106 T.C. No. 15
UNITED STATES TAX COURT
TRANS CITY LIFE INSURANCE COMPANY,
AN ARIZONA CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 23678-93, 16934-94. Filed April 30, 1996.
P is an insurance company authorized to sell
disability and life insurance within the State of
Arizona. P’s primary and predominant business activity
is writing credit life and disability insurance
policies. During the subject years, P and G, an
unrelated entity, entered into two retrocession
(reinsurance) agreements for valid and substantial
business reasons. Under the terms of each agreement, G
retroceded its position on reinsurance to P, and P
agreed to pay G a $1 million ceding commission. The
agreements helped P qualify as a life insurance company
under sec. 816, I.R.C., which, in turn, allowed P to
claim the small life insurance company deduction under
sec. 806, I.R.C. Relying on sec. 845(b), I.R.C., R
disregarded both of these agreements because, she
alleged, the agreements did not transfer to P risks
proportionate to the benefits that P derived from the
small life insurance company deductions under sec. 806,
I.R.C.Held: R may rely on sec. 845(b), I.R.C., prior to
the issuance of regulations. Held, further: R
committed an abuse of discretion in determining that
the agreements had “a significant tax avoidance effect”
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