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This factor favors petitioner.
viii. Risk Transferred Versus Tax Benefits Derived
The legislative history of section 845(b) refers to a
determination of the amount of: (1) The tax benefits enjoyed by
the parties to a reinsurance agreement, as well as (2) the risk
transferred between the two. H. Conf. Rept. 98-861, supra at
1063, 1984-2 C.B. (Vol. 2) at 317. Respondent generally argues:
(1) The risk fees received by petitioner under the Agreements are
the appropriate measure of the risk transferred to it by Guardian
and (2) the small life insurance company deduction is the tax
benefit that petitioner derived from the Agreements. Respondent
concludes that Guardian did not transfer risks to petitioner
which were commensurate with the latter’s benefit from the small
life insurance deduction. In respondent’s view, petitioner
assumed minimal risk, as reflected in the size of the risk fees,
while enjoying disproportionate tax benefits.
We reject respondent’s position on the proper measure of
risk. A more appropriate standard is to compare the tax benefits
(in this case, petitioner’s tax savings from the small life
insurance company deduction) to petitioner’s exposure to loss
under the Agreements, measuring the latter based on the
difference between the face amount of the reinsured policies and
the amount of reserves backing those policies. By that
reckoning, the insurance risk incurred by petitioner was not
disproportionate to the tax benefits. The risks associated with
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