Trans City Life Insurance Company, an Arizona Corporation - Page 1

                                   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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