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generate for petitioner anything more than nominal profits, apart
from tax savings. Petitioner replies that the benefit of the
small life insurance company deduction is not a tax avoidance
effect under section 845(b). Petitioner claims that it entered
into the Agreements for valid and substantial business reasons
that went beyond qualifying as a life insurance company.
A tax avoidance effect must be significant to one or both of
the parties to a reinsurance agreement in order for the
Commissioner to exercise her authority to make adjustments under
section 845(b). The conference report on DEFRA states that a tax
avoidance effect is significant “if the transaction is designed
so that the tax benefits enjoyed by one or both parties to the
contract are disproportionate to the risk transferred between the
parties.” H. Conf. Rept. 98-861, supra at 1063; 1984-3 C.B.
(Vol. 2) at 317. This test focuses on the economic substance of
the agreement, and the conference report sets forth seven factors
that help determine an agreement’s economic substance. These
factors, which are nonexclusive and none of which is
determinative by itself, are: (1) The duration or age of the
business reinsured; (2) the character of the business reinsured;
(3) the structure for determining the potential profits of each
of the parties and any experience rating; (4) the duration of the
reinsurance agreement between the parties; (5) the parties’ right
to terminate the reinsurance agreement and the consequences of a
termination; (6) the relative tax positions of the parties; and
(7) the general financial situations of the parties. Id.
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