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locations. The insured employees' lives were to remain insured
even after their employment was terminated. The anticipated
mortality of this large group was actuarially determined, and
both AIG and petitioner engaged in the COLI transactions based on
these actuarial expectations. While there would obviously be
some variation in the actual mortality of the insured population,
such variations were not expected to significantly affect the
plan. And as explained later, the function of the claims
stabilization reserve was to ameliorate fluctuations in actual
mortality experience.
Economic substance depends on whether, from an objective
standpoint, the transaction was likely to produce economic
benefits aside from tax deductions. See Kirchman v.
Commissioner, 862 F.2d at 1492; Bail Bonds by Marvin Nelson, Inc.
v. Commissioner, 820 F.2d 1543, 1549 (9th Cir. 1987), affg. T.C.
Memo. 1986-23. Viewing the COLI plan as a whole, we find that
the only function of the plan was to produce tax deductions in
order to reduce petitioner's income tax liabilities. Without the
tax deductions, the plan as designed would produce a negative
cash-flow and a negative earnings effect for petitioner in each
and every year the plan was in effect. Consequently, the COLI
transactions lacked economic substance apart from producing tax
deductions.
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