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values, and death benefits. Petitioner was to be the owner and
beneficiary of the policies. Detailed projections were prepared
to demonstrate the financial impact of the plan. The projections
assumed a high rate of interest (11.06 percent) would be charged
to petitioner on its policy loans. This would be countered by a
high rate of interest to be credited to petitioner on the portion
of the gross cash surrender value that petitioner had borrowed
against. The crediting rate was 40 basis points below the rate
charged to petitioner on its policy loans (10.66 percent). The
rate to be credited on the unborrowed portion of the gross cash
surrender value was 4 percent. Policy loans by petitioner would
be used to pay most of the premiums and interest with the result
that petitioner's net equity in the policies would remain
relatively small. Death benefits would be applied to reduce
outstanding policy loans.
The profit and loss statements in the projections illustrate
the pretax effect and the after-tax effect that the COLI plan
would have on petitioner. The difference between pretax and
after-tax effects was based on the income tax savings that would
result from deducting policy loan interest and administrative
fees. Policy loan interest was clearly the dominant element.
All the various projections prepared before the actual purchase
of the policies in June 1993 show that the pretax effect on
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