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petitioner for each policy year was a loss and that the after-tax
effect was a significant profit.
The projections submitted to petitioner on June 4, 1993,
were prepared just before petitioner's purchase of the COLI
policies in June 1993. These projections are attached as
appendix B. We shall use figures from the projections in
appendix B to illustrate the COLI plan's lack of economic
substance.
The elements of the COLI plan and their projected impact on
petitioner at the completion of the first policy year were as
follows. Petitioner would make a premium payment of $108,573,000
and simultaneously borrow $101,328,000 against the policy. This
required petitioner to pay the balance of $7,245,000 to AIG to
satisfy the premium. At the end of the policy year, interest
accrued on petitioner's policy loans would be $11,191,000, and
petitioner would also have incurred administrative fees of
$290,000. What benefit was petitioner to get for these costs?
At the end of the first policy year, the COLI policies would have
net cash surrender value of $11,287,000. In addition, based on
actuarial determinations, petitioner expected death benefits from
the COLI policies in the first year to be $3,250,000.39 Based on
the combination of these first-year costs and benefits, the net
39Under the terms of the policies, death benefits from a
policy would first be used to reduce any outstanding loan.
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