113 T.C. No. 21

UNITED STATES TAX COURT

WINN-DIXIE STORES, INC. AND SUBSIDIARIES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5382-97. Filed October 19, 1999.

P entered into a leveraged corporate-owned life

insurance (COLI) program in which it purchased life

insurance on approximately 36,000 of its employees and

systematically borrowed against the cash value of the

policies to fund the premiums. The COLI program was

designed so that annual premiums, fees, and policy loan

interest would exceed the projected annual death

benefits and net cash value of the policies. The

program was designed to generate large amounts of

interest on petitioner's policy loans that petitioner

intended to deduct for income tax purposes. The income

tax savings from the deductions for interest and fees

were projected to be substantially in excess of the

projected net costs of maintaining the COLI program. 

In each year of operation, the COLI program projected a

pretax loss and an after-tax gain.

Held: P's broad-based leveraged COLI program

lacked economic substance and business purpose (other

than tax reduction) and is therefore a sham for tax

purposes. As a result, interest on P's COLI policy
- 2 -

loans is not deductible interest on indebtedness within

the meaning of sec. 163, I.R.C. The administrative

fees associated with the COLI program are not

deductible because they were incurred in furtherance of

a sham. 

Michael J. Henke, Tegan M. Flynn, Cary D. Pugh, Thomas

Crichton IV, Robert H. Cox, and Thomas P. Marinis, Jr., for

petitioner.

Nancy B. Herbert, Jeffrey L. Bassin, James D. Hill, and

Michelle A. Missry, for respondent.

RUWE, Judge: Respondent determined a deficiency of

$1,599,176 in petitioner's Federal income tax for its tax year

ending June 30, 1993. After concessions, the issue is whether

deductions petitioner claimed for policy loan interest and

administrative fees associated with certain of petitioner's

corporate-owned life insurance (COLI) policies are deductible.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulations of facts are incorporated herein by this

reference. At the time the petition was filed, petitioner was a
- 3 -

Florida corporation with its principal office in Jacksonville,

Florida. 

Petitioner was founded in the 1920's, and its stock is

publicly traded on the New York Stock Exchange. Petitioner is a

major food retailer made up of self-service food stores which

sell groceries, meats, seafood, fresh produce, deli/bakery,

pharmaceuticals, and general merchandise items. As of June 30,

1993, petitioner had 1,165 stores in 14 States and the Bahama

Islands. 

Petitioner is an accrual basis taxpayer, which has adopted a

52-53 week fiscal year ending on the last Wednesday in June. 

Petitioner filed a consolidated corporate Federal income tax

return for its fiscal year ending June 30, 1993. 

As of June 30, 1993, petitioner employed approximately

36,000 full-time and 69,000 part-time employees. Since 1988, all

full-time employees who completed 3 months of continuous service

have been eligible for a flexible benefits program called "WinnFlex". Under Winn-Flex, employees were furnished certain

benefits that they received automatically and certain optional

benefits among which they could choose. Employees automatically

received life insurance and accident and sickness coverage. The

optional benefits included a medical plan, dental coverage,

vision coverage, supplemental associate life insurance, long-term

disability and two flexible spending accounts for health care and
- 4 -

dependent care. Petitioner self-insured the medical and life

insurance benefits under Winn-Flex while the remaining benefits

were insured through third parties. 

The life insurance coverage provided by the company under

the core Winn-Flex benefit program was in effect only while a

worker was a full-time employee. Petitioner provided no

postretirement benefits to its employees under Winn-Flex. Early

retirees covered by the Winn-Flex plan had the option of

continued coverage under a separate insurance pool not paid for

by petitioner. 

Since 1980, petitioner has also maintained a program to

provide death, disability, and retirement benefits to a limited

number of full-time management level employees. This program was

known as the "Management Security Program" (MSP). During the

fiscal year ending in 1993, 615 of petitioner's employees were

covered under the MSP. In order to provide funds for specific

benefits for each manager, petitioner purchased flexible premium

adjustable life insurance policies on each manager (MSP policies)

from American Heritage Life Insurance Co. (AHL). The MSP

policies are individual policies and not group contracts. The

death benefits under the individual MSP policies were tailored to

cover petitioner's costs for preretirement deaths of the covered

individual and to cover costs of postretirement benefits. 
- 5 -

Petitioner's practice of purchasing MSP policies on the lives of

its managers began long before 1993.

During 1992 and early 1993, Wiedemann & Johnson (WJ) and The

Coventry Group (Coventry) formed a joint venture (WJ/Coventry)

and approached petitioner with a proposal for the purchase by

petitioner of individual excess interest life insurance policies

on the lives of petitioner's employees. AIG Life Insurance

Company (AIG) was to be the underwriter for the proposed

policies. In a letter dated January 12, 1993, Mr. Alan Buerger,

chairman of Coventry, confirmed a meeting on January 14, 1993,

with Mr. Richard D. McCook, petitioner's financial vice

president. Included with the letter was a memorandum from Mr.

Buerger and Mr. Bruce Hlavacek, chairman and chief executive

officer of WJ, proposing that petitioner purchase a "broad-based

COLI pool". 

The memorandum provided an overview section which generally

described a broad-based COLI pool as consisting of a group of

corporate-owned life insurance (COLI) policies covering a wide

cross-section of a corporation's employees. Petitioner was the

proposed beneficiary of the COLI policies to be written on the

lives of petitioner's employees. WJ/Coventry's proposal focused

on two issues raised by petitioner in a prior meeting. These two

issues were described as "(i) achieving positive earnings in
- 6 -

Insurance

Carrier

(1)

IRS

(3)

Winn-Dixie

(2)

every year; and (ii) providing an exit if the tax laws change or

Winn-Dixie's appetite for interest deductions declines." 

The memorandum summarized the tax aspects of leveraged COLI

with the following captioned diagram:

1 - Winn-Dixie makes deposits and pays loan interest

 to insurance carrier.

2 - Winn-Dixie receives withdrawals, loans and death 

 proceeds from the insurance carrier.

3 - Winn-Dixie receives a tax deduction for loan interest 

 paid.

The memorandum next explained the difference between the

proposed broad-based COLI pool and petitioner's then existing

leveraged COLI program being used to fund the MSP. The

memorandum stated:

Winn-Dixie is familiar with leveraged COLI and

particularly with the tax arbitrage created when

deductible policy loan interest is paid to finance nontaxable policy gains. Winn-Dixie's existing leveraged

COLI policies provide this arbitrage and, having been

purchased before passage of the 1986 Tax Reform Act,

provide it beyond the $50,000 cap applicable to newer

policies. 
- 7 -

A broad-based COLI Pool applies the same principle in

ways that are effective under current law. But, where

each of the existing policies was designed to fund a

specific executive's benefit under the MSP, the Pool

that we have illustrated would cover 38,000 employees

at all levels of Winn-Dixie's workforce. 

With respect to obtaining the employees' consent to purchase the

COLI policies on their lives, the memorandum stated:

We usually recommend that a company adopt or expand

employee death benefits when installing a COLI Pool. 

This provides an immediate and meaningful benefit for

employees, and it helps to provide a logic and

incentive for obtaining employees' consent to being

insured. The benefit may depend on the size of the

pool and the amount of the insurance purchased on each

employee. A death benefit in the range of $5,000 to

$15,000 is typical for the Pools presented here. After

an employee leaves the company, the benefit is normally

reduced or discontinued. With normal rates of

retirement and attrition, only a small proportion of

the participants will receive a benefit. As a result,

the cost of providing the benefit is insignificant. 

The memorandum also expressed an opinion on the tax issues

raised by the proposed COLI pool, the legislative status of

leveraged COLI, and exit strategies available to petitioner in

the event that the tax laws change: 

What tax issues are raised by the COLI Pool?

Deductibility of Interest. Because the COLI Pool

involves systematic borrowing of increases in the

policies' cash value, a deduction for interest to carry

policy loans is allowed only if at least four of the

first seven annual premiums are paid in cash. In

addition, a deduction is allowed for interest on only

the first $50,000 debt to carry policies on any one

employee. The COLI Pool proposed here is designed to

satisfy the 4-out-of-7 rule, and the financial

illustrations take into account the $50,000 cap on

loans for which interest deductions are allowed. 
- 8 -

 * * * * * * *

What is the legislative status of leveraged COLI?

In the past few years, Rep. Barbara Kennelly (D-Conn.)

and Senator David Pryor (D-Ark.) have introduced bills

that would impose new restrictions on the deductibility

of interest paid on loans from COLI policies. No bill

is now pending, but it is possible that one will be

introduced in the future. Kennelly/Pryor, as the last

such bill was generally known, was written with the

participation and support of the National Association

of Life Underwriters, and, if a similar bill does

become law, we do not believe the financial advantages

of Winn-Dixie's COLI Pool would be seriously

compromised.

History suggests that specific changes in the law that

would address leveraged COLI would also allow

grandfathering of existing policies. Past changes, for

example, imposition of the $50,000 loan cap, have

grandfathered existing policies, and the large number

of major corporations that have created COLI pools is a

significant political constituency. Of course,

grandfathering cannot be assumed, and we have,

therefore, kept the consequences of exit very much in

mind in developing strategies for Winn-Dixie.

What exit strategies are available if the tax laws or

Winn-Dixie's tax position changes?

A COLI Pool can become a financial burden if the tax

arbitrage in the program loses its attractiveness. 

This can occur, for example, if Winn-Dixie's marginal

tax rate on interest deductions becomes low and remains

low, if Winn-Dixie becomes an alternative minimum

taxpayer, or if the intended premium payment strategy

becomes invalid through regulation. Likewise, WinnDixie's appetite for interest expense may be satisfied

for reasons unrelated to deductibility.

 * * * * * * *

If it becomes necessary or useful to terminate the COLI

Pool, or to discontinue further borrowing, Winn-Dixie

will be able to do so without significant adverse

effect. The policies can be put on a "paid-up" basis,
- 9 -

1The above-quoted sections of the proposal remained

substantially the same in each of the revised copies of the

proposal. 

either with the original carrier or with another

carrier via a "1035" exchange, without incurring a tax

liability, a negative effect on earnings, or a

significant cash payment. 

The memorandum outlined two proposed financial strategies

for structuring the purchase by petitioner of the pool of COLI

policies. The first strategy was labeled "cash management". The

second strategy was labeled the "zero-cash strategy" and was

described as follows:

Under Strategy 2, Winn-Dixie would maximize its tax

arbitrage by borrowing the first three premiums and

would minimize its cash investment by withdrawing

accumulated policy values to pay the next four

premiums. The policies used in this zero cash strategy

are specially designed to minimize cash outflows and to

maximize the rate of return on investment. Thus, loads

are minimal, the interest rate is high, and the loan

spread is limited to 40 basis points. Because little

cash is required, a higher premium can be used. We

have illustrated an average premium of $3,000 per

employee. 

Petitioner elected strategy 2, the zero-cash strategy. 

On January 25 and 27, 1993, Mr. Buerger sent revised copies1

of the 1993 COLI proposal materials to Mr. McCook and Mr.

Hlavacek. The revised 1993 COLI proposals outlined two scenarios

for the amount of interest petitioner was to be charged for

policy loans. Both interest scenarios were based upon the zero-
- 10 -

2The Jan. 27, 1993, revised proposal assumed a pool covering

38,000 employees with an average premium of $3,000 per employee. 

cash strategy.2 The two scenarios for the zero-cash strategy

were outlined as follows:

Scenario 1 - Constant Loan Interest Scenario. In this

scenario, it is assumed that Winn-Dixie's appetite for

interest deductions remains large, and policy interest

is charged at 11.06% throughout the life of the COLI

Pool. This scenario results in the largest amount of

earnings possible. 

Scenario 2 - Reducing Loan Interest Scenario. In this

scenario, Winn-Dixie's appetite for interest deductions

is assumed to reduce over time. To adjust to the

change in circumstances, the interest rate under the

COLI Pool policies is reduced to 8% after the fifteenth

year. This scenario generates a somewhat smaller tax

arbitrage, but the resulting earnings are nevertheless

significant. 

Included in the revised proposal memorandum dated January 27,

1993, were projections of petitioner's profit and loss, cashflow, and balance sheet balances under scenario 1, the constant

loan interest rate scenario, for the years 1993 through 2052. 

The projections were based on the assumption that premiums paid

by petitioner would be financed by policy loans in all years

except years 4 through 7. In the years 4 through 7, inclusive,

premiums were to be paid using funds from policy withdrawals. 

The constant loan interest rate (scenario 1) projections included

in the January 27, 1993, memorandum are attached as appendix A. 
- 11 -

3The 11.06-percent rate was based on Moody's Baa rate from

November 1992, which was 8.96 percent. Coventry converted it to

an arrears rate and added 1 percent to reach 11.06 percent. 

4This is referred to as "loan spread". The Jan. 27, 1993,

memorandum explains: "An effective COLI Pool should have a small

'spread' between the interest rate charged on policy loans and

the amounts credited to borrowed cash values." 

5The rate in effect for the MSP policies was 8.41 percent.

Under the constant loan interest rate scenario, the

projections assumed that the interest rate paid by petitioner on

policy loans remained constant at 11.06 percent3 for the life of

the pool. Amounts to be credited to petitioner on borrowed cash

value were set at 40 basis points below the 11.06 percent being

charged to petitioner.4 Thus, the borrowed cash value would be

credited at 10.66 percent. The remaining cash value was credited

at 4 percent. The January 27, 1993, memorandum explains that "A

COLI Pool generally works best when the interest rate on policy

loans is highest."5 The projections under the constant loan

interest rate scenario were also based on the following

assumptions: 

Corporate tax bracket 38%

Population (number of insured

 employees) 38,000

Premium $3,000 per life

Mortality assumption 100% of 1983 GAM1

Fee $8 per participant 

 annually

1The mortality assumption "GAM" was not defined in the proposal. 

Ultimately, petitioner and AIG agreed upon using the 1980 Commissioners

Standard Ordinary Mortality Table B to estimate mortality. 
- 12 -

6See appendix A.

7This amount is arrived at using the assumed premium per

employee of $3,000 times the assumed 38,000 employees for a total

of $114 million. 

8This amount is the interest due from petitioner as

calculated by Coventry on a projected first-year policy loan

taken by petitioner in the amount of $107,684,000. Annual

interest of 11.06 percent on $107,684,000 is actually

$11,909,850.

9Using these figures the calculation is: $119,586,000 +

$2,016,000 + ($114,000,000) + ($11,902,000)+ ($304,000) =

($4,604,000). The $1,000 variance between this calculation and

the pretax loss of $4,605,000 in appendix A appears to be

attributable to rounding of the components of the calculation.

Based upon the above assumptions, Coventry projected that

the "pretax earnings effect" of the COLI plan for the first

policy year (1993) would be a loss of $4,605,000,6 before

adjusting for the related reduction in income taxes. This pretax

loss was based on the following projected figures for the end of

the first policy year: Cash surrender value (CSV) of the COLI

policies of $119,586,000 increased by death benefits of

$2,016,000 and reduced by annual premiums of $114 million,7

accrued loan interest of $11,902,000,8 and administration fees of

$304,000.9 Similar projections for the years 1994 through 2052

produced pretax losses in each year.

With respect to the estimated 1993 premiums of $114 million,

the projection indicated that petitioner would, in part, satisfy

the premiums by borrowing $107,684,000 against cash surrender
- 13 -

10The projection indicated that petitioner would actually

pay the estimated $11,902,000 of interest due on the 1993 loan of

$107,684,000 in 1994. Interest accumulated on policy loans was

payable in arrears. 

value. For 1994, the projection indicated that petitioner would

partially satisfy its premium and interest payment10 obligation

by borrowing $113,929,000 and withdrawing $1,649,000 from the net

cash value of the policy. For 1995, the projection indicated

that a loan of $110,318,000 and a policy withdrawal of

$14,731,000 would be used to pay a large portion of the premiums

of $113,852,000 and interest payment of $24,486,000. Except for

the next 4 years, 1996 through 1999, the projection indicated

petitioner would finance a large portion of its premium and

interest payments with policy loans. For years 1996 through

1999, petitioner would generally finance its premium and interest

payments through policy withdrawals. The policies' premiums were

to be completely paid by 2007; therefore, no premium payments

were projected for the years 2008 through 2052. However, for

years 2008 through 2052, policy loans continued to be projected

in amounts that were approximately between 90 percent and 95

percent of the amount of the annual loan interest payments.

The projection indicated that petitioner would sustain a

negative "pretax earnings effect" on the COLI plan for every year

the plan remained in effect. Thus, the projection for the years
- 14 -

11The corporate tax rate on all projections was an estimated

combined Federal and State marginal tax rates. 

1993 through 2052 indicated petitioner would incur net pretax

out-of-pocket losses as follows: 

Year

 Pretax

 Loss 

 Effect Year

 Pretax 

 Loss 

 Effect Year

 Pretax

 Loss 

 Effect

1993 $4,605,000 2013 $16,390,000 2033 $15,238,000

1994 8,403,000 2014 17,839,000 2034 14,769,000

1995 11,282,000 2015 18,071,000 2035 14,320,000

1996 10,399,000 2016 18,285,000 2036 13,828,000

1997 9,997,000 2017 18,492,000 2037 13,281,000

1998 9,559,000 2018 18,546,000 2038 12,674,000

1999 9,381,000 2019 18,446,000 2039 12,013,000

2000 9,756,000 2020 18,342,000 2040 11,312,000

2001 9,959,000 2021 18,228,000 2041 10,583,000

2002 10,310,000 2022 18,103,000 2042 7,675,000

2003 10,725,000 2023 17,968,000 2043 5,867,000

2004 11,358,000 2024 17,817,000 2044 8,374,000

2005 12,215,000 2025 17,645,000 2045 7,782,000

2006 13,151,000 2026 17,446,000 2046 7,214,000

2007 14,178,000 2027 17,215,000 2047 6,650,000

2008 10,134,000 2028 16,946,000 2048 6,110,000

2009 11,269,000 2029 16,643,000 2049 5,583,000

2010 12,420,000 2030 16,193,000 2050 5,070,000

2011 13,653,000 2031 15,086,000 2051 4,586,000

2012 14,973,000 2032 16,545,000 2052 4,742,000

 Total pretax loss 755,644,000

The projection of profit and loss also included an analysis

of the effect of the COLI plan on petitioner's income tax

liability in each of the years 1993 through 2052. Assuming a 38-

percent corporate tax bracket,11 the projected $11,902,000 loan

interest accrued and deducted by petitioner in the first policy
- 15 -

12A deduction of $11,902,000 times an assumed tax rate of 38

percent actually results in a tax benefit of $4,522,760. But see

supra note 8. 

13For instance, a deduction of $304,000 times an assumed tax

rate of 38 percent results in a tax benefit of $115,520. 

14Thus, $4,524,000 + $116,000 = $4,640,000.

15For instance, a reduction in earnings due to amounts paid

of $4,605,000 can be offset by a reduction in taxes of $4,640,000

for an overall after-tax earnings increase of $35,000.

year (1993) resulted in a projected tax saving of $4,524,000.12

A projected deduction for estimated administration fees of

$304,000 resulted in a projected tax saving in 1993 of

$116,000.13 Thus, the total projected tax benefits from

deductions generated by the proposed COLI plan during the first

policy year was $4,640,000.14 The projection compared the

estimated tax benefit of $4,640,000 to the estimated pretax loss

effect of $4,605,000 resulting in a positive "after-tax earnings

effect" of $35,000.15 The after-tax earnings effect (the excess

of tax savings over net pretax costs) was projected to increase

substantially in subsequent years. Coventry's projected aftertax earnings effect was as follows:
- 16 -

16Projected interest and fees over a 60-year period totaled

$77,476,680,000 and $14,326,000, respectively. 

Year

 After-tax

 Earnings

 Effect Year

 After-tax

 Earnings

 Effect Year

 After-tax

 Earnings

 Effect

1993 $35,000 2013 $60,796,000 2033 $44,780,000

1994 1,021,000 2014 59,009,000 2034 43,361,000

1995 2,770,000 2015 58,409,000 2035 41,789,000

1996 3,642,000 2016 57,797,000 2036 40,124,000

1997 4,033,000 2017 57,161,000 2037 38,369,000

1998 4,458,000 2018 56,647,000 2038 36,529,000

1999 4,624,000 2019 56,250,000 2039 34,601,000

2000 9,997,000 2020 55,819,000 2040 32,582,000

2001 16,143,000 2021 55,353,000 2041 30,479,000

2002 22,799,000 2022 54,846,000 2042 30,466,000

2003 30,108,000 2023 54,291,000 2043 29,291,000

2004 37,980,000 2024 53,683,000 2044 23,772,000

2005 46,477,000 2025 53,017,000 2045 21,361,000

2006 55,822,000 2026 52,289,000 2046 18,971,000

2007 64,479,000 2027 51,492,000 2047 16,655,000

2008 68,339,000 2028 50,620,000 2048 14,423,000

2009 66,998,000 2029 49,664,000 2049 12,313,000

2010 65,616,000 2030 48,730,000 2050 10,347,000

2011 64,127,000 2031 48,327,000 2051 8,529,000

2012 62,524,000 2032 45,233,000 2052 6,264,000

 Total after-tax earnings 2,246,431,000

The projected total after-tax earnings of more than $2.2

billion were the result of total projected income tax savings of

more than $3 billion less projected pretax net losses. The

projected tax savings were attributable to the anticipated tax

deductions for policy loan interest and fees.16 The effect on

Winn-Dixie's after-tax earnings and cash-flow was projected to be

positive in each year only because of tax benefits from interest

and fee deductions. Absent such tax benefits, the effect on
- 17 -

17Similarly, the proposal memorandum projected the effect of

the COLI purchase on petitioner's after-tax retained earnings

balance on its balance sheet over 60 years. The proposal

predicted that petitioner's retained earnings balance would 

increase by $2,241,491,000 over the 60 years. 

18Before the preliminary census, the projections were based

on estimates of the number of employees and their ages.

Winn-Dixie's earnings and cash-flow would be negative in every

year.17

In February 1993, Mr. McCook decided to have petitioner

engage in the proposed broad-based COLI plan. On March 25, 1993,

Mr. Hlavacek sent Mr. McCook another projection under the

constant loan interest rate scenario estimating the effect of the

proposed COLI plan. The projection estimated, among other

things, the effect over 60 years beginning in 1993 of the

proposed COLI purchase on petitioner's effective tax rate. The

projection assumed an effective tax rate of 40 percent and

predicted that the proposed COLI purchase would reduce

petitioner's effective tax rate each year, reaching its lowest

point of 26.54 percent in 2007. 

AIG participated in the development of information for

projections regarding petitioner's proposed COLI plan. A

preliminary census reflecting the ages of the approximately

36,000 employees to be insured was prepared on May 28, 1993.18

Mr. Buerger sent two more sets of revised projections to Mr.

McCook. The first set of revised projections was sent on May 28,
- 18 -

19See supra note 11. 

20See supra note 11.

1993, and the second was sent on June 4, 1993. Both projections

were based on issuance of the proposed policies effective as of

March 1993. The first set of revised projections assumed that

petitioner's taxes were paid at a rate of 40 percent19 for

purposes of predicting the tax effect of the COLI purchase on

petitioner's financial ratios. The second set of revised

projections used a tax rate of 39 percent20 and assumed just

over 36,000 of petitioner's employees would be insured. This

projection also assumed that maximum loans would be made in most

years but that cash withdrawals would be made in policy years 4

through 7 and policy years 16 through 21. The June 4, 1993,

projections are attached as appendix B.

Using the same basic analysis that had been used in the

January projections, the June 4, 1993, projections again

indicated that petitioner would sustain a pretax loss and a

posttax profit on the COLI policies for every year the plan

remained in effect. See appendix B. Thus, for the years 1993

through 2052, the June 4, 1993, projections indicated the broadbased COLI plan would affect petitioner's profit and loss as

follows: 
- 19 -

Policy

Year1

 Pretax

Earnings

 Effect

Tax Benefit

 From Interest

Deduction

Tax Benefit

 From Admin Fee

Deduction

After-tax

 Earnings

Effect3

1993 2($4,188,000) $4,368,000 $113,000 = $292,000

1994 (7,885,000) 8,988,000 113,000 = 1,217,000

1995 (10,869,000) 13,887,000 113,000 = 3,130,000

1996 (9,972,000) 13,856,000 112,000 = 3,996,000

1997 (9,669,000) 13,823,000 112,000 = 4,266,000

1998 (9,366,000) 13,788,000 112,000 = 4,533,000

1999 (9,063,000) 13,750,000 111,000 = 4,799,000

2000 (9,243,000) 19,159,000 111,000 = 10,027,000

2001 (9,736,000) 25,088,000 111,000 = 15,462,000

2002 (10,013,000) 31,595,000 110,000 = 21,692,000

2003 (10,345,000) 38,733,000 110,000 = 28,498,000

2004 (10,879,000) 46,551,000 110,000 = 35,782,000

2005 (11,619,000) 55,104,000 109,000 = 43,595,000

2006 (12,428,000) 64,456,000 109,000 = 52,136,000

2007 (13,208,000) 73,436,000 108,000 = 60,336,000

2008 (9,182,000) 73,039,000 107,000 = 63,965,000

2009 (9,409,000) 72,612,000 107,000 = 63,310,000

2010 (9,651,000) 72,153,000 106,000 = 62,608,000

2011 (9,888,000) 71,661,000 105,000 = 61,878,000

2012 (10,104,000) 71,134,000 105,000 = 61,134,000

2013 (10,056,000) 70,569,000 104,000 = 60,616,000

2014 (11,085,000) 70,497,000 103,000 = 59,515,000

2015 (11,875,000) 69,905,000 102,000 = 58,132,000

2016 (12,704,000) 69,181,000 101,000 = 56,579,000

2017 (13,584,000) 68,405,000 100,000 = 54,921,000

2018 (14,384,000) 67,581,000 99,000 = 53,296,000

2019 (15,112,000) 66,710,000 98,000 = 51,696,000

2020 (15,905,000) 65,789,000 96,000 = 49,980,000

2021 (16,447,000) 64,818,000 95,000 = 48,467,000

2022 (16,336,000) 63,797,000 94,000 = 47,554,000

2023 (16,124,000) 62,724,000 92,000 = 46,692,000

2024 (15,898,000) 61,599,000 91,000 = 45,791,000

2025 (15,662,000) 60,421,000 89,000 = 44,848,000

2026 (15,417,000) 59,191,000 87,000 = 43,862,000

2027 (15,163,000) 57,908,000 85,000 = 42,831,000

2028 (14,901,000) 56,573,000 84,000 = 41,756,000

2029 (14,632,000) 55,187,000 82,000 = 40,637,000

2030 (14,352,000) 53,750,000 80,000 = 39,478,000

2031 (14,063,000) 52,264,000 78,000 = 38,279,000

2032 (13,765,000) 50,732,000 75,000 = 37,043,000

2033 (13,457,000) 49,155,000 73,000 = 35,771,000

2034 (13,141,000) 47,535,000 71,000 = 34,465,000

2035 (12,816,000) 45,873,000 69,000 = 33,126,000

2036 (12,483,000) 44,172,000 66,000 = 31,755,000

2037 (12,139,000) 42,435,000 64,000 = 30,360,000

2038 (11,784,000) 40,665,000 61,000 = 28,942,000

2039 (11,417,000) 38,865,000 59,000 = 27,507,000

2040 (11,035,000) 37,040,000 56,000 = 26,060,000

2041 (10,638,000) 35,194,000 53,000 = 24,609,000

2042 (10,223,000) 33,332,000 51,000 = 23,160,000

2043 (9,794,000) 31,460,000 48,000 = 21,714,000

2044 (9,344,000) 29,583,000 45,000 = 20,284,000

2045 (8,902,000) 27,707,000 43,000 = 18,847,000

2046 (8,455,000) 25,840,000 40,000 = 17,425,000

2047 (8,006,000) 23,990,000 37,000 = 16,022,000

2048 (7,563,000) 22,167,000 34,000 = 14,638,000

2049 (7,153,000) 20,378,000 32,000 = 13,256,000

2050 (6,739,000) 18,630,000 29,000 = 11,921,000

2051 (6,407,000) 16,932,000 27,000 = 10,552,000

2052 (6,244,000) 15,292,000 24,000 = 9,072,000

(681,922,000) ?? ?? = ??

1Policy years are from Mar. 1 to the end of February.

2Based on the underlying figures from which this amount was computed, the figure should be $4,189,000.

3In some instances the figures in this column vary from the sum of their components by $1,000. This appears 

 to be due to rounding off, and any variances appear to be insignificant.
- 20 -

21Three hundred million dollars is the approximate total of

the annual "After-Tax Earnings" projected for the policy years

1993 through 2007. The total projected After-Tax Earnings for

the years 1993 through 2052 is $2,246,431,000. See appendix A.

The June 4 projections indicate that without tax savings

from policy loan interest and administration fee deductions, the

earnings effect over 60 years would have been a negative

$681,922,000. The tax savings over 60 years for interest and fee

deductions were projected to be $2,696,038,000. After these tax

benefits are taken into consideration, the projection indicated

that petitioner would realize an after-tax profit of

$2,014,115,000. These after-tax financial benefits were

dependent on the tax savings flowing from the interest and fee

deductions being generated by the broad-based COLI plan.

Petitioner prepared a list of "Company Expense Reduction

Opportunities" for fiscal year 1993 that listed 23 items of

savings that totaled $329,093,000. The largest item of expense

reduction on the list is "Proposed Corporate Life Insurance

(COLI)". The list shows that this item (COLI) was estimated to

be implemented on June 30, 1993, and that petitioner's estimated

savings from COLI was $300 million. Mr. McCook testified that he

thought this figure was derived from the "After-Tax Earnings

Effect" shown in column J of appendix A.21

AIG is a major underwriter of COLI policies. AIG had been

working with WJ/Coventry in preparing the COLI plan. Mr. Qureshi
- 21 -

22Exhibit A, Client Master Information Form, listed

petitioner's name as the name to appear on the policy and as the

owner of the policy. Petitioner's main address was listed as the

billing address, and Mr. McCook was named as the contact. The

policy name was listed as "Excess Interest Life Ins.", and the

effective date was listed as Mar. 1, 1993.

23Exhibit B, Certification of Employee Census, generally

required that petitioner, as part of the application for coverage

under the policies, certify that employee information on the

census was correct. Among other things, petitioner certified

that each individual on the census was a full-time (minimum 30

hours per week) employee, at least 18 years of age, no older than

age 75, not absent from work for more than 10 consecutive

business days within the 90 days preceding the date of

of AIG was the actuary who designed and priced the COLI policies

purchased by petitioner. On June 4, 1993, Mr. Larry Walters of

AIG, sent a Letter of Understanding regarding the COLI policies

to Mr. McCook. The Letter of Understanding provided that

petitioner would remit, as consideration for the policies, a net

payment of $7,245,000, the difference between a total premium of

$108,573,000 and an estimated first year policy loan of

$101,328,000. In the Letter of Understanding, AIG agreed to

provide life insurance coverage in accordance with the Policy

Terms Overview. The Letter of Understanding required that the

following conditions be met: 

1. * * *[Petitioner] reviews and verifies the

accuracy of the information contained on the

Client Master Information Form, attached as

Exhibit A.[22] * * *

2. * * *[Petitioner] completes and certifies the

information contained on the Certification of

Employee Census form, attached as Exhibit B,[23]
- 22 -

certification, and that petitioner notify and obtain consent from

each employee on the census that insurance is to be issued on his

or her life. 

* * *

3. * * *[Petitioner] completes at least one

Individual Life Insurance Application for each

defined class of covered employees.

4. The aggregate number of employees within each

defined class of covered employees, on the

effective date of coverage, totals at least 2,000

lives.

5. The minimum annual premium for each covered

employee is $3,000 and the maximum annual premium

for each covered employee is $16,667.

6. AIG Life determines that each defined class of

covered employees identified on the attached

Client Master Information Form and each employee

identified on the Certification of Employee Census

are acceptable for underwriting purposes and that

the amounts of coverage applied for are

acceptable.

In addition, the Letter of Understanding required that petitioner

acknowledge and agree with the following: 

1. This Letter of Understanding and attached Exhibits

A and B contain the entire agreement between the

parties and supersedes all previous agreements

entered into between Client and AIG Life, or

promises made with regard to the subject matter of

this letter. 

2. * * * [Petitioner] has reviewed with its own legal

and tax advisors all present and future

implications of its ownership of the Policies,

including, but not limited to, the tax

consequences of loans and/or withdrawals from the

Policies and the deductibility thereof, and that

it has not relied upon any representations of AIG
- 23 -

Life or any employee, broker, or agent of AIG Life

in that regard.

3. The premiums specified in the Policies are

intended to meet the requirements of Section 7702

and Section 7702A of the Internal Revenue Code as

in effect on the date of this letter so that the

Policies will qualify as life insurance and will

not be treated as modified endowment contracts. 

AIG Life does not warrant or represent that the

Policies will not be treated as modified endowment

contracts.

4. The statements contained in the attached Exhibits

A and B shall be considered as binding

representations by the * * * [petitioner] and that

such Exhibits shall be deemed attached to and made

a part of the Policies.

The Letter of Understanding provided that if, within 90 days of

June 4, 1993, all the above conditions had been met and AIG

received the total first-year premium, then AIG would agree to

issue to petitioner, in the State of Florida, the life insurance

policies effective as of March 1, 1993. 

By invoice dated June 9, 1993, Coventry requested payment of

a balance due on the 1993 COLI policies of $7,245,000 from

petitioner. The invoice reflected a total premium of

$108,573,000, covering 36,191 total lives at $3,000 of premium

each, less a policy loan of $101,328,000 to arrive at the net

amount due. 

On June 15, 1993, in accordance with the Letter of

Understanding, AIG sent the "Policy Terms Overview" (PTO) to

petitioner. The PTO provided for an effective date of March 1,
- 24 -

24"Cost of Insurance" was defined in the policy document. 

The COI was calculated on each monthly processing date. 

Generally, the COI was calculated under the following formula: 

COI = (Proceeds - Account Value) x (Value from Table of

 1,000 Maximum Insurance Rates)

Proceeds were defined as the benefits due to petitioner as

the beneficiary. Account Value on the policy date was defined as

the initial net premium less an annual expense charge.

1993, and required that AIG and petitioner agree to several

provisions under the insurance policies relating to the

following: Claim Stabilization Reserve, Cost of Insurance Rates,

Expense Caps, Surrender Fee, Interest Rate on Unborrowed Funds,

and the Loan Interest Spread. 

The PTO generally provided that AIG would establish on

behalf of petitioner a claims stabilization reserve (CSR) for the

policies. Petitioner could not withdraw or borrow against the

amounts credited to the CSR. The maximum level of the CSR at the

end of each year was generally determined to be the higher of the

annualized "cost of insurance"24 (COI) charges actually collected

in any one of 3 preceding policy years or the highest amount of

death benefits actually incurred in any one of 3 policy years. 

COI charges were deducted from the premium that was paid and used

to fund the CSR. The CSR was generally held available by AIG to

pay death claims under the COLI policies. 
- 25 -

25Each basis point equals one one-hundredth of a percent

(0.01 percent). Thus, 40 basis points is equivalent to 0.40

On each policy anniversary, the PTO required AIG to compute

an "Experience Cost", defined as COI charges collected from

petitioner during the preceding year, less a 2-percent AIG

retention fee, less the net amount for which AIG was at risk for

claims during the preceding policy year. The negotiated 2-

percent retention fee limited AIG's mortality related profit. If

the experience cost as of a policy anniversary was positive, it

was added to the CSR's value as of the policy anniversary. If

the experience cost was negative, it was subtracted from the

CSR's value. AIG credited interest to the CSR at an annual rate

of 4 percent. If, on a policy anniversary, the CSR balance

exceeded its maximum permissible level, the excess was credited

to the unrestricted policy account value. The PTO provided that

the CSR would be held by AIG on behalf of petitioner for as long

as the policies remained in force plus 1 year. At the end of the

1 year, a final accounting would be made by AIG and the balance

of any remaining reserve would be refunded to petitioner. 

Petitioner was to be charged 11.06 percent interest on

amounts that it borrowed against the cash value of the policies. 

Pursuant to the PTO, the portion of the policy account value that

was borrowed would earn interest at a rate not to exceed 40 basis

points25 or four-tenths of 1 percent below the amount charged on
- 26 -

percent.

26The 10.66 percent figure is arrived at by reducing the

loan interest rate of 11.06 percent by 0.40 percent. 

policy loans. Thus, the interest rate credited on the portion of

the account value that had been borrowed was 10.66 percent.26

The balance of the policy account values would earn interest at a

rate guaranteed to be no less than 4 percent. 

The policies provided for expense charges which would not

exceed 23 percent of the premiums paid. The expense charges were

comprised of premium expense charges of 17.8 percent and annual

expense charges of 5.2 percent. The negotiated PTO reduced

maximum expense charges from 23 percent to 8.934 percent of

premiums paid. 

Mr. McCook approved the purchase of the 1993 COLI policies,

and on June 17, 1993, Mr. McCook, on behalf of petitioner,

executed the June 4, 1993, Letter of Understanding. On the same

day, petitioner remitted the net amount of $7,245,000 to AIG as

payment for the policies. 

The 1993 COLI policy forms were registered and approved in

form and for sale by the insurance commissioner of the State of

Florida. Initially, the total number of lives included, subject

to eligibility, under the 1993 COLI policies was 36,191 as of

June 17, 1993. 
- 27 -

27Mr. Walters of AIG signed the PTO on July 15, 1993. 

28The contracts were listed on the delivery receipt as being

policy Nos. 5003000001 through 5003035983. 

On June 17, 1993, petitioner paid WJ/Coventry $300,000

pursuant to an invoice dated June 11, 1993. The payment was for

services to be performed in year 1 of an administration agreement

for the 1993 COLI policies. Also on June 17, 1993, Mr. McCook

signed a Notification Certificate as a condition precedent to the

sale of the COLI policies in which petitioner certified that it

would notify the employees of the purchase of the COLI policies

and give them an opportunity to refuse the coverage. 

On July 19, 1993, Mr. McCook executed the PTO.27 Also on

July 19, 1993, Mr. McCook accepted receipt of the COLI policy

contract documents from AIG and authorized Coventry to retain

possession of the policies on petitioner's behalf.28 The type

of coverage provided was listed as "excess interest life". The

person whose life was insured under each policy was one of

petitioner's employees. Petitioner was listed as the owner and

beneficiary of each policy. 

The rights and liabilities of AIG and petitioner were

governed by insurance policy forms (Policy Form), riders to the

policies, the Letter of Understanding, and the PTO. The Letter

of Understanding and the PTO set forth essential elements of the
- 28 -

29Some of the death benefits were paid under Option B, which

was calculated to include the account value in the face amount,

and the insurance proceeds were determined to be the larger of

the face amount on the date of death, or the account value on the

date of death multiplied by a specified percentage. 

30The net cash value of the policy was defined as the cash

value less any prior withdrawals and any policy debt. The cash

value was defined as the greater of the Guaranteed Cash Value, or

the Account Value less the surrender charge that applies. The

Guaranteed Cash Value was determined by a Table of Guaranteed

Values provided with the policy. 

agreement between petitioner and AIG and amended and tailored the

COLI policies to petitioner. 

Policy face amounts varied with the age of each insured. 

Generally, petitioner's death benefits were governed by policy

Option A, which provided for benefits based on the larger of the

face amount plus the account value on the date of death, or the

account value on the date of death multiplied by a specified

percentage based on the age of the insured.29 The applicable

mortality table was the 1980 Commissioners Standard Ordinary

Mortality Table B, Age Last Birthday, referred to as the CSO-B

table. Under the terms of the policies, death benefits from a

policy would first be used to reduce any outstanding loan.

Under the terms of the policies, petitioner could withdraw

part of the cash value of each COLI policy. However, a

withdrawal could not exceed the "net cash value"30 of the policy. 

The policies also permitted petitioner to borrow an amount

that, with interest to the next policy anniversary, would not
- 29 -

exceed the net cash value of the policy. The policies provided

that at the insured's death, any policy debt will be deducted

from the proceeds of that policy. The policies were the sole

security for any loans. Interest on petitioner's loans was due

on each policy anniversary date. The policies provided for both

a fixed and variable loan interest rate. 

The policies were modified by a Renewable Level Term

Insurance Rider. The rider provided death benefits equal to the

amount of death benefits lost as a result of a withdrawal from

the account value. Under the provisions of the rider, petitioner

had the option on any policy anniversary date to elect to change

from the 11.06-percent policy loan interest rate to a fixed rate

of 10 percent in arrears or 9.1 percent in advance which would

apply to both old and new policy loans. For the 1993 COLI policy

year March 1, 1993 to 1994, petitioner elected the variable loan

interest rate of 11.06 percent. 

The final provisions governing the COLI policies purchased

by petitioner in June 1993 were devised to produce results in

accord with those set forth in the June 4, 1993, projections

contained in appendix B.

On July 19, 1993, petitioner entered into an Administrative

Services Agreement with Coventry in which petitioner appointed

Coventry as the administrator of the COLI pool. Under the
- 30 -

31Petitioner deducted $100,000 of the $300,000 on its income

tax return for the fiscal period ending June 30, 1993. 

agreement, petitioner was to pay $300,00031 in each of the first

2 years and $200,000 annually in all subsequent policy years, and

Coventry was to perform the following services in connection with

the COLI policies: 

(a) On the basis of census information supplied by

petitioner

(1) Identify which of the petitioner's employees

may become insured;

(2) Calculate the face amounts of the policies

and the first year premiums for the covered

employees;

(3) Determine and process new insureds and process

any change in the status of any insured;

(4) Make the necessary calculations with respect

to premiums, loans, withdrawals, loan interest,

death claims and/or any other periodic payments;

(b) Provide consolidated invoice and itemization to

petitioner and AIG;

(c) Receive and inspect the insurance policies from AIG

and forward them to petitioner;

(d) Search government databases and other sources for 

covered deceased employees and obtain death 

certificates for deceased insureds;

(e) Provide petitioner with ongoing advice with respect

to financial options and strategies related to 1993

COLI polices; and 

(f) Provide petitioner with various reports including 

insurance value reports, year-end summaries, 

accounting reports and custom-designed decisionsupport reports.
- 31 -

For employees who died while in petitioner's employ,

petitioner filed an Employer's Statement through its plan

administrator, Coventry, who would then present the claim to AIG. 

Coventry, as plan administrator, was responsible for ascertaining

employee deaths for those employees that died while no longer in

petitioner's employ. 

Westport Management, an organization that performs

administrative services for life insurance companies, was engaged

by AIG and WJ/Coventry to administer petitioner's COLI policies. 

In order to ascertain deaths of former employees, Coventry would

ask Westport to perform "Social Security sweeps", by checking

data base files to determine whether any covered former employee

had died. After the purchase of the policies and input of the

COLI policy data on its computer system, Westport began its

administrative duties, regularly preparing performance and

accounting reports, which were provided to Coventry and AIG. On

every policy anniversary, Westport calculated all values on a

monthly basis for all policies for the coming year. On

petitioner's behalf, Coventry administered the COLI plan, acted

as an intermediary with AIG, and checked reports and other

information provided by AIG and Westport to ensure correctness. 

Every month and on request, Coventry received reports from

Westport on past and expected performance of the policies and

policy loans. From these reports, Coventry generated annual and
- 32 -

periodic policy value and other reports and journal entries

showing aggregate policy activity. The Coventry reports included

information about the CSR, experience rating, cash value

calculations, claims, refunds and recisions. The Coventry

reports also included information about the amount of tax savings

the COLI program was generating for petitioner. 

From 1993 through 1996, petitioner kept the employee COLI

policies in force. AIG billed petitioner for premiums and

interest annually on a net basis, as set forth below:

June 1993, Policy year beginning March 1, 1993:

Premium $108,573,000

Loan (101,328,000)

Net premium 

17,245,000

1A revised invoice was sent on Sept. 21, 1993, which reflected a

reduction in insureds from 36,191 to 35,983 due to a recision of 208

policies. Thus, the calculation was as follows: 

 Premium $107,949,000.00

 Loan (100,770,140.06)

 Net premium 7,178,859.94

 Less amount paid (7,245,000.00)

 Balance owed petitioner 66,140.06

Policy year beginning March 1, 1994:

Premium $107,862,000.00

Loan (108,877,159.95)

Interest 11,136,375.63

Balance due 10,121,215.68
- 33 -

Policy year beginning March 1, 1995:

Premium $107,685,000.00

Loan (112,165,202.89)

Withdrawal (4,080,660.74)

Net premium due (8,560,863.63)

Interest 23,140,858.57

Balance due 

114,579,994.94

1Policy year beginning Mar. 1, 1995, was revised at least twice. 

The final revision resulted in the following:

 Premium $107,685,000.00

 Loan (112,112,913.04)

 Withdrawal (4,134,020.12)

 Net premium due (8,561,933.16)

 Interest 23,140,858.57

 Balance 14,578,925.41

 Amount paid 14,579,994.94

 Net refund due 1,069.53

Policy year beginning March 1, 1996:

Premium $107,553,000.00

Withdrawal (129,934,414.41)

Net premium due (22,381,414.41)

Interest 35,497,690.97

Balance due 13,116,276.56

COI and policy expense charges (DAC tax, State premium tax,

commission and loading charges) under petitioner's COLI policies

were as follows: 

Policy 

 Year 

Cost of 

Insurance

Expense

Charges Total

 1993 $3,354,561 $3,412,447 $6,767,008

 1994 4,641,249 4,721,130 9,362,379

 1995 4,890,649 8,516,817 13,407,466

 1996 5,173,414 8,990,642 14,164,056

The annual amounts of cash paid by petitioner to AIG for the

COLI policies, compared with the total of COI and policy expense

charges for corresponding years, were as follows:
- 34 -

32See preceding table for cash total.

Policy 

 Year 

Cash Paid By

 Petitioner 

COI Plus

Expense

 Charges 

1993 $7,178,860 $6,767,008

1994 10,121,216 9,362,379

1995 14,578,925 13,407,466

1996 13,116,277 14,164,056

 Total 44,995,278 43,700,909

For the first 4 COLI policy years, beginning March 1, 1993, AIG

billed petitioner $431,049,000 in gross premiums and $69,774,925

in interest charges. Gross premiums and interest charges totaled

$500,823,925. Of this total amount, petitioner remitted the

above-calculated $44,995,27832 in cash.

Following the enactment of tax law changes in 1996,

petitioner commenced discussions with AIG, Coventry, and WJ

concerning the phaseout or discontinuance (unwind) of the COLI

policies. These discussions concerned the approximately 36,000

policies purchased by petitioner in 1993 plus approximately

11,000 and 9,000 COLI policies purchased in 1994 and 1995,

respectively. On October 22, 1996, Mr. McCook sent a letter to

Mr. Qureshi, vice president of AIG, which stated:

Winn-Dixie has used AIG policies on three corporate

owned life insurance (COLI) programs over the last

several years. Because of the recent tax law changes,

we have been working with Alan Buerger of the Coventry

Group and Bruce Hlavacek of Wiedemann and Johnson, to

try to minimize the financial impact on Winn-Dixie for

the phase out of COLI. 

Mr. Qureshi responded to Mr. McCook's October 22, 1996, letter
- 35 -

and acknowledged the recent change in the law with respect to the

COLI policies. Mr. Qureshi also indicated that AIG would be

pleased to discuss various options available to petitioner. 

Coventry prepared a draft booklet dated October 30, 1996,

which contained, among other things, an overview of the current

status of petitioner's COLI pool, an opinion of the financial

effect of the 1996 tax law change, and explanations of several

exit and unwind strategies. The draft booklet indicated that

petitioner had three separate enrollments covering approximately

55,740 lives. The first enrollment "WD1" was in relation to the

policies written in 1993 covering 35,810 employees. The second

enrollment "WD2" was in relation to the policies written on

November 30, 1994, covering 10,704 employees. The third

enrollment "WD3" was written on June 30, 1995, and covered 9,226

employees. With respect to the effect of the 1996 tax law

changes on petitioner's COLI policies, the booklet stated in

pertinent part: 

In August of 1996, Congress amended the Internal

Revenue Code was [sic] to deny deductions for any

interest on policy loans on the lives of employees,

officers, and persons financially interested in a trade

or business maintained by the taxpayer. The

disallowance was retroactive to January 1, 1996, except

that deductions may be continued through 1998 on up to

20,000 policies. The deduction on those policies,

however, must be based on an interest rate no higher

than Moody's average corporate bond rate, and only 90%
- 36 -

of such interest is deductible in 1997 and 80% thereof

is deductible in 1998. 

 * * * * * * *

In the aggregate, the three enrollments cover 55,740

lives with aggregate outstanding loans of about $500

million at interest rates averaging 11%. At a 39% tax

bracket, these policies would produce tax deductions

worth $21,450,000 per year. 

Under the amended law, assuming aggregate indebtedness

of $195 million on the "best" 20,000 policies and a

Moody's rate of 8% per annum, the following savings

will be available:

Calendar 1996 $6,084,000

Calendar 1997 5,475,600

Calendar 1998 4,867,200

The booklet next identified three basic exit strategies for

petitioner. The three strategies were listed as the policy

surrender, policy unwind, and aggressive tax strategy. The

policy surrender strategy generally entailed the cancellation or

surrender of the policy and the receipt by petitioner of the net

cash value of the policy. The booklet recommended under this

strategy that petitioner maintain the policies on 20,000 lives in

fiscal years 1996 and 1997. 

With respect to the policy unwind strategy, in lieu of

surrendering the policies, petitioner was informed that it could

keep the policies in force and allow the unrealized gains related

to the policies to be paid out eventually as tax-free death

benefits. The booklet further stated that in order to unwind a

policy, petitioner "would withdraw a portion of the cash value
- 37 -

equal to premiums paid (i.e., Winn-Dixie's tax basis) and apply

the withdrawal to repay an equal amount of loan." The booklet

indicated that the result of such a withdrawal and repayment is a

policy with a greatly reduced cash value, substantially all of it

borrowed. 

The third strategy, the aggressive tax strategy, suggested

that under the revised statute, deductions were disallowed only

with respect to policies on the life of an individual who was an

officer or employee or was financially interested in petitioner's

trade or business. The booklet further indicated that counsel

for Coventry believed that a strong argument could be made that

the disallowance described by the statute did not apply where the

insured was a former officer or employee or was not financially

interested. Based on this argument, the booklet gave an example

which assumed an additional $200 million of aggregate

indebtedness could be attributed to petitioner's former employees

upon whom policies were still maintained. As a result of the

additional $200 million of aggregate indebtedness, the booklet

concluded that the tax savings in each year would be equal to 39

percent of 11 percent of $200 million or $8,580,000, for as long

as the loans remained in force.

In a letter to Mr. Qureshi dated September 8, 1997, Mr.

McCook indicated that in light of the passage of the legislation

pertaining to leveraged COLI, petitioner was working toward a
- 38 -

33This was approximately one-third of the total policy loan

interest that would accrue during the first policy year that

began Mar. 1, 1993, and ended Feb. 28, 1994. The $3,735,544 was

interest attributable to the period Mar. 1 through June 30, 1993. 

We note that petitioner deducted interest on these "loans" for

the period Mar. 1 through June 30, 1993, even though the COLI

policies and policy loans were not finalized until mid-June 1993. 

Respondent argues that interest cannot accrue for a period prior

to the time the loan was actually made. Because of our

disposition, we need not address this issue.

34This was one-third of the $300,000 administrative fee for

the first policy year that began Mar. 1, 1993, and ended Feb. 28,

1994.

more complete understanding of the COLI policies it purchased

from AIG. Finally, in letters dated December 4, 1997, Mr. McCook

notified Mr. Qureshi and Mr. Buerger of petitioner's intent to

cancel all three blocks of leveraged COLI policies. Mr. McCook

indicated in his notice to Mr. Qureshi that petitioner wished to

surrender COLI blocks I, II, and III as of November 1, October

30, and June 30, 1997, respectively. 

OPINION

On its return for the fiscal year ending June 30, 1993, 

petitioner claimed a deduction of $3,735,544 for accrued interest

on loans from COLI policies that petitioner purchased in 1993.33

Petitioner also claimed a $100,000 deduction for administrative

fees related to these COLI policies.34 Respondent disallowed the

deductions after determining that the 1993 COLI Plan was tax

motivated, unsupported by any independent business purpose, and
- 39 -

lacked economic substance. Respondent argues that the

arrangement was a sham.

The starting point for determining whether the form of a

particular transaction will be recognized for tax purposes is the

Supreme Court's decision in Gregory v. Helvering, 293 U.S. 465,

469 (1935), wherein the Court stated:

The legal right of a taxpayer to decrease the amount of

what otherwise would be his taxes, or altogether avoid

them, by means which the law permits, cannot be

doubted. * * * But the question for determination is

whether what was done, apart from the tax motive, was

the thing which the statute intended.

In Gregory, the Court denied reorganization treatment with

respect to a stock distribution even though the taxpayers had

followed each step required by the Code for a reorganization. In

deciding that the distribution was taxable as a dividend, the

Court held that the structure of the transaction was a "mere

device" for the "consummation of a preconceived plan" and not a

reorganization within the intent of the Code as it then existed. 

Id. Because the transaction lacked economic substance, as

opposed to formal reality, it was not "the thing which the

statute intended." Id.; see Kirchman v. Commissioner, 862 F.2d

1486, 1490-1491 (11th Cir. 1989), affg. Glass v. Commissioner, 87

T.C. 1087 (1986). 

A transaction that lacks substance is not recognized for

Federal tax purposes. See ACM Partnership v. Commissioner, 157
- 40 -

35In Kirchman v. Commissioner, 862 F.2d 1486, 1492 (11th

Cir. 1989), affg. Glass v. Commissioner, 87 T.C. 1087 (1986), the

court observed:

Courts have recognized two basic types of sham

transactions. Shams in fact are transactions that

never occur. In such shams, taxpayers claim deductions

for transactions that have been created on paper but

which never took place. Shams in substance are

transactions that actually occurred but which lack the

F.3d 231, 247 (3d Cir. 1998), affg. in part and revg. in part

T.C. Memo. 1997-115; United States v. Wexler, 31 F.3d 117, 122

(3d Cir. 1994). Denial of recognition means that such a

transaction cannot be the basis for a deductible expense. See

United States v. Wexler, supra at 122. Citing the Supreme

Court's decision in Gregory, the Court of Appeals for the

Eleventh Circuit in Kirchman v. Commissioner, supra, stated the

doctrine as follows:

The sham transaction doctrine requires courts and

the Commissioner to look beyond the form of a

transaction and to determine whether its substance is

of such a nature that expenses or losses incurred in

connection with it are deductible under an applicable

section of the Internal Revenue Code. If a

transaction's form complies with the Code's

requirements for deductibility, but the transaction

lacks the factual or economic substance that form

represents, then expenses or losses incurred in

connection with the transaction are not deductible.

[Id. at 1490.]

Because the transactional events at issue in this case actually

occurred, we limit our inquiry to the question of whether the

substance of the COLI transaction corresponds with its form.35 
- 41 -

substance their form represents. * * *

36In Knetsch v. United States, 364 U.S. 361 (1960), the

Court applied sec. 163(a) of the 1954 Code. The language of sec.

163(a) of the 1954 Code remained unchanged in the 1986 Code. See

sec. 163(a); see also United States v. Wexler, 31 F.3d 117, 123

(3d Cir. 1994).

Section 163(a) provides that "There shall be allowed as a

deduction all interest paid or accrued within the taxable year on

indebtedness." Court opinions have clearly established that a

lack of economic substance may operate to bar interest deductions

arising under section 163. See Knetsch v. United States, 364

U.S. 361 (1960);36 United States v. Wexler, supra; Goldstein v.

Commissioner, 364 F.2d 734 (2d Cir. 1966), affg. 44 T.C. 284

(1965). Interest payments are not deductible if they arise from

transactions "that can not with reason be said to have purpose,

substance, or utility apart from their anticipated tax

consequences." Goldstein v. Commissioner, supra at 740; see also

Sheldon v. Commissioner, 94 T.C. 738 (1990). "Such transactions

are said to lack 'economic substance.'" Lee v. Commissioner, 155

F.3d 584, 586 (2d Cir. 1998) (quoting Jacobson v. Commissioner,

915 F.2d 832, 837 (2d Cir. 1990), affg. in part and revg. in part

T.C. Memo. 1988-341), affg. in part and remanding in part on

another ground T.C. Memo. 1997-172.

The fact that an enforceable debt exists between the
- 42 -

borrower and lender is not dispositive of whether interest

arising from that debt is deductible under section 163. Rather,

the overall transaction, of which the debt is a part, must have

economic substance before interest can be deducted. See Lee v.

Commissioner, supra at 587; United States v. Wexler, supra at

125. If this were not the rule, every tax shelter, no matter how

transparently sham, could qualify for an interest expense

deduction as long as there was a real creditor in the transaction

that demanded repayment. Such a result would be "contrary to the

longstanding jurisprudence of sham shelters from Knetsch on

down." Lee v. Commissioner, supra at 587.

In determining whether a transaction or series of related

transactions constitute a substantive sham, both this Court and a

majority of the Courts of Appeals have utilized a flexible

analysis that focuses on two related factors, economic substance

apart from tax consequences, and business purpose. See ACM

Partnership v. Commissioner, supra; Karr v. Commissioner, 924

F.2d 1018, 1023 (11th Cir. 1991); accord Casebeer v.

Commissioner, 909 F.2d 1360 (9th Cir. 1990), affg. in part and

revg. in part on another ground Larsen v. Commissioner, 89 T.C.

1229 (1987); James v. Commissioner, 899 F.2d 905, 908-909 (10th

Cir. 1990), affg. 87 T.C. 905 (1986); Shriver v. Commissioner,

899 F.2d 724, 727 (8th Cir. 1990), affg. T.C. Memo. 1987-627;
- 43 -

37In certain situations courts have held that a transaction

that lacks economic substance, other than the production of a tax

benefit, is a substantive sham regardless of the motive of the

taxpayer. See Knetsch v. United States, supra at 365; Dewees v.

Commissioner, 870 F.2d 21, 35 (1st Cir. 1989); Kirchman v.

Commissioner, supra at 1492.

Rose v. Commissioner, 868 F.2d 851, 854 (6th Cir. 1989), affg. 88

T.C. 386 (1987); Kirchman v. Commissioner, supra; United Parcel

Serv. of Am., Inc. v. Commissioner, T.C. Memo. 1999-268.37

Economic substance, in this context, is determined by

objective evaluation of changes in economic position of the

taxpayer (economic effects) aside from tax benefits. See

Kirchman v. Commissioner, supra at 1492; accord Knetsch v. United

States, supra at 366 ("nothing of substance to be realized * * *

from this transaction beyond a tax deduction"); ACM Partnership

v. Commissioner, supra at 248; Sheldon v. Commissioner, supra. 

The inquiry into whether there was a legitimate business purpose

involves a subjective analysis of the taxpayer's intent. See ACM

Partnership v. Commissioner, supra at 247; Kirchman v.

Commissioner, supra at 1492.

We will begin with an examination of the economic substance

of petitioner's 1993 COLI plan. In doing so, we focus on the

COLI transaction in its entirety rather than any single step. 

See Kirchman v. Commissioner, supra at 1493-1494.

Petitioner's 1993 purchase of COLI on the lives of

approximately 36,000 of its employees was done pursuant to an
- 44 -

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.

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 "zerocash 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
- 45 -

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
- 46 -

39Under the terms of the policies, death benefits from a

policy would first be used to reduce any outstanding loan.

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
- 47 -

40The projections refer to the loss as negative pretax

earnings.

effect of the COLI plan was a first-year loss40 of $4,188,000

computed as follows:

 Net premium payment $7,245,000

 Interest on policy loan 11,191,000

 Administrative fees 290,000

 18,726,000

Less: Net cash surrender value 11,287,000

 Death benefits 3,250,000

 14,537,000

 Loss 14,189,000

1The June 1993 projection shows $4,188,000. This is apparently

due to rounding or a math error.

Following the same approach, the June 1993 projections show the

COLI plan producing pretax losses in the next 2 policy years of

$7,885,000 and $10,869,000, respectively. Thereafter, the pretax

losses over the next 57 years range from $6,244,000 in the last

year to $16,447,000 in year 2021. The total of pretax losses for

the projected 60 years was $681,922,000. In each and every year,

the combined yearly pretax benefits from the policies; i.e., the

expected death benefits from the 36,000 policies plus the yearend net equity value of the policies, were substantially less

than petitioner's cost of maintaining the policies.

The next part of the June 1993 profit and loss projections

illustrates the "tax effect" of the COLI plan. The profit and

loss statement contained in the June 1993 projections shows
- 48 -

41The above figures were taken from the June 1993

projections reflected in appendix B. The totals vary by $1,000,

apparently due to rounding off the last three digits.

42See supra note 41.

first-year income tax savings from the COLI plan of $4,480,000. 

This amount is composed of tax savings of $4,368,000 attributable

to a deduction of accrued first-year interest on policy loans of

$11,191,000 and tax savings of $113,000 attributable to a

deduction of first-year administrative fees of $290,000. Based

on this, the projected "after-tax earnings effect" for the first

policy year was $292,000.41 Similar projections for each of the

following 59 years show that while the "pretax earnings effect"

of the plan resulted in losses, the "after-tax earnings effect"

continued to be positive in each year reaching its peak in the

year 2008 when the "after-tax earnings effect" would be

$63,965,000. This amount was arrived at by subtracting the

pretax loss of $9,182,000 from projected income tax savings of

$73,146,000.42 The projected income tax savings of $73,146,000

were attributable to tax deductions for interest of $187,279,000

and administrative fees of $276,000. The June 1993 projections

indicate that had the 1993 COLI plan remained in effect through

the year 2052, petitioner's total pretax loss over 60 years would

have been $681,922,000 but that the total tax saved because of

policy loan interest and fee deductions would have exceeded $3
- 49 -

43In addition, the plan would result in petitioner’s having

a cumulative net equity in the COLI policies at the end of the

first policy year of $96,000. Cumulative net equity was the

gross surrender value of the policies minus outstanding policy

loans and accrued policy loan interest. Gross cash surrender

value of $112,471,000 minus the sum of the outstanding loan of

$101,184,000 and accrued loan interest of $11,191,000 equals

$96,000. See appendix B, Balance Sheet Summary. The combination

of cumulative net equity and positive cash-flow equals the

projected positive after-tax earnings effect of $292,000. 

$96,000 plus $196,000 equals $292,000.

billion, resulting in a total "after-tax earnings effect" of more

than $2 billion.

The June 1993 projections contain a cash-flow analysis for

each policy year from 1993 to 2052. The structure of the zerocash strategy was intended to produce a positive after-tax cashflow for each policy year. Thus for the first year, the plan was

to produce a positive cash-flow of $196,000 after factoring in

tax savings from deducting policy loan interest and fees.43

Without the savings from these deductions, there would have been

a negative cash-flow of over $4 million. The projections show

increasing positive after-tax cash-flows for each of the

following 59 years. Projected after-tax cumulative cash-flow for

the entire 60-year period was more than $2 billion. Cumulative

net equity at the end of each year varied, rising in some years

and falling in others but, because of the policy loans and

withdrawals, remained relatively small in relationship to the

numbers in the overall plan. For example, cumulative net equity
- 50 -

after 15 years was projected to be $498,000, whereas cumulative

positive cash-flow was projected to be $289,263,000. See

appendix B, Cash Flow. Without the tax savings from tax

deductions for policy loan interest and fees, there would have

been a substantial negative cash-flow in each year, and the costs

of maintaining the COLI plan would have greatly exceeded

benefits. 

We recognize that one of the normal benefits of life

insurance is the death benefit to be received if the insured dies

before the insured's actuarially determined life expectancy. 

Thus, the predictable cost of maintaining life insurance might be

greater than predictable death benefits and still be justified by

the financial protection that insurance provides against the

financial consequences of the unexpected death of the insured. 

But as we discuss later, petitioner had no such reason or purpose

for engaging in the 1993 COLI program. Petitioner suggests that

the policies could conceivably produce tax-independent benefits

if some catastrophe were to occur that would produce large,

unexpected death benefits. We are convinced that this was so

improbable as to be unrealistic and therefore had no economic

significance. Indeed, petitioner makes no pretense that it

purchased these policies in anticipation of, or to protect itself

against, a catastrophic event. The policies were on the lives of

36,000 individual employees of various ages who lived in diverse
- 51 -

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. 
- 52 -

In determining whether a transaction should be respected for

tax purposes, we also look to whether the taxpayer had a business

purpose for engaging in the transaction other than tax avoidance. 

See Frank Lyon Co. v. United States, 435 U.S. 561, 583-584

(1978); Kirchman v. Commissioner, supra at 1492; Bail Bonds by

Marvin Nelson, Inc. v. Commissioner, supra at 1549. Petitioner

argues that it had an economic objective and valid business

purposes for entering into the COLI transaction other than tax

avoidance. Petitioner alleges that before entering into the 1993

COLI transaction, it had become concerned with increasing costs

associated with its Winn-Flex program and that it decided to

implement the COLI program as a mechanism for obtaining funds to

pay such costs. 

Before entering into the COLI transaction, there were

numerous versions of profit and loss and cash-flow projections,

which were consistently formatted so that petitioner could

compare the pretax earnings effect to the post-tax earnings

effect. Petitioner requested multiple versions of the

projections at various estimated combined Federal and State

marginal tax rates in order to see what effect a change in rates

would have on the proposed COLI transaction. On the other hand,

petitioner produced no contemporaneously prepared documents

indicating that it purchased the 1993 COLI policies in order to

provide a source for funding its Winn-Flex obligations. Unlike
- 53 -

the policies used to fund petitioner's obligations under its

Management Security Program, the individual 1993 COLI policies

were not tailored to fund benefits due the insured employees

under Winn-Flex. Indeed, the policies were to remain in effect

after the individual employees left petitioner's employ. In

planning for and setting up the COLI plan, petitioner's financial

vice president and principal financial officer, Mr. McCook, never

told the individuals at WJ/Coventry, who were planing the COLI

transactions, about any purpose or objective to use the COLI plan

to fund benefits under Winn-Flex. 

On brief, petitioner argues that death benefits and policy

loans and withdrawals from the net cash value of COLI policies

could be used to help fund Winn-Flex. However, the projections,

which embody petitioner's broad-based COLI plan, show that

anticipated death benefits and net cash values were going to be

exhausted in order to satisfy petitioner's premiums and policy

loan interest obligations. According to petitioner's COLI plan,

there would be no death benefits and cash value left over to

provide the necessary funding for Winn-Flex. Indeed, the COLI

plan anticipated that after using available death benefits,

policy loan proceeds, and withdrawals, petitioner would still be

required to make annual cash payments in order to satisfy its

annual premium and policy loan interest obligations. We do not
- 54 -

believe that petitioner purchased the COLI policies to fund WinnFlex. 

In his testimony, Mr. McCook made it clear that his focus

was on the bottom line, after-tax earnings impact, of the COLI

plan and the resulting positive cash-flow that the tax deductions

were expected to generate. Referring to the January 27, 1993,

projections of profit and loss prepared by Coventry (appendix A),

Mr. McCook testified that he expected that by the 15th year the

annual financial benefit of the COLI transaction would offset the

annual costs of petitioner's Winn-Flex obligations. According to

the January 27, 1993, projection of profit and loss (appendix A),

there was a pretax loss in each year of the 60 years in the

projection. The pretax loss for the 15th year (2007) was

$14,178,000, and the cumulative pretax loss for the first 15

years was $148,483,000. The January 27, 1993, projection of

profit and loss showed a profit for the year 2007 only after

considering the tax savings from the policy loan interest and fee

deductions. The projected after-tax profit from the COLI plan

for 2007 was $64,479,000. When Mr. McCook identified the amount

he believed would be available to fund the annual costs of WinnFlex, he referred to the $64,479,000 amount of projected aftertax earnings from the COLI program for the year 2007. This

amount was produced by loan interest and fee deductions. A tax

savings generated by the COLI plan was the only reason the plan
- 55 -

44When Mr. McCook was asked how the $300 million was

derived, he testified that he thought that it was the total of

the "After-tax Savings" figures listed in the Jan. 27, 1993,

projections. These Jan. 27, 1993, projections are contained in

appendix A, Profit and Loss Statement. The after-tax earnings

referred to by Mr. McCook are in column J. The total after-tax

earnings for the policy years 1993 through 2007 are slightly more

than $300 million. The total projected after-tax earnings for

the years 1993 through 2052 are more than $2 billion.

45We note that none of these tax savings were earmarked for

funding Winn-Flex. They were simply projected to reduce

petitioner's tax liabilities and thereby increase petitioner's

after-tax profits by more than $2 billion over 60 years.

produced positive earnings and cash-flow. Indeed, petitioner's

internal records show that petitioner viewed the 1993 COLI plan

as an "Expense Reduction Opportunity", that would produce

estimated savings of $300 million.44 The only "expense" that was

reduced by the COLI plan was petitioner's income tax liability.

Even if we were to accept Mr. McCook's testimony that he

intended to use tax savings to fund Winn-Flex, that would not

cause the COLI plan to have economic substance.45 If this were

sufficient to breathe substance into a transaction whose only

purpose was to reduce taxes, every sham tax-shelter device might

succeed. Petitioner's benefit from the COLI plan was dependent

on the projected interest and fee deductions that would offset

income from petitioner's normal operations. The possibility that

such tax benefits could have been used as a general source of

funds for petitioner's Winn-Flex obligations (or any other

business purpose) does not alter the fact that the COLI plan
- 56 -

itself had only one function and that was to generate tax

deductions which were to be used to offset income from its

business and thereby reduce petitioner's income tax liabilities

in each year. 

Petitioner also argues that the purchase of the COLI

policies permitted it to increase group life benefits offered to

Winn-Flex participants. It is true that petitioner offered an

additional $5,000 in life insurance benefits to employees who

agreed to allow petitioner to purchase COLI policies on their

lives. However, this was done at the suggestion of Coventry in

order to obtain the employees' consent to have their lives

insured. There was no relationship between death benefits under

the COLI policies and the relatively small $5,000 employee death

benefit. All policies bore a $3,000 annual premium, and death

benefits under the policies were based on that premium amount and

the age of the employee. Also, petitioner had a high turnover

among its employees, and the $5,000 death benefit expired when

the insured's employment with petitioner ended. As a result,

Coventry advised petitioner that the additional $5,000 in

coverage could be provided at an insignificant cost. Based on

the record, we do not believe that the purpose of the COLI plan

was to fund employee benefits.

Petitioner's COLI plan required a relatively small amount of

cash investment by petitioner and charged a high rate of interest
- 57 -

on petitioner's policy loans based on the assumption that

petitioner's "appetite for interest deductions remains large". 

The projections showed that the COLI plan would generate positive

cash-flows and earnings only because of the tax benefit

associated with the interest and fee deductions. Tax

considerations permeated the planning stages of petitioner's

COLI. When the broad-based COLI plan was first explained to him,

Mr. McCook recognized that it was a tax shelter. Mr. McCook's

primary concern was to achieve a positive cash-flow. The only

way a positive cash-flow could be achieved was through the

deduction of interest on policy loans. This is why petitioner

concentrated on its ability to deduct loan interest and the

availability of "exit strategies" in the event new legal

restrictions on deductions were enacted or petitioner's

"appetite" for interest deductions diminished. 

Following the enactment of tax law changes in August 1996,

which greatly restricted employers' deductions for interest on

loans from company-owned life insurance policies on the lives of

employees, petitioner terminated its COLI program. See Health

Insurance Portability and Accountability Act of 1996, Pub. L.

104-191, sec. 501, 110 Stat. 2090. The 1996 change in the tax

law caused petitioner's COLI program to become a financial burden

because it specifically prohibited the deduction of policy loan

interest under petitioner's plan. After the 1996 tax law change,
- 58 -

46Petitioner's case is appealable to the Court of Appeals

for the Eleventh Circuit. Decisions of the Court of Appeals for

the Fifth Circuit that were handed down prior to Sept. 30, 1981,

are generally binding as precedent in the Eleventh Circuit. 

Bonner v. City of Pritchard, 661 F.2d 1206 (11th Cir. 1981).

none of petitioner's purported business purposes affected

petitioner's decision to terminate the COLI program. 

Petitioner cites Campbell v. Cen-Tex, Inc., 377 F.2d 688

(5th Cir. 1967), as controlling precedent in this case.46

Petitioner's reliance on this case is misplaced. Cen-Tex was a

family-owned corporation that had entered into deferred

compensation arrangements, which obligated it to provide payments

to the surviving spouse or lineal descendants of employee

stockholders and to purchase and redeem stock of deceased

stockholders. Cen-Tex decided to meet these obligations by

purchasing insurance on the lives of the employee stockholders. 

Cen-Tex paid the first annual premium on each policy and prepaid

the next four annual premiums, discounted at 3 percent, and then

borrowed against the value on each of the policies at a 4-percent

rate. See id. at 689. The court allowed deductions for interest

on the policy loans. 

Cen-Tex, Inc. is clearly distinguishable from petitioner's

case. The parties in Cen-Tex, Inc. stipulated that the insurance

policies at issue were procured to assist in meeting the

obligations of the taxpayer under its deferred compensation plan

and its obligations under the stock option and redemption
- 59 -

agreement, as well as for the general objective of having

insurance on its key employees and stockholders. Based on this

concession, the court found there was a bona fide nontax business

purpose and economic objective to be served by the insurance. 

See id. The court also found that the transaction produced

benefits other than tax benefits. The court concluded that "The

policies purchased provided for a beneficial interest. The

transaction was not without economic value, economic

significance, economic substance, or commercial substance." 

Campbell v. Cen-Tex, Inc., supra at 692 (fn. refs. omitted).

In contrast to Campbell v. Cen-Tex, Inc., supra, we have

found that no nontax purpose was served by the COLI transactions. 

The projections for the COLI policies contemplated a substantial

pretax loss in each year, even after considering the projected

death benefits and net cash surrender value of the policies. 

Only by deducting the policy loan interest and fees and reducing

its income tax could petitioner anticipate any benefit from its

COLI transactions. Without the tax benefits of the policy loan

interest and fee deductions being generated by the COLI plan,

petitioner's plan would have generated a predictable negative

cash-flow and pretax loss in each of the 60 years projected. 

This predictable result precludes any economic value, economic
- 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-ofseven 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
- 61 -

47In pertinent part, sec. 264(a) provides:

SEC. 264(a) General Rule.--No deduction shall be

allowed for--

* * * * * * *

(3) Except as provided in subsection

(c), any amount paid or accrued on

indebtedness incurred or continued to

purchase or carry a life insurance,

endowment, or annuity contract (other than a

single premium contract or a contract treated

as a single premium contract) pursuant to a

plan of purchase which contemplates the

systematic direct or indirect borrowing of

part or all of the increases in the cash

value of such contract (either from the

insurer or otherwise).

loans, petitioner was not barred from taking such deductions

prior to 1996. 

Section 264(a)(3) generally provides that no deduction is

allowed for amounts paid or accrued on indebtedness incurred to

purchase a life insurance contract if such debt was incurred

pursuant to a plan of purchase which contemplates the systematic

borrowing of increases in the cash value of the insurance

contract. Section 264(c)(1) provides an exception to the general

rule under section 264(a)(3). Section 264(c)(1) provides that if

no part of any four annual premiums due in the first 7-year

period of an insurance contract is financed by means of

indebtedness, then the general rule of section 264(a)(3) will not

apply.47 
- 62 -

* * * * * * *

(c) Exceptions.--Subsection (a)(3) shall not apply to

any amount paid or accrued by a person during a taxable

year on indebtedness incurred or continued as part of a

plan referred to in subsection (a)(3)--

(1) if no part of 4 of the annual

premiums due during the 7-year period

(beginning with the date the first premium on

the contract to which such plan relates was

paid) is paid under such plan by means of

indebtedness,

(2) if the total of the amounts paid or

accrued by such person during such taxable

year for which (without regard to this

paragraph) no deduction would be allowable by

reason of subsection (a)(3) does not exceed

$100,

(3) if such amount was paid or accrued

on indebtedness incurred because of an

unforeseen substantial loss of income or

unforeseen substantial increase in his

financial obligations, or

(4) if such indebtedness was incurred in

connection with his trade or business.

For purposes of applying paragraph (1), if there is a

substantial increase in the premiums on a contract, a

new 7-year period described in such paragraph with

respect to such contract shall commence on the date the

first such increased premium is paid.

48The parties also agree that petitioner's COLI policies

meet the definition of a life insurance contract for purposes of

The parties refer to this exception as the "four-of-seven test". 

The parties agree that petitioner's COLI policies meet the

requirements of the four-of-seven test.48 The parties disagree
- 63 -

sec. 7702. 

as to whether satisfaction of the requirements of section 264(a)

and (c) authorizes a deduction of the interest expenses arising

out of a transaction that otherwise is without substance. 

An argument similar to petitioner's was made in Knetsch v.

United States, 364 U.S. 361 (1960). In Knetsch, the Court found

that the taxpayer's purchase of annuity contracts and

simultaneous loans from an insurance company was a sham that did

not give rise to deductible interest. Nevertheless, like

petitioner, the taxpayer in Knetsch contended that by enacting

section 264 as part of the 1954 Code, Congress "authorized" the

interest deductions for transactions prior to the effective date

of the 1954 Code. See id. at 367. Section 264(a)(2), as enacted

in 1954, denied a deduction for amounts paid on indebtedness

incurred to purchase or carry a single premium annuity contract,

but only as to contracts purchased after March 1, 1954, the date

of enactment. See id. From this the taxpayers reasoned that

Congress intended to allow interest deductions for such

transactions occurring prior to March 1, 1954, regardless of

their substance. The Supreme Court disagreed, concluding that

unless such meaning plainly appeared from the statute and its

legislative history, the Court would not attribute such an intent

to Congress, for "'To hold otherwise would be to exalt artifice

above reality and to deprive the statutory provision in question
- 64 -

of all serious purpose.'" Id. (quoting Gregory v. Helvering, 293

U.S. at 470).

A taxpayer's right to a deduction for interest on an

insurance policy loan is based on section 163, not section 264. 

Golsen v. Commissioner, 54 T.C. 742, 755 (1970), affd. 445 F.2d

985 (10th Cir. 1971). Section 264 does not confer the right to a

deduction but simply denies, disallows, or prohibits deductions

that might otherwise be allowable under some other provision. 

See id. at 756. Thus, while the parties agree that petitioner's

COLI plan meets the "four-of-seven test" of section 264(c)(1) and

would be excepted from the general disallowance rule of section

264(a)(3), section 264 does not confer a right upon petitioner to

take the deduction that would not otherwise be allowable under

section 163. 

Petitioner cites the Senate Finance Committee's report

discussing the scope of section 264 prior to the 1964 amendment. 

The report states that "under present law, no interest deductions

are denied where the taxpayer purchases an insurance contract

with the intention of borrowing the maximum amount on the

contract each year". S. Rept. 830, 88th Cong., 2d Sess. (1964),

1964-1 C.B. (Part 2) 505, 581. Based on this, petitioner argues

that Congress did not view the Supreme Court's decision in

Knetsch as foreclosing interest deductions based on the type of
- 65 -

sham transactions involved in this case. A similar argument was

advanced in McLane v. Commissioner, 46 T.C. 140 (1966), affd. 377

F.2d 557 (9th Cir. 1967), where the taxpayers had engaged in a

series of transactions similar to those in the instant case. In

the Revenue Act of 1964, Pub. L. 88-272, sec. 215(a), 78 Stat.

55, Congress added subsection (a)(3) of section 264 to address

problems associated with amounts paid or accrued on indebtedness

incurred with respect to several types of insurance contracts

pursuant to a plan of systematic borrowing. In McLane v.

Commissioner, supra at 144-145, we considered the same passage

from the Senate Finance Committee report that petitioner cites

and stated:

Based upon the foregoing, petitioner by a tour de

force concludes that: (a) The 1958 transaction herein

is the type of abuse meant to be curbed by subsection

(a)(3), but only prospectively; (b) the legislative

history expressly confirms his assertion that the

deduction flowing from this abuse was allowable under

prior law; and (c) the 'interest' involved herein is

therefore deductible.

We agree with petitioners that the 1958

transaction in form fell within the class of

transactions at which subsection (a)(3) was aimed. But

we do not agree with his assertion that the legislative

history should be turned into an open-ended license

applicable without regard to the substance of the

transaction. Nor do we agree with the assertion that,

if Knetsch and Pierce, were controlling with respect to

post-1958 multiple-premium annuities, there would have

been no need for further legislation in 1964. Knetsch

and Pierce involved transactions without substance. 

Congress, in enacting section 264(a)(3), struck at

transactions with substance. It is a reductio ad

absurdum to reason, as petitioner does, that Congress

simultaneously struck down a warm body and breathed
- 66 -

life into petitioner's cadaver. [Fn. ref. omitted.]

Petitioner attempts to supplement its argument by citing

additional legislative materials related to changes or proposed

changes to section 264 in 1984, 1986, 1987, 1988, 1990, 1991, and

1996. We need not address each of the changes and proposals

regarding interest deductions on life insurance policy loans. It

is clear that Congress and the Treasury Department were aware of

the problems associated with interest deductions on life

insurance loans. However, we are not persuaded that Congress, by

enacting and amending section 264 or other related provisions

that restrict the deductibility of interest, intended to allow

interest deductions under section 163 based on transactions that

lacked either economic substance or business purpose. In

Knetsch, the Supreme Court noted that nothing in the legislative

history of section 264 suggests that Congress intended to protect

sham transactions. Similarly, we find nothing in the more recent

legislative history of section 264 suggesting that Congress

intended to allow deductions arising from sham transactions that

lacked economic substance and business purpose.

The transactions associated with petitioner's COLI program

lacked economic substance and business purpose (other than tax

reduction). As a result, the interest on petitioner's COLI loans

was not deductible interest on indebtedness within the meaning of
- 67 -

49Respondent argues that the administrative fees should be

disallowed pursuant to sec. 265. Because we have held that the

administrative fees must be disallowed as the product of a sham, 

we have no need to consider disallowance under sec. 265.

section 163. The same reasoning applies to the administrative

fees associated with the COLI plan.49 They were incurred in 

connection with, and were an integral part of, a sham transaction

and, as a result, are not deductible. See Karr v. Commissioner,

924 F.2d at 1022-1023; Kirchman v. Commissioner, 862 F.2d 1486;

Lee v. Commissioner, 155 F.3d 584 (2d Cir. 1998). We, therefore,

uphold respondent's disallowance of these deductions.

Decision will be entered

under Rule 155.
- 68 -

Appendix A

Scenario 1 - Constant Loan Interest Rate

Profit and Loss Statement

(dollars in thousands except earnings per share)

 Pre-Tax Effect Tax Effect 

Year

 

(A)

Net

Annual

(Premium)*

 

(B)

Annual

CSV

Increase/

(Decrease)

 

(C)

Accrued

Loan

Interest

(Payment)

 

(C1)

Deductible

Loan

Interest

(Payment)

 

(D)

Death

Benefits

 

(E)

Admin.

Fee

 

(F)

Pre-Tax

Earnings

Effect

A+B+C+D+E

 

 (G)

Policy

 Loan

 Tax

Credit

 

(H)

Admin.

Fee

Tax

 Credit

 

(I)

Tax

Effect

G+H

 

(J)

After-Tax

Earnings

Effect

 

 (K)

 After-Tax

 Earnings

Per Share**[1]

 

1993 (114,000) 119,586 (11,902) (11,902) 2,016 (304) (4,605) 4,524 116 4,640 35 0.00 

1994 (112,280) 126,513 (24,486) (24,486) 2,155 (304) (8,403) 9,308 115 9,423 1,021 0.01 

1995 (99,121) 122,492 (36,661) (36,661) 2,312 (304) (11,282) 13,936 115 14,052 2,770 0.04 

1996 23,952 (29) (36,633) (36,633) 2,614 (303) (10,399) 13,926 115 14,041 3,642 0.05 

1997 24,182 (30) (36,602) (36,602) 2,756 (303) (9,997) 13,915 115 14,030 4,033 0.05 

1998 24,411 (32) (36,570) (36,570) 2,934 (303) (9,559) 13,903 115 14,018 4,458 0.06 

1999 24,340 (35) (36,535) (36,535) 3,152 (303) (9,381) 13,890 115 14,005 4,624 0.06 

2000 (113,380) 152,293 (51,654) (51,654) 3,287 (302) (9,756) 19,639 115 19,753 9,997 0.13 

2001 (113,264) 168,363 (68,351) (68,351) 3,595 (302) (9,959) 25,988 115 26,103 16,143 0.21 

2002 (113,137) 185,941 (86,771) (86,771) 3,959 (302) (10,310) 32,994 115 33,108 22,799 0.30 

2003 (112,997) 205,253 (107,079) (107,079) 4,399 (301) (10,725) 40,718 115 40,833 30,108 0.39 

2004 (112,841) 226,309 (129,436) (129,436) 4,911 (301) (11,358) 49,224 114 49,338 37,980 0.50 

2005 (112,667) 249,264 (154,019) (154,019) 5,508 (300) (12,215) 58,578 114 58,692 46,477 O.61 

2006 (112,472) 274,461 (181,034) (181,034) 6,194 (300) (13,151) 68,860 114 68,974 55,822 0.73 

2007 (112,253) 302,091 (210,699) (206,693) 6,983 (299) (14,178) 78,543 114 78,657 64,479 0.84 

2008 0 213,785 (231,471) (206,209) 7,851 (299) (10,134) 78,359 113 78,473 68,339 0.89 

2009 0 234,409 (254,176) (205,666) 8,796 (298) (11,269) 78,153 113 78,266 66,998 0.87 

2010 0 257,067 (278,992) (205,060) 9,803 (297) (12,420) 77,923 113 78,036 65,616 0.86 

2011 0 281,888 (306,108) (204,387) 10,864 (296) (13,653) 77,667 113 77,780 64,127 0.84 

2012 0 309,092 (335,731) (203,644) 11,961 (295) (14,973) 77,385 112 77,497 62,524 0.82 

2013 0 338,897 (368,084) (202,828) 13,091 (294) (16,390) 77,075 112 77,186 60,796 0.79 

2014 0 371,620 (403,420) (201,938) 14,253 (293) (17,839) 76,736 111 76,848 59,009 

2015 0 408,917 (442,145) (200,971) 15,448 (291) (18,071) 76,369 111 76,480 58,409

2016 0 449,906 (484,575) (199,926) 16,673 (290) (18,285) 75,972 110 76,082 57,797

2017 0 494,902 (531,044) (198,799) 17,938 (288) (18,492) 75,544 110 75,653 57,161 0.75 

2018 0 544,368 (581,916) (197,588) 19,289 (287) (18,546) 75,084 109 75,192 56,647 0.74 

2019 0 598,625 (637,563) (196,285) 20,777 (285) (18,446) 74,588 108 74,696 56,250 0.73 

2020 0 657,819 (698,339) (194,878) 22,461 (283) (18,342) 74,054 108 74,161 55,819 0.73 

2021 0 722,246 (764,590) (193,354) 24,397 (281) (18,228) 73,474 107 73,581 55,353 0.72 

2022 0 792,208 (836,648) (191,694) 26,615 (279) (18,103) 72,844 106 72,950 54,846 0.72 

 *Total annual premium less annual withdrawal.

 **Based on 76.6 million shares outstanding.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.
- 69 -

Scenario 1 - Constant Loan Interest Rate

Profit and Loss Statement

(dollars in thousands except earnings per share)

 Pre-Tax Effect Tax Effect 

Year

 

(A)

Net

Annual

(Premium)*

 

(B)

Annual

CSV

Increase/

(Decrease)

 

(C)

Accrued

Loan

Interest

(Payment)

 

(C1)

Deductible

Loan

Interest

(Payment)

 

(D)

Death

Benefits

 

(E)

Admin.

Fee

 

(F)

Pre-Tax

Earnings

Effect

A+B+C+D+E

 

(G)

Policy

 Loan

 Tax

Credit

 

(H)

Admin.

Fee

Tax

 Credit

 

(I)

Tax

Effect

G+H

 

(J)

After-Tax

Earnings

Effect

 

 (K)

 After-Tax

 Earnings

Per Share**[1]

 

2023 0 867,928 (914,804) (189,879) 29,184 (276) (17,968) 72,154 105 72,259 54,291 0.71

2024 0 949,613 (999,303) (187,885) 32,146 (273) (17,817) 71,396 104 71,500 53,683 0.70

2025 0 1,037,393 (1,090,314) (185,684) 35,546 (270) (17,645) 70,560 103 70,662 53,017 0.69 

2026 0 1,131,328 (1,187,917) (183,247) 39,410 (267) (17,446) 69,634 101 69,735 52,289 0.68 

2027 0 1,231,384 (1,292,076) (180,544) 43,740 (263) (17,215) 68,607 100 68,707 51,492 0.67 

2028 0 1,337,543 (1,402,677) (177,547) 48,446 (259) (16,946) 67,468 98 67,567 50,620 0.66

2029 0 1,449,715 (1,519,519) (174,238) 53,415 (255) (16,643) 66,210 97 66,307 49,664 0.65

2030 0 1,567,742 (1,642,320) (170,601) 58,634 (250) (16,193) 64,829 95 64,923 48,730 0.64

2031 0 1,691,227 (1,770,698) (166,634) 64,628 (244) (15,086) 63,321 93 63,414 48,327 0.63 

2032 0 1,819,004 (1,904,072) (162,337) 68,762 (238) (16,545) 61,688 90 61,778 45,233 0.59

2033 0 1,953,020 (2,041,845) (157,710) 73,819 (232) (15,238) 59,930 88 60,018 44,780 0.58

2034 0 2,089,112 (2,182,737) (152,749) 79,081 (225) (14,769) 58,044 85 58,130 43,361 0.57

2035 0 2,226,401 (2,325,080) (147,440) 84,576 (217) (14,320) 56,027 83 56,110 41,789 0.55

2036 0 2,362,737 (2,466,685) (141,768) 90,329 (209) (13,828) 53,872 80 53,952 40,124 0.52

2037 0 2,495,443 (2,604,815) (135,720) 96,292 (201) (13,281) 51,574 76 51,650 38,369 0.50

2038 0 2,621,661 (2,736,378) (129,288) 102,236 (192) (12,674) 49,130 73 49,203 36,529 O.48

2039 0 2,738,347 (2,858,051) (122,486) 107,873 (182) (12,013) 46,545 69 46,614 34,601 0.45

2040 0 2,842,259 (2,966,346) (115,340) 112,947 (172) (11,312) 43,829 65 43,895 32,582 0.43

2041 0 2,930,135 (3,057,756) (107,898) 117,200 (162) (10,583) 41,001 61 41,063 30,479 0.40

2042 0 2,998,802 (3,128,893) (100,220) 122,567 (151) (7,675) 38,084 57 38,141 30,466 0.40

2043 0 3,033,490 (3,175,595) (92,381) 136,378 (139) (5,867) 35,105 53 35,158 29,291

2044 0 3,035,085 (3,194,629) (84,469) 151,298 (128) (8,374) 32,098 49 32,147 23,772

2045 0 3,010,969 (3,184,372) (76,577) 165,738 (116) (7,782) 29,099 44 29,143 21,361

2046 0 2,957,486 (3,143,787) (68,803) 179,192 (105) (7,214) 26,145 40 26,185 18,971 0.25

2047 0 2,873,589 (3,071,784) (61,234) 191,639 (94) (6,650) 23,269 36 23,305 16,655 0.22

2048 0 2,760,378 (2,968,747) (53,949) 202,343 (83) (6,110) 20,501 32 20,532 14,423 0.19

2049 0 2,619,159 (2,835,702) (47,020) 211,032 (73) (5,583) 17,868 28 17,895 12,313 0.16

2050 0 2,451,775 (2,674,269) (40,506) 217,487 (63) (5,070) 15,392 24 15,416 10,347 0.14

2051 0 2,261,733 (2,487,427) (34,457) 221,162 (54) (4,586) 13,094 21 13,114 8,529 0.11

2052 0 2,102,864 (2,284,848) (28,917) 177,288 (46) (4,742) 10,988 17 11,006 6,264 0.08

 *Total annual premium less annual withdrawal.

 **Based on 76.6 million shares outstanding.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 _________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.
- 70 -

Scenario 1 - Constant Loan Interest Rate

Cash Flow Detail

(dollars in thousands)

 Corporate Cash Outflow Corporate Cash Inflow Net Cash Flow Surplus

Year

 

(A)

Premium

 

(B)

Loan

Interest

 

(C)

After-Tax

Admin.

Fee

 

(D)

Policy Loan

Tax

Savings

 

(E)

Policy

Loan

 

(F)

Policy

Withdrawal

 

 (G)

 

 

Tax-Free

 Death

Benefits

 

(H)

Net

Cash

Clow

 

(I)

Cumulative

Cash

Flow

 

(J)

Cumulative

Cash

Flow

at 4.35%

Pre-Tax*

 

(K)

Cumulative

Net

 Equity[1]

 

1993 (114,000) 0 (188) 4,524 107,684 0 2,016 35 35 (53) 78

1994 (113,929) (11,902) (188) 9,308 113,929 1,649 2,155 1,021 1,056 838 178

1995 (113,852) (24,486) (188) 13,936 110,318 14,731 2,312 2,770 3,826 3,485 237

1996 (113,771) (36,661) (188) 13,926 0 137,722 2,614 3,642 7,468 7,095 337

1997 (113,681) (36,633) (188) 13,915 0 137,864 2,756 4,033 11,501 11,201 331

1998 (113,588) (36,602) (188) 13,903 0 137,999 2,934 4,458 15,959 15,854 175

1999 (113,488) (36,570) (188) 13,890 0 137,828 3,152 4,624 20,583 20,799 133

2000 (113,380) (36,535) (187) 19,639 137,175 0 3,287 9,997 30,580 31,316 242

2001 (113,264) (51,654) (187) 25,988 151,666 0 3,595 16,143 46,723 48,339 266

2002 (113,137) (68,351) (187) 32,994 167,521 0 3,959 22,799 69,522 72,556 295

2003 (112,997) (86,771) (187) 40,718 184,946 0 4,399 30,108 99,630 104,822 327

2004 (112,841) (107,079) (187) 49,224 203,952 0 4,911 37,980 137,610 145,922 367

2005 (112,667) (129,436) (186) 58,578 224,681 0 5,508 46,477 184,087 196,723 414

2006 (112,472) (154,019) (186) 68,860 247,446 0 6,194 55,822 239,910 258,345 466

2007 (112,253) (181,034) (186) 78,543 272,425 0 6,983 64,479 304,388 330,377 524

2008 0 (210,699) (185) 78,359 193,013 0 7,851 68,339 372,728 408,310 519

2009 0 (231,471) (185) 78,153 211,704 0 8,796 66,998 439,725 486,960 575

2010 0 (254,176) (184) 77,923 232,250 0 9,803 65,616 505,341 566,303 635

2011 0 (278,992) (184) 77,667 254,772 0 10,864 64,127 569,468 646,249 700

2012 0 (306,108) (183) 77,385 279,469 0 11,961 62,524 631,992 726,695 769

2013 0 (335,731) (182) 77,075 306,543 0 13,091 60,796 692,788 807,528

2014 0 (368,084) (182) 76,736 336,285 0 14,253 59,009 751,797 888,697

2015 0 (403,420) (181) 76,369 370,192 0 15,448 58,409 810,205 971,429

2016 0 (442,145) (180) 75,972 407,477 0 16,673 57,797 868,002 1,055,756 920

2017 0 (484,575) (179) 75,544 448,433 0 17,938 57,161 925,163 1,141,696 950

2018 0 (531,044) (178) 75,084 493,496 0 19,289 56,647 981,810 1,229,415 978

2019 0 (581,916) (177) 74,588 542,978 0 20,777 56,250 1,038,060 1,319,082 1,005

2020 0 (637,563) (175) 74,054 597,043 0 22,461 55,819 1,093,880 1,410,713 1,035

2021 0 (698,339) (174) 73,474 655,995 0 24,397 55,353 1,149,233 1,504,320 1,069

2022 0 (764,590) (173) 72,844 720,151 0 26,615 54,846 1,204,080 1,599,912 1,107

 *Assumes deaths occur midyear.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 _______________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.
- 71 -

Scenario 1 - Constant Loan Interest Rate

Cash Flow Detail

(dollars in thousands)

 Corporate Cash Outflow Corporate Cash Inflow Net Cash Flow Surplus 

Year

 

 (A)

 Premium

 

(B)

Loan

Interest

 

(C)

After-Tax

Admin.

Fee

 

(D)

Policy Loan

Tax

Savings

 

(E)

Policy

Loan

 

(F)

Policy

Withdrawal

 

(G)

Tax-Free

Death

Benefits

 

(H)

Net

Cash

Flow

 

(I)

Cumulative

Cash

Flow

 

(J)

Cumulative

Cash

Flow

at 4.35%

Pre-Tax*

 

(K)

Cumulative

Net

 Equity[1]

 

2023 0 (836,648) (171) 72,154 789,772 0 29,184 54,291 1,258,371 1,697,489 1,151

2024 0 (914,804) (169) 71,396 865,114 0 32,146 53,683 1,312,054 1,797,047 1,201

2025 0 (999,303) (168) 70,560 946,382 0 35,546 53,017 1,365,071 1,898,574 1,258

2026 0 (1,090,314) (166) 69,634 1,033,725 0 39,410 52,289 1,417,360 2,002,054 1,322

2027 0 (1,187,917) (163) 68,607 1,127,225 0 43,740 51,492 1,468,851 2,107,465 1,393

2028 0 (1,292,076) (161) 67,468 1,226,943 0 48,446 50,620 1,519,472 2,214,778 1,469

2029 0 (1,402,677) (158) 66,210 1,332,873 0 53,415 49,664 1,569,135 2,323,956 1,548

2030 0 (1,519,519) (155) 64,829 1,444,941 0 58,634 48,730 1,617,866 2,435,071 1,508

2031 0 (1,642,320) (151) 63,321 1,562,850 0 64,628 48,327 1,666,193 2,548,711 685

2032 0 (1,770,698) (148) 61,688 1,685,629 0 68,762 45,233 1,711,426 2,662,208 1,729

2033 0 (1,904,072) (144) 59,930 1,815,248 0 73,819 44,780 1,756,207 2,778,260 1,858

2034 0 (2,041,845) (139) 58,044 1,948,220 0 79,081 43,361 1,799,568 2,895,941 1,933

2035 0 (2,182,737) (135) 56,027 2,084,057 0 84,576 41,789 1,841,357 3,015,138 2,010

2036 0 (2,325,080) (130) 53,872 2,221,133 0 90,329 40,124 1,881,481 3,135,794 2,089

2037 0 (2,466,685) (125) 51,574 2,357,313 0 96,292 38,369 1,919,850 3,257,856 2,168

2038 0 (2,604,815) (119) 49,130 2,490,097 0 102,236 36,529 1,956,379 3,381,277 2,243

2039 0 (2,736,378) (113) 46,545 2,616,674 0 107,873 34,601 1,990,980 3,506,008 2,309

2040 0 (2,858,051) (107) 43,829 2,733,964 0 112,947 32,582 2,023,562 3,632,001 2,362

2041 0 (2,966,346) (100) 41,001 2,838,725 0 117,200 30,479 2,054,041 3,759,218 2,397

2042 0 (3,057,756) (93) 38,084 2,927,665 0 122,567 30,466 2,084,507 3,889,822 169

2043 0 (3,128,893) (86) 35,105 2,986,788 0 136,378 29,291 2,113,799 4,022,599

2044 0 (3,175,595) (79) 32,098 3,016,051 0 151,298 23,772 2,137,571 4,153,131

2045 0 (3,194,629) (72) 29,099 3,021,226 0 165,738 21,361 2,158,932 4,284,556

2046 0 (3,184,372) (65) 26,145 2,998,071 0 179,192 18,971 2,177,903 4,416,931 (4,341)

2047 0 (3,143,787) (58) 23,269 2,945,592 0 191,639 16,655 2,194,558 4,550,372 (4,598)

2048 0 (3,071,784) (52) 20,501 2,863,415 0 202,343 14,423 2,208,980 4,685,016 (4,796)

2049 0 (2,968,747) (45) 17,868 2,752,205 0 211,032 12,313 2,221,293 4,821,045 (4,928)

2050 0 (2,835,702) (39) 15,392 2,613,208 0 217,487 10,347 2,231,639 4,958,675 (4,991)

2051 0 (2,674,269) (34) 13,094 2,448,575 0 221,162 8,529 2,240,168 5,098,134 (4,975)

2052 0 (2,487,427) (28) 10,988 2,305,443 0 177,288 6,264 2,246,432 5,239,658 (4,941)

 

 *Assumes deaths occur midyear.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.
- 72 -

Scenario 1 - Constant Loan Interest Rate

Balance Sheet Summary

(dollars in thousands)

 

Year

 

(A)

Cash

Amount

 

(B1)

Gross

Cash Surrender

Value

 

 (B2)

 Outstanding

 (Loan) 

 

(B)

Insurance Net

Cash Surrender

Value

 

(C)

Accrued

Loan

Interest

 

(D)

Retained

Earnings

Gain/(Loss)

 

(E)

Annual

Impact on

Earnings

 

 1993 35 119,596 (107,616) 11,980 11,902 113 113

 1994 1,056 246,061 (221,396) 24,665 24,486 1,234 1,121

 1995 3,826 368,374 (331,476) 36,898 36,661 4,063 2,828

 1996 7,468 368,186 (331,216) 36,970 36,633 7,805 3,743

 1997 11,501 367,876 (330,943) 36,933 36,602 11,831 4,026

 1998 15,959 367,397 (330,652) 36,745 36,570 16,134 4,303

 1999 20,583 367,008 (330,339) 36,669 36,535 20,717 4,582

 2000 30,580 518,930 (467,034) 51,896 51,654 30,822 10,106

 2001 46,723 686,622 (618,005) 68,618 68,351 46,990 16,168

 2002 69,522 871,619 (784,552) 87,066 86,771 69,817 22,827

 2003 99,630 1,075,569 (968,163) 107,406 107,079 99,957 30,140

 2004 137,610 1,300,113 (1,170,310) 129,803 129,436 137,977 38,019

 2005 184,087 1,547,013 (1,392,580) 154,433 154,019 184,501 46,524

 2006 239,910 1,818,331 (1,636,831) 181,499 181,034 240,375 55,875

 2007 304,388 2,116,279 (1,905,056) 211,223 210,699 304,912 64,537

 2008 372,728 2,324,858 (2,092,868) 231,990 231,471 373,247 68,334

 2009 439,725 2,552,907 (2,298,156) 254,751 254,176 440,300 67,054

 2010 505,341 2,802,162 (2,522,535) 279,628 278,992 505,977 65,676

 2011 569,468 3,074,513 (2,767,705) 306,808 306,108 570,168 64,192

 2012 631,992 3,372,040 (3,035,541) 336,500 335,731 632,761 62,593

 2013 692,788 3,696,994 (3,328,067) 368,927 368,084 693,631 60,870

 2014 751,797 4,051,835 (3,647,555) 404,280 403,420 752,657 59,026

 2015 810,205 4,440,729 (3,997,694) 443,035 442,145 811,096 58,438

 2016 868,002 4,866,820 (4,381,326) 485,495 484,575 868,922 57,826

 2017 925,163 5,333,474 (4,801,480) 531,993 531,044 926,113 57,191

 2018 981,810 5,844,342 (5,261,448) 582,894 581,916 982,788 56,675

 2019 1,038,060 6,403,152 (5,764,585) 638,568 637,563 1,039,065 56,277

 2020 1,093,880 7,013,474 (6,314,100) 699,374 698,339 1,094,915 55,849

 2021 1,149,233 7,678,773 (6,913,114) 765,659 764,590 1,150,302 55,387

 2022 1,204,080 8,402,381 (7,564,627) 837,754 836,648 1,205,186 54,885

All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.
- 73 -

Scenario 1 - Constant Loan Interest Rate

Balance Sheet Summary

(dollars in thousands)

 

Year

 

(A)

Cash

Amount

 

(B1)

Gross

Cash Surrender

Value

 

(B2)

Outstanding

(Loan)

 

(B)

Insurance Net

Cash Surrender

Value

 

(C)

Accrued

Loan

Interest

 

(D)

 Retained

 Earnings

 Gain/(Loss)

 

(E)

Annual

Impact on

Earnings

 

 2023 1,258,371 9,187,244 (8,271,289) 915,955 914,804 1,259,522 54,335

 2024 1,312,054 10,035,794 (9,035,290) 1,000,504 999,303 1,313,255 53,733

 2025 1,365,071 10,949,751 (9,858,179) 1,091,572 1,090,314 1,366,329 53,074

 2026 1,417,360 11,929,899 (10,740,660) 1,189,239 1,187,917 1,418,682 52,353

 2027 1,468,851 12,975,894 (11,682,425) 1,293,469 1,292,076 1,470,244 51,563

 2028 1,519,472 14,086,579 (12,682,433) 1,404,146 1,402,677 1,520,941 50,696

 2029 1,569,135 15,259,936 (13,738,869) 1,521,067 1,519,519 1,570,684 49,743

 2030 1,617,866 16,493,017 (14,849,189) 1,643,828 1,642,320 1,619,373 48,690

 2031 1,666,193 17,781,309 (16,009,926) 1,771,382 1,770,698 1,666,878 47,504

 2032 1,711,426 19,121,648 (17,215,847) 1,905,801 1,904,072 1,713,155 46,277

 2033 1,756,207 20,505,234 (18,461,532) 2,043,703 2,041,845 1,758 064 44,909

 2034 1,799,568 21,920,085 (19,735,415) 2,184,670 2,182,737 1,801,501 43,437

 2035 1,841,357 23,349,517 (21,022,427) 2,327,091 2,325,080 1,843,368 41,867

 2036 1,881,481 24,771,530 (22,302,756) 2,468,774 2,466,685 1,883,570 40,202

 2037 1,919,850 26,158,656 (23,551,673) 2,606,983 2,604,815 1,922,018 38,448

 2038 1,956,379 27,479,838 (24,741,217) 2,738,622 2,736,378 1,958,623 36,604

 2039 1,990,980 28,701,693 (25,841,333) 2,860,360 2,858,051 1,993,289 34,667

 2040 2,023,562 29,789,198 (26,820,490) 2,968,708 2,966,346 2,025,924 32,635

 2041 2,054,041 30,707,139 (27,646,985) 3,060,154 3,057,756 2,056,439 30,514

 2042 2,084,507 31,419,234 (28,290,172) 3,129,061 3,128,893 2,084,676 28,238

 2043 2,113,799 31,884,697 (28,712,437) 3,172,260 3,175,595 2,110,463 25,787

 2044 2,137,571 32,075,465 (28,884,537) 3,190,928 3,194,629 2,133,870 23,406

 2045 2,158,932 31,972,124 (28,791,793) 3,180,331 3,184,372 2,154,891 21,022

 2046 2,177,903 31,564,289 (28,424,843) 3,139,446 3,143,787 2,173,562 18,671

 2047 2,194,558 30,841,004 (27,773,818) 3,067,186 3,071,784 2,189,959 16,398

 2048 2,208,980 29,806,151 (26,842,200) 2,963,951 2,968,747 2,204,185 14,225

 2049 2,221,293 28,470,031 (25,639,258) 2,830,773 2,835,702 2,216,365 12,180

 2050 2,231,639 26,848,924 (24,179,646) 2,669,277 2,674,269 2,226,648 10,284

 2051 2,240,168 24,972,749 (22,490,297) 2,482,451 2,487,427 2,235,193 8,545

 2052 2,246,432 22,930,156 (20,650,250) 2,279,906 2,284,848 2,241,491 6,298

All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.
- 74 -

Appendix B

Scenario 1 - Constant Loan Interest Rate - March Issue

Profit and Loss Statement

(dollars in thousands except earnings per share)

 Pre-Tax Effect Tax Effect 

Year

 

(A)

Net

Annual

(Premium)*

 

(B)

Annual

CSV

Increase/

(Decrease)

 

(C)

Accrued

Loan

Interest

(Payment)

 

(C1)

Deductible

Loan

Interest

(Payment)

 

(D)

Death

Benefits

 

(E)

Admin.

Fee

 

(F)

Pre-Tax

Earnings

Effect

A+B+C+D+E

 

(G)

Policy

Loan

Tax

 Credit

 

(H)

Admin.

Fee

Tax

 Credit

 

(I)

Tax

Effect

G+H

 

(J)

After-Tax

Earnings

Effect

 

 (K)

After-Tax

 Earnings

Per Share**[1]

 

1993 (108,573) 112,615 (11,191) (11,191) 3,250 (290) (4,188) 4,368 113 4,480 292

1994 (108,411) 119,289 (23,024) (23,024) 4,551 (289) (7,885) 8,988 113 9,101 1,217

1995 (106,499) 126,697 (35,570) (35,570) 4,791 (289) (10,869) 13,887 113 14,000 3,130 0.04

1996 20,817 (77) (35,489) (35,489) 5,064 (288) (9,972) 13,856 112 13,968 3,996 0.05

1997 20,730 (82) (35,401) (35,401) 5,371 (287) (9,669) 13,823 112 13,935 4,266 0.06

1998 20,601 (87) (35,308) (35,308) 5,715 (286) (9,366) 13,788 112 13,900 4,533 0.06

1999 20,426 (93) (35,208) (35,208) 6,097 (286) (9,063) 13,750 111 13,862 4,799 0.06

2000 (106,826) 140,401 (49,052) (49,052) 6,519 (285) (9,243) 19,159 111 19,270 10,027 0.13

2001 (106,493) 154,280 (64,224) (64,224) 6,985 (284) (9,736) 25,088 1ll 25,198 15,462 0.20

2002 (106,134) 169,781 (80,873) (80,973) 7,496 (283) (10,013) 31,595 110 31,705 21,692 0.28

2003 (105,748) 186,761 (99,131) (99,131) 8,055 (282) (10,345) 38,733 110 38,843 28,498 0.37

2004 (105,333) 205,194 (119,124) (119,124) 8,665 (281) (10,879) 46,551 110 46,661 35,782 0.47

2005 (104,886) 225,206 (140,990) (140,990) 9,331 (280) (11,619) 55,104 109 55,213 43,595 0.57

2006 (104,406) 247,089 (164,889) (164,889) 10,056 (278) (12,428) 64,456 109 64,564 52,136 0.68

2007 (76,351) 240,547 (187,967) (188,297) 10,839 (277) (13,208) 73,436 108 73,544 60,336 0.79

2008 167,368 (1,027) (186,925) (187,279) 11,678 (276) (9,182) 73,039 107 73,146 63,965 0.84

2009 165,195 (1,104) (185,806) (186,185) 12,58O (274) (9,409) 72,612 107 72,719 63,310 0.83

2010 159,327 (797) (184,604) (185,009) 16,696 (272) (9,651) 72,153 106 72,260 62,608 0.82

2011 156,940 (1,247) (183,315) (183,747) 18,005 (270) (9,888) 71,661 105 71,767 61,878

2012 154,027 (1,338) (181,935) (182,394) 19,409 (268) (10,104) 71,134 105 71,238 61,134

2013 144,448 5,292 (180,457) (180,946) 20,927 (266) (10,056) 70,569 104 70,673 60,616 0.79

2014 0 163,324 (195,835) (180,762) 21,690 (264) (11,085) 70,497 103 70,600 59,515 0.78

2015 0 177,742 (211,722) (179,242) 22,367 (262) (11,875) 69,905 102 70,007 58,132

2016 0 193,511 (228,882) (177,388) 22,927 (259) (12,704) 69,181 101 69,283 56,579

2017 0 210,606 (247,408) (175,397) 23,475 (256) (13,584) 68,405 100 68,505 54,921

2018 0 229,051 (267,377) (173,285) 24,195 (254) (14,384) 67,581 99 67,680 53,296

2019 0 248,689 (288,854) (171,050) 25,303 (250) (15,112) 66,710 98 66,807 51,696 0.67

2020 0 269,099 (311,842) (168,689) 27,085 (247) (15,905) 65,789 96 65,885 49,980 0.65

2021 0 290,908 (336,367) (166,200) 29,257 (244) (16,447) 64,818 95 64,913 48,467 0.63

2022 0 314,911 (362,586) (163,581) 31,579 (240) (16,336) 63,797 94 63,890 47,554 0.62

 *Total annual premium less annual withdrawal.

 **Based on 76.6 million shares outstanding.

 Assumes 39 percent tax bracket.

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.

Scenario 1 - Constant Loan Interest Rate - March Issue
- 75 -

Profit and Loss Statement

(dollars in thousands except earnings per share)

 Pre-Tax Effect Tax Effect 

Year

 

(A)

Net

Annual

(Premium)*

 

(B)

Annual

CSV

Increase/

(Decrease)

 

(C)

Accrued

Loan

Interest

(Payment)

 

(C1)

Deductible

Loan

Interest

(Payment)

 

(D)

Death

Benefits

 

(E)

Admin.

Fee

 

(F)

Pre-Tax

Earnings

Effect

A+B+C+D+E

 

(G)

Policy

Loan

Tax

 Credit

 

(H)

Admin.

Fee

Tax

 Credit

 

 

(I)

Tax

Effect

G+H

 

(J)

After-Tax

Earnings

Effect

 

 (K)

After-Tax

 Earnings

Per Share**[1]

 

2023 0 340,631 (390,574) (160,830) 34,055 (236) (16,124) 62,724 92 62,816 46,692

2024 0 368,031 (420,387) (157,945) 36,690 (232) (15,898) 61,599 91 61,689 45,791

2025 0 397,113 (452,064) (154,926) 39,518 (228) (15,662) 60,421 89 60,510 44,848 0.59

2026 0 427,884 (485,639) (151,772) 42,562 (224) (15,417) 59,191 87 59,278 43,862 0.57

2027 0 460,325 (521,120) (148,483) 45,852 (219) (15,163) 57,908 85 57,994 42,831 0.56

2028 0 494,399 (558,503) (145,060) 49,417 (214) (14,901) 56,573 84 56,657 41,756 0.55

2029 0 530,041 (597,761) (141,505) 53,298 (209) (14,632) 55,187 82 55,269 40,637 0.53

2030 0 567,297 (638,854) (137,821) 57,409 (204) (14,352) 53,750 80 53,830 39,478 0.52

2031 0 606,129 (681,731) (134,011) 61,738 (199) (14,063) 52,264 78 52,342 38,279 0.50

2032 0 646,466 (726,305) (130,083) 66,267 (193) (13,765) 50,732 75 50,808 37,043 0.48

2033 0 688,252 (772,492) (126,038) 70,970 (188) (13,457) 49,155 73 49,228 35,771 0.47

2034 0 731,334 (820,110) (121,884) 75,817 (182) (13,141) 47,535 71 47,606 34,465 0.45

2035 0 775,547 (868,971) (117,624) 80,784 (176) (12,816) 45,873 69 45,942 33,126 0.43

2036 0 820,751 (918,904) (113,262) 85,840 (170) (12,483) 44,172 66 44,238 31,755 0.41

2037 0 866,663 (969,570) (108,809) 90,931 (163) (12,139) 42,435 64 42,499 30,360 0.40

2038 0 913,101 (1,020,708) (104,268) 95,980 (157) (11,784) 40,665 61 40,726 28,942 0.38

2039 0 959,789 (1,071,984) (99,653) 100,929 (150) (11,417) 38,865 59 38,923 27,507 0.36

2040 0 1,006,430 (1,123,011) (94,973) 105,689 (144) (11,035) 37,040 56 37,096 26,060 0.34

2041 0 1,052,640 (1,173,299) (90,240) 110,158 (137) (10,638) 35,194 53 35,247 24,609

2042 0 1,097,999 (1,222,329) (85,467) 114,237 (130) (10,223) 33,332 51 33,383 23,160

2043 0 1,142,143 (1,269,661) (80,666) 117,847 (123) (9,794) 31,460 48 31,508 21,714 0.28

2044 0 1,184,472 (1,314,554) (75,854) 120,853 (116) (9,344) 29,583 45 29,628 20,284 0.26

2045 0 1,223,920 (1,356,161) (71,045) 123,447 (109) (8,902) 27,707 43 27,750 18,847

2046 0 1,259,769 (1,393,716) (66,257) 125,594 (102) (8,455) 25,840 40 25,880 17,425

2047 0 1,291,564 (1,426,758) (61,513) 127,285 (95) (8,006) 23,990 37 24,027 16,022

2048 0 1,318,398 (1,454,407) (56,838) 128,534 (88) (7,563) 22,167 34 22,201 14,638

2049 0 1,339,293 (1,475,845) (52,250) 129,481 (82) (7,153) 20,378 32 20,409 13,256 0.17

2050 0 1,353,960 (1,490,508) (47,770) 129,883 (75) (6,739) 18,630 29 18,660 11,921 0.16

2051 0 1,361,755 (1,498,003) (43,417) 129,910 (69) (6,407) 16,932 27 16,959 10,552 0.14

2052 0 1,361,650 (1,497,588) (39,210) 129,756 (62) (6,244) 15,292 24 15,316 9,072 0.12

 *Total annual premium less annual withdrawal.

 **Based on 76.6 million shares outstanding.

 Assumes 39 percent tax bracket.

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.
- 76 -

Scenario 1 - Constant Loan Interest Rate - March Issue

Cash Flow Detail

(dollars in thousands)

 Corporate Cash Outflow Corporate Cash Inflow Net Cash Flow Surplus 

Year

 

(A)

Premium

 

(B)

Loan

Interest

 

(C)

After-Tax

Admin.

Fee

 

(D)

Policy Loan

Tax

Savings

 

(E)

Policy

Loan

 

(F)

Policy

Withdrawal

 

(G)

Tax-Free

Death

Benefits

 

(H)

Net

Cash

Clow

 

(I)

Cumulative

Cash

Flow

 

(J)

Cumulative

Cash

Flow

at 4.35%

Pre-Tax

 

(K)

Cumulative

Net

 Equity[1]

 

1993 (108,573) 0 (177) 4,368 101,328 0 3,250 196 196 98 96

1994 (108,411) (11,191) (176) 8,988 107,413 0 4,551 1,174 1,370 1,122 139

1995 (108,188) (23,024) (176) 13,887 114,126 1,689 4,791 3,105 4,475 4,087 164

1996 (107,951) (35,570) (176) 13,856 0 128,768 5,064 3,991 8,466 8,040 169

1997 (107,698) (35,489) (175) 13,823 0 128,427 5,371 4,260 12,727 12,371 175

1998 (107,427) (35,401) (175) 13,788 0 128,028 5,715 4,527 17,254 17,089 181

1999 (107,137) (35,308) (174) 13,750 0 127,564 6,097 4,792 22,045 22,202 188

2000 (106,826) (35,208) (174) 19,159 126,528 0 6,519 9,999 32,044 32,722 216

2001 (106,493) (49,052) (173) 25,088 139,077 0 6,985 15,431 47,475 49,017 247

2002 (106,134) (64,224) (173) 31,595 153,098 0 7,496 21,658 69,134 72,052 281

2003 (105,748) (80,873) (172) 38,733 168,466 0 8,055 28,460 97,594 102,591 318

2004 (105,333) (99,131) (171) 46,551 185,160 0 8,665 35,742 133,336 141,317 359

2005 (104,886) (119,124) (171) 55,104 203,297 0 9,331 43,551 176,887 188,984 402

2006 (104,406) (140,990) (170) 64,456 223,142 0 10,056 52,088 228,976 246,569 450

2007 (76,351) (164,889) (169) 73,436 217,421 0 10,839 60,288 289,263 313,996 498

2008 0 (187,967) (168) 73,039 0 167,368 11,678 63,950 353,213 387,000 512

2009 0 (186,925) (167) 72,612 0 165,195 12,580 63,294 416,508 461,294 527

2010 0 (185,806) (166) 72,153 0 159,327 16,696 62,204 478,712 536,425 932

2011 0 (184,604) (165) 71,661 0 156,940 18,005 61,837 540,548 613,196 973

2012 0 (183,315) (164) 71,134 0 154,027 19,409 61,091 601,639 691,263 1,017

2013 0 (181,935) (162) 70,569 0 144,448 20,927 53,847 655,486 763,984 7,786

2014 0 (180,457) (161) 70,497 154,593 0 21,690 66,161 721,647 851,306 1,140

2015 0 (195,835) (160) 69,905 161,737 0 22,367 58,013 779,660 932,617

2016 0 (211,722) (158) 69,181 176,233 0 22,927 56,461 836,121 1,014,532

2017 0 (228,882) (156) 68,405 192,048 0 23,475 54,889 891,011 1,097,047

2018 0 (247,408) (155) 67,581 209,115 0 24,195 53,328 944,339 1,180,188 1,377

2019 0 (267,377) (153) 66,710 227,389 0 25,303 51,872 996,211 1,264,075 1,200

2020 0 (288,854) (151) 65,789 246,381 0 27,085 50,250 1,046,461 1,348,549 930

2021 0 (311,842) (149) 64,818 266,366 0 29,257 48,450 1,094,911 1,433,440 947

2022 0 (336,367) (146) 63,797 288,659 0 31,579 47,520 1,142,432 1,519,651 980

 Assumes 39 percent tax bracket.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.
- 77 -

Scenario 1 - Constant Loan Interest Rate - March Issue

Cash Flow Detail

(dollars in thousands)

 Corporate Cash Outflow Corporate Cash Inflow Net Cash Flow Surplus 

Year

 

(A)

Premium

 

(B)

Loan

Interest

 

(C)

After-Tax

Admin.

Fee

 

(D)

Policy Loan

Tax

Savings

 

(E)

Policy

Loan

 

(F)

Policy

Withdrawal

 

(G)

Tax-Free

Death

Benefits

 

(H)

Net

Cash

Clow

 

(I)

Cumulative

Cash

Flow

 

(J)

Cumulative

Cash

Flow

at 4.35%

Pre-Tax

 

(K)

Cumulative

Net

 Equity[1]

 

2023 0 (362,586) (144) 62,724 312,610 0 34,055 46,659 1,189,090 1,607,284 1,013

2024 0 (390,574) (142) 61,599 338,182 0 36,690 45,755 1,234,846 1,696,336 1,049

2025 0 (420,387) (139) 60,421 365,397 0 39,518 44,809 1,279,655 1,786,798 1,088

2026 0 (452,064) (136) 59,191 394,268 0 42,562 43,820 1,323,475 1,878,662 1,129

2027 0 (485,639) (134) 57,908 424,799 0 45,852 42,787 1,366,262 1,971,918 1,174

2028 0 (521,120) (131) 56,573 456,970 0 49,417 41,709 1,407,972 2,066,555 1,221

2029 0 (558,503) (128) 55,187 490,734 0 53,298 40,588 1,448,560 2,162,562 1,269

2030 0 (597,761) (125) 53,750 526,152 0 57,409 39,426 1,487,986 2,259,931 1,322

2031 0 (638,854) (121) 52,264 563,196 0 61,738 38,223 1,526,209 2,358,655 1,378

2032 0 (681,731) (118) 50,732 601,833 0 66,267 36,983 1,563,192 2,458,730 1,437

2033 0 (726,305) (114) 49,155 642,002 0 70,970 35,708 1,598,900 2,560,155 1,500

2034 0 (772,492) (111) 47,535 683,650 0 75,817 34,398 1,633,298 2,662,930 1,567

2035 0 (820,110) (107) 45,873 726,616 0 80,784 33,056 1,666,354 2,767,056 1,636

2036 0 (868,971) (103) 44,172 770,746 0 85,840 31,683 1,698,036 2,872,538 1,709

2037 0 (918,904) (100) 42,435 815,922 0 90,931 30,284 1,728,320 2,979,385 1,785

2038 0 (969,570) (96) 40,665 861,884 0 95,980 28,863 1,757,184 3,087,615 1,864

2039 0 (1,020,708) (92) 38,865 908,432 0 100,929 27,426 1,784,610 3,197,247 1,944

2040 0 (1,071,984) (88) 37,040 955,322 0 105,689 25,978 1,810,588 3,308,313 2,026

2041 0 (1,123,011) (83) 35,194 1,002,270 0 110,158 24,527 1,835,115 3,420,851 2,109

2042 0 (1,173,299) (79) 33,332 1,048,887 0 114,237 23,078 1,858,192 3,534,909 2,191

2043 0 (1,222,329) (75) 31,460 1,094,731 0 117,847 21,634 1,879,827 3,650,541 2,270

2044 0 (1,269,661) (71) 29,583 1,139,503 0 120,853 20,208 1,900,034 3,767,815 2,346

2045 0 (1,314,554) (67) 27,707 1,182,248 0 123,447 18,783 1,918,817 3,886,781 2,411

2046 0 (1,356,161) (62) 25,840 1,222,163 0 125,594 17,375 1,936,192 4,007,510

2047 0 (1,393,716) (58) 23,990 1,258,488 0 127,285 15,988 1,952,180 4,130,077

2048 0 (1,426,758) (54) 22,167 1,290,735 0 128,534 14,623 1,966,803 4,254,559

2049 0 (1,454,407) (50) 20,378 1,317,860 0 129,481 13,262 1,980,064 4,381,015 2,505

2050 0 (1,475,845) (46) 18,630 1,339,314 0 129,883 11,937 1,992,002 4,509,544 2,489

2051 0 (1,490,508) (42) 16,932 1,354,286 0 129,910 10,579 2,002,580 4,640,170 2,462

2052 0 (1,498,003) (38) 15,292 1,362,102 0 129,756 9,109 2,011,689 4,772,838 2,425

 Assumes 39 percent tax bracket.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.
- 78 -

Scenario 1 - Constant Loan Interest Rate - March Issue

Balance Sheet Summary

(dollars in thousands)

 

Year

 

(A)

Cash

Amount

 

(B)

Gross

Cash Surrender

Value

 

(C)

Outstanding

(Loan)

 

 

(D)

Insurance Net

Cash Surrender

Value

 

(E)

Accrued

Loan

Interest

 

(F)

Asset

Balance[1]

 

(G)

Retained

Earnings

Gain/(Loss)

 

(H)

Annual

Impact on

Earnings[2]

 

 1993 196 112,471 (101,184) 11,287 11,191 22,478 292 

 1994 1,370 231,340 (208,177) 23,163 23,024 46,187 1,509

 1995 4,475 357,345 (321,611) 35,734 35,570 71,304 4,639 3,130

 1996 8,466 356,530 (320,873) 35,658 35,489 71,146 8,635 3,996

 1997 12,727 355,660 (320,084) 35,576 35,401 70,977 12,901 4,266

 1998 17,254 354,728 (319,239) 35,489 35,308 70,797 17,435 4,533

 1999 22,045 353,729 (318,333) 35,396 35,208 70,603 22,233 4,799

 2000 32,044 492,780 (443,511) 49,268 49,052 98,321 32,260 10,027

 2001 47,475 645,163 (580,691) 64,471 64,224 128,696 47,722 15,462

 2002 69,134 812,376 (731,222) 81,154 80,873 162,027 69,415 21,692

 2003 97,594 995,749 (896,300) 99,449 99,131 198,580 97,912 28,498

 2004 133,336 1,196,556 (1,077,073) 119,483 119,124 238,607 133,695 35,782

 2005 176,887 1,416,165 (1,274,773) 141,392 140,990 282,382 177,289 43,595

 2006 228,976 1,656,195 (1,490,857) 165,338 164,889 330,227 229,425 52,136

 2007 289,263 1,887,983 (1,699,519) 188,464 187,967 376,431 289,761 60,336

 2008 353,213 1,877,537 (1,690,100) 187,437 186,925 374,362 353,725 63,965

 2009 416,508 1,866,313 (1,679,980) 186,333 185,806 372,139 417,035 63,310

 2010 478,712 1,854,651 (1,669,115) 185,536 184,604 370,140 479,643 62,608

 2011 540,548 1,841,752 (1,657,463) 184,289 183,315 367,604 541,522

 2012 601,639 1,827,931 (1,644,980) 182,951 181,935 364,886 602,656

 2013 655,486 1,819,864 (1,631,621) 188,244 180,457 368,701 663,272 60,616

 2014 721,647 1,967,636 (1,770,661) 196,975 195,835 392,811 722,787 59,515

 2015 779,660 2,127,281 (1,914,300) 212,981 211,722 424,702 780,919

 2016 836,121 2,299,721 (2,069,461) 230,259 228,882 459,142 837,498

 2017 891,011 2,485,785 (2,236,968) 248,817 247,408 496,225 892,420

 2018 944,339 2,686,271 (2,417,518) 268,754 267,377 536,131 945,715 53,296

 2019 996,211 2,901,756 (2,611,702) 290,054 288,854 578,907 997,411 51,696

 2020 1,046,461 3,132,325 (2,819,553) 312,772 311,842 624,614 1,047,391 49,980

 2021 1,094,911 3,378,611 (3,041,297) 337,314 336,367 673,681 1,095,858 48,467

 2022 1,142,432 3,641,933 (3,278,367) 363,566 362,586 726,152 1,143,412 47,554

All figures are estimates. Actual results will depend upon mortality, interest rates and dividends

 

 

1Note: The yearly Asset Balances shown above in column F are the sum of the amounts in columns D and E. The proper asset balances should be the 

 Net Cash Surrender Values shown in column D minus the Accrued Loan Interest shown in column E. For example, for 1993, $11,287 minus $11,191 equals 

 $96. $96 plus the cash flow of $196 (column A) equals the total gain shown in Column G.

 

2Blank space indicates that there was no legible figure in underlying exhibit.

 
- 79 -

Scenario 1 - Constant Loan Interest Rate - March Issue

Balance Sheet Summary

(dollars in thousands)

 

Year

 

(A)

Cash

Amount

 

(B)

Gross

Cash Surrender

Value

 

(C)

Outstanding

(Loan)

 

 

(D)

Insurance Net

Cash Surrender

Value

 

(E)

Accrued

Loan

Interest

 

(F)

Asset

Balance[1]

 

(G)

Retained

Earnings

Gain/(Loss)

 

(H)

Annual

Impact on

Earnings[2]

 

 2023 1,189,090 3,923,010 (3,531,423) 391,587 390,574 782,161 1,190,104 

 2024 1,234,846 4,222,408 (3,800,972) 421,436 420,387 841,823 1,235,895

 2025 1,279,655 4,540,559 (4,087,407) 453,152 452,064 905,216 1,280,743 44,848 

 2026 1,323,475 4,877,748 (4,390,980) 486,768 485,639 972,406 1,324,605 43,862 

 2027 1,366,262 5,234,121 (4,711,827) 522,294 521,120 1,043,414 1,367,436 42,831

 2028 1,407,972 5,609,615 (5,049,892) 559,723 558,503 1,118,226 1,409,192 41,756

 2029 1,448,560 6,003,965 (5,404,934) 599,030 597,761 1,196,791 1,449,829 40,637

 2030 1,487,986 6,416,810 (5,776,634) 640,176 638,854 1,279,029 1,489,307 39,478

 2031 1,526,209 6,847,570 (6,164,461) 683,109 681,731 1,364,840 1,527,586 38,279

 2032 1,563,192 7,295,469 (6,567,727) 727,742 726,305 1,454,047 1,564,629 37,043

 2033 1,598,900 7,759,356 (6,985,364) 773,992 772,492 1,564,484 1,600,400 35,771

 2034 1,633,298 8,237,806 (7,416,130) 821,676 820,110 1,641,786 1,634,864 34,465

 2035 1,666,354 8,728,882 (7,858,275) 870,608 868,971 1,739,579 1,667,990 33,126

 2036 1,698,036 9,230,346 (8,309,732) 920,613 918,904 1,839,517 1,699,745 31,755

 2037 1,728,320 9,739,681 (8,768,326) 971,355 969,570 1,940,925 1,730,105 30,360

 2038 1,757,184 10,253,679 (9,231,107) 1,022,571 1,020,708 2,043,279 1,759,047 28,942

 2039 1,784,610 10,769,072 (9,695,144) 1,073,928 1,071,984 2,145,913 1,786,554 27,507

 2040 1,810,588 11,281,885 (10,156,848) 1,125,037 1,123,011 2,248,048 1,812,614 26,060

 2041 1,835,115 11,787,573 (10,612,166) 1,175,408 1,173,299 2,348,707 1,837,223

 2042 1,858,192 12,281,040 (11,056,521) 1,224,520 1,222,329 2,446,849 1,860,383

 2043 1,879,827 12,756,559 (11,484,628) 1,271,931 1,269,661 2,541,592 1,882,097 21,714

 2044 1,900,034 13,207,807 (11,890,907) 1,316,900 1,314,554 2,631,454 1,902,381 20,284

 2045 1,918,817 13,626,925 (12,268,353) 1,358,572 1,356,161 2,714,733 1,921,228

 2046 1,936,192 14,006,378 (12,610,200) 1,396,178 1,393,716 2,789,894 1,938,654

 2047 1,952,180 14,338,988 (12,909,734) 1,429,254 1,426,758 2,856,012 1,954,675

 2048 1,966,803 14,617,963 (13,161,046) 1,456,917 1,454,407 2,911,324 1,969,313 14,638

 2049 1,980,064 14,835,464 (13,357,114) 1,478,350 1,475,845 2,954,194 1,982,570 13,256

 2050 1,992,002 14,985,118 (13,492,121) 1,492,997 1,490,508 2,983,505 1,994,490 11,921

 2051 2,002,580 15,061,908 (13,561,443) 1,500,465 1,498,003 2,998,469 2,005,043 10,552

 2052 2,011,689 15,061,904 (13,561,891) 1,500,014 1,497,588 2,997,602 2,014,114 9,072

All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

__________________________________

 

1Note: The yearly Asset Balances shown above in column F are the sum of the amounts in columns D and E. The proper asset balances should be the

Net Cash Surrender Values shown in column D minus the Accrued Loan Interest shown in column E. For example, for 2023, $391,587 minus $390,574 equals

$1,013. $1,013 plus the cash flow of $1,189,090 (column A) equals the total gain shown in Column G.

 

2Blank space indicates that there was no legible figure in underlying exhibit.

Scenario 1 - Constant Loan Interest Rate - March Issue
- 80 -

Effect on Financial Ratios

(dollars in thousands)

 

Year

 

(1)

Projected

Sales

 

(2)

Current

Operating

Expense

 

(3)

Pre-Tax

COLI

Expense

 

(4)

Adjusted

Operating

Expense

 

(5)

Adjusted

Operating

Expense as

a % of

Sales

 

 

(6)

Pre-Tax

Earnings

 

(7)

Taxes

 Paid at 39%

 

(8)

COLI

Tax

Savings

 

(9)

Adjusted

Taxes Paid

 

(10)

Adjusted 

Tax Rate[1]

 

1993 10,800,000 2,160,000 4,188 2,164,188 20.04% 337,500 131,625 4,480 127,145 37.67%

1994 11,232,000 2,246,400 7,885 2,254,285 20.07% 351,000 136,890 9,101 127,789 36.41%

1995 11,681,280 2,336,256 10,869 2,347,125 20.09% 365,040 142,366 14,000 128,366 35.16%

1996 12,148,531 2,429,706 9,972 2,439,678 20.08% 379,642 148,060 13,968 134,092 35.32%

1997 12,634,472 2,526,894 9,669 2,536,564 20.08% 394,827 153,983 13,935 140,047 35.47%

1998 13,139,851 2,627,970 9,366 2,637,337 20.07% 410,620 160,142 13,900 146,242 35.61%

1999 13,665,445 2,733,089 9,063 2,742,152 20.07% 427,045 166,548 13,862 152,686 35.75%

2000 14,212,063 2,842,413 9,243 2,851,656 20.07% 444,127 173,210 19,270 153,939 34.66%

2001 14,780,546 2,956,109 9,736 2,965,845 20.07% 461,892 180,138 25,198 154,939 33.54%

2002 15,371,768 3,074,354 10,013 3,084,366 20.07% 480,368 187,343 31,705 155,638 32.40%

2003 15,986,638 3,197,328 10,345 3,207,673 20.06% 499,582 194,837 38,843 155,995 31.22%

2004 16,626,104 3,325,221 10,879 3,336,099 20.07% 519,566 202,631 46,661 155,970 30.02%

2005 17,291,148 3,458,230 11,619 3,469,848 20.07% 540,348 210,736 55,213 155,522 28.78%

2006 17,982,794 3,596,559 12,428 3,608,987 20.07% 561,962 219,165 64,564 154,601 27.51%

2007 18,702,106 3,740,421 13,208 3,753,629 20.07% 584,441 227,932 73,544 154,388 26.42%

2008 19,450,190 3,890,038 9,182 3,899,220 20.05% 607,818 237,049 73,146 163,903 26.97%

2009 20,228,197 4,045,639 9,409 4,055,049 20.05% 632,131 246,531 72,719 173,812 27.50%

2010 21,037,325 4,207,465 9,651 4,217,116 20.05% 657,416 256,392 72,260 184,133 28.01%

2011 21,878,818 4,375,764 9,888 4,385,652 20.05% 683,713 266,648 71,767 194,881 28.50%

2012 22,753,971 4,550,794 10,104 4,560,899 20.04% 711,062 277,314 71,238 206,076 28.98%

2013 23,664,130 4,732,826 10,056 4,742,882 20.04% 739,504 288,407 70,673 217,734 29.44%

2014 24,610,695 4,922,139 11,085 4,933,224 20.05% 769,084 299,943 70,600 229,343 29.82%

2015 25,595,123 5,119,025 11,875 5,130,899 20.05% 799,848 311,941 70,007 241,934

2016 26,618,928 5,323,786 12,704 5,336,489 20.05% 831,841 324,418 69,283 255,136

2017 27,683,685 5,536,737 13,584 5,550,321 20.05% 865,115 337,395 68,505 268,890

2018 28,791,032 5,758,206 14,384 5,772,591 20.05% 899,720 350,891 67,680 283,211 31.48%

2019 29,942,674 5,988,535 15,112 6,003,647 20.05% 935,709 364,926 66,807 298,119 31.86%

2020 31,140,381 6,228,076 15,905 6,243,981 20.05% 973,137 379,523 65,885 313,638 32.23%

2021 32,385,996 6,477,199 16,447 6,493,646 20.05% 1,012,062 394,704 64,913 329,791 32.59%

2022 33,681,436 6,736,287 16,336 6,752,623 20.05% 1,052,545 410,492 63,890 346,602 32.93%

 Assumes 39 percent tax bracket.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.

Scenario 1 - Constant Loan Interest Rate - March Issue
- 81 -

Effect on Financial Ratios

(dollars in thousands)

 

Year

 

(1)

Projected

Sales

 

(2)

Current

Operating

Expense

 

(3)

Pre-Tax

COLI

Expense

 

(4)

Adjusted

Operating

Expense

 

(5)

Adjusted

Operating

Expense as

a % of

Sales

 

 

(6)

Pre-Tax

Earnings

 

(7)

Taxes

 Paid at 39%

 

(8)

COLI

Tax

Savings

 

(9)

Adjusted

Taxes Paid

 

(10)

Adjusted 

Tax Rate[1]

 

2023 35,028,693 7,005,739 16,124 7,021,863 20.05% 1,094,647 426,912 62,816 364,096 33.26%

2024 36,429,841 7,285,968 15,898 7,301,866 20.04% 1,138,433 443,989 61,689 382,300 33.58%

2025 37,887,034 7,577,407 15,662 7,593,069 20.04% 1,183,970 461,748 60,510 401,238 33.89%

2026 39,402,516 7,880,503 15,417 7,895,920 20.04% 1,231,329 480,218 59,278 420,940 34.19%

2027 40,978,616 8,195,723 15,163 8,210,886 20.04% 1,280,582 499,427 57,994 441,433 34.47%

2028 42,617,761 8,523,552 14,901 8,538,453 20.03% 1,331,805 519,404 56,657 462,747 34.75%

2029 44,322,472 8,864,494 14,632 8,879,126 20.03% 1,385,077 540,180 55,269 484,912 35.01%

2030 46,095,370 9,219,074 14,352 9,233,426 20.03% 1,440,480 561,787 53,830 507,958 35.26%

2031 47,939,185 9,587,837 14,063 9,601,900 20.03% 1,498,100 584,259 52,342 531,917 35.51%

2032 49,856,753 9,971,351 13,765 9,985,115 20.03% 1,558,024 607,629 50,808 556,822 35.74%

2033 51,851,023 10,370,205 13,457 10,383,662 20.03% 1,620,344 631,934 49,228 582,706 35.96%

2034 53,925,064 10,785,013 13,141 10,798,154 20.02% 1,685,158 657,212 47,606 609,606 36.18%

2035 56,082,066 11,216,413 12,816 11,229,229 20.02% 1,752,565 683,500 45,942 637,558 36.38%

2036 58,325,349 11,665,070 12,483 11,677,553 20.02% 1,822,667 710,840 44,238 666,602 36.57%

2037 60,658,363 12,131,673 12,139 12,143,812 20.02% 1,895,574 739,274 42,499 696,775 36.76%

2038 63,084,697 12,616,939 11,784 12,628,723 20.02% 1,971,397 768,845 40,726 728,119 36.93%

2039 65,608,085 13,121,617 11,417 13,133,034 20.02% 2,050,253 799,599 38,923 760,675 37.10%

2040 68,232,409 13,646,482 11,035 13,657,517 20.02% 2,132,263 831,582 37,096 794,487 37.26%

2041 70,961,705 14,192,341 10,638 14,202,979 20.01% 2,217,553 864,846 35,247 829,599 37.41%

2042 73,800,173 14,760,035 10,223 14,770,258 20.01% 2,306,255 899,440 33,383 866,057 37.55%

2043 76,752,180 15,350,436 9,794 15,360,230 20.01% 2,398,506 935,417 31,508 903,910 37.69%

2044 79,822,267 15,964,453 9,344 15,973,798 20.01% 2,494,446 972,834 29,628 943,206 37.81%

2045 83,015,158 16,603,032 8,902 16,611,934 20.01% 2,594,224 1,011,747 27,750 983,997

2046 86,335,764 17,267,153 8,455 17,275,608 20.01% 2,697,993 1,052,217 25,880 1,026,337

2047 89,789,195 17,957,839 8,006 17,965,845 20.01% 2,805,912 1,094,306 24,027 1,070,279 38.14%

2048 93,380,763 18,676,153 7,563 18,683,716 20.01% 2,918,149 1,138,078 22,201 1,115,877 38.24%

2049 97,115,993 19,423,199 7,153 19,430,352 20.01% 3,034,875 1,183,601 20,409 1,163,192 38.33%

2050 101,000,633 20,200,127 6,739 20,206,866 20.01% 3,156,270 1,230,945 18,660 1,212,286 38.41%

2051 105,040,658 21,008,132 6,407 21,014,539 20.01% 3,282,521 1,280,183 16,959 1,263,224 38.48%

2052 109,242,285 21,848,457 6,244 21,854,701 20.01% 3,413,821 1,331,390 15,316 1,316,074 38.55%

 Assumes 39 percent tax bracket.

 All figures are estimates. Actual results will depend upon mortality, interest rates and dividends.

 __________________________________

 

1Blank space indicates that there was no legible figure in underlying exhibit.