113 T.C. No. 21
UNITED STATES TAX COURT
WINN-DIXIE STORES, INC. AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5382-97. Filed October 19, 1999.
P entered into a leveraged corporate-owned life
insurance (COLI) program in which it purchased life
insurance on approximately 36,000 of its employees and
systematically borrowed against the cash value of the
policies to fund the premiums. The COLI program was
designed so that annual premiums, fees, and policy loan
interest would exceed the projected annual death
benefits and net cash value of the policies. The
program was designed to generate large amounts of
interest on petitioner's policy loans that petitioner
intended to deduct for income tax purposes. The income
tax savings from the deductions for interest and fees
were projected to be substantially in excess of the
projected net costs of maintaining the COLI program.
In each year of operation, the COLI program projected a
pretax loss and an after-tax gain.
Held: P's broad-based leveraged COLI program
lacked economic substance and business purpose (other
than tax reduction) and is therefore a sham for tax
purposes. As a result, interest on P's COLI policy
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