- 60 -
significance, economic substance, or commercial substance other
than the tax benefit.
Based upon all the aforementioned considerations, we find
that petitioner purchased the COLI policies in 1993 pursuant to a
plan the only function of which was to generate interest and fee
deductions in order to offset income from other sources and
thereby significantly reduce its income tax liability. We hold
that petitioner's 1993 broad-based COLI program lacked substance
and was a sham.
Petitioner argues that lack of economic substance does not
warrant disallowing the interest deduction in question because
deductions for interest on life insurance policy loans were
condoned by Congress as indicated by the safe harbor test of
section 264 and its legislative history. Petitioner argues that
the legislative history shows that Congress clearly accepted the
deductibility of interest on corporate-owned life insurance
products that satisfy the safe harbor tests of section 264.
Petitioner maintains that because its COLI policies were life
insurance contracts within the meaning of section 7702 and its
pattern of borrowing from the policies satisfied the "four-of-
seven test" of section 264(c)(1), its loan interest is deductible
under section 163. Petitioner also argues that because Congress,
through legislation in 1996, further extended its denial of
deductions associated with interest payments on COLI policy
Page: Previous 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 NextLast modified: May 25, 2011