The North West Life Assurance Company of Canada - Page 1

                                          107 T.C. No. 19                                              

                                     UNITED STATES TAX COURT                                           

             THE NORTH WEST LIFE ASSURANCE COMPANY OF CANADA, Petitioner v.                            
                        COMMISSIONER OF INTERNAL REVENUE, Respondent                                   

                  Docket No. 4694-94.               Filed December 12, 1996.                           

                        P, a Canadian insurance company, operated through                              
                  a permanent establishment in the United States for                                   
                  purposes of the income tax convention between the                                    
                  United States and Canada.  P reported its net                                        
                  investment income effectively connected with its                                     
                  conduct of an insurance business within the United                                   
                  States pursuant to sec. 842(a), I.R.C., without regard                               
                  to the minimum amount of net investment income that                                  
                  sec. 842(b), I.R.C., treated as effectively connected.                               
                  P claimed under the Convention With Respect to Taxes on                              
                  Income and on Capital, Sept. 26, 1980, U.S.-Can.,                                    
                  T.I.A.S. No. 11087, 1986-2 C.B. 258 (Canadian                                        
                  Convention), to be exempt from sec. 842(b), I.R.C.                                   
                  Held, art. VII(2) of the Canadian Convention requires                                
                  that profits attributed to a permanent establishment be                              
                  measured based on the permanent establishment's facts                                
                  and by reference to the establishment's separate                                     
                  accounts insofar as those accounts represent the real                                
                  facts of the situation.  Held, further, sec. 842(b),                                 
                  I.R.C. in prescribing a statutory minimum amount of net                              
                  investment income that must be treated as effectively                                

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