Trans City Life Insurance Company, an Arizona Corporation - Page 21

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          primary business objective because it enabled petitioner to earn            
          more money for its shareholders (irrespective of tax                        
          consequences) than any other alternative.  Instead of entering              
          into the Agreements, petitioner could have ceded away its credit            
          disability insurance business in order to maintain its                      
          qualification as a life insurance company.   Petitioner employed            
          this technique both before and after the subject years.  If                 
          petitioner had ceded away its credit disability business, it                
          would have paid less tax than it did by entering into the                   
          Agreements.                                                                 
          4.  1988 Agreement                                                          
               a.  Original Agreement                                                 
               The 1988 Agreement was drafted by Guardian.  Under the                 
          agreement, petitioner assumed 95 percent of Guardian’s interest             
          in Guardian’s:  (1) January 1, 1984, reinsurance agreement with             
          Business Men’s Assurance (BMA) and (2) January 1, 1985,                     
          reinsurance agreement with United Pacific Life Insurance Company            
          (UPL).  Guardian retained an experience refund equal to 90                  
          percent of the positive net cash-flow from the reinsured                    
          policies.  The experience refund provision was part of the 1988             
          Agreement because Guardian was unwilling to sell to petitioner              
          the profits on business with reserves in excess of $180 million             
          for $1 million.  The parties agreed to the 90-percent figure                
          because the block of business was expected to be sufficiently               
          profitable that petitioner's 10 percent of the profits would                
          exceed the ceding commission.                                               





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