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Corporation, which had two wholly owned subsidiaries, National
American Life Insurance Company of Pennsylvania, a Pennsylvania
Corporation (NALICO), and Western States Administrators, a
California Corporation (WSA).
During 1989, both NALICO and WSA required infusions of
additional capital. Because of significant 1989 losses in its
accident and health insurance business, NALICO required
additional capital in order to satisfy general industry
guidelines and State law requirements relating to the maintenance
of a premium-to-capital ratio of not more than 10 to 1. WSA
required additional capital in order to maintain, on a
consolidated basis, a minimum net worth of $7 million pursuant to
a bank loan agreement. As of September 30, 1989, NAC
Corporation, WSA, and NALICO had a consolidated net worth of
$5,841,436.
Petitioners undertook to satisfy these capital requirements
by transferring three parcels of improved real property, and
their $1,060,000 unsecured promissory note (the Capital Note), to
NAC Corporation, the parent corporation of the two capital-
deficient, wholly owned subsidiaries. As of December 31, 1989,
petitioners had a net worth far in excess of the consolidated net
worth of NAC Corporation, WSA, and NALICO.
The first of the three parcels, the Clinton Way Property,
had a fair market value of $1,870,000 on December 26, 1989, the
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