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overall plan that projected costs and benefits for each year over
a 60-year period. See appendixes A and B. Petitioner also
recognized that circumstances might well change during that
period that would cause it to modify or terminate the plan. In
fact, the COLI plan was impacted by legislation in 1996, and the
COLI policies were terminated in 1997. However, for the first 2
years, the COLI plan was followed and it produced results that
were consistent with plan projections.38 We will, therefore,
examine the economic substance of the COLI transactions by
analyzing the projections that reflect the plan.
Shortly after having been approached by WJ/Coventry
regarding proposals for COLI to be purchased from AIG, petitioner
decided that it was interested in what was described as a "zero-
cash strategy". This strategy was based on an elaborate plan
involving the purchase of life insurance on the lives of over
36,000 of petitioner's then current employees. The plan was
complex and depended upon relationships between many factors,
including number of lives insured, premium levels, policy
expenses, rates of interest to be charged and credited, policy
loans, cash surrender values, withdrawals from cash surrender
38The instant case involves deductions for accrued interest
and fees in the first plan year. The first year of the COLI
insurance began on Mar. 1, 1993, and ended on Feb. 28, 1994. The
deductions in issue were based on an allocation of the interest
and fees that had accrued during petitioner's taxable year ended
June 30, 1993.
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