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reserves. Respondent argues that these long-term reserves led to
tax avoidance, and that the coinsurance-modco structure did not
change the Agreements into the equivalent of YRTLI or otherwise
minimize their tax avoidance effect. We disagree. Ms. Wallace
testified (and we believed) that the use of the coinsurance-modco
structure minimized the transfer of reserves to petitioner.
Under this structure, she testified, many of the reserves stayed
with Guardian instead of being transferred to petitioner. This
structure was similar to the reinsurance of YRTLI.
This factor favors petitioner.
iii. Determining Potential Profits and Experience Rating
An experience rating formula that results in the reinsurer’s
assuming a risk of loss beyond the annual mortality risk, as well
as enjoying a share of profits commensurate with its loss
exposure, may indicate that the tax benefits resulting from the
assumption of reserve liabilities by the reinsurer are not
disproportionate to the risk transferred between the parties.
When the experience rating formula for a reinsurance agreement
results in the reinsurer’s receiving only an annual risk premium,
plus a fixed fee, the agreement may be economically equivalent to
YRTLI combined with a financing arrangement. H. Conf. Rept.
98-861, supra at 1063, 1984-3 C.B. (Vol. 2) at 317.
Respondent argues that the fee structure of the Agreements
was a financing arrangement. Respondent claims that the
Agreements were structured to terminate when the EAB equaled
zero. Respondent concludes that petitioner rented its surplus to
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