- 9 -
either with the original carrier or with another
carrier via a "1035" exchange, without incurring a tax
liability, a negative effect on earnings, or a
significant cash payment.
The memorandum outlined two proposed financial strategies
for structuring the purchase by petitioner of the pool of COLI
policies. The first strategy was labeled "cash management". The
second strategy was labeled the "zero-cash strategy" and was
described as follows:
Under Strategy 2, Winn-Dixie would maximize its tax
arbitrage by borrowing the first three premiums and
would minimize its cash investment by withdrawing
accumulated policy values to pay the next four
premiums. The policies used in this zero cash strategy
are specially designed to minimize cash outflows and to
maximize the rate of return on investment. Thus, loads
are minimal, the interest rate is high, and the loan
spread is limited to 40 basis points. Because little
cash is required, a higher premium can be used. We
have illustrated an average premium of $3,000 per
employee.
Petitioner elected strategy 2, the zero-cash strategy.
On January 25 and 27, 1993, Mr. Buerger sent revised copies1
of the 1993 COLI proposal materials to Mr. McCook and Mr.
Hlavacek. The revised 1993 COLI proposals outlined two scenarios
for the amount of interest petitioner was to be charged for
policy loans. Both interest scenarios were based upon the zero-
1The above-quoted sections of the proposal remained
substantially the same in each of the revised copies of the
proposal.
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