- 93 -
nonexistent.49 As a result, the level of risk, if any, that was
shifted from petitioner to NUF and OPL was insignificant.
The possibility that cumulative catastrophic losses in
excess of the $10 million per-occurrence limit on the AFM policy
would occur, and that claims for occurrences involving less than
$25,000 would increase dramatically, and that, either
individually or in combination, they would exceed total EVC's,
was improbable, unrealistic, and insignificant. We find that
these theoretical possibilities had nothing to do with
petitioner's motivation for transferring the EVC profits, less
fronting costs, to OPL and that the insertion of NUF and OPL into
petitioner's EVC activity provided no significant nontax benefit
to either petitioner or its shippers.
49We agree with respondent's expert Mr. Edward T. Kelley,
who concluded as follows:
As a general rule, the firm would prudently retain
exposures which could be expected to generate
reasonably predictable numbers of claims and relatively
stable and consistent amounts of total loss, and seek
to transfer exposures with substantially lower
predictability and greater volatility to an insurer
willing to assume liability for such exposures at terms
acceptable to the firm. Since * * * [petitioner], by
the nature of its operations, generates a very large
number of relatively homogeneous units of exposure, the
predictability of expected losses related to shippers'
property in its custody is very high and year to year
variability is relatively limited. Its self-insurance
program for handling claims for loss of or damage to
shippers' property produced consistently profitable
results during the years 1979 through 1982 * * *.
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