinafter referred to as “manufacturing companies”), manufacture valves and fittings which are used in numerous applications. Among other applications, these valves and fittings are used in nuclear power plants, petrochemical plants, offshore oil rigs, scientific research and the space program.

2. There are seperately [sic] incorporated companies (hereinafter referred to as “support companies”) that provide parts and/or services to the manufacturing companies.

3. Eastern Swagelok, Western Swagelok and Central Swagelok (hereinafter referred to as “regional warehouses”) are separately incorporated regional warehouses which purchase products from the manufacturing companies. They are owned as follows:

A. Eastern — Fred A. Lennon 60%
Catherine Lennon Loziek 40%
B. Western — Fred A. Lennon 50%
Alice P. Lennon -50%
C. Southern — Fred A. Lennon 54.5%
Catherine Lennon Loziek 45.5%
D. Central — Fred A. Lennon 55.6%
Catherine Lennon Loziek 44.4%

4. The regional warehouses, support and manufacturing companies are referred to hereinafter as the Crawford Companies.

5. The regional warehouses resell the products to a number of independently owned and operated Crawford distributors, The domestic distributors are exclusive dealers of Crawford.

6. Mr. Fred A. Lennon is the sole owner of Crawford. Mr. Lennon also has interests in various other corporations that provide parts and/or services to the manufacturing companies as set forth in Exhibit I. Alice P. Lennon is the wife of Mr. Lennon, Catherine Lozick is his daughter and John P. Lennon is his son.

7. The Crawford Companies had the need for a large amount of product and general liability insurance, which, by the year in issue, became very expensive.

8. Prior to establishing its own insurance company, the quotes the Crawford Companies received for insurance was generally an up front cash premium of $850,-000.00 to obtain the first one million dollars of coverage. Constance was created because the Crawford Companies were unable to secure insurance at a reasonable price and without substantial limitations on the types and amounts of risk.

9. Constance Insurance Company (hereinafter referred to as “Constance”) was chartered in March of 1978.

10. Constance was created under, and is governed by, the Colorado Captive Insurance [Company] Act C.R.S. § 10-6-101-130 (1973).

11. Constance has its headquarters in Denver, Colorado.

12. Constance is owned in the following manner:

Entity Percentage of Ownership
Eastern Swagelok 20%
Western Swagelok 20%
Southern Swagelok 20%
Central Swagelok 20%
John Fant (A) 5%
F.J. Callahan (B) 5%
Ernest P. Mansour (C) 5%
Norge Tobbe (D) 5%
100%

N.J. Tobbe (D) is an assistant secretary of Crawford Fitting, John Fant (A) is an attorney employed by Crawford Fitting Co., F.J. Callahan (B) is the Executive Vice President of Crawford Fitting company, Ernest P. Mansour (C) is a partner in the law firm Mansour, Gavin, Gerlack & Manos Co., L.P.A. Mansour, Gavin, Gerlack & Manos has performed legal services for Crawford Fitting for a number of years.

13. The initial capitalization of Constance was a million dollars which was provided by the shareholders in proportion to their ownership interest.

14. Since the initial capitalization of Constance, there have been no additional capital contributions or sale of stock.

15. Since the initial capitalization of Constance, the only funds which it has obtained have been from insurance premiums paid by the Crawford Companies and Constance’s investment income.

16. The Crawford Companies do not directly or indirectly indemnify Constance.

17. Constance was administered in 1978 by an independent group of insurance consultants and actuaries known as Alexander & Alexander who negotiated and drafted the policy on behalf of Constance.

18. Constance, for the period covered by 4-1-78 through 12-31-78, issued Policy # CGL-001, for comprehensive general liability and product liability insurance for the parties listed in Endorsement # 25, Pages 1 and 2. The named insured under the policy included Fred. A. Lennon, A.P. Lennon, J.P. Lennon, C.L. Lozick, Edward A. Lozick, approximately 45 Crawford Companies, the Profit Sharing and/or Pension Trusts and/or Plans of the Crawford Companies.

19. The 115 independent distributors, none of which are owned directly or indirectly by Crawford, are insured under the products liability coverage.

20. Nertz, Inc., is a named insured owned 100% by Ed Lozick. Ed Lozick is married to Catherine Lozick.

21. Ekohwerks Company is a named insured owned by Bernie Gallagher, William Tobbe, E.J. Callahan, Earl Shuffleberg and Steve Matousek.

22. Midwest Bank and Trust Company is the trustee of the Profit Sharing and/or Pension Trusts. Among other investments, the Trusts own and lease real property and screw machines.

23. The policy was drafted by Alexander & Alexander. The terms of the policy were negotiated by Alexander & Alexander on behalf of Constance.

24. All management fees for Alexander & Alexander were paid by Constance.

25. The policy provided coverage in the amount of $1,500,000. Constance retained $100,000 of the risk per occurrence, 100,000 aggregate, and reinsured the balance of $1,400,000 with an unrelated insurance company, The Bermuda Fire & Marine Insurance Co., Limited. Constance paid a premium of $475,000 for the reinsurance. The total premium for the policy for the period April 1, 1978 to April 1, 1979 was $575,000.

26. Risk retention and reinsurance was decided by the Constance Board of Directors based upon Alexander & Alexander’s recommendations from its own actuarial experience. The Board of Directors of Constance determined how much of the risk would be retained and how much would be reinsured. This decision was based upon a recommendation of Alexander & Alexander based on their actuarial experience in the field.

27. The amount of the premium charged by Constance was suggested by Alexander & Alexander based on their actuarial information. In addition, the board considered premiums being charged in the industry.

28. Crawford paid $157,028 in premiums to Constance in 1978. The total premium for the policy for the period April 1, 1978 to April 1, 1979 was $575,000. Each company paid its premium to Constance with its own check. In the year ending December 31, 1978, Constance Insurance Company lost $60,490.

29. The United States of 'America allocated, based upon a method of proration $20,485 to the retained portion of Constance’s risk. This resulted in the disallowance to Crawford of an expense deduction in the amount of $20,485 for the period in question.

30. Constance, under the terms of the policy with Crawford, must provide coverage during the policy period for claims made at any time for products manufactured by the Crawford Co. and it is required to defend claims and pay the legal expenses related to them.

31. For risk to be reinsured there has to be a primary insurance policy.

32. Constance paid all liabilities incurred by Crawford within the scope of the policy without any direct or indirect reimbursement from Crawford.

33. The period in issue for Crawford is April, 1978 through December, 1978. Crawford was on a calendar year basis. Constance commenced business on April 1, 1978. Constance is on a fiscal year commencing April 1.

34. The disallowance resulted in an income tax deficiency of $9,423.00 to Crawford Fitting Co. There was no tax consequence to Constance as a result of this adjustment in its fiscal 1978 tax year.

35. The disallowed deduction was based upon the $100,000 of insurance that Constance retained.

36. Crawford paid the deficiency, filed a timely refund claim and then timely filed this suit for refund for $9,423.00 of corporate income tax plus interest thereon as is provided by law.

37. The portion of the premium that Crawford paid Constance that was reinsured to third parties was allowed as a deductible expense.

38. Crawford also had excess general and product liability insurance with unrelated third parties over and above that which it arranged through Constance, for at least 30 million dollars during the period in issue.

39. The excess insurance was purchased by Crawford in the open market. The excess insurance coverage is applicable only after the coverage provided by Constance is exhausted.

III. ANALYSIS

The Court has jurisdiction of the parties and subject matter under 28 U.S.C. § 1346(a)(1).

a. Background: Deductibility of Insurance Premiums.

Title 26 of the Internal Revenue Code, § 162(a), allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Section 1.162-l(a) of the Income Tax Regulations provides, in relevant part, that:

Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business____ Among the items included in business expenses are ... insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business____

“Insurance” is not defined under the Internal Revenue Code. The Supreme Court, however, has stated that elements of risk-shifting and risk-distributing, historically and commonly, have been considered ordinary indicia of insurance. Helvering v. LeGierse, 312 U.S. 531, 61 S.Ct. 646, 85 L.Ed. 996 (1941).

Where elements of risk-shifting and risk-distributing are absent from an insurance contract, the fundamental aspects of an insurance agreement are lacking. See Steere Tank Lines, Inc. v. U.S., 577 F.2d 279 (5th Cir.1978), cert. denied, 440 U.S. 946, 99 S.Ct. 1424, 59 L.Ed.2d 634 (1979). In that case, the Court stated that “a taxpayer who establishes a reserve in an effort to ensure against future losses is not entitled to a deduction at the time the reserve is established or funded. A deduction is proper when the liability becomes fixed.” Id. at 282. Accordingly, the Court found that where there was no shifting or genuine pooling of risks under the insurance agreement before it, plaintiff’s payment of money into a contract premium account, from which were to be paid all accident claims against the taxpayer, was not an insurance premium deductible as a business expense, but rather a nondeductible reserve for accident claims. See also Spring Canyon Coal Co. v. Commissioner, 43 F.2d 78 (10th Cir.1930), cert. denied, 284 U.S. 654, 52 S.Ct. 33, 76 L.Ed. 555 (1931) (Corporation’s payments into self-insurance reserve fund held not deductible as an “ordinary and necessary business expense”). A taxpayer cannot “deduct as an expense an amount which he fears he may some day be called upon to spend,” such as self-insurance. See id. at 80, citing Appeal of Pan-American Hide Co., 1 B.T.A. 1249 (1925).

The fundamental issue in the case at bar, then, is whether the payment made by the plaintiff Crawford Fitting Company to the Constance Insurance Company, characterized by the plaintiff as an insurance premium, was in fact an insurance premium deductible under § 162, or was, as the defendant contends, a reserve held by the plaintiff Crawford Fitting Company as self-insurance to cover contingent losses.

B. Positions of the Parties.

Defendant asserts that risk-shifting is an essential element of an insurance contract, citing U.S. v. Newton Livestock Auction Market, Inc., supra, and states that the risk has not been shifted as to the $100,-000.00 risk retained and insured by Constance itself. Defendant contends that accordingly, the portion of plaintiffs payment of an insurance premium to Constance for the $100,000.00 risk coverage is a reserve for self-insurance, and therefore not deductible as an insurance premium. Furthermore, defendant asserts that its characterization of the premium plaintiff paid to Constance is not changed by the undisputed fact that Constance is a separate corporate entity from plaintiff, where the risk of loss remains within Crawford’s economic group. Defendant states, “[m]erely because Constance is a separate corporate entity does not mean taxpayer can label a transaction as ‘insurance’ where no risk as to the first $100,000 of loss has been shifted.”

Plaintiff Crawford argues first that the insurance premium in issue is deductible as an ordinary and necessary business expenses under I.R.C. § 162, where the premium was paid to Constance in an arms-length transaction, and second, that Constance is not “related” to Crawford. Plaintiff states that the “economic family theory” advanced by the government violates “the firmly entrenched separate corporate entity doctrine which recognizes, for both tax and nontax purposes, bona fide transactions between related corporations.” Plaintiff argues that “Constance is not a sham, nor is it merely the alter-ego of Crawford.” Plaintiff states:

[Constance] is a separate corporate entity engaged in the insurance business. The shareholders of Constance are not the shareholders of Crawford. The premiums charged by Constance were actuarially sound and consistent with the insurance industry; Constance performed all of the usual and ordinary procedures engaged in by other insurance companies including underwriting, claims handling and adjustment, and investment of reserves. Constance provided Crawford with a legitimate means of obtaining insurance coverage for Crawford and numerous “affiliated” companies — insurance that was either unavailable or only available at much higher rates. Thus, the present case is fundamentally different from those cases in which a nominal corporation has been disregarded as a true separate entity because it is merely a sham or lacks all business justification. See e.g., Noonan v. Commissioner, 52 T.C. 907 (1969) [sic]; Roubik v. Commissioner, 53 T.C. 365 (1969).

Plaintiff further states that while it is “questionable whether risk-shifting or risk-distributing are the criterion for determining the tax deductibility of insurance premiums,” nonetheless, “both elements were present in this case.”

It is undisputed that to the extent Constance reinsured the remainder of the risk, in the amount of $1,400,000.00, with the Bermuda Fire & Marine Insurance Co., Ltd., an unrelated insurance company, plaintiff is entitled to a deduction for the insurance premium for that amount of coverage. This reinsurance arrangement neutralized the risk borne by Constance to the extent of that amount. The focus, then, is upon the $100,000.00 not reinsured with the Bermuda Fire & Marine Insurance Co., but retained by Constance, and the question is whether or not plaintiff shifted and distributed the risk of loss up to that amount to its subsidiary, Constance, and whether, in law, it was required to do so in order to deduct the premium therefor.

C. Law and Discussion.

In Carnation Co. v. Commissioner, 640 F.2d 1010 (9th Cir.1981), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 381, the Carnation Company incorporated a wholly owned Bermuda subsidiary to insure and reinsure various multiple line risks of the Carnation Company and its subsidiaries. The Bermuda subsidiary, Three Flowers Assurance Co., Ltd., was initially capitalized with a contribution of $120,000.00 from Carnation. Subsequently, Carnation proceeded to purchase a blanket insurance policy from an independent insurance company, American Home, which then, under contract, reinsured 90% of its liability under the Carnation policy with Carnation’s wholly owned Bermuda insurance subsidiary, Three Flowers. Under the terms of the reinsurance contract, American Home was required to first pay Carnation’s claims before it could seek reimbursement from Three Flowers. However, because of American Home’s concern about Three Flowers’ ability to cover the reinsured losses, Carnation agreed, prior to the consummation of the reinsurance contract, to capitalize Three Flowers up to three million dollars (i.e. an additional $2,880,000.00) at Carnation’s election or Three Flowers’ request. American Home then ceded 90% of the premiums it received from Carnation to Three Flowers, and Three Flowers paid American Home a five percent commission, as well as reimbursement for premium losses.

Reciting the Tax Court’s findings that the agreements between Carnation, American Home, and Three Flowers, were interdependent, the Court stated, “The key was that American Home refused to enter into the reinsurance contract with Three Flowers unless Carnation agreed to capitalize Three Flowers.” The Court stated that the three agreements must be considered together, and that, in toto, they revealed that Carnation was attempting to shift its risk of loss. The Court then upheld the tax court’s holding that, as a matter of law, the agreements between the three parties neutralized Carnation’s risk of loss to the extent that American Home reinsured with Three Flowers. Summarily rejecting Carnation’s contention that the revenue ruling conflicted with the separate status given corporations, the Court held that the payment received by the wholly owned foreign subsidiary was the parent company’s contribution of capital and not an insurance premium.

In reaching its decision, the Court relied on the reasoning set out in Rev.Rul. 77-316, 1977-2 C.B. 53. In that ruling, the government reviewed three situations in which a domestic parent corporation and its domestic subsidiaries paid amounts as insurance premiums to (1) a wholly owned foreign “insurance” subsidiary, (2) an unrelated domestic insurance subsidiary, which immediately transferred 95% of the risks to a wholly owned foreign “insurance” subsidiary, and (3) a wholly owned foreign “insurance” subsidiary which contemporaneously transferred 90% of the risks to an unrelated insurance company, for purposes of insuring the parent company. In all three situations, the government ruled that where the taxpayer’s wholly owned subsidiary retained risks of the parent company, the premiums attributable to those risks were not deductible.

After reciting the different fact situations, the government stated that both risk-shifting and risk-distributing are necessary-elements of an insurance agreement. The government then noted that in each of the three recited situations, there was “no economic shifting or distributing of risks of loss with respect to the risks carried or retained by the wholly owned foreign subsidiaries.” Rather, said the government, the insuring parent corporation, its domestic subsidiaries, and its wholly owned foreign “insurance” subsidiary, though in fact separate corporate entities, in reality “represent one economic family with the result that those who bear the ultimate economic burden of loss are the same persons who suffer the loss.” Accordingly, the government stated that there was no deduction under I.R.C. § 162 for amounts paid by the parent companies and their domestic subsidiaries as insurance premiums for risks ultimately retained by the foreign insurance companies. The government stated: “Because such amounts remain within the economic family and under the practical control of the respective parent in each situation, there has been no amount ‘paid or incurred’.” Furthermore, said the government, such amounts would not constitute taxable income to the foreign subsidiaries under I.R.C. § 61, but rather contributions of capital under I.R.C. § 118, since nothing was occurring other than the movement of an asset, cash, within the families of related corporations.

However, said the government, to the extent that amounts paid by the parent companies as insurance premiums are for risks retained by an unrelated insurer and are not reinsured by a subsidiary of the parent, or are transferred through a reinsurance agreement to an unrelated insurer, the premiums paid to cover these risks are deductible under § 162 of the Code. “Since these amounts are not withdrawable by ... [the parent company] and its domestic subsidiaries ..., they have been ‘paid or incurred’ within the meaning of § 162. Furthermore, the requisite shifting and distribution of the risks has occurred to the extent the unrelated insurers ... bear the risks of loss.”

In its ruling, the government did not dispute the identity of the wholly owned foreign subsidiaries of the parent companies as corporate entities independent of the parent companies, citing Moline Properties v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), 1943 C.B. 1011, but examined what it called “the economic reality of each situation.” A look at such economic realities, stated the government, was what led the government to conclude that the various “insurance agreement^],” to the extent that risks were retained by the wholly owned foreign subsidiaries, were “designed to obtain a deduction by indirect means that would be denied if sought directly.”

The rationale of both Carnation Co. and Rev.Rul. 77-316 was applied by the U.S. District Court for the District of Colorado in Steams-Roger Corp. v. U.S., 577 F.Supp. 833 (D.Colo.1984), 84-1 T.C. 83, 217, ¶ 9165. In that case, Steams-Roger incorporated a captive insurance company pursuant to the Colorado Captive Insurance Company Act, Colo.Rev.Stat. § 10-6-101-130 (1973), which issued insurance policies covering Stearns-Roger, its fifteen subsidiaries, and its project customers. The captive insurance company, Glendale Insurance Company, was capitalized with one million dollars. Steams-Roger agreed to indemnify Glendale for losses and damages up to three million dollars.

Stearns-Roger deducted the premiums it paid to Glendale as business expenses for insurance for the 1974-1978 tax years. Said deductions were disallowed by the Internal Revenue Service. Stearns-Roger then paid the deficiencies and filed the refund action. The initial inquiry, stated the Court, in determining the “deductibility” of the sums Stearns-Roger paid Glendale as “insurance premiums” was “whether Glendale, a wholly owned Stearns-Roger subsidiary, should be treated as a corporate entity distinct from the plaintiff (footnote omitted).” Id. at 836, 84-1 T.C. at 83,219. Recognizing that a legitimate corporate entity will not be disregarded for tax purposes where it is created for a business purpose, or where business activity follows its creation; and the fact that a parent corporation and its wholly owned subsidiaries may in fact be separate tax entities, the Court stated that there are, however, certain situations where “the financial transactions of separate but related corporations may be aggregated and treated as the transactions of a single taxpayer for certain purposes.” Id. at 836, 84-1 T.C. at 83,219-83,220. In such cases, stated the Court, where corporations engage in transactions with the principal purpose of avoiding or evading the payment of income tax, certain tax laws permit the Internal Revenue Service to void the transactions. See, e.g., 26 U.S.C. §§ 267, 269, 482. However, stated the Court, while tax considerations played some part in the insurance arrangement under review, it found that the principal impelling motive for Steams-Roger’s formation and transaction of business with Glendale was “business necessity,” and not tax avoidance or evasion. The Court therefore found and concluded that the attribution sections cited above were inapplicable.

The Court next considered the economic family theory, and the concepts of risk-shifting and risk-distributing, set forth in Carnation Rev.Rul. 77-316, supra, and stated that:

Glendale Insurance Company is not in the business of insuring “others.” Its only business is to insure its parent corporation which wholly owns it and ultimately bears any loss or enjoys any profits it produces. Both profits and losses stay within the Steams-Roger “economic family.” In substances the arrangement shifts no more risk from Steams-Roger than if it had self insured.

Steams-Roger at 838, 84-1 T.C. at 83,221.

The Court thus concluded that the agreement between Steams-Roger and Glendale was not an insurance contract for purposes of federal income taxation since the agreement did not shift the risk of losses from Steams-Roger to its wholly owned subsidiary. Accordingly, the Court held that plaintiff was not entitled to a business expense deduction for “insurance premiums” paid to the Glendale Insurance Company.

Likewise, in Beech Aircraft Corp. v. U.S., Civ. No. 82-1369 (D.Kan. July 3, 1984), the plaintiff corporation formed a subsidiary captive insurance company, a Bermuda insurance company named Travel Air Insurance Company, Ltd., “to obtain products liability insurance and provide, by attorneys of its selection, defenses of such actions superior to that provided by commercial insurance carriers.” Id. at 85,401. In Beech, the Court concluded that there was no real transfer of risks under the agreement between Beech and the Bermuda insurance company as to excess coverage for the latter part of 1972, and disallowed a business expense deduction for “insurance premiums” made by Beech to Travel Air for such coverage.

When the Bermuda insurance company was formed, it issued 120,000 shares of common stock at $1.00 per share. Beech acquired 109,000 shares, and the other 11,-000 shares were issued to six others, who were, for the most part affiliated with Beech. The Bermuda insurance company then issued a two million dollar policy covering products liability to Beech. Beech paid a premium of one and a half million dollars for coverage for the period of September 1, 1971 through August 31, 1972. Beech simultaneously obtained excess coverage from Fairfax Underwriters in the amount of ten million dollars, and then an additional three million dollars coverage from Travel Air for the same period. Total coverage amounted to 15 million dollars.

In 1973, Beech sought to obtain primary coverage from several different insurance carriers under its own conditions, but was unsuccessful. However, Beech was able to obtain 13 million dollars of excess coverage from two separate companies, in addition to the two million dollars of primary coverage from Travel Air, as well as five million dollars of top excess insurance coverage under a contract with three other companies. This established a total coverage of 20 million dollars. Beech Aircraft paid Travel Air $1,675,000.00 for the primary coverage, an amount which Travel Air calculated would, when invested for the time it would hold the money, equal the amount of money it might have to pay for losses under the insurance contract with Beech.

When Beech filed its corporate income tax return for the fiscal year ending September 30, 1973, it claimed a business expense deduction for insurance “premiums” it paid to Travel Air for products liability insurance, which was disallowed. Beech paid the deficiency, and brought the action to recover the same.

In setting forth its conclusions of law, the Court noted that Travel Air was only capitalized for $150,000.00, while it purported to provide excess coverage for losses of several million dollars. “Only Beech could have responded to such a loss had such occurred,” the Court stated. Id. at 85,404. Thus, stated the Court:

As a matter of economic reality, if and when a loss occurred and was paid by Travel Air, the net worth of Beech was reduced to approximately the same extent as though Beech had paid the loss itself. While these arrangements had the appearance of insurance, in reality Beech still carried the risk (citation omitted).

Id. Accordingly, the Court found that the transactions between Beech and Travel Air did not, in reality, constitute insurance, and therefore found that Beech was not entitled to deduct as a legitimate business expense the payments that it made to Travel Air as insurance premiums.

The Court finds the above cited cases, as well as Rev.Rul. 77-316, to be instructive in the Court’s review of the matter sub judice. However, we find that the application of certain key concepts and definitions set forth in both to result in conclusions in the instant case different from those reached in the earlier cited cases and revenue ruling. The economic reality of the above cited cases and those situations reviewed in Rev.Rul. 77-316 .was that a parent company was trying to deduct nondeductible costs of self-insurance by paying “insurance premiums” for risks that were retained. In this case, the insurance arrangement was legitimately organized to enable Crawford to secure insurance at a reasonable price, without substantial limitations on the types and amounts of risks, see Stipulation No. 8, in return for the payment of legitimate premiums. Furthermore, the Court finds that the arrangement survives the application of the economic family theory and the concepts of risk-shifting and risk-distributing as they are discussed in the above cited cases and Rev.Rul. 77-316

In determining whether or not plaintiff correctly took a deduction for the insurance premiums in question, we focus on substance over form in order to determine whether or not “in truth and substance the sums set aside by [plaintiff] were not ‘expenses’ of the business.” Spring Canyon Coal Co. v. Commissioner, supra, at 79, citing Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 (1920) and Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 46 S.Ct. 449, 70 L.Ed. 886 (1926). This Court certainly does not countenance the kind of arrangement between corporations set up for the purpose of avoiding or evading income tax, nor suggest that in those situations the financial transactions of the separately incorporated but related corporations should not be aggregated and treated as the transactions of a single taxpayer. However, in the instant case, the Court finds that the taxpayer and the other shareholders of the captive insurance company, as well as the insureds, are not so economically related that their separate financial transactions must be aggregated and treated as the transactions of a single taxpayer, the plaintiff. The Court further finds that the economic risk of loss of the plaintiff was shifted and distributed among the shareholders of the captive insurance company and its insureds.

First, looking at the nature of the ownership of the plaintiff and the captive insurance company, the Court finds it is somewhat different in the case at bar than in the cases aforementioned. In this case, plaintiff Crawford Fitting Company is a separately incorporated entity from the wholly owned captive insurance company, and is not the parent company of the captive. Crawford Fitting Company, along with Nupro Company, Whitey Company and Cajon Company, referred to as the Crawford Companies, manufacture and sell their products to four separately incorporated regional warehouses. These warehouses, which purchase and resell the products of the manufacturing companies to a number of independently owned and operated Crawford distributors, are also independently incorporated from the plaintiff and the captive insurance company. They are owned, in varying percentages, by Fred A. Lennon, his wife, Alice P. Lennon, and his daughter, Catherine Lennon Lozick. Eighty percent of Constance’s stock is owned by the four incorporated warehouses. The remaining 20% of Constance’s stock is owned by Norge Tobe, assistant secretary of Crawford Fitting, John Fant, in-house counsel, F.J. Callahan, executive vice-president, and Ernest P. Mansour, “outside counsel.” The Court finds these above related alterations of fact to be so significantly different from the situations set forth in the above cited cases and in Rev.Rul. 77-316 that they change the characterization of the “insurance premiums,” and the tax treatment accorded them, in those cases and that ruling.

We find the instant case to be more closely aligned with Rev.Rul. 78-338, 1978-2 C.B. 110, than the above cited cases and Rev.Rul. 77-316. In Rev.Rul. 78-338, the government reviewed an insurance arrangement between the taxpayer, a domestic corporation, and a foreign insurance company formed by the taxpayer and owned by the taxpayer and 30 other wholly unrelated owner-insureds. No shareholder owned a controlling interest in the insurance company, and pursuant to the insurance company’s bylaws, no shareholder’s individual risk coverage could exceed five percent of the total risks the company insured. The insurance company provided insurance coverage only for its shareholders, their subsidiaries, and their affiliates, for certain specified risks located throughout the world. Premiums were established in accordance with customary insurance ratings.

Stating that since, under the circumstances of the situation before it, i.e., an absence of any economic relationship between the taxpayer and other insureds-shareholders, the government found that the economic risk of loss could be shifted and distributed among the shareholders-insureds, and that the arrangement was thus not one of self-insurance. Accordingly, it held that the insurance premiums were deductible under I.R.C. § 162, as ordinary and necessary business expenses, distinguishing Rev.Rul. 77-316.

While in Rev.Rul. 78-338 the taxpayer owned a certain percentage of common voting stock in the captive insurance company, so did thirty other unrelated corporations as well. In the instant case, the plaintiff owns no ownership share in the captive insurance company. Defendants hasten to point out that the plaintiff taxpayer is in fact owned by Fred A. Lennon, who owns 100% of the plaintiff Crawford Fitting Company and varying percentages of the regional warehouses, which own 80% of Constance. However, we note that Crawford Fitting Company, as earlier pointed out, was not the parent company of the warehouses, nor was it the parent company of the captive insurance company. The fact that Fred A. Lennon owns Crawford and a percentage of the warehouses does not mean that the warehouses’ 80% ownership interest in Constance is the same as an 80% ownership by Crawford. Any gain or loss enjoyed or suffered by Constance does not affect the net worth of Crawford. The Court thus finds Fred A. Lennon’s ownership interest in the different companies inconsequential where each in fact was incorporated for a valid business purpose independent from the others, and the creation of each was followed by legitimate business activity. See Steams-Roger Corp., Inc., supra at 836, 84-1 T.C. at 83,219.

Furthermore, the ownership structure of Constance was diversified by the participation and ownership of shareholders other than the regional warehouses. While the government argues that the 20% ownership of the captive by Tobe, Fant, Callahan, and Mansour, was ownership by shareholders so closely connected with Crawford and its owner as to constitute ownership by the same, or at least by members of the same economic family, the Court finds that some kind of employment relationship with the plaintiff, an insured of the captive company, but not an owner, to be insignificant. None of those four men will, by virtue of their employment relationship with Crawford or the owner thereof, feel the benefit of the deduction for insurance premiums taken by Crawford in insuring with the captive. Furthermore, any interest they have in Crawford will not suffer a loss by virtue of any loss of the captive.

The Court also takes notice of the fact that beyond the distinguishing presence of nonaffiliated shareholders in the case at bar is the presence of nonaffiliated policyholders. The named insureds under the policy included not only Fred A. Lennon and Crawford, but the other manufacturing companies, the numerous companies that supply goods and services to the manufacturing companies, the 115 independent distributors of the Crawford products, the profit sharing trusts administered by Midwest Bank and Trust Company, as well as A.P. Lennon, J.P. Lennon, C.L. Lozick, and Edward L. Lozick. None of these have any ownership interest in the captive insurance company, or, for that matter, in the plaintiff taxpayer. Each of the covered companies paid a premium proportionate to its insurance coverage, an amount totaling, by the Court’s calculations, slightly more than 70% of all premiums received by Constance, although the amount of premiums relating to the potential liability of the independent distributors was incorporated in the premium paid by Crawford. See deposition of Ernest P. Mansour, pp. 17, 34, appended to Stipulation of Facts as Exhibit K. These various persons and entities covered under the policy existed independent of the plaintiff, and the risks they faced were sufficiently similar and independent of those faced by the plaintiff so as to make the sum of risks carried by the captive company less than the sum of risks of the insureds. The Court notes as an aside that the parties themselves stipulated that the 115 independent distributors are not owned either directly or indirectly by Crawford.

Additionally, and not inconsequentially, the Court notes that the initial capitalization of Constance, provided by the shareholders in proportion to their ownership interest, totaled one million dollars. See Stipulation No. 13. In the instant case, there was no question, as there was in certain of the above recited factual situations, that the captive was inadequately capitalized to cover all risks it covered under the policy with the parent without an infusion of capital from the parent. In this case, the capitalization of Constance was more than adequate to cover the risks it retained under the policy. Specifically, Constance was capitalized to one million dollars. Of the $1,500,000.00 of coverage under the policy, Constance retained $100,-000.00 of the risk per occurrence, $100,-000.00 aggregate, so that it would not have to extend itself beyond the capitalization risk of the policy. The balance of $1,400,-000.00 was reinsured on an aggregate basis with an unrelated insurance company. Furthermore, there was no agreement between Crawford, the plaintiff, and the captive requiring the plaintiff to indemnify it for a sum of money above that amount initially paid by the plaintiff in capitalizing the captive, nor has such indemnification occurred. There have been no additional capital contributions since the initial capitalization.

In conclusion, the Court finds that the plaintiff did not form the captive insurance company for purposes of tax avoidance or evasion, but rather for a legitimate business purpose; that the captive insurance company is a separate and independent corporate entity which provided insurance for the plaintiff that was' unavailable or available only at higher rates; that the premiums charged by the plaintiff were actuarially based, and proportionate to the risks they covered; that plaintiff taxpayer is not a shareholder of the captive, nor a shareholder in any of the warehouses which have an ownership interest in Constance, and that a percentage of ownership in the captive by four men who have an employment relationship with the plaintiff taxpayer did not constitute ownership by Crawford or members of its “economic family”; and that various nonaffiliated persons or entities facing risks similar but independent of those faced by plaintiff were named insureds under the policy, enabling the distribution of risk thereunder.

The Court thus holds that the plaintiff did shift the risk of loss outside its economic family to the captive, who fairly and adequately distributed the risk of loss among its group of insureds, and that the financial transactions of the separate corporations should therefore not be aggregated and treated as the transactions of a single taxpayer. The amount paid by the taxpayer to the captive insurance company as an insurance premium is thus deductible as an ordinary and necessary business expense under § 162 of the Internal Revenue Code, and plaintiff is accordingly entitled to a refund in the amount of $9,423.00, plus interest thereon as provided by law.

IT IS SO ORDERED.

      . A well-stated definition of these two concepts was adopted by the Second Circuit Court of Appeals in Commissioner v. Treganowan, 183 F.2d 288 (2nd Cir.1950), cert. denied, 340 U.S. 853, 71 S.Ct. 82, 95 L.Ed. 625. Although the type of insurance under consideration was life insurance, we find the definition to be helpful nonetheless.
      Risk shifting emphasizes the individual aspect of insurance: the effecting of a contract between the insurer and insured each of whom gamble on the time the latter will die. Risk distribution, on the other hand, emphasizes the broader, social aspect of insurance as a method of dispelling the danger of a potential loss by spreading its cost throughout a group. By diffusing the risks through a mass of separate risk-shifting contracts, the insurer casts his lot with the law of averages.

        Id. at 291.

      . The Tenth Circuit Court of Appeals has set forth the difference between insurance and self-insurance in a nutshell: "Insurance exists when a contractual relationship between the insurer and the insured shifts to the insurer the risk of loss of the insured. Self-insurance is the assumption of risk of his own loss by one having an insurable interest (footnote omitted).” U.S. v. Newton Livestock Auction Market, Inc., 336 F.2d 673, 676 (10th Cir.1964).

      . Constance paid a premium of $475,000 for the reinsurance.

      . We note the Court's statement that "[t]here is no evidence that Beech made any guarantees that it would pay any losses which occurred greater than the excess insurance carried by Travel Air, nor did it agree to further enlarge the capital structure of Travel Air in any event.” Id. at 85,401.

      . At oral arguments, counsel for plaintiff represented that plaintiff has a third layer of additional coverage, which "goes up to $200 million.” See Tr. 15. The Court notes Stipulation No. 38, that Crawford had excess general and product liability insurance of at least 30 million dollars.


author: PATRICK F. KELLY, District Judge.

text:
    Clarence J. WENDLER, Plaintiff, v. UNITED STATES of America, Defendant.
    No. 84-1361-K.
    United States District Court, D. Kansas.
    Jan. 16, 1985.
    John Shirley, Scott City, Kan., J. Scott Hamilton, Denver, Colo., for plaintiff.
    Emily M. Trapnell, Torts Branch, Civil Div., U.S. Dept, of Justice, Washington, D.C., for F.A.A.; Walter Welch and Jerry Jones, Washington, D.C., of counsel.
   MEMORANDUM AND ORDER

PATRICK F. KELLY, District Judge.

Plaintiff Clarence J. Wendler, a commercial pilot, has brought this Federal Tort Claims Act (FTCA) suit against defendant United States of America (United States). Plaintiff seeks damages claiming defendant’s agent, Federal Aviation Administration (FAA), was negligent in issuing an emergency suspension of plaintiff’s commercial pilot’s certificate and was negligent in processing plaintiff’s application for reissuance of the certificate. This action is before the Court on United States’ motion to dismiss. For reasons stated below, United States’ motion is granted.

The facts as alleged in plaintiff’s petition are as follows: Prior to September 29, 1980, plaintiff held a commercial pilot certificate and an airman medical certificate issued by FAA. These certificates were needed by plaintiff to engage in his commercial crop dusting business in Lane County, Kansas.

On September 29, 1980, FAA issued an emergency suspension of plaintiff’s commercial pilot certificate upon the recommendation of Dr. John Malina, Regional Flight Surgeon for FAA.

On October 6, 1980, plaintiff appealed the suspension to the National Transportation Safety Board (NTSB).

On November 17, 1980, plaintiffs appeal was dismissed by stipulation between plaintiffs attorney and counsel for FAA. The stipulation provided that plaintiff was to reapply for his airman medical certificate and supply certain information to FAA. In return, FAA promised to expedite plaintiffs reapplication and reissue his certification upon proof of qualification.

Plaintiff asserts FAA was negligent in issuing the suspension and was negligent in processing plaintiffs reapplication for his airman medical certificate and commercial pilot certificate. Plaintiff also asserts these certificates were not reissued to him until October 30, 1981, 13 months after issuance of his emergency suspension, despite FAA’s actual knowledge as of October 16, 1980, that there was no reasonable ground for the suspension or for refusing to reissue the certification.

Plaintiff alleges FAA owed him a duty to exercise due care before issuing the suspension and owed him a duty to promptly process his reapplication. Plaintiff claims these duties were breached, and as a result he suffered $240,600.00 in lost income and $125,000.00 in mental anguish.

This being a motion to dismiss, plaintiff is entitled to the benefit of any factual doubts. Ammon v. Kaplow, 468 F.Supp. 1304, 1309 (D.Kan.1979). In addition, the allegations of Wendler’s complaint must be taken as true to the extent they are not contradicted by affidavits. Wyatt v. Kaplan, 686 F.2d 276, 282 n. 13 (5th Cir.1982) (citing Black v. Acme Markets, Inc., 564 F.2d 681, 683 n. 3 (5th Cir.1977).

United States asserts it is entitled to have Wendler’s action dismissed for the following reasons: (1) plaintiff’s complaint fails to state a claim upon which relief may be granted; (2) the acts by FAA fall within the discretionary function exception of the FTCA, 28 U.S.C. § 2680(a); and (3) the acts by FAA fall within the interference with contract exception of the FTCA, 28 U.S.C. § 2860(h).

Because there are sufficient grounds to dismiss Wendler’s action based upon the discretionary function exception of the FTCA, there is no need to address the other asserted grounds for dismissal.

The discretionary function exception of the FTCA, 28 U.S.C. § 2680(a), provides: The provisions of this chapter and section 1346(b) of this title shall not apply to—

Any claim based upon an act or omission of an employee of the government, exercising due care, in the execution of a statute or regulation, whether or not such statute or regulation be valid, or based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the government, whether or not the discretion involved be abused.

The controlling authority interpreting this discretionary function exception is United States v. S.A. Empresa De Viacao Aerea Rio Grandense (Varig Airlines) et al., — U.S. -, 104 S.Ct. 2755, 81 L.Ed.2d 660 (1984) (Varig). In Varig, Chief Justice Burger, expressing the unanimous view of the court, held the discretionary function exception to the FTCA (28 U.S.C. § 2680(a)) immunizes United States and precludes a tort action based upon FAA’s conduct in its aircraft certification process, which process places the duty to insure that an aircraft conforms to safety regulations on the manufacturer and operator, and places on FAA the role of policing the conduct of private individuals by monitoring their compliance with federal regulations by means of a spot check program.

In so holding, Chief Justice Burger stated:

... it is possible to isolate several factors useful in determining when the acts of a Government employee are protected from liability by § 2680(a). First, it is the nature of the conduct, rather than the status of the actor, that governs whether the discretionary function exception applies in a given case. As the Court pointed out in Dalehite [v. U.S.], the exception covers “[n]ot only agencies of government ... but all employees exercising discretion.” 346 U.S. [15] at 33, 73 S.Ct. [956] at 966 [97 L.Ed. 1427]. Thus, the basic inquiry concerning the application of the discretionary function exception is whether the challenged acts of a Government employee — whatever his or her rank — are of the nature and quality that Congress intended to shield from tort liability.
Second, whatever else the discretionary function exception may include, it plainly was intended to encompass the discretionary acts of the Government acting in its role as a regulator of the conduct of private individuals. Time and again the legislative history refers to the acts of regulatory agencies as examples of those covered by the exception, and it is significant that the early tort claims bills considered by Congress specifically exempted two major regulatory agencies by name. See supra, at — [104 S.Ct. at 2763]. This emphasis upon protection for regulatory activities suggests an underlying basis for the inclusion of an exception for discretionary functions in the Act: Congress wished to prevent judicial “second-guessing” of legislative and administrative decisions grounded in social, economic, and political policy through the medium of an action in tort. By fashioning an exception for discretionary governmental functions, including regulatory activities, Congress took “steps to protect the Government from liability that would seriously handicap efficient government operations.” United States v. Muniz, 374 U.S. 150, 163, 83 S.Ct. 1850, 1858, 10 L.Ed.2d 805 (1963).

— U.S. at -, 104 S.Ct. at 2765, 81 L.Ed.2d at 674-75 (footnotes omitted).

The above language in Varig controls the outcome of the case at bar. In addition, this Court agrees with the court’s statement in Flammia v. United States, 739 F.2d 202 (5th Cir.1984), that: “[w]e view the language of Varig Airlines to dictate that the exemption under the Federal Tort Claims Act derived from this discretion extends to specific individual applications as well as to broad policies.” 739 F.2d at 204. For several reasons, the present action is one of those cases of “specific individual application.”

First, medical determinations concerning public safety are inherently discretionary. In Beins v. United States, 695 F.2d 591 (D.C.Cir.1982), a factually analogous case to the case at bar which defendant relies upon, the court stated:

Finally, we note that some medical standards do require the FAA to balance a medical judgment with a calculation of whether the applicant’s medical condition permits him to perform his duties safely....
This language [of 14 C.F.R. § 67.-13(d)(2)(ii), . 15(d)(2)(ii)(d)(2)(ii) (1982).] requires the air surgeon to use his medical judgment to determine whether the applicant suffers or has suffered a convulsive disorder, disturbance of consciousness, or neurologic condition. Then he must analyze the scope of any such problem. Finally, the air surgeon has to decide whether the condition would make the pilot unable to perform his duties safely at present or within two years. In this case, we find that this last step — the determination under this regulation of whether appellant’s possible neurologic problems made him unable to perform his duties or exercise his privileges safely — left the air surgeon a range of policy judgment, albeit a narrow one. In making his decision, the air surgeon had to evaluate how, and the likelihood that, appellant would have future neurologic problems that could impinge on his performance as a pilot. Then the air surgeon had to calculate thé possible effects of the problems on air safety. This was not just a matter of testing known medical facts against a clear medical standard. For these reasons, we conclude that the specific determinations of the air surgeon about this appellant’s neurological fitness constitute an exercise of discretion under the terms of the exception in 28 U.S.C. § 2680(a).

695 F.2d at 603-05.

Second, because the medical licensing authority of FAA is unparalleled in the private sector, this case is clearly one where the government is “acting in its role as regulator of the conduct of private individuals.” This proposition has support in the Tenth Circuit. In McMann v. Northern Pueblos Enterprises, et al., 594 F.2d 784 (10th Cir.1979), the Tenth Circuit Court of Appeals held because the Miller Act deals with federal contracts, a private party could never be in a position to require a Miller bond, and thus could never be liable for failure to require the bond. Id. at 786; see also, Arvanis v. Noslo Engineering Consultants, Inc., 739 F.2d 1287, 1290 (7th Cir.1984).

Another reason Varig controls the present action is because the policy of “not wanting to handicap efficient government operations” would not be furthered by allowing plaintiff to pursue this suit. In a case interpreting Varig, the court in Proctor v. United States, No. 83-3415 AWT, Aug. 23, 1984 (C.D.Cal.), mindful of this policy, stated:

The (...) entire FAA certification process is immune from potential tort liability-

Id. If the process involved in the present action was not immune, the policy that Congress took “steps to protect the government from liability that would seriously handicap efficient government operations” would be defeated. Such would be the case if the air surgeon’s medical determination to suspend and the determination process to reissue plaintiff’s airman medical certificate were influenced by the fear of a tort suit.

Moreover, the better policy is to err in favor of grounding a pilot of suspect qualifications. This, because as noted in Delta Airlines v. United States, 490 F.Supp. 907 (N.D.Ga.1980), FAA’s obligation and responsibility to the public at large outweigh its responsibility to the individual pilot. Id. at 917. In addition, as stated by the court in Delta Airlines, FAA’s very purpose is to:

... promote air safety and to require the air carriers “to perform their services with the highest possible degree of safety in the public interest.” Exemptions which are merely in the private, economic interest of the individual airman may not be granted, since exemptions may not be used simply for the “alleviation of personal hardship cases.” Starr v. FAA, 589 F.2d 307, 312 (7th Cir.1978). The rationale for this holding has been succinctly stated by the Fifth Circuit: “It is well known that there is very little second chance given to one who loses control of an aircraft, particularly during critical periods of flight____”

490 F.Supp. at 918.

Finally, because in Beins the court held edical determinations involving the safety of the public at large involve some policy judgment, and the Supreme Court’s statement in Varig that “[wjhere there is room for policy judgment and decision there is discretion.”, 104 S.Ct. at 2764, the acts of FAA in issuing the emergency order of suspension of plaintiff’s airman medical certificate and commercial pilot certificate and the acts of FAA in handling plaintiff’s reapplication for certification were discretionary. Thus, they fall under 28 U.S.C. § 2680(a), and this Court lacks subject matter jurisdiction to hear plaintiff’s case.

IT IS THEREFORE ORDERED this 16 day of January, 1985, that defendant United States of America’s motion to dismiss this cause of action is granted.


author: TOM S. LEE, District Judge.

text:
    James Edward JACKSON, et al., Plaintiff, v. FRANKLIN COUNTY SCHOOL BOARD, et al., Defendants.
    Civ. A. No. J84-0716(L).
    United States District Court, S.D. Mississippi, Jackson Division.
    Jan. 18, 1985.
    Willie L. Rose, McComb, Miss., for plaintiff.
    W.H. McGehee, McGehee, McGehee & Torrey, Meadville, Miss., for defendants.
   MEMORANDUM OPINION AND ORDER

TOM S. LEE, District Judge.

This cause is before the court on the motion of the plaintiffs, James Edward Jackson, a minor, and his mother, Lillie R. Thompson, to require the defendants, Franklin County School Board, Barry Dillard and Larry Jones, to comply with the interim placement requirements of 20 U.S.C. § 1415 and with a previous order of this court. After consideration of evidence and testimony presented at a hearing and the memoranda of authority submitted by the parties, the court is of the opinion that the plaintiffs’ motion for preliminary injunction should be denied.

In January 1984, Jackson was involved in an altercation with a girl in a special education class at Franklin County High School. After admitting to school authorities that he unbuttoned the girl’s blouse and touched her breast, he was suspended from school for three days. During his suspension, Jackson went before the Franklin County Youth Court regarding the incident and was sent to East Mississippi State Hospital for three months for treatment, counselling and continued educational services. He was released from East Mississippi after approximately one month and returned to live with his mother in Franklin County. A decision was made by his mother that he not return to school for the balance of the school year. He has not attended Franklin County High School since his suspension in January and did not to seek readmission until the fall semester of 1984. On September 24, the plaintiffs filed this action to obtain James’ readmission to the school. After a hearing on their first motion for preliminary injunction, the court ordered that the parties meet the next day to prepare the individualized education program (IEP) necessary to readmit Jackson as a student. After review of Jackson’s psychological and academic reports, Franklin County’s Director of Special Education, Dr. Aleta Schexnayder, stated that his primary needs were, in descending order of priority, in-depth counselling, vocational training and academics. Dr. Schexnayder suggested group homes in Mississippi and Devrereaux schools outside the state on the basis that these facilities could meet all three of Jackson’s needs, as well as provide twenty-four supervision and a controlled environment. A Job Corps program would provide vocational training as well as counselling but would not meet Jackson’s academic needs. Dr. Schexnayder stated that the school system could not meet all three of his needs, as the vocational program at Franklin County High School, adult education, and home tutoring would satisfy some vocational and academic needs but would not provide the counselling that Dr. Schexnayder considers to be the top priority. Franklin County does not have the personnel to provide in-depth counselling treatment in a controlled environment that she believes will be most beneficial to Jackson. The parties discussed the options available to meet the specified needs, and the plaintiffs and their attorneys rejected each offer. Following the conference, the plaintiffs initiated the administrative appellate procedure provided in the Education for all Handicapped Children Act (EAHAC) and also filed this second motion for preliminary injunction.

The criteria for the issuance of a preliminary injunction are well settled in the Fifth Circuit. The moving party must demonstrate:

1. A substantial likelihood that the movant will prevail on the merits;

2. A substantial threat that the movant will suffer irreparable injury if the injunction is not granted;

3. That the threatened injury to the movant outweighs the threatened harm the injunction may do to the nonmoving party; and

4. That granting the preliminary injunction will not disserve the public interest. Canal Authority v. Callaway, 489 F.2d 567, 572 (5th Cir.1979). A preliminary injunction is extraordinary relief and should only be granted upon a clear showing by the plaintiff. Id.

The plaintiffs must first establish a substantial likelihood of success on the merits of their claims. The issue presented by the plaintiffs’ motion is narrow and deals only with the educational placement of Jackson pending resolution of his appellate proceedings. 20 U.S.C. § 1415(e)(3) states:

(3) During the pendency of any proceeding conducted pursuant to this section, unless the State or local educational agency and the parents or guardian otherwise agree, the child shall remain in the then current educational placement of such child, or, if applying for initial admission to a public school, shall, with the consent of the parents or guardian, be placed in the public school program until all such proceedings have been completed.

The plaintiffs contend that Jackson is entitled to return to in-school placement under the IEP in effect when he left school in January 1984. The defendants argue that Jackson currently has no IEP in effect because the January 1984 plan had expired. A revised IEP is required, according to the defendants, and, because of repeated instances of Jackson’s disruptive behavior, in-school placement is no longer advisable or practicable. Dr. Schexnayder opined that, based on psychological reports reflecting that Jackson suffers from a psychosexual disorder and on her contact with him, Jackson would be disruptive of the educational process and dangerous to the emotional and physical well-being of other students. Prior to the January 1984 incident, Jackson was involved in two similar incidents, one of which occurred on school grounds and resulted in his being adjudicated a delinquent by the Franklin County Youth Court. The other incident, involving a three year old child, resulted in Jackson’s being sent to Columbia Training School. The defendants have, however, offered to provide Jackson with home tutoring and counselling services through Southwest Mississippi Mental Health while his appeal is pending. In addition, the defendants’ offers of placement at facilities outside Franklin County remain open. The plaintiffs have rejected these offers and apparently will accept nothing but in-school placement.

The EAHCA provides the framework whereby federal funding for education of handicapped children is available to public school systems. The Act guarantees a “free appropriate public education” for all handicapped children. See Stacey G. v. Pasadena Independent School District, 695 F.2d 949, 952 (5th Cir.1983). 20 U.S.C. § 1415(e)(3) protects the child’s rights by requiring that the student be maintained in “the then current educational placement.” However, “[wjhile the placement may not be changed, this does not preclude the agency from using its normal procedures for dealing with children who are endangering themselves or others.” 34 C.F.R. § 300.513 (comment). The school system retains its authority and duty to “ensure a safe school environment.” S-1 v. Turlington, 635 F.2d 342, 348 n. 9 (5th Cir.1981).

This court is of the opinion that the defendants’ refusal to permit Jackson to continue with his in-school placement is based on the reasonable conclusion that he would disrupt the educational process of other students and is not violative of the school’s responsibility to him. Furthermore, it is clear that the services offered meet Jackson’s needs more effectively than the IEP in effect in January 1984. Therefore, plaintiffs have not shown a substantial likelihood of success on the merits.

Plaintiffs have also failed to show that Jackson will suffer irreparable harm by not being allowed to resume his studies pursuant to the January 1984 IEP. Of course, remaining out of school normally is harmful to any student, but it appears that neither Jackson nor his mother made a concerted effort for readmission until recently. In addition, according to Dr. Schexnayder, who enjoys the full confidence of plaintiffs and their witness, Donna Miller, Jackson’s own educational needs would be better served in group residential placement. Finally, the plaintiffs and their attorneys have rejected every option for alternative educational service, including temporary tutoring at the public library or at home and counselling, with no apparent basis except personal preference. Franklin County is apparently willing to accept increased financial burdens in order to satisfy Jackson’s special needs. To allow him to return to an outdated IEP and disregard the offered assistance would not be beneficial to him or in his best interest.

Any harm suffered by Jackson is outweighed by the defendants’ showing that his presence would interfere with the providing of effective educational services to other students. Furthermore, the public interest is best served by preserving the defendants’ ability to provide a safe and effective environment for learning, while still offering quality educational services to Jackson.

Because the plaintiffs have failed to satisfy the requirements of the Canal Au thority test, it is ordered that the motion for preliminary injunction is denied. This court notes that this order deals only with services to be provided for a short period of time. If Jackson, his mother and his attorneys will accept one of the service options offered by the defendants, his education need not be further interrupted, and he will be in a better position to continue his studies following resolution of administrative appeals regarding permanent placement.

At the hearing, the court reserved ruling on the plaintiffs objection to the admissibility of records from East Mississippi State Hospital. Consideration of those records, except excerpts elicited on cross examination, was unnecessary to the court’s ruling and the plaintiffs’ objection is, therefore, sustained. The court reserves ruling on the defendants’ motion for the imposition of sanctions against the plaintiffs for the filing of this motion, alleged to be repetitive and frivolous.