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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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