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Its primary and predominant business activity was writing credit
life and disability insurance policies covering individuals who
financed vehicles purchased from automobile dealers. During the
subject years, it wrote direct credit policies that generated the
following amounts of premiums from life and disability insurance:
Year Life insurance Disability insurance
1989 $3,227,739 $2,570,868
1990 2,626,873 1,971,888
1991 2,590,894 1,807,293
1992 3,189,966 2,079,715
b. Notices of Deficiency
Petitioner’s 1989 through 1992 Forms 1120L, U.S. Life
Insurance Company Income Tax Return, reported small life
insurance company deductions (see section 806) of $1,770,350,
$1,792,007, $1,361,574 and $1,109,638, respectively. Respondent
disallowed these deductions. According to the 1993 Notice:
Your reinsurance agreement with Guardian Life Insurance
Company of America has a significant tax avoidance
effect with respect to the Trans City Life Insurance
Company. Pursuant to Internal Revenue Code section 845
an adjustment is made to reserves to eliminate the
avoidance effect by treating the reinsurance agreement
as terminated on December 31, 1989 and reinstating the
agreement on January 1, 1990.
By eliminating the avoidance effect of this agreement
you do not meet the requirements of a life insurance
company as specified in Internal Revenue Code section
816 because the reserves necessary to meet the
definition of a life insurance company do not comprise
more than 50 percent of your total reserves.
Therefore, it is determined that the amount of
$1,770,350.00, claimed on your return as a small life
insurance company deduction for the taxable year ended
December 31, 1989, is not allowed.
Accordingly, income is increased in the amount of
$1,770,350.00 for the taxable year ended December 31, 1989.
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