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risks underwritten by insurance companies.
Accordingly, Lone Star Life Insurance Company and
Hibiscus Life Insurance Company may not file
consolidated returns.
It is determined that reinsurance agreements
between Hibiscus Life Insurance Company and Lone Star
Life Insurance Company have significant tax avoidance
effect. This effect is eliminated by disallowing
Hibiscus's reserves associated with the reinsurance
agreements pursuant to I.R.C. sec. 845. As a result of
the disallowance Hibiscus has no reserves and fails to
qualify as an insurance company under I.R.C. sec. 816.
Accordingly, Lone Star Life Insurance Company and
Hibiscus Life Insurance Company may not file
consolidated returns.
Prior to April 18, 1996, Hibiscus received constructive and
actual notice of the notice of deficiency issued to petitioner.
Petitioner filed a timely petition for redetermination with
the Court contesting the notice of deficiency.5 The petition
includes an allegation that the notice of deficiency was issued
to petitioner after the expiration of the period of limitations.
Respondent filed an answer to the petition denying that the
period of limitations had expired in this case by virtue of the
Forms 872 that Revenue Agent Barrett obtained during the
examination. Petitioner in turn filed a reply to respondent's
answer asserting that, as a consequence of respondent's direct
dealing with petitioner during the examination process, the Forms
872 executed by Hibiscus were ineffective to extend the period of
limitations applicable to petitioner. As indicated, the parties'
5 At the time the petition was filed, petitioner maintained
its principal place of business at Dallas, Texas.
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