The Progressive Corporation v. United States

Insurance company the Progressive Corporation (plaintiff) maintained an active investment portfolio. Progressive employed various investment strategies, including trading in a forward conversion, by which Progressive would make three contemporaneous transactions. First, Progressive purchased common stock. Second, Progressive purchased a put option on a similar quantity of the same stock, giving Progressive the option to sell the stock at a designated, fixed price. Third, Progressive purchased a call option on a similar quantity of the same stock, giving Progressive the right to buy the stock at a set price in the future. In doing so, Progressive effectively hedged its initial stock purchase by retaining the right to buy or sell the same amount of stock depending on the stock’s performance. Progressive claimed deductions for dividends it collected from its initial stock purchase under 26 U.S.C. § 246, a provision of the Internal Revenue Code that permitted corporate tax deductions for dividends if the corporation held the stock in question for at least 16 days. After an Internal Revenue Service (IRS) audit, the IRS disallowed the deductions, taking the position that Progressive’s concurrent put options reduced its stock-holding period to zero days because Progressive had a right to sell the stock the entire time it owned the stock. Progressive sued the United States (defendant), and the district court granted Progressive’s motion for summary judgment. The United States appealed.