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James H. Gordon has been petitioner's independent actuary
since its incorporation in 1967, except for 1979 to 1982.
Mr. Gordon negotiated the 1988 Agreement on behalf of petitioner,
and he dealt only with Jeremy Starr of Guardian. Mr. Gordon
attempted to obtain for petitioner a risk fee between 1.5 and 1.8
percent. Guardian refused to pay that amount.
The effect of the 1988 Agreement on Guardian was to increase
its taxable income by the $1 million ceding commission, in
addition to a tax on equity that resulted from Guardian’s status
as a mutual insurer, and decrease its liabilities related to its
coinsurance reserves. Petitioner was able to retain assets from
its credit life and disability business (and the related
investment income) that it would have otherwise had to cede away,
and it was able to retain the underwriting profit on that
business.
The 1988 Agreement did not extend any loss carryover period
for petitioner. It did not eliminate for petitioner any separate
return limitation year (SRLY) taint from any previous operating
loss. It did not change the character of any item of income or
deduction for petitioner from ordinary to capital or capital to
ordinary. It did not change the source of any item of income or
deduction for petitioner from foreign to domestic or domestic to
foreign.
b. First Amendment/Trust Account
The first amendment to the 1988 Agreement was completed on
January 28, 1989. It required that: (1) A trust (the Trust) be
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