Opinion ID: 778862
Heading Depth: 2
Heading Rank: 1

Heading: The COLI VIII plan

Text: 7 The COLI VIII plan's purpose was to achieve positive cash flows from its inaugural year. Its success turned on 26 U.S.C. § 264's 4-of-7 safe harbor. This permits life insurance premiums to be paid with the proceeds of a loan whose collateral is the policy itself, but only as long as this payment method is used for no more than three of seven consecutive years. To comply with this stricture, in years 1-3 several events happened simultaneously on the first day of the policy year: 8 (i) Camelot paid a premium of about $14 million, creating $14 million in policy value; 9 (ii) Camelot took a policy loan of about $13 million, using the policy value created by the premium as collateral; 10 (iii) the $13 million loan offset almost fully the $14 million premium payment; 11 and 12 (iv) in net effect, Camelot paid only $1 million cash. 13 CM Holdings, 254 B.R. at 592-93. The payment of a premium with the proceeds of a loan whose collateral is the premium it pays for is somewhat chimeral, but § 264 permits such a payment mechanism for up to three years, as long as policy loans do not fund the premium payments for the other four years. The result is that in years 1-3, in a simultaneous netting transaction, over 90% of the payment for annual premiums and accrued policy loan interest came from a policy loan, with only the remainder paid in cash. 14 The payment mechanism for the following four years used a loading dividend to fund the premiums. For those years, in a simultaneous netting transaction occurring on the first day of the policy year: 15 (i) Camelot paid the annual premium plus accrued interest; 16 (ii) approximately 95% of the annual premium was taken by MBL as an expense charge, while approximately 5% was credited to the policy value; 17 (iii) approximately 5-8% of the expense charge was set aside to cover MBL's actual expenses; 18 (iv) approximately 92-95% of the expense charge was immediately returned to Camelot in the form of a loading dividend; 19 (v) Camelot received a partial withdrawal of policy value in an amount equal to approximately 99% of the accrued loan interest; 20 (vi) the loading dividend and partial withdrawal were used to offset payment of the annual premium and accrued loan interest; and 21 (vii) Camelot paid the balance due in cash. 22 CM Holdings, 254 B.R. at 593. The broad structure of the plan, then, was to fund year 1-3 premiums with proceeds from the policy loans, and year 4-7 premiums with a loading dividend that offset the payments due. 23 The interest rate Camelot paid MBL on the loan it received affected the amount of interest-payment deductions to which it was entitled. Of several available interest rates, Camelot always selected the highest one. CM Holdings, 254 B.R. at 595. 2 24