Determination Letter 201525013 Released June 19, 2015 Revocation Transcribed from scan

Investment-focused company lost section 501(c)(15) exemption

Apply this to your situation

This page covers one taxpayer's ruling from 2015, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

Transcribed from a scanned original: the IRS released this determination as an image-only PDF. The full text below is a machine transcription, proofread against the scan. Check the original PDF before quoting exact language.

View official IRS release (PDF)

Plain-English summary

The organization had been recognized as a tax-exempt small nonlife insurance company under section 501(c)(15). The IRS examination found that investment and related-party transactions were its primary business, while its capital and efforts were not focused primarily on insurance. The report also concluded that its insurance arrangements lacked adequate risk shifting and risk distribution. The organization could not continue relying on its original determination letter because the IRS found material misstatements in its application and material changes in its operations. Appeals revoked the exemption but granted limited relief under section 7805(b), making the revocation effective on a later redacted date.

Ruling snapshot

Question: Did the organization remain an insurance company eligible for exemption under section 501(c)(15), and could it rely on its original determination letter?
Outcome: Revocation, with limited effective-date relief
Key authorities: IRC §§ 501(c)(15), 816, 831, and 7805(b); Treas. Reg. §§ 1.801-3(a)(1), 1.501(a)-1(a)(2), and 601.201

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
Employer Identification Number:

Release Number: 201525013

Release Date: 6/19/2015 Person to Contact:
Date: March 6, 2015
ORG Employee ID Number:
ADDRESS ; Tel:
Fax:
Tax Period(s) Ended:

December 31, 20XX
December 31, 20XX
December 31, 20XX

Certified Mail
UIL: 0501.15-00

Dear *.

This is a final determination that you do not qualify for exemption from Federal income tax under Internal
Revenue Code (the “Code”) section 501(a) as an organization described in Code section 501(c)(15).

The revocation of your exempt status was made for the following reason(s):

Taxpayer is not an insurance company exempt from tax pursuant to Code § 501(c)(15) as of 20XX, 20XX
and 20XX. In accord with your request, relief has been granted as authorized by Section 7805(b) of the
Internal Revenue Code as of December 20, 19XX.

You are required to file Federal income tax returns on Forms 1120 for the short tax period beginning July
27, 20XX and for all tax years thereafter. File your return with the appropriate Internal Revenue Service
Center per the instructions of the return. For further instructions, forms, and information please visit

www.irs.gov.

Please show your employer identification number on all returns you file and in all correspondence with
Internal Revenue Service.

We will make this letter and the proposed adverse determination letter available for public inspection
under Code section 6110 after deleting certain identifying information. We have provided to you, in a
separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the
documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is
not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have
to file a petition in a United States Court. The Taxpayer Advocate can however, see that a tax matters
that may not have been resolved through normal channels get prompt and proper handling. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this
letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate
for more information.

If you have any questions about this letter, please contact the person whose name and telephone number
are shown in the heading of this letter.

Sincerely Yours,

Appeals Team Manager

Enclosure: Publication 556

Internal Revenue Service Department of the Treasury

Taxpayer Identification Number:
Date: July 27, 2006

Form:
990
ORG Tax Year(s) Ended:
ADDRESS December 31, 20XX

Person to Contact/ID Number:

Contact Numbers:

Telephone:

Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear.

We have enclosed a copy of our report of examination explaining why we believe revocation of your
organization’s exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed Publication 3498, The
Examination Process, explains how to appeal an Internal Revenue Service (IRS) decision. Publication 3498
also includes information on your rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the Appeals Office and they
will contact you. For your convenience, an envelope is enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals conference, or if you do not

request an Appeals conference, you may file suit in United States Tax Court, the United States Court of Federal

Claims, or United States District Court, after satisfying procedural and jurisdictional requirements as described
in Publication 3498.

Letter 3610 (Rev. 11-2003)
Catalog Number: 34801V

You may also request that we refer this matter for technical advice as explained in Publication 892, Exempt
Organization Appeal Procedures for Unagreed Issues. If a determination letter is issued to you based on
technical advice, no further administrative appeal is available to you within the IRS on the issue that was the
subject of the technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed Adverse Action.
We will then send you a final letter revoking your exempt status. If we do not hear from you within 30 days
from the date of this letter, we will process your case on the basis of the recommendations shown in the report
of examination and this letter will become final. In that event, you will be required to file Federal income tax
returns for the tax period(s) shown above. File these returns with the Ogden Service Center within 60 days from
the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with
the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a

substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot

reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a

United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been

resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and
ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we need to
contact you.

Thank you for your cooperation.

Sincerely,

Director, EO Examinations

Enclosures:

' Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (Rev.11-2003)
Catalog Number: 34801V

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
orm . im
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
20XX
Issues 20XX
LEGEND
ORG - Organization name XX — Date address - Address city - City
state ~- State county -— County territory — Territory
Director-1 thru 4 Manager-1 thru 4 Partnership-1 thru 15 - LP-1 thru
15 Company-1 thru 54 - CO-1 thru 54 Property-1 thru 8

Whether ORG (“ORG”) is an insurance company described in I.R.C. §
501(c)(15).
Whether ORG can continue to rely on its initial determination letter, dated
October 19, 20XX, which recognized the organization’s exempt status under
I.R.C. § 501(c)(15), for the tax years at issue if the organization did not
operate as an “insurance company”, as that term is used I.R.C. § 501(c)(15).
Whether ORG qualifies for relief under I.R.C. §7805(b) in the circumstances
presented if ORG cannot continue to rely upon its determination letter.
Whether January 1, 20XX -- the first day of the first tax period covered under
this report --will be the effective date of revocation of ORG’s recognition as an
insurance company described in I.R.C. § 501(c)(15) if the Commissioner
exercises discretion to grant relief under I.R.C. §7805(b).

[This report supersedes the report sent on July 5, 20XX, with respect to the
proposed effective date of revocation if the Commissioner exercises discretion to
grant relief under I.R.C. §7805(b)., addressed under Issue #4. Exhibits identified
within this report are the same as those that were enclosed with the report sent on
July 5, 20XX, and are therefore not being re-submitted as enclosures with this
report. ]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 1

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX
Overview of Topics Discussed in Report 20XX

oO Oo N OD

11
12

Formation and Licensure Within Territory [Page 4]

Form 990 Filed for Tax Years 19XX-20XX Prelnsurance Applying for
Tax-Exemption [Pages 5 — 7]

IRC 953(d) Foreign Insurance Company Election Signed on May 3, 20XX [Page
8]

Application for Recognition of Tax-Exempt Status [Pages 9 — 12]

Role of ORG Officers / Directors in the Tax-Exempt Application Process [Pages
13 — 15]

IRS Exemption Ruling Letter Issued on October 19, 20XX [Pages 16 — 17]
Relationship Between ORG and Companies [Page 18]
Director Family Members Identified With ORG Transactions [Page19]

Org Chart Identifying Managers and Equity Holders of Sole Shareholder [Page
20]

Primary Purpose of ORG is Insuring Business Activities of Directors [Page 21]
ORG Business Plan Tied to Companies [Pages 22-24]

Professional Background of ORG Officers / Directors, Director-1 and Director-4
[Page 25]

Sources of Revenue Reported for Years 20XX-20XX [Pages 26-27]

[A] Net Gain from Sale of Non-Inventory Assets [Pages 28-38]

[B] Premium Revenue from Direct-Written Policies [Pages 39 — 65]
[C] | Assumed Reinsurance Premiums [Pages 66 — 72]

[D] Miscellaneous Revenue From Line of Credit Fee [Pages 73 — 74]
[E] Other Investment Income [Pages 75 - 78]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 2

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer

ORG

Facts

Overview of Topics Discussed in Report

Year/Period Ended
20XX
20XX
20XX

14 Expenses Reported for Years 20XX-20XX [Page 79]

[A]
[B]
[C]
[D]
[E]

[F]

Legal Fees [Pages 80-87]

Interest [Pages 88 — 89]
Management Fee [Pages 90 — 93]
Property Taxes [Pages 94 — 96]

Incurred Claims and Experience Refunds Due to the Insurance Company

[Page 97 — 02]
Insurance Commissions [Page 03]

15 Assets Reported for Years 20XX-20XX [Page 04]

[A]
[B]
[C]
[D]
[E]
[F]

Accounts Receivable [Pages 05 — 112]

Other Assets (Line of Credit) [Pages 113 — 117]
Other Notes / Loans Receivable [Pages 118 — 124]
Securities Investments [Pages 125 — 126]

Other Investments [Pages 127 — 131]

Land, Building & Equipment [Pages 132 — 136]

16 Liabilities Reported for Years 20XX-20XX [Page 137]

17 Plan to Liquidate On/Before December 31, 20XX [Pages 138 — 148]

Form 886-A (Rev. 4-68)

Page 3

Department of the Treasury - Internal Revenue Service

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Formation and Licensure Within 20XX
Country

ORG was incorporated on December 20, 19XX, under the laws of the Territory. The
purpose for which ORG was organized is explained within Article 4(1) of ORG’s
Memorandum of Association, which States that ORG was established “to engage in the
business of an insurance and reinsurance company, to act as insurance agents,
intermediaries and consultants, to accept risks and to settle claims on its own behalf
and on behalf of others.”

[ORG’s Memorandum of Association is illustrated within Exhibit 1.]

On December 29, 19XX, ORG received its insurance license under Sections 16(1) and
17 of the Insurance Act of 1994 of the Territory. Regarding such licensure, ORG’s
License No. 99CA 24 States that ORG was granted an insurance license in accordance
with provisions of Section 17 of the Insurance Act “to carry on general insurance
business in the classes of Fire, Theft, Business Interruption, Legal Liability, Property &
Casualty Insurance and Credit Life & Credit Disability Reinsurance from with the
Territory.”

[ORG’s License No. under Sections 16(1) and 17 of the Territory Insurance Act of
1994 is illustrated within Exhibit 2.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 4

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Form 990 Filed for Tax Years 19XX-20XX Preceding 20XX
Applying for Tax-Exemption

ORG filed Form 990 for tax years 19XX and 20XX, pre Insurance the application for
recognition of tax-exempt status submitted in year 20XX. Information reported within
these Forms 990 is summarized here.

Part | / Income Statement reported no revenue for year 19XX; and revenue of $0
for year 20XX consisting of —

$0 interest

$0 premiums from offshore reinsurer, CO-23 Insurance, Ltd.

Form 990, Part I, Line # Year 19XX Year 20XX
$$$ % $$$ %
2 - Program Service
Revenue

Premiums Written -0-
Premiums Assumed -0-
4 - Interest on Savings / Temp Cash Inv 0) 0%

11 - Other Revenue

Premiums Insurance

Premiums Subject to Reinsurance 0 0%

12 - Total Revenue -0- 0% 0 0%

Part Il / Statement of Functional Expenses reported no expenses for year 19XX, and
expenses for year 20XX consisting of —

$0 accounting fees
$0 commissions
$0 experience refunds
$0 loss expenses incurred

Form 990, Part Il, Line # Year 19XX Year 20XX
$$$ % $$$ %

31 — Accounting Fees 0 0

43 - Commissions 0 0

43 - Experience Refunds 0 0

43 -Loss Expenses Incurred 0 0

44 - Total Functional Expenses -0- 00.00% 0 00.00%

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 5

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Form 990 Filed for Tax Years 19XX-20XX Preceding 20XX
Applying for Tax-Exemption

Part Ill / Statement of Program Service Accomplishments, Stated for years 19XX
and 20XX, respectively:

“The tax exempt purpose of the organization is the providing of

property and casualty insurance underwriting services to

independently operated businesses, both related and unrelated.”

“To provide property and casualty insurance underwriting services to
independently operated businesses, both related and unrelated.”

Part IV / Balance Sheet reported no assets at beginning-of-year 19XX, and
$0 non-interest bearing cash as the only asset at year-end 19XX. No
liabilities were reported for year 19XX.

Part IV / Balance Sheet reported for year 20XX —

Beginning-of-year 20XX assets to be the same as year-end 19XX assets — sole

asset was $0 of non-interest bearing cash.

Year-end 20XX assets totaled $0 -- $0 non-interest bearing cash + $0 accounts
receivable + $0 other investments
No liabilities at beginning-of-year 20XX; and $0 accounts payable as sole liability at
year-end 20XX.

Form 990, Part IV, Year 19XX Year 20XX

Line # $$$ % $$$ %

45 - Non-Interest Bearing Cash 0 0% 0 0
47 - Accounts Receivable -0- 0 0
56 - Other Investments -0- 0 0
59 - Total Assets 00,000 00.00% 0 00.00%
Form 990, Part IV, Year 19XX Year 20XX

Line # $$$ % $$$ %

60 - Accounts Payable and

Accrued Expenses 0.00 00.00% 0 00.00%
66 — Total Liabilities 0.00 00.00% 0 00.00%
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 6

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Form 990 Filed for Tax Years 19XX-20XX Preceding 20XX
Applying for Tax-Exemption

Part V identified directors and insurance manager for year 19XX as:

Director-1
Director-2
Director-3

These directors were reported as devoting an average of 0 hours/week to ORG,
earning zero compensation, and having an address of Address, City, State Zip code.
An attachment to Form 990/year 19XX reported that these

shareholders owned an equal 0% in ORG.

Part V identified directors and insurance manager for year 20XX, as:

Director-1
Director-4

For years 19XX-20XX, Part V identified Insurance Manager as ORG’s
insurance manager, devoting 0 hours/week to ORG, and earning estimated
compensation of $0. Insurance Manager's address was identified as
Address, City, Territory.

[ORG's Form 990, filed for years 19XX-20XX, preceding application for tax-exempt
status, are illustrated within Exhibits 3A and 3B.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 7

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer : Year/Period Ended
ORG 20XX
Facts 20XX

IRC 953(d) Foreign Insurance Company Election 20XX
Signed on May 3, 2000XX

ORG’s election under Code section 953(d) election was signed under penalty of perjury
by officer/director, Director-1 on May 3, 20XX. Article 7 thereof provided that the
IRC 953(d) election be effective commencing as of 12/20/19XX.

Article 6 thereof was erroneous in regard to ORG assets having an adjusted basis equal
to 0% of ORG’s gross income for the prior year because ORG’s Form 990 filed for
year 19XX reported no revenue:

“ORG maintains an office or other

fixed place of business in the located at Address, City, State
Zip Code, and owns assets
which are physically located in the with an adjusted

basis equal to 0% of the prior year’s gross income of ORG”

[ORG’s foreign insurance company election under Code §953(d) is illustrated within
Exhibit 4.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 8

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Application for Recognition of Tax-Exempt Status 20XX

ORG's Form 1024, Application for Recognition of Exemption Under Section 501(a), was
signed and dated by its Director, Director-1, on July 17, 20XX, under the penalties of

perjury.

Proposed Activities

Part Il, Item 1 of ORG’s Form 1024 Stated the following with respect to ORG’s proposed

activities:

(a)

Activities: ORG is a small property and casualty insurance
company formed and licensed under the laws of the Territory. In
such capacity, it is licensed to conduct property and casualty
related insurance activities. Its activities are specifically limited to
the underwriting of property and casualty related risks on both a
direct and reinsurance basis. These are as follows:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 9

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Application for Recognition of Tax-Exempt Status 20XX
(1) Underwriting select lines of property and casualty

insurance coverages for business entities that are both
related and unrelated hereto. These insurance risks can
be categorized, by way of example, errors and
omissions insurance, business economic loss, business
interruption, bankruptcy protection, employment
practices, loss of key employee services, and other lines
of property and casualty related risks. Total
organizational time devoted to underwriting and
administration of insurance estimated to be 0% to 0%.

(2) Accepting and issuing reinsurance coverage for select
lines of property and casualty insurance risks, including
credit disability insurance. No credit life is envisioned
within the company. Total organizational time devoted
to reinsurance related administration is estimated to be
0% to 0%.

ORG achieves control of insurance related costs and cash flow
through centralized premium and loss monitoring. ORG retains
its investment income and will invest the monetary assets of the
company to support underwriting expense and losses. All of
the activities relate to the conduct of an insurance business
(other than life business). The nature of investments shall
include cash and cash equivalents, marketable securities, real
estate and any other permitted assets.

(b) The above described activities were all initiated in December,
19XX.

(c) | The above described activities are conducted and overseen in
the Territory through a designated resident insurance manager,
. who at the current time is Insurance Manager, a subsidiary of
Professional Service Company in the Territory. Insurance
Manager is licensed in accordance with the Insurance Act, 1994
to act as insurance manager in the jurisdiction.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 10

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX
4, Application for Recognition of Tax-Exempt Status 20XX

ORG’s insurance activity is not anticipated to exceed $0 in gross
written premiums during the first four years of the company.
Therefore ORG is applying for recognition under IRC Section
501(c)(15).

Identification of Officers / Directors
Part li, Item 3 of ORG’s Form 1024 identified ORG’s officers/directors as Director-1
and Director-4. The Directors’ address was identified as Address, City, State Zip code.
Although not disclosed within the Form 1024 application package, Director-1 and
Director-4 are husband-wife, and that the Address in City, State is the location of the
“Companies”, a group of businesses to be discussed later in this report.

No Connection Stated to Exist With Organizations Other than Insured Parties
Part Il — Item 5 requested a description of the “other organization” and an explanation of
the relationship with this “other organization” where the applicant organization was,
planned to be, or was connected in any way with any other organization. ORG’s
response Stated: “There is no connection to another organization, other than by the
applicant to its insured(s).”

No Promotional Literature Distributed
ORG checked the “No” box in response to the question within Part Il — Item 16 of its
Form 1024: “Does the organization publish pamphlets, brochures, newsletters,
journals, or similar printed material? If “Yes”, attach a recent copy of each.”

Financial Support and Expenses
In response to Part Il-ltem 2, where the applicant organization was required to list its
present and future sources of financial support, beginning with the largest source first,
ORG represented that insurance premiums would be the largest source of financial
support, followed by investment income and shareholder capital contributions.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 11

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Application for Recognition of Tax-Exempt Status 20XX

ORG represented its revenues and expenses within Part Ill — Section A of its Form
1024 as entirely related to its exempt purpose:

Revenue

1/1/XX to
6/30/XX
(Estimated) 20XX

19XX Total

3 Gross amounts derived

from activities relate

the organization’s exempt

purpose

d to

8 Total Revenue

Expenses

9 Expenses attributed

activities related to the
organization’s exempt

purposes

19 Total expenses

20 Excess of revenue over

expenses

Supporting revenue amounts represented within Part Ill-Section A of Form 1024 were
amounts of direct written premiums and reinsurance assumed premiums that ORG
represented within Schedule | of its Form 1024:

Jan 1 -— June 30
20XX

20XX

Direct Written Premiums

Reinsurance Assumed

Reinsurance Ceded

Net Written Premiums

OlO!}O}oO

Oo/O|o|o

[ORG’s Form 1024, Application for Recognition of Exemption Under Section
501(a), is illustrated within Exhibit 5.]

Form 886-A (Rev. 4-68)

Page 12

Department of the Treasury - Internal Revenue Service

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Role of ORG Officers / Directors in the Tax-Exempt 20XX
- Application Process

IDR 3 (years 20XX-20XX) requested explanations concerning the role of ORG officers /
directors in the application process, other than Director-1’s signing the Form
024 application under penalties of perjury on 7/17/20XX.

Officers/Directors Not Involved in Previous Formation of
IRC 501(c)(15) Insurance Companies

Item #2 of IDR 3 (years 20XX-20XX) inquired as to whether ORG’s officers/directors
were involved in forming an insurance company recognized as exempt from federal
income tax under Code § 501(c)(15). ORG’s response explained that -

“Prior to the formation of the Company neither Director-1 nor Director-4

had ever previously formed an insurance company recognized as exempt

from federal income tax under Code section 501(c)(15).”

Application Procedures Handled by Officers’ Attorneys / Accountants

Item #3 of IDR 3 (years 20XX-20XX) as to whether ORG officers/directors understood
the procedural steps required to obtain recognition of tax-exempt status under Code §
501(c)(15), and, if not, whether such procedural steps were explained to them by a tax
consultant/tax advisor. ORG’s response explained that -

“Director-1 & Director-4 do not personally handle tax compliance matters

for any of their many business entities. After Director-1 and his

subordinates completed their business due diligence on setting up an

insurance company, the procedural steps to obtain recognition of

exception under Code §501(c)(15) were carried out by their attorneys and

accountants.”

No Feasibility Study Conducted to Form ORG
Item # 4 of IDR 3 (years 20XX-20XX) requested an explanation as to whether ORG
officers/directors had obtained and/or conducted a feasibility study as to forming
an insurance company qualifying as tax-exempt under Code § 501(c)(15). ORG’s
response explained that -
“Director-1 and his subordinates completed due diligence on the concept
and business possibilities of forming an insurance company. A business
plan was prepared and submitted both to the Territory insurance
regulators and to the IRS. This business plan was previously provided to
you in response to an earlier IDR. No document entitled ‘feasibility study’
was prepared.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 13

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Role of ORG Officers / Directors in the Tax-Exempt 20XX
Application Process

Opinion Letter Regarding Tax Ramifications Not Received by ORG Officers/Directors
Item #5 of IDR 3 (years 20XX-20XX) requested an explanation as to whether ORG
officers / directors had received an opinion letter from an attorney or accountant as to
tax ramifications involved in establishing an insurance company qualifying as tax
exempt under Code § 501(c)(15). ORG’s response explained that -

“Prior to the formation of the Company, neither Director-1 nor Director-4 received

any opinion letter from any accountant in regard to the tax ramifications of

establishing an insurance company recognized as exempt from federal income

tax under Code section 501(c)(15). Whether prior to the formation of the

Company Director-1 or Director-4 received an opinion letter from an attorney,

and if so, the content of any such letter, cannot be disclosed without violating the

attorney-client privilege.” .

Law Firm-1, Law Firm-2, and Professional Service Company Retained

Item #7 of IDR 3 (years 20XX-20XX) requested an explanation as to whether any tax
consultant/tax advisor had ever represented to ORG officers/directors about tax benefits
that could be obtained by forming an insurance company qualifying as tax-exempt
under Code § 501(c)(15). ORG’s response explained that -

“The law firm of Law Firm-1 represented Director-1 and the

Company officers in connection with the formation of the Company

and in connection with obtaining recognition from the IRS of the

Company’s exemption under Code section 501(c)(15). Director-1

sought out Law Firm-1 for their services because he had heard

from business associates that Law Firm-1 had experience in

that area. The law firm of Law Firm-2 PLC has provided

certain legal services to the Company. Law Firm-2 PLC (and

its predecessors) have represented Director-1 for nearly 30 years

on a wide variety of matters. The officers and the Company

engaged an accountant working for Law Firm-1 to prepare the

990 forms that have been filed for the Company. The Company

engaged the auditing firm of Professional Service Company to provide the audits

required by Territory and which have also been provided to you. The Company

does not view any of these persons as ‘promoters of tax benefits’

but as independent service providers who were sought out and

engaged by the Company or its officers/shareholder to provide

representation and advice. Other than as described in response to

Item No. 5, above, none of these persons ever made any

representations about tax benefits to the Company’s officers /

directors.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 14

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Role of ORG Officers / Directors in the Tax-Exempt 20XX
Application Process

Responses Concerning Inquiries About “Promoters”
Item #8 of IDR 3 (years 20XX-20XX) requested an explanation as to whether ORG
officers / directors investigated the background of “promoters” and work with such
“promoters” as part of their decision to form an insurance company qualifying as tax
exempt under Code § 501(c)(3)._ ORG’s response referred to what was explained in
the responses to Items # 5 and #7 of IDR 3, by stating, “See answers to No. 5 and No.

Promotional Material Not Provided to Officers/Directors

Item #9 of IDR 3 (years 20XX-20XX) requested an explanation as to whether ORG
officers / directors were provided with literature and/or promotional material informing
about tax benefits that could be obtained in forming an insurance company qualifying as
tax-exempt under Code § 501(c)(15). ORG’s response explained that “promotional”
material was not provided and referred to responses provided to Items #5 and #7 of IDR
3:

“See answers to Nos. 5 and 7. The persons described in Nos. 5 and 7

did not provide any ‘promotional’ material to Director-1.”

Referral of Attorney/Accountant
Item #0 of IDR 3 (years 20XX-20XX) requested an explanation as to whether ORG
officers / directors had been referred to someone knowledgeable (e.g., attorney or
accountant) about creating an organization qualifying as tax exempt under Code §
501(c)(15). ORG’s response referred to responses given to Items #5 and #7 of IDR 3:
“See answer to Nos. 5 and 7 above.”

Law Firm-1 Retained for Forms 024 and 990 Services
Item #11 of IDR 3 (years 20XX-20XX) requested an explanation as to whether ORG
retained professional services — such as an accountant, attorney, or CPA firm — to
assist with the Form 1024 application process or prepare Form 990. ORG’s response
Stated:
“Yes. Law Firm-1 worked on the Form 1024 and an accountant in their
office prepared the Form 990 for the years 19XX to 20XX.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 15

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

IRS Exemption Ruling Letter Issued 20XX
on October 19, 200XX

On October 19, 20XX, the Internal Revenue Service (“IRS”) issued a letter to ORG,
recognizing ORG as exempt from federal income tax under Code section 501(c)(15).
This letter, in part, States:

Based on the information supplied, and assuming your operations will be
as Stated in your application for recognition of exemption, we have
determined you are exempt from United States income tax under section
501(a) of the Code as an organization described in section 501(c)(15)
commencing on January 1, 20XX, for tax years when your net written
premiums (or, if greater, your direct written premiums) do not exceed the
$0 limit prescribed by section 501(c)(15).

You have the right to protest our ruling in regard to your effective date of
exemption if you believe it is incorrect. To protest, you should submit a
Statement of your views to this office, with a full explanation of your
reasoning. This Statement must be submitted within 30 days of the date
of this letter and must be signed by one of your officers. You also have a
right to a conference in this office after your Statement is submitted. If you
want a conference, you must request it when you file your protest
Statement. If you are to be represented by someone who is not one of
your officers, he/she must file a proper power of attorney and otherwise
qualify under our Conference and Practice Requirements.

This ruling is based on the financial and other information submitted in
support of your application. Based solely on that information, we have
concluded you are a “company” or “association” within the meaning of
section 501(c)(15) of the Code, and have the business purpose of
conducting the activities described in your application. This ruling is not
effective unless you actually operate as represented. We are not ruling on
issues other than exempt status. We have not been asked and we have
not considered whether any of your transactions would give rise to the
application of the provisions of either section 842 or 845 of the Code.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 16

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

IRS Exemption Ruling Letter Issued 20XX
on October 19, 200XX

Please notify the State Tax Exempt and Government Entities (TE/GE)
Customer Service office if there is any change in your name, address,
sources of support, purposes or method of operation. If you amend your
organizational document or bylaws, please send a copy of the amendment
to that office. The mailing address is: Internal Revenue Service, TE/GE

Customer Service, Address, City, State Zip code.

[The IRS ruling letter, dated October 19, 20XX, issued to ORG and recognizing ORG as
exempt from federal income tax is illustrated within Exhibit 6.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 17

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Relationship Between ORG and Companies 20XX

ORG is related by common ownership and/or control to an economic group of
businesses referred to as the “Companies”:

CO-1 (EIN)
CO-2 (EIN)
CO-3 (EIN)
LP-1 (EIN)
LP-2 (EIN)
LP-3 (EIN)

ee he fe

With the exception of CO-3, all businesses within the Companies have a common
address of Address, City, State Zip code.

CO-3’s address is at Address, City, State Zip Code ORG’s director, Director-1, is also
a director and minority owner of CO-3.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 18

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Family Members Identified With ORG Transactions 20XX

Key Family members were identified from transactions discussed in this report —
[A] Director-1 (SSN) and Director-4

ORG officers/directors

[B] Director-2 (SSN)

Brother of Director-1

Manager of CO-4

Director of CO-5

[C] Director-3 (SSN)

Brother of Director-1

* Manager of CO-6

Director of CO-7

[D] | Manager-1

* Nephew of Director-1

Manager of CO-8

Co-Manager of CO-9

[E]} Manager-2

Son of Director-1

Manager of CO-10, the General Partner of LP-4.

[F] Manager-3

Husband of Director-1’s niece

Manager of CO-11, the General Partner of LP-5

[G] Manager-4

Husband of Director-1’s niece.

Manager of CO-12, the General Partner of LP-6

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 19

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Org Chart Identifying Managers and Equity 20XX
Holders of Sole Shareholder

Managers and equity owners of ORG’s sole shareholder, the LP-1 are identified here.
The CO-13 held a 0% general partnership interest in the LP-1 during years 20XX-20XX.
Managers of the CO-13 are therefore considered to control ORG through their control

over ORG’s sole shareholder.

CO-13 (EIN)
General Partner of the LP-1, holding an equity

interest of 0% during years 20XX-20XX.

Managers during years 20XX-20XX were ORG
director, Director-1; his son, Manager-2; and
his nephew, Manager-1.

ORG directors,Director-1 and Director-4,

as holding 0% of equity in CO-13 during
20XX-20XX

Manager-2, son of Director-1 and Director-

4, owning 0% of CO-13 equity in year
20XX, and 0% equity in years 20XX-20XX

& Remaining portion of CO-13 equity held by
persons considered to be Director-1 family
members during years 20XX-20XX

Limited Partners of the LP-1
Director-1 Director-4 (SSN) — Directors of
DI and limited partnership equity holders —
held 0% in year 20XX; 0% at beginning-
of-year 20XX; 0% at year-end 20XX-
20XX; and 0% at year-end 20XX.

LP-7 (EIN) — Limited partnership equity
holder, holding 0% at year-end 20XX-
20XX

LP-8 (EIN) — Limited partnership equity
holder, holding 0% at year-end 20XX
Director-1 Limited Partnership-9 (EIN),
dated 10/10/29/XX — Limited partnership
equity holder, holding 0% at year-end
20XX

Remaining limited partnership equity held
by persons considered to be Director
Family members, each holding % at year-
end 20XX.

LP-1 (EIN)
Sole shareholder of ORG

ORG (EIN

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 20

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Primary Purpose of CORG is Insuring Business 20XX
Activities of Directors

Note 1, General Information, (at Page 5) of ORG’s financial Statements for year 20XX,
Identified ORG’s (the “Company’s) primary purpose:

“The primary purpose of the Company is to provide access to non-

traditional insurance coverage of risks that businesses are commonly

faced with but to which limited or no insurance coverage is currently

available. The Company will accept third party business through

recognized credit life/disability reinsurance companies. The Company

presently insures the various business activities of Director-1 and

Director-4, who are directors and their affiliated companies.”

(Emphasis added for underlined areas.)

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 21

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX-12
EIN 20XX-12
Facts 20XX-12

ORG Business Plan Tied to Companies

ORG’s Business Plan identified ORG as a captive insurer providing non-traditional
coverage to the Companies economic group. Companies was
identified as the risk manager relating to coverage provided by ORG.

Excerpts from ORG’s Business Plan given here refer to ORG as the “Company” and to
Companies as “CC”.

Section I A— General Description / Overview
“The company will insure various business activities of The Companies, a
diversified conglomerate of businesses located primarily in State, USA (_).
The Company will also accept third-party insurance as described herein.”

Section | B — General Description / Purpose
“The purpose of the Company is to provide access to non-traditional
insurance policies with which risks of loss businesses are commonly faced
but to which limited or no insurance coverage is currently available. The
Companies believes that it faces several risks over the next few years for
which traditional insurance is either too expensive or unavailable. Also,
the Company hopes to obtain profitable reinsurance business. In addition,
the Company may cede certain risks to reinsurers.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 22

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

ORG Business Plan Tied to Companies 20XX

Section Il A — Marketing / Planned Areas and Type of Business
“The Company will operate as a property and casualty insurance company
and will not issue life insurance policies. Insurance will be written on The
Companies, to enable better risk management, and allow ORG to obtain
non-traditional insurance at better price points.”

Section II B — Marketing / Method of Solicitation
“The Company does not presently intend to have insurance agents or
solicitors. All insurance initially will either come directly from The
Companies, or be obtained by the Company’s insurance manager.”

Section Il C — Marketing / Source of Business
“The Company expects that zero percent (0%) or more of its business will
come from The Companies. The Companies is a diversified conglomerate
of companies, with numerous employees and assets and is currently
faced with all of the below-described insurable risks. The Companies will
seek to engage in management of its risks and containing the cost of
acquiring the foregoing classes of insurance.

The balance of the insurance underwriting business will be accepted by
way of reinsurance of unrelated, licensed insurance companies.”

Section Ill B — Technical / Details of Underwriting
“The Company will be highly selective as to the risks, which it will
underwrite in the early stages of its development. The Companies will
continue to obtain regular commercial property and casualty insurance
from standard providers, and will primarily use the Company to provide
non-traditional insurance and to access the reinsurance market.”

Section Ill D — Technical / Claims and Accounting Techniques
“The frequency of claims from The Companies is expected to be low and
so all claims will be dealt with on an adhoc basis in consultation with the
Company's insurance manager. Where advised by the insurance
manager or otherwise determined, the services of third party loss
adjusters and other specialists may be used. The Company intends to
adopt a conservative approach to reserving for outstanding claims but
IBNR is not expected to form a significant proportion of those reserves.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 23

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

ORG Business Plan Tied to Companies 20XX

“It is expected that most inwards reinsurance business will be in the form of
Quota Share treaties, which will be accounted quarterly and settled on a balance
of account basis.”

Section Ill H — Technical / Commission Structure
“The Company will not pay commissions to agents and solicitors in the
traditional sense. The Company may pay set fees to its insurance
manager to obtain third-party insurance.”

[ORG’s Business Plan is illustrated within Exhibit 7.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 24

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX

Professional Background of ORG Officers / . 20XX
Directors, Director-1 and Director-4

ORG’s response to Item #1 of IDR 3 (years 20XX-20XX) gave the professional
background of husband-wife officers/directors, Director-1 and Director-4.

Director-4 was explained to have received a bachelor of science degree in home
economics from the University of State. She has been a full-time mother and wife, and
has not engaged in business except through her husband.”

Director-1’s resume’ disclosed that he —

te
he
he

Received his bachelor of science in accountancy degree from

University in January 19XX.

Worked as an IRS revenue agent from June — December 19XX.

Attended school for 3 semesters.

Returned to City, State to join his father in managing business enterprises and
investments his father had made.

Funded, managed, and served on the board of directors of over 100 companies as a
private investor. These include multiple companies .
Lived in City, Country, where he funded and managed various Country enterprises.
Helped found and served on the board of directors of several insurance companies.
Was among the original founders of CO-14, a publicly traded life insurance company
domiciled in State. [Family members of Director-1 also were original founders.]

Was one of the original founders of Mutual Insurance — a mutual insurance
company domiciled in State -- and served on its Board for the past 18 years.

Served on the Governing Board of the Hospital-1 and its successor, Hospital-2,
since 19XX. Six of these years were served as Chairman of the Board.

[Director-1’s resume’ is illustrated within Exhibit 8.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 25

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer

ORG
Facts

Sources of Revenue Reported for Years 20XX-
20XX

Year/Period Ended
20XX-12
20XX-12
20XX-12

ORG’s sources of revenue reported for years 20XX-XX are summarized here. In years
20XX-XX, premium revenue was less than 0% of aggregate revenue — 0% for year
20XX and 0% for year 20XX. The net gain from the sale of non-inventory assets was
over 0% of aggregate revenue for years 20XX-XX — 0% for 20XX and 0% for 20XX.

Premium revenue for year 20XX was about 0%, with the remaining revenue coming
from other investments (0%) and a net gain from non-securities sales (0%).

Form 990, Part I, Line #

Year 20XX Year 20XX

Year 20XX

$$$ % $$$

$$$ %

2 - Program Service
Revenue

Premiums Written

0 0%

Premiums Assumed 0

0 0%

4 - Interest on

Inv

Savings / Temp Cash

Dividends and Interest 0 0%

0 0%

Net Rental Income

7 - Other Investment
Income

0 0%

8 - Net Gain from Sale of
Non-Inventory Assets

Securities

-0 -0%

Non-Securities

0 0% 0

0 0%

11 - Other Revenue

Premiums Insurance 0 0%

Reinsurance

Premiums Subject to

0 0%

Misc. Revenue —
Line of Credit Fee

12 - Total Revenue

0 0%
0 00% 0

00%

0 00%

[ORG’s general ledger for years 20XX-20XxX is illustrated within Exhibits 9A, 9B, and

9C.]

[ORG’s audited financial Statements for years 20XX-20XX are illustrated within
Exhibits 0A, OB, and 0C.]

[ORG Forms 990 filed for years 20XX-20XX are illustrated within Exhibits 11A, 11B,

and 11C.]

Form 886-A (Rev. 4-68)

Page 26

Department of the Treasury - Internal Revenue Service

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer

Year/Period Ended

ORG 20XX
Facts 20XX

Sources of Revenue Reported for Years 20XX-20XX 20XX
ORG sources of revenue discussed in further detail are —
[A] Net gain from sale of non-inventory assets
[B] Premium revenue from direct-written policies
{[C} Assumed reinsurance premiums
[D] Miscellaneous revenue from line of credit fee
[E] Other Investment Income
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 27

Part I, Line 8 of ORG’s Form 990 reported a net gain from the sale of non-inventory

assets for years 20XX-20XX:

Year 20XX $0
Year 20XX $0
Year 20XX $0

A pattern relating to gains reported for years 20XX-20XX exists, whereby ORG’s sole
shareholder, the LP-1, transferred one-third interests in properties located in State that
ORG disposed of in the following year. The pattern began in year 20XX, when ORG
received two one-third interests in properties located in State that were sold in year
20XX at a net gain of $0.

One-Third Interests in Two Properties Received at
Basis of $0 on 12/29/20XX

Two documents entitled, “Special Warranty Deed” show that ORG’s sole shareholder,
the LP-1, transferred an “undivided one third (1/3) interest” in two properties located in
County and County Counties, State. Both Special Warranty Deeds were executed by
the LP-1, as Grantor, on 12/29/20XX. The two properties for which a one-third interest
in each was transferred under these Special Warranty Deeds to ORG, as Grantee, are
described in supporting exhibits to the deeds as:

Property-1 — County, State

Property-2 — County, State

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 28

Basis amounts for the two property interests transferred in year 20XX totaled to $0:

Property Interests
Transferred in Year
20XX Basis
0% interest in County, State
property described as "Property-
1" 0
0% interest in County County,
State property described as "
Property-2" 0
0

Supporting ORG’s receipt of the two one-third property interests is that ORG’s G/L
account 0 / Land had a balance of $0 at 1/1/20XX.

[Special Warranty Deeds executed by the LP-1 on 12/29/20XX, to transfer an
“undivided one third (1/3) interest” in two properties located in County and County
Counties, State of State, are illustrated within Exhibits 12A and 12B.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 29

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX .
13-A. Net Gain from Sale of Non-Inventory Assets 20XX

One-Third Interests in Two Properties Sold for $0 Net Gain in Year 20XX
ORG disposed of its 0% interest in the Freeway and Street property through two sales
occurring on July 3, 20XX and November 6, 20XX. The sale on July 3, 20XX, was 0%
sold to three limited partnerships affiliated with the Companies economic group — the
LP-8, the CO-4, and the CO-6 — for a gain of $0. ORG’s captive affiliates - CO-7 and
CO-5 — concurrently sold their equal portions of the property interest under one contract
for all sellers/owners, whereby ORG was allocated 1/3 of sales proceeds. The sale in
November 6, 20XX, was 0% sold to the CO-6 for a gain of $0. ORG was the only party
to this sale.

Total gain from the two sales was $0

$0 (0%) + $0 (0%) = $0 (0%).

[ORG’s sale of the 0% portion of the Property-2 property, transacted on 7/3/20XX,
resulting in sales proceeds of $0 and net gain of $0, was not disclosed within the Form
1024 application. ORG officer/director,.Director-1, signed the Form 1024 application
under penalty of perjury two weeks after this sales transaction, on 7/17/20XX.]

ORG disposed of its 0% interest in the Property-1 property through five sales occurring
on November 6, 20XX and December 19, 20XX:

0% sold on November 6, 20XX, to the CO-6 for a gain of $0
0% sold on December 19, 20XX, to the LP-10 for a gain of $0
0% sold on December 19, 20XX, to the CO-6 for a gain of $0
0% sold on December 19, 20XX, to the CO-1 for a gain of $0
0% sold on December 19, 20XX, to the LP-7 for a gain of $0
Total gain from the five sales was $0

$0 (0%) + $0 (0%) + $O (0%) + $O (0%) + $O (0%) = $O (0%)

When ORG sold its 0%, 0%, and 0% portions of interest in the Property-1 property on
12/19/20XX, ORG’s captive affiliates -- CO-7 and CO-5 — concurrently sold their equal
portions of the property interest under one contract for all sellers/owners, resulting in
ORG receiving an allocated 1/3 portion of the sales proceeds.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 30

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer

Year/Period Ended

ORG 20XX
Facts 20XX
13-A. Net Gain from Sale of Non-Inventory Assets 20XX

Computations of net gains from ORG’s sales of the 0% property interests in the

Property-2 and Property-1 properties in year 20XX, along with identification of property

purchasers and property sellers are summarized here:

Property Interests Sold in Year 20XX
Property
Sellers /
Gain Territory
Property | Sale % of Sales Property | From Property Insurance
Sold Date Property | Proceeds | Basis Sale Purchaser(s) | Companies
LP-8 ORG
Property- CO-4 CO-5
2 O7/XX/XX 0% 0 0 0 | CO-6 CO-7
Property- CO-6 ORG
1 11/06/XX 0% 0 0 0
Property- CO-6 ORG
2 11/06/XX 0% 0 0 0
ORG
Property- LP-10 CO-5
1 12/1 9/XX 0% 0 0 0 CO-7
Property- CO-6 ORG
1 12/19/XX 0% 0 0 0
CO-1 ORG
Property- CO-5
1 12/19/XX 0% 0 0 0 CO-7
LP-7 ORG
Property- CO-5
1 12/19/XX 0% 0 0 0 CO-7
Totals From Seven Sales 0 0 0/0
Other Misc. Gains/Losses per Response to Item 1 — IDR 2 0
Net Gain Reported in Form 990 / Year 20XX 0

[When ORG officer/director, Director-1 signed the Form 1024 (discussed above) under
penalties of perjury on 7/17/20XX, ORG had already engaged in a sales transaction on
7/3/20XX. The Form 1024 gave no disclosure about sales that would occur on

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 31

11/6/20XX and 12/19/20XX, even though ORG had already held interests in the
Property-2 and Property-1 properties when it was signed on 7/17/20XX.]

Property Purchasers Controlled/Owned by Director-1 Family
The six property purchasers -- five limited partnerships and one limited liability company
— were controlled and/ or owned by Director-1 Family members who also were officers
in ORG and its affiliate captive sellers:

CO-6 (EIN) - Address, City, State Zip code — Director-3 is manager of general
partner (CO-6) and controls all of limited partnership equity. [Director-3 is an
officer/director of captive affiliate, CO-7]
LP-8 (EIN) - Address, City, State Zip code - Director-1 and Manager-2 (father
and son) are mangers of general partner (LP-8). Director-1 controls all of limited
partnership equity. [Director-1 is an officer/director of ORG.]}
CO-4 (EIN) - Address, City, State Zip code — Director-2 is one of three managers
of the general partner (CO-4), and controls all of the limited partnership equity.
[Director-2 is an officer/director of captive affiliate, CO-5]

LP-10 (EIN) - Address, City, State Zip code. The three Director-1 brothers who

are key officers/directors of the affiliate captives — Director-1 (ORG), Director-2
(CO-5), and Director-3 (CO-7) — each hold a one-third equity interest in one of

the two general partners of the LP-10 ( — EIN), and each hold a 0%
limited partner equity interest in the LP-10. [One of the general partners of the
LP-10 — — was also a general partner in the LP-7.]

LP-7 (EIN) — Address, City, State Zip code — Dissolved in year 20XX. Limited

partner equity was held equally during years 20XX-20XX, by the LP-8 (0%), the
CO-6 (0%) and the CO-4 (0%). The general partner was CO-22 (EIN).
Ownership and control in the three limited partners and the general partner of the
LP-7 are identified above.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 32

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer
ORG
Facts
13-A. Net Gain from Sale of Non-Inventory Assets

Year/Period Ended
20XX
20XX
20XX

CO-1 (EIN) - Address, City, State Zip code. 0% of total member equity in the
CO-1 was equally held by the three limited partner sole shareholders of ORG
and its affiliate captives — LP-1 (ORG), LP-3 (CO-7), and LP-2 (CO-5) — each
holding 0% member equity. The remaining 0% of member equity in the CO-1
was held by two corporations — CO-16 (0% -- EIN) and CO-17 (0% -- EIN).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 33

One-Third Interest in Property Received at Basis of $0 on 12/31/20XX
The pattern of ORG receiving property and disposing of it in the following year
continued in year 20XX, when ORG received another one-third interest in State
property.

A special warranty deed, executed on 12/31/20XX, by the LP-1, as Grantor, transferred
to ORG an “undivided one third (1/3) interest” in a property located in County County,
State, described as “Property-3”. Director-1’s nephew, Manager-1, signed the Special
Warranty Deed as manager of the CO-13. The CO-13 was identified in the Special
Warranty Deed as general partner of the LP-1.

ORG recorded the property's basis in the amount of $0 within G/L account 01-001 /
Land on 12/31/20XX, under a posting described as, “Contribution of 1/3 of 0% interest
in Property-3 from LP-1”.

G/L Account 1600 — Land

Amount
Date Reference | Journal Trans Description Debit Credit
Contribution of 1/3 of 0% interest in
12/31/XX GJ 1 J Property-3 from LP-1 0

[The Special Warranty Deed executed by the LP-1 on 12/31/20XX, to transfer an
“undivided one third (1/3) interest” in a property located in County County, State,
described as “Property-3 is illustrated within Exhibit 13.]

One-Third Property Interest Sold for $0 Net Gain in Year 20XX

ORG disposed of its one-third interest (0%) in the Property-3
(“Property-3”) property by two sales transactions within year 20XX —

0% sold on 7/31/XX

0% sold on 8/31/XX

The LP-15 — identified above as a property purchaser in year 20XX — was the sole
purchaser of the one-third interest in the Property-3 property.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 34

Minutes of ORG Board Meeting Discuss Sale of Property-3 Property Interest in
20XX
Minutes of ORG’s Board meeting held on February 17 20XX, note that assets and net
income increased substantially as a result of ORG’s sale of the Property-3 property
interest, which was referred to as appreciated property carried on the books at basis:
“The financial Statements of the Company for the year ended December
31, 20XX were presented to the Directors.....lt was noted that the
Company now has $0 in Assets compared with $0 in the prior year. The
increase is mainly a result of the sale of appreciated property (Property-3)
which was carried on the books at basis. The breakdown of total assets is
as follows:

Cash and cash equivalents: $0 — Cash and
money market account

Investments and Receivables: $0 — Money invested in real estate
and real estate investment companies

In 20XX, the Company made additional investments in companies whose
business is real estate investment. These companies loan money
secured by real estate.

Director-1 completed his review of the balance sheet and then conducted
a brief review of the Income Statement for the year noting the Company
showed Net income of $0 compared with $0 in the prior year. This was
mainly attributable to the sale of Property-3. Total investment revenue
was $0 compared with $0 in the prior year. Premium income for the year
was $0 compared with $0 for the prior year.”

[Emphasis added to above underlined areas.]

[Minutes of ORG’s Board meeting held on 2/17/20XX are illustrated within Exhibit 14.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 35

Transactions within ORG’s G/L accounts #1/Capital Gains (Loss) and #0 / Land
identified sales proceeds of $0; a $0 basis in the 1/3 interest in Property-3 property; and

a net gain of $0.

Total gain from the two sales was $0

$0 (0%) + $0 (0%) = $0 (0%)

G/L Account 0 / Capital G/L Account 0/Land
Gains (Loss) Sales
Date Reference Trans Proceeds
Descriptio Trans
n Amount Description | Amount
Wire from
Investment Wire from
Property Investment
Exchange Property
31-Jul of Exchange of
20XX Property-3 0 | Property-3 0 0
Reclass
Coding
GJ2 Gen J error
Wire from
Inv. Property
Exchange
(Sale of 0 %
of Property-3
Interest)
31-Aug- 0 0
20XX Gen 0
Gain + Basis = Sales Proceeds 0 0 0
Proceeds from Sale of Investment Property from Statement of Cash Flows within
Audited Financials, Year 20XX 0
Insignificant Difference 0

An insignificant difference of $0 exists between the $0 of sales proceeds computed from
ORG’s G/L postings and the $0 of investment property sale proceeds reported within
the Statement of Cash Flows of ORG’s audited financial Statements for year 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 36

$0 Net Gain Reported for Year 20XX
The $0 net gain reported within Part |, Line 8 of Form 990 / Year 20XX came from
ORG's sharing of profit-loss in a domestic corporation, CO-18 (EIN). The CO-18
invested in a land fund that acquired real estate in State — the Land Fund. Net gain of
$0 from the Land Fund’s sale of land in year 20XX flowed from the Land Fund to the
CO-18 to ORG.

The CO-18 was reported as ORG’s subsidiary within Note 6, “Investment in Affiliates”
(at Pages 0-11) of ORG audited financials for the period ended 12/31/20XX:

The Company has two subsidiaries as at December 31, 20XX which are
CO-19 and CO-18. The Company has not prepared separate
consolidated financial Statements.”

Schedule K-1 filed for year 20XX by the CO-18 (EIN) identified that LLC as a domestic
corporation in which ORG had a 0% interest in profit-loss sharing and capital ownership
at year-end 20XX. Part J — Column (d) of the Schedule K-1 reported $0 of withdrawals
and distributions. Part J — Column (b) of the Schedule K-1 reported $0 of capital
contributed by ORG into the CO-18 during year 20XX.

[Schedule K-1 filed for year 20XX by the CO-18 (EIN) is illustrated within Exhibit 15.]

The $0 net gain reported within Part I, Line 8 of ORG’s Form 990 / Year 20XX, the $0
reported as withdrawals/distributions in the CO-18’s Schedule K-1, and the $0 capital
contribution reported in the CO-18’s Schedule K-1 were identified in ORG G/L postings
as —

$0 debited to ORG’s cash operating bank account, G/L account #0 / Cash —

Bank

$0 credited to ORG’s investment in the CO-18, G/L account #0 / CO-18
$0 difference as a net gain credited to G/L account #0 / Capital Gains

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 37

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX
13-A. Net Gain from Sale of Non-Inventory Assets 20XX
Account ID
/ Trans
Description Date Reference | Journal | Description Debit Credit
2/
Cash —
Bank 31-Dec-XX | GJ 12/XX-1 | Gen J CO-18 0
3/CO-18 31-Dec-XX | GJ 12/XX -1 Gen J CO-18 0
1 / Capital
Gains
(Loss) 31-Dec-XX | GJ 12/XX -1 Gen J CO-18 0
Total of Postings to G/L Accounts 0 0

ORG Board Meeting Notes that Real Property Interest Sales Did Not Recur in

20XX

Minutes of ORG’s Board meeting held on February 9, 20XX discussed the review
ORG’s financial Statements for the year ended 12/31/20XX. During this meeting,
ORG’s Board acknowledged that sales of interests in appreciated real property did not
recur in year 20XX, resulting in a substantial decrease in net income:

“The balance sheet review was finished and then a brief review of the
Income Statement for the year was conducted. It was noted that the

Company showed a net loss of $0 compared with net income of $0 in the

prior year. The decrease is due to the sale of appreciated property in prior

years not recurring this year. Total investment revenue was $0 compared
with $0 in the prior year. Premium income for the year was $0 compared

with $0 for the prior year.”

[Emphasis added to underlined area.]

[Minutes of ORG Board held on 2/9/20XX are illustrated within Exhibit 16.}

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 38

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
13-B. Premium Revenue from Direct-Written Policies

ORG premiums from direct-written policies were reported as -

Other Revenue of $0 within Part | / Line 11 for year 20XX

Program Service Revenue of $0 within Part | / Line 2 for year 20XX

Program Service Revenue of $0 within Part | / Line 2 for year 20XX

Consistent with ORG’s purpose and activities discussed within the audited financial
Statements and Business Plan, insureds relating to this premium revenue were part of
the Companies economic group or affiliated with it through control/ownership.

In years 20XX-XX, ORG insured two affiliates within the Companies economic group —
LP-3 and CO-3.

In year 20XX, ORG wrote additional policies for three LP affiliates of the Companies
economic group — CO-6, CO-4, and the LP-10. Coverage for all three of these LPs was
for commercial excess / general liability. The three LPs purchased real property
interests sold by ORG during year 20XX (Property-1 and Property-2). The CO-6
purchased the real property interest sold by ORG in year 20XX (Property-3).

$0 Reported as Direct Written Insurance Premiums for Year 20XX

The $0 of direct insurance premiums reported within Form 990 / year 20XX
came from two policies negotiated and entered into in the Territory between
ORG and two businesses within the Companies economic group:

Insured Party Policy # Premium
LP-3 01-01 0
(EIN)
CO-3 01 - 09 0
(EIN)
Total Direct Insured Premiums 0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 39

Form 886A Department of the Treasury - Interna! Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
13-B. Premium Revenue from Direct-Written Policies

Identification of Insured, the LP-3
The LP-3 was established in November 19XX. Its business operations were split 15-75-
10:

owning/operating retail petroleum facilities primarily in State and State (0%)

realestate speculation and development in State (0%)
private and. public equity investments (0%)

The LP-3’s general partner — the CO-17 — held a 0% equity interest in the LP-3. The
brother and nephew of ORG officer/director, Director-1 — Director-3 (brother) and
Manager-1 (nephew) — were managers of the CO-17. Director-3’s equity holdings in the
LP-3 were a 0% limited partnership interest at beginning-of-year 20XX, and a 0% limited
partnership interest at year-end 20XX.

Policy # 01 - 01 Insuring the LP-3
ORG’s policy # 01 - 01 insuring the LP-3 provided administrative
actions insurance coverage. The policy supplemented general liability insurance
coverage provided by CO-20; having a $0 liability limit that expired on December 1,
20XX.

The $0 premium of policy #01 - 01 had two components:
Negotiated annual single premium $0
Endorsement annual single premium 0 $0

Policy #01 - 01 had a liability limit / maximum expense of —

$0 per single insured event
$0 aggregate maximum for all events

The deductible provided under policy #01 - 01 was for —

$0 for a single event maximum
$0 for an annual maximum

The policy period for policy #01 - 01, in verbatim, is stated as:
“Only for Insured Events occurring on or after January 1, 20XX, for which
claims are made and reported between 12:01 a.m. January 1, 20XX, and
12:01 a.m., January 1, 20XX.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 40

(Emphasis added for underlined area. A $0 claim paid with respect t to policy

01 - 01 is discussed later in the report.)

[ORG policy #01 - 01 written for year 20XX is illustrated within Exhibit 17.]

The LP-3 paid the $0 premium for policy #01 - 01 per its check #1, dated 8/17/20XX.
ORG recorded this payment within its G/L account #2 / Premium Insurance on
0/25/20XX.

Identification of Insured, CO-3
CO-3 is a corporation established in June 19XX, having business operations split 20-80:

0% devoted towards owning/operating retail petroleum facilities primarily in
State
0% devoted towards real estate speculation and development in State

ORG’s principal officer/director, Director-1, also was a director of CO-3. During year
20XX, CO-3 had four equity holders that included another member of the Companies
group, the CO-1:

Owner/Address TIN Ownership %
CO-1
Address, City, State EIN 0%
LP-11
Address, City, State Zip code EIN 0%
Individual-1
Address, City, State Zip Code Not Provided 0%
LP-12
Address, City, State Zip Code EIN 0%
Total Equity in CO-3 00.00%
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 41

Policy # 01 - 09 insuring CO-3
ORG’s policy # 01 - 09 insuring CO-3 provided employment
practices liability insurance coverage. The policy supplemented general liability
insurance coverage provided by CO-21, having a $0
liability limit that expired on July 1, 20XX.

The $0 premium of policy #01 - 09 had two components:
Negotiated annual single premium $ 0
Endorsement annual single premium 0 $0

Policy #01 - 09 had a liability limit / maximum expense of —

$0 per single insured event
$0 aggregate maximum for all events

The deductible provided under policy #01 - 09 was for —

$0 for a single event maximum
$0 for an annual maximum

The policy period for policy #01 - 09, in verbatim, is Stated as:
-“Only for Insured Events occurring on or after January 1, 20XX, for which
claims are made and reported between 12:01 a.m. January 1, 20XX, and
12:01 a.m., January 1, 20XX.”

[ORG policy #01 - 09 written for year 20XxX is illustrated within Exhibit 18.]

CO-3 paid the $0 premium for policy #01 - 09 per its check #2, dated 10/25/20XX. ORG
recorded this payment within its G/L account #2 / Premium Insurance on 10/25/20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 42

Summary of Year 20XX Direct Written Policies

The table here summarizes policy information supporting the $0 reported as direct
written insurance premiums for year 20XX.

Total Premiums Reported
within Form 990 / Year 20XX $0

Form 886-A (Rev. 4-68)

Page 43

Department of the Treasury - Internal Revenue Service

Risk Not Actuarially Supported for Year 20XX
Policies #01 - 01 and #01 - 09
Note 2(e), “Significant Accounting Policies for Loss Reserve”, (at Page 7) to ORG
audited financial Statements for year 20XX reported that ORG management did not
believe that a reserve for policy losses was necessary, that ORG did not provide for
losses, and that any reserve to cover payment of claimed losses was not determinable:

Management does not believe that a reserve for policy losses and related
expenses is necessary. However, because of the length of time required
for the ultimate liability for losses and loss expenses to be determined, the
net amounts that will ultimately be paid to settle any liability may vary
significantly from the nil amount provided for in the Statement of assets
and liabilities.

The Company does not provide for losses on incurred but not yet reported
cases. It has been the Company’s experience that incidents which may
give rise to claims are invariably reported almost immediately and
therefore any additional provision for this category of claim is
unnecessary. Although management believes that no additional provision
is necessary, any reserve to cover the ultimate payment of such amounts
is not presently determinable.

Item #6 of IDR 3 (year 20XX) requested rate charts and actuarial reports to support
whether risk transfer and risk distribution existed under ORG’s direct premium policies

01 - 09 and #01 - 01. ORG’s response Stated:

“The risks insured under these policies are non-standard risks concerning
which actuarial information and analysis were not available. Management
of the Company personally assessed this risk based upon their knowledge
of the insureds and the insureds’ businesses. The Company engaged
outside insurance counsel to tailor the policy coverages and limitations to
match their business assessments of risk. The policies clearly transfer
risk from the insureds to the Company. The direct written policies together
with reinsurance business also clearly distribute risk among many
insureds.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 44

Item #2A of IDR 8 (year 20XX) requested documentation supporting “ORG
management's personal assessment of risk based upon their knowledge of the insureds
and the insureds’ business.” ORG’s correspondence, dated December 10, 20XX (at
Page 10), responded by stating:

“The Company’s management was very familiar from personal

observation and evaluation with the direct insured risks. Because of the

familiarity, no ‘underwriting memo’ or similar document exists.”

[Emphasis added to above underlined areas. ]

Item #2B of IDR 8 requested documentation supporting ORG’s Statement as to the
“engagement of outside insurance counsel to tailor the policy coverages and limitations
to match their business assessments of risk.” ORG’s correspondence, dated December
10, 20XX (at Page 0), responded by stating:

“Company engaged Law Firm-3 of City to tailor policy coverages and

limitations. Without in any way waiving the attorney-client privilege as to

communications between Law Firm-3, the Company provides a copy of

billing Statement and check at Tab 18.”

The invoice referenced in ORG’s response was #1, dated February 20, 20XX, billed in
the amount of $0 to “The Companies” by the legal firm of Law Firm-3. Time billed
within this invoice was not for actuarial risk services relating to ORG policies #01 - 09
and #01 - 01. ORG was allocated $0 from the $0 billed to the Companies by Law Firm-
3, which was reported as legal expenses in Form 990 / year 20XX.

[The Law Firm-3 invoice #0, dated 2/20/20XX, billed in the amount of $0 to The
Companies is illustrated within Exhibit 19.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 45

$0 Reported as Direct Written Insurance Premiums for Year 20XX
ORG renewed its policies written for the LP-3 and CO-3 for the $0 reported as direct
written premiums in year 20XX:

Policy 02 - 01
Insuring the LP-3 for administrative actions
Total premium = $0
Policy 02 - 09
Insuring CO-3 for employment practices liability
Total premium = $0

Policy # 02 - 01 Insuring the LP-3
ORG direct policy #01 - 01 written for year 20XX was substantially similar to its
predecessor written for year 20XX. ORG’s policy # 01 - 01 provided administrative
actions insurance coverage and supplemented general liability / no-deductible
insurance coverage provided by CO-20; having a $0 liability limit that expired on
December 1, 20XX.

The $0 premium of policy #02 - 01 had two components:
Negotiated annual single premium $ 0
Endorsement annual single premium 0 $0

Policy #02 - 01 had a liability limit / maximum expense of —

$0 per single insured event
$0 aggregate maximum for all events

Policy #02 - 01 did not provide a deductible for either a single event
maximum amount or an annual maximum.

The policy period for policy #02 - 01, in verbatim, is Stated as:
“Only for Insured Events occurring on or after January 1, 20XX, for which
claims are made and reported between 12:01 a.m. January 1, 20XX, and
42:01 a.m., January 1, 20XX.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 46

The LP-3’s premium payment of $0 was recorded within G/L account #2 / Premium
Insurance on 12/23/20XX, through a cash receipts journal (“CRJ”) credit posting having
a reference of “0” and a transaction description of “CO-17-Insurance Change”. A
corresponding debit posting was made to G/L account #2 / Cash-Bank, indicating that
the $0 premium was deposited.

[ORG policy #01 - 01 written for year 20XX is illustrated within Exhibit 20.]

Policy # 02 - 09 insuring CO-3
ORG direct policy # 02 - 09 written for year 20XX was substantially similar to its
predecessor written for year 20XX. ORG’s policy # 02 - 09 provided employment
practices liability insurance coverage and supplemented general liability / no deductible
insurance coverage provided by CO-21, having a
$0 liability limit that expired on July 1, 20XX.

The $20 premium of policy #02 - 09 had two components:
Negotiated annual single premium $ 0
Endorsement annual single premium 0 $0

Policy #02 - 09 had a liability limit / maximum expense of —

$0 per single insured event

$0 aggregate maximum for all events

Policy #02 - 09 did not provide a deductible for either a single event
maximum amount or an annual maximum.

The policy period for policy #02 - 09, in verbatim, is Stated as:
“Only for Insured Events occurring on or after January 1, 20XX, for which
claims are made and reported between 12:01 a.m. January 1, 20XX, and
12:01 a.m., January 1, 20XX.”

CO-3’s premium payment of $0 was recorded within G/L account #2 / Premium
Insurance on 12/18/20XX, through a cash receipts journal (“CRu”) credit posting having
a reference of “0” and a transaction description of “CO-3 — Premium Insurance Income’.
A corresponding debit posting was made to G/L account #2 / Cash-Bank, indicating that
the $0 premium was deposited.

[ORG policy #02 - 09 written for year 20XxX is illustrated within Exhibit 21.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 47

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (*“ ”) 20XX
20XX
Facts 20XX
13-B. Premium Revenue from Direct-Written Policies

Summary of Year 20XX Direct Written Policies

The table here summarizes policy information supporting the $0 reported as direct
written insurance premiums for year 20XX.

Year 20XX
Limits of External
ORG Type of Policy Coverage | Policy Liability / Primary
Insured Coverage Premium | Period Payment Maximum _ | Deductible | Insurer
| Policy # Expense
check #3,
paid in
amount of
$0 to ORG,
and $0 per Law Firm-3 /
recorded in | single $0 single $0OM liability
CO-3 Between G/L as insured event limit
Policy 02 - 12:01 a.m. | deposited | event/$0 | maximum | /$0
09 1/1/20XX in bank aggregate | amount / deductible
Employment and 12:01 account on | maximum $0 annual 107/1/20XX
Practices a.m. 12/18/20X | for all maximum policy
Liability $0 | 1/1/20XX X events deductible | expiration
check #0,
paid in
amount of
$0 to ORG,
and $0 per CO-20
recorded in | single $0 single Incorporated
Between G/L as insured event / $0M liability
12:01 a.m. | deposited event / $0 maximum limit / $0
1/1/20XX in bank aggregate | amount/ deductible
and 12:01 account on | maximum $0 annual 1 12/1/20XX
LP-3 Administrative a.m. 12/23/20X |; for all maximum policy
02 - 01 action $0 | 1/1/20XX xX events deductible { expiration
Total Premiums Reported
within Form 990 / Year 20XX $0

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 48

Risk Not Actuarially Supported for Year 20XX
Policies #02 - 01 and #02 - 09
Consistent with Year 20XX, Note 2(e), “Loss Reserve” (at Page 0) of ORG audited
financials for year 20XX, reported that ORG management did not believe that a reserve
for policy losses was necessary, that ORG did not provide for losses, and that any
reserve to cover payment of claimed losses was not determinable:
“Policies written and assumed provide for coverage on a claims-made
basis. Therefore, the reserve for policy losses and related expenses
consists primarily of the estimated cost for losses, defense and expenses
associated with claims reported on a case by case basis which are
unsettled at the year end. In relation to premiums assumed, losses and
loss expenses paid are recorded when advised by the Ceding insurance
company. Outstanding losses comprise estimates of the amount of
reported losses and loss expenses in respect of policies written, and
amount advised by the Ceding insurance company.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 49

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer
ORG (“ ”)

Facts
13-B. Premium Revenue from Direct-Written Policies

Year/Period Ended
20XX
20XX
20XX

Item #4E of IDR 1 (years 20XX-20XX) requested an actuarial analysis supporting
computation of premium charges, risk transfer, and risk distribution for policies in effect
during the 12-month periods ended December 31, 20XX-20XX. ORG’s
correspondence, dated 7/20/20XX, responded by stating that actuarial analysis was

unnecessary for direct-written policies:

“The directly written policies were of risks well known to the company and

no actuarial analysis was necessary. CO-23 advises that its retrocession
arrangement was never subjected to actuarial analysis and that it had no

reason to do so.”

[Emphasis added to above underlined areas.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 50

$0 Reported as Direct Written Insurance Premiums for Year 20XX

Five policies written by ORG for year 20XX support the $0 of direct written
premiums reported within Form 990:

Policy 03 - 01

Insuring the LP-3 for administrative actions
Total premium = $0

Policy 03 - 09
Insuring CO-3 for employment practices liability
Total premium = $0
Policy 13 - 32
Insuring the CO-6 for claims made — commercial excess general liability
Total premium = $0
Policy 13 - 03
Insuring the LP-10 for claims made — commercial excess general liability
Total premium = $0

Policy 13 - 33

Insuring the CO-4 for claims made — commercial excess general liability
Total premium = $0

$0+0+0+0+0=$0

These direct policies had a coverage period that was, “Only for insured events occurring
on or after January 1 20XX, for which claims are made and reported between 12:01 AM
of January 1 20XX and 12:01 AM of January 1 20XX.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 51

Policy # 03 - 01 Insuring the LP-3
ORG direct policy #03 - 01 written for year 20XX was substantially similar to its
predecessors written for years 20XX-20XX. ORG’s policy #03 - 01 provided
administrative actions insurance coverage and supplemented general liability / no-
deductible insurance coverage provided by CO-20; having a $0 liability limit that expired
on December 1, 20XX.

The “Renewable Certificate” section of policy #03 - 01 contained this information:

Insured:
LP-3
Address
City, State Zip code
Phone number

Policy Period:
For insured events occurring on or after January 1 20XX, for which claims are
made and reported between 12:01 AM of January 1 20XX and 12:01 AM of
January 1 20XX.
[Same policy period as that for the other direct-written policies effected in year
20XX.]

Type of Coverage:
Administrative action insurance.

Premium: .
Negotiated annual single premium $ 0
Endorsement annual single. premium 0 $0

Limits of Liability - Maximum Expense:

Per single insured event $0
Aggregate maximum for all events $ 0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 52

Deductible:
Single event maximum amount $ 0.00
Annual maximum deductible $ 0.00

Articles within the “Renewal Application” section of policy #03 - 01 disclosed that -

The LP-3’s business operations were devoted 0% towards owning/operating
retail petroleum facilities located primarily in State and State, 0% devoted
towards real estate speculation/development in State, and 0% devoted
towards private/public equity investments. [Articles 4 and 5]

The LP-3 had general liability coverage under a $0 million liability limit / non-

deductible policy with CO-20, expiring on 12/1/ 20XX. [Article 0]

The premium for policy #03 - 01 was $0. [Article 11]

The LP-3 paid the $0 premium for policy #03 - 01 per its check #0, dated 12/31/20XX.
ORG deposited this payment on 1/15/20XX.

[ORG policy #03 - 01 written for year 20XxX is illustrated within Exhibit 22.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 53

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
| 20XX
Facts 20XX
13-B. Premium Revenue from Direct-Written Policies

Policy # 03 - 09 Insuring CO-3
ORG direct policy #03 - 09 written for year 20XX was substantially similar to its
predecessors written for years 20XX-20XX. ORG’s policy #03 - 09 provided
employment practices liability insurance coverage and supplemented general liability /
no deductible insurance coverage provided by CO-21, having a
$0 liability limit that expired on July 1, 20XX.

The “Renewable Certificate” section of policy # XX-03-09 contained this information:

Insured:
CO-3
Address
City, State Zip Code
Phone number

Policy Period:
For insured events occurring on or after January 1 20XX, for which claims are
made and reported between 12:01 AM of January 1 20XX and 12:01 AM of
January 1 20XX.

Type of Coverage:
Employment practices liability insurance.
Premium:
Negotiated annual single premium $ 0
Endorsement annual single premium 0 $0
Limits of Liability Maximum Expense:
Per single insured event $ 0
Aggregate maximum for all events $ 0
Deductible:
Single event maximum amount $ 0.00
Annual maximum deductible $ 0.00
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 54

Articles within the “Renewal Application” section of policy #03- 09 disclosed that -

CO-3’s business operations were devoted 0% towards owning/operating retail
petroleum facilities located primarily in State, and 0% devoted towards real
estate speculation/development in State. [Articles 4 and 5]
CO-3 had general liability coverage under a $0 million liability limit / non-
deductible policy with Law Firm-3, expiring on 7/1/ 20XX. [Article 0]
The premium for policy #03 - 09 was $0. [Article 11]

CO-3 paid the $0 premium for policy #03 - 09 per its check #0, dated 12/31/20XX. ORG
deposited this payment on 1/15/20XX.

[ORG policy #03 - 09 written for year 20XX is illustrated within Exhibit 23.]

Policy #13 - 32 Insuring the CO-6
ORG’s policy # 13 - 32 insuring the CO-6 provided
claims made — commercial excess general liability coverage. The policy supplemented
general liability / no-deductible insurance coverage provided by Travelers Indemnity
Company, having a $0 liability limit that expired on 12/1/ 20XX.

The “Declarations” section of policy #13 - 32 contained this information:
Insured:

CO-6

c/o Address

City, State Zip code

Phone number

Policy Period:
For insured events occurring on or after January 1 20XX, for which claims are
made and reported between 12:01 AM of January 1 20XX and 12:01 AM of
January 1 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 55

Type of Coverage:
Claims made — Commercial Excess General Liability, as described in the
Coverage Agreement.

Coverage Agreement
The Coverage Agreement States:
“In consideration of premium received, ORG agrees to indemnify the scheduled
insured listed below in section A for any amounts (other than premiums) required
to be paid for occurrences after the effective date of this certificate, but only for
Commercial Excess Liability (Umbrella) amounts that are in excess of the
underlying coverage of $0. This excess indemnification shall not exceed the
limits as Stated in section A for the scheduled insured and is subject to the same
terms and conditions as the underlying Commercial Excess Liability (Umbrella)
policy issued to the respective insured by of
State — Policy Number #99 - 02. This indemnification does not constitute “Other
Insurance; Other Indemnification” under said underlying Commercial Excess
Liability (Umbrella) Policy. If the insured has other policies in force that also
apply in excess of the underlying Commercial Excess Liability (Umbrella) policy
coverage of $0, this policy will apply on a pro rata basis based on the total
amount of coverage available for all applicable policies in excess of the
underlying policy of $0.”

Policy Limit (inclusive of defense expenses):
$0 Each Occurrence
$0 Aggregate Limit

Section “A” of policy #13 - 32 contained this information:
Scheduled Insured:
CO-6
$0 Each Occurrence
$0 Aggregate Limit

Retroactive Date:
1/1/XX

Annual Policy Premium:
CO-6 $0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 56

Articles within the “Application” section of policy #13 - 32 disclosed that -

The CO-6’s business operations were devoted 0% towards owning/operating retail
petroleum facilities located primarily in State, and 0% devoted towards real estate
speculation/development in State. [Article 6]
The CO-6 had general liability coverage under a $0 million liability limit / non- .
deductible policy with Travelers Indemnity Company, expiring on 12/1/ 20XX. [Article
8]

The CO-6 paid the $0 premium for policy #13 - 32 per its check #0, dated 12/31/20XX.
ORG deposited this payment on 1/15/20XX.

[ORG policy #13 - 32 written for year 20XxX is illustrated within Exhibit 24.]

Policy 13 - 31 Insuring the LP-10
ORG’s policy #13 - 31 insuring the LP-10 provided
claims made — commercial excess general liability coverage. The policy supplemented
general liability / no-deductible insurance coverage provided by Travelers Indemnity
Company, having a $0 liability limit that expired on 12/1/ 20XX.

The “Declarations” section of policy # 13 - 31 contained this information:

Insured:
LP-10
c/o Address
City, State Zip code
Phone number

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 57

Policy Period:
For insured events occurring on or after January 1 20XX, for which claims are
made and reported between 12:01 AM of January 1 20XX and 12:01 AM of
January 1 20XX.

Type of Coverage:
Claims made — Commercial Excess General Liability, as described in the
Coverage Agreement.

Coverage Agreement
The Coverage Agreement States:
“In consideration of premium received, ORG agrees to indemnify the scheduled
insured listed below in section A for any amounts (other than premiums) required
to be paid for occurrences after the effective date of this certificate, but only for
Commercial Excess Liability (Umbrella) amounts that are in excess of the
underlying coverage of $0. This excess indemnification shall not exceed the
limits as Stated in section A for the scheduled insured and is subject to the same
terms and conditions as the underlying Commercial Excess Liability (Umbrella)
policy issued to the respective insured by of
State — Policy Number # 99 - 02. This indemnification does not constitute “Other
Insurance; Other Indemnification” under said underlying Commercial Excess
Liability (Umbrella) Policy. If the insured has other policies in force that also
apply in excess of the underlying Commercial Excess Liability (Umbrella) policy
coverage of $0, this policy will apply on a pro rata basis based on the total
amount of coverage available for all applicable policies in excess of the
underlying policy of $0.”

Policy Limit (inclusive of defense expenses):
$0 Each Occurrence
$0 Aggregate Limit

Section “A” of policy #13 - 31 contained this information:

Scheduled Insured:
LP-10
$0 Each Occurrence
$0 Aggregate Limit

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 58

Retroactive Date:

1/1/XX
Annual Policy Premium:
LP-10 $0

Articles within the “Application” section of policy #13 - 31 disclosed that -

The LP-10’s business operations were devoted 0% towards owning/operating retail
petroleum facilities located primarily in State, and 0% devoted towards real estate
speculation/development in State. [Article 6]

The LP-10 had general liability coverage under a $0 million liability limit / non-

deductible policy with Travelers Indemnity Company, expiring on 12/1/ 20XX. [Article
8]

The LP-10 paid the $0 premium for policy # XX-13-031 per its check #0, dated
12/31/20XX. ORG deposited this payment on 1/15/20XX.

[ORG policy #13 - 31 written for year 20XX is illustrated within Exhibit 25.]

Policy 13 - 33 Insuring the CO-4
ORG’s policy #13 - 33 insuring the CO-4 provided
claims made — commercial excess general liability coverage. The policy supplemented
general liability / no-deductible insurance coverage provided by Travelers Indemnity
Company, having a $0 liability limit that expired on 12/1/ 20XX.

The “Declarations” section of policy #13 - 33 contained this information:

Insured:
CO-4
c/o Address
City, State Zip code
Phone number

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 59

Policy Period:
For insured events occurring on or after January 1 20XX, for which claims are
made and reported between 12:01 AM of January 1 20XX and 12:01 AM of
January 1 20XX.

Type of Coverage:
Claims made — Commercial Excess General Liability, as described in the
Coverage Agreement.

Coverage Agreement
The Coverage Agreement States:
“In consideration of premium received, ORG agrees to indemnify the scheduled
insured listed below in section A for any amounts (other than premiums) required
to be paid for occurrences after the effective date of this certificate, but only for
Commercial Excess Liability (Umbrella) amounts that are in excess of the
underlying coverage of $0. This excess indemnification shall not exceed the
limits as Stated in section A for the scheduled insured and is subject to the same
terms and conditions as the underlying Commercial Excess Liability (Umbrella)
policy issued to the respective insured by of
— Policy Number #99 - 02. This indemnification does not constitute “Other
Insurance; Other Indemnification” under said underlying Commercial Excess
Liability (Umbrella) Policy. If the insured has other policies in force that also
apply in excess of the underlying Commercial Excess Liability (Umbrella) policy
coverage of $0, this policy will apply on a pro rata basis based on the total
amount of coverage available for all applicable policies in excess of the
underlying policy of $0.”

Policy Limit (inclusive of defense expenses):
$0 Each Occurrence
$0 Aggregate Limit

Section “A” of policy #13 - 33 contained this information:

Scheduled Insured:
CO-4
$0 Each Occurrence
$0 Aggregate Limit

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 60

Retroactive Date:

1/1/XX
Annual Policy Premium:
CO-4 $0

Articles within the “Application” section of policy #13 - 33 disclosed that -

& The CO-4’'s business operations were devoted 0% towards owning/operating retail
petroleum facilities located primarily in State, and 0% devoted towards real estate
speculation/development in State. [Article 6]

& The CO-4 had general liability coverage under a $0 million liability limit / non-

deductible policy with , expiring on 12/1/ 20XX. [Article
8]

The CO-4 paid the $0 premium for policy #13 - 33 per its check #0, dated 12/31/20XX.
ORG deposited this payment on 1/15/20XX.

[ORG policy #13 - 33 written for year 20XX is illustrated within Exhibit 26.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 61

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer

ORG (“ ”)

13-B. Premium Revenu

Facts
e from Direct-Written Policies

20XX
20XX
20XX

Year/Period Ended

Summary of Year 20XX Direct Written Policies

The table here summarizes policy information supporting the $0 reported as direct
written insurance premiums for year 20XX.

Year 20XX
Limits of External
ORG Type of Policy Coverage | Policy Liability / Primary
insured Coverage Premium | Period Payment Maximum _ | Deductible | Insurer
/ Policy # Expense
check #0,
dated
12/31/1XX,
paid in $0 per Law Firm-3 /
amount of | single $0 single $1M liability
Between $0 to ORG, | insured event limit
CO-3 Policy 12:01 am. | and event/$0 | maximum /$0
03 - 09 1/1/20XX deposited aggregate | amount/ deductible
Employment and 12:01 in bank maximum $0 annual 107/1/20XX
Practices a.m. account on | for all maximum policy
Liability $0 | 1/4/20XX 1/15/20XX__| events deductible | expiration
check #0,
dated
12/31/1XX,
paid in $0 per
amount of | single $0 single
Between $0 to ORG, | insured event CO-20 / $0M
12:01 a.m. | and event / $0 maximum liability limit /
1/1/20XX deposited aggregate | amount/ $0 deductible
and 12:01 in bank maximum $0 annual /12/1/20XX
LP-3 Policy | Administrative a.m. account on | for all maximum policy
03 - 01 action $0 | 1/1/20XX 1/15/20XX_ | events deductible {| expiration

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 62

Form 886A

Department of the Treasury - Interna! Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer

Year/Period Ended

ORG (“ ”) 20XX
20XX
Facts 20XX
13-B. Premium Revenue from Direct-Written Policies
Year 20XX
Limits of External
ORG Type of Policy Coverage | Policy Liability / Primary
Insured Coverage Premium | Period Payment Maximum | Deductible |. Insurer
! Policy # Expense
CO-6 Policy | Commercial $0 | Between check #0, $0M each Not given Travelers
13 - 32 excess general 12:01 a.m. | dated occurrence | in policy Indemnity
liability 1/1/20XX 12/311XX, /$3M Co. of State /
and 12:01 paid in aggregate no deductible
a.m. amount of | limit /$0M
1/1120XX $0 to ORG, umbrella
and coverage /
deposited 12/1/20XX
in bank policy
account on expiration
1/15/20XX
LP-10 Policy | Commercial $0 | Between check #0, $0M each Not given Travelers
13 -31 excess general 12:01 a.m. | dated occurrence | in policy Indemnity
liability 1/1/20XX 12/31/1XX, /$0M Co. of State /
and 12:01 paid in aggregate no deductible
a.m. amount of | limit /$0M
1/1/20XX $0 to ORG, umbrella
and coverage /
deposited 12/1/20XX
in bank policy
account on expiration
1/15/20XX
CO-4 Policy | Commercial $0 | Between check #0, $0M each Not given Travelers
13-33 excess general 12:01 a.m. | dated occurrence | in policy Indemnity
liability 1/1/20XX 12/31/XX, /$0M Co. of State /
and 12:01 paid in aggregate no deductible
a.m. amount of | limit /$5M
1/1/20XX $20 to umbrella
ORG, and coverage /
deposited 12/1/20XX
in bank policy
account on expiration
1/15/20XX

Total Premiums Reported
within Form 990 / Year 20XX

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 63

Risk Not Actuarially Supported for Year 20XX
Policies #03 - 01, #03 - 09, #13 - 31, #13 - 32, and #13 - 33

Note 4, “Reserve for Policy Losses and Related Expenses’, (at Page 9) of ORG audited
financials for year 20XX reports that ORG’s reserve for insurance loss is based upon
estimated costs:

“Policies written and assumed provide for coverage on a claims-made

basis. Therefore, the reserve for policy losses and related expenses

consist primarily of the estimated cost of losses, defense and expenses

associated with claims reported on a case by case basis which are

unsettled at year end. In relation to premiums assumed, losses and loss

expenses paid are recorded when advised by the ceding insurance

company. Outstanding losses comprise estimates of the amount of

reported losses and loss expenses in respect of policies written, and

amounts advised by the ceding insurance company.

Management believes that the reserve for policy losses and loss related
expenses will be adequate to cover the ultimate net cost of losses incurred
to balance sheet date. However, because of the length of time required
for the ultimate liability of losses and loss expenses to be determined, the
net amounts that will ultimately be paid to settle any liability may vary
significantly from the amount provided for in the balance sheet.”

The reserve for policy losses and loss-related expenses reported in ORG’s audited
financials was reported in the amount of $0 as an incurred claim and experience refund
of ORG’s Form 990 filed for year 20XX. This $0 amount was allocated within ORG’s
general ledger between the two direct insureds for which policies were written in year
20XX — LP-3 ($0) and CO-3 ($0); and was reported as an Other Liability described as
“IBNR Reserve’ within Part IV — Line 65 of ORG’s Form 990 filed for 20XX-20XX.

Item #14 of IDR 1 (years 20XX-20XX) requested documentation supporting computation
of the $0 reported as Other Liabilities / IBNR Reserve within Part IV — Line 65 of
Form 990 / years 20XX-20XX. ORG’s response, dated 7/20/20XX, explained that
supporting documentation for the $0 reserve reported could not be located:

“This item was based upon the recommendation of the Company’s

insurance consultants. The Company has not been able to locate

the supporting documentation.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 64

Reiterated here is ORG’s response to Item #4E of IDR 1 (years 20XX-20XX), which
requested an actuarial analysis supporting computation of premium charges, risk
transfer, and risk distribution for policies in effect during the 12-month periods ended
December 31, 20XX-20XX. ORG’s response, dated 7/20/20XX, explained that actuarial
analysis was unnecessary for direct-written policies:

“The directly written policies were of risks well known to the company and

no actuarial analysis was necessary. CO-23 advises that its retrocession

arrangement was never subjected to actuarial analysis and that it had no

reason to do so.”

[Emphasis added to above underlined areas.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 65

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX-12
EIN 20XX-12
Facts 20XX-12
13-C. Assumed Reinsurance Premiums

ORG premiums from assumed/reinsurance contracts were reported as -

ro
&
oe

Other Revenue of $0 within Part | / Line 11 for year 20XX
Program Service Revenue of $0 within Part | / Line 2 for year 20XX
Program Service Revenue of $0 within Part | / Line 2 for year 20XX

Assumed Reinsurance Activity Reported in Audited Financials

Note 1, General Information’, (at Page 5) to ORG audited financials for year 20XX,
reported ORG (the “Company”) as -

Accepting third-party business through recognized credit life/disability
reinsurance companies (CO-23 or “CO-23”).

Reinsuring a 0% pro-rata portion of group certificates of disability insurance
assumed by CO-23.

“The primary purpose of the Company is to provide access to non-
traditional insurance coverage of risks that businesses are commonly
faced with but to which limited or no insurance coverage is currently
available. The Company will accept third party business through
recognized credit life/disability reinsurance companies. The Company
presently insures the various business activities of Director-1 and Director-
4, who are directors, and their affiliated companies.

In 20XX, the Company entered into an agreement with CO-23 to provide
reinsurance coverage of accident and medical expenses business. The
Company has agreed to reinsure a pro-rata portion, 1.00%, of group
certificates of disability insurance assumed by CO-23. The Company has
also agreed to be liable for a pro-rata share, 0%, of all incurred claims
related to the policies noted above. All of the premiums assumed in 20XX

relate to this agreement with CO-23.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 66

Note 1, “General Information”, (Page 7) to ORG audited financial Statements for year
20XX, reported ORG’s assumed reinsurance agreement with CO-23 continuing within

that year:

“During 20XX, the Company entered into an agreement with CO-23 (‘CO-
23’) to provide reinsurance coverage of certain business assumed by CO-

The Company has agreed to reinsure a pro-rata portion, between 0%
and 0% of special risks accident medical insurance assumed by CO-23.
The Company has also agreed to be liable for a pro-rata share. Between
0% and 0%, of all incurred claims related to the policies noted above. All
premiums assumed for the years ended 31 December 20XX and 20XX
relate to this agreement.”

Note 1, “Organization”, (at Page 6) to ORG audited financials for year 20XX, reported
ORG having assumed reinsurance agreements during that year with CO-23 and
another reinsurer, referred to as CO-24:

“During 20XX, the Company entered into an agreement with CO-23 (“CO-
23) to provide reinsurance coverage of certain business assumed by CO-

The Company has agreed to reinsure a pro-rata portion in the current
year of 0%, of special risks relating to accident and medical insurance
assumed by CO-23. The Company has also agreed to be liable for a pro-
rata share, 0%, of all incurred claims related to the policies above. In
20XX, the Company entered into another agreement to provide
reinsurance coverage with CO-24 (“CO-24”). The same terms and
conditions relating to CO-23 apply to CO-24 and the Company has agreed
to reinsure and assume liability for a pro-rata share of 0%.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 67

Agreement with CO-23 (“CO-23”)

Key provisions within the Agreement between ORG and CO-23 were identified as:

he
he

Type of insurance: identified as “special risks accident medical retrocession’”.
Parties Involved: Four parties starting with the policy writer (CO-25), the original
reinsured (CO-26), the retrocedant (CO-23 “CO-23”), and the reinsurer (ORG). A
fifth party is the intermediary (CO-27“ ”).

Premium: estimated original gross premium of $0 million for year 20XX; and
estimated original gross premium of $0 million for years 20XX-20XX.
Commission: Earned by CO-23 at a rate of 0% to cover all original acquisition
costs (including tax), administration expenses, Federal Excise Tax, commissions,
reinsurance costs and overriding commission.

Claims: Settlement by third party adjuster (TPA) as agreed by the original
reinsured (CO-26).

Period: A continuous contract in respect of policies attaching on or after 1° April
20XX (and attaching on/after 1* April 20XX for continued Agreement), subject to
six months notice of cancellation at anniversary date. The maximum original
policy period not to exceed 12 months

Policy Contractual Obligations: In the event of cancellation or non-

renewal of the Agreement, all declarations in force at the time shall

continue to their natural expiry. In the event that any policy is required by
statute, departmental regulation or court order to be continued in force,

ORG, as the Retrocessionaire, will continue to remain liable with respect

to each policy until CO-26, as the Original Reinsured may legally cancel,
non-renew, or otherwise eliminate liability under such policies.

Class/Business Solicited: Reinsurance business is derived from accident /
medical expenses covering students, members of youth sports teams, special
activities groups (e.g., coaches, cheerleaders, and connected groups), and
members of student athletic programs.

Accounts: Quarterly reporting and accounting that is received within 60 days
after the end of each calendar quarter. Such quarterly reporting relates to the
underlying documents from which assumed / reinsurance premiums and related
expenses were identified.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 68

CO-23 Quarterly Retrocession Computations
ORG’s assumed/reinsurance premiums reported for years 20XX-20XX came from
quarterly retrocession computations generated by CO-23 for the 2m 3 and 4"
quarters of these years. Each of CO-23’s quarterly computations indicate that it is a
“special risks accident medical retrocession” and identify CO-23 as the “Retrocedant”
and ORG as the “Retrocessionaire”.

Revenue and deductions within CO-23’s quarterly retrocession computations
consist of —

Retroceded Premiums: Reported as Premiums Subject to Reinsurance within
Part VII — Line 03c of Form 990, and are recorded within G/L account #0 /
Premiums Subj. to Reinsurance.

«" ¥ Quarters of Year 20XX = $0 Retroceded Premiums
=" Y Quarters of Year 20XX = $0 Retroceded Premiums
« ¥ Quarters of Year 20XX = $0 Retroceded Premiums

he % Insurance Commission and Claims: CO-23 deducted a 0% Insurance

commission and claims before retrolnsurance premiums to ORG. The 0%
Insurance commission and the claims are reported within Part Il — Line 43 of
Form 990. The 0% Insurance commission is recorded within G/L account #0 /
Insurance Commission. Claims are recorded within G/L account #0 / Incurred
Claims.

= ¥ Quarters of Year 20XX = $0 Insurance commission + $0 claims

" Y Quarters of Year 20XX = $0 Insurance commission + $0 claims

= ¥ Quarters of Year 20XX = $0 Insurance commission + $0 claims

Net Due Retrocessionaire: The difference resulting after the 0% Insurance
commissions and the claims were deducted from the retroceded premiums.

» Quarters of Year 20XX = $0 Net Due Retrocessionaire

" Quarters of Year 20XX = $0 Net Due Retrocessionaire

*» ¥ Quarters of Year 20XX = $0 Net Due Retrocessionaire

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 69

Experience Refund Due to Retrocedant: Deducted by CO-23 as the

difference between 0% of the retroceded premiums and the Net Due
Retrocessionaire.

% Quarters of Year 20XX = $0 Experience Refund Due

Retrocedant

= 2 Quarters of Year 20XX = $0 Experience Refund Due
Retrocedant

=" 2 Quarters of Year 20XX = $0 Experience Refund Due
Retrocedant

Cash Due Retrocessionaire: Cash paid over to ORG by CO-23, computed as

the difference between the Retroceded Premiums, less deductions of the 0%
Insurance Commissions, Claims, and the Experience Refund Due
Retrocedant.

" 2 Quarters of Year 20XX = $0 Cash Due Retrocessionaire
» % Quarters of Year 20XX = - $0 Cash Due Retrocessionaire
" ~ Quarters of Year 20XX = $ 0 Cash Due Retrocessionaire

These revenue and deduction items are summarized here for years 20XX-20XX:

Revenue/Expense Item 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Ali Qtrs

Premiums Retroceded
[Reported as Premiums
Subject to Reinsurance
within Part VII — Line 03c
of Form 990, and are
recorded within G/L
account #4 / Premiums
Subj. to Reinsurance.]

Year 20XX 0.00 0.00 0.00 0.00 0.00

Year 20XX
1st Quarter amount is for
period of Jan 1 - Oct 31,

20XX. 0.00 0.00 0.00 0.00 0.00
Year 20XX 0.00 0.00 0.00 0.00 0.00
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 70

Revenue/Expense Item 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr All Qtrs

Less:

Ceding Commission
[0% of the Premiums

Subject to Reinsurance.
Reported within Part Il-
Line 43 of Form 990 and

recorded within G/L

account #5 / Ceding

Commission.]
Year 20XX 0.00 -0.00 -0.00 -0.00 -0.00
Year 20XX -0.00 -0.00 -0.00 -0.00 -0.00

4st Quarter amount is for
period of Jan 1 - Oct 31,
20XX.

Year 20XX 0.00 -0.00 -0.00 -0.00 -0.00

Incurred Claims
[Reported within Part Il —
Line 43 of Form 990 and
recorded within G/L
account #5 / Incurred
Claims.]

Year 20XX 0.00 -0.00 -0.00 -0.00 -0.00

Year 20XX -0.00 -0.00 -0.00 -0.00 -0.00
1st Quarter amount is for
period of Jan 1 - Oct 31,
20XX.

Year 20XX 0.00 0.00 -0.00 -0.00 -0.00

Equals:

Net Due
Retrocessionaire
[Premiums Retroceded -
Insurance Commission -
Incurred Claims]

Year 20XX 0.00 0.00 0.00 0.00 0.00

Year 20XX -0.00 0.00 0.00 0.00 0.00
1st Quarter amount is for
period of Jan 1 - Oct 31,

20XX.
Year 20XX 0.00 0.00 0.00 0.00 0.00
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 71

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer
ORG (“ ”)
EIN

Facts

13-C. Assumed Reinsurance Premiums

Year/Period Ended
20XX-12
20XX-12
20XX-12

Revenue/Expense Item

1st Qtr

2nd Qtr

3rd Qtr

4th Qtr

All Qtrs

Less:

Experience Refund Due
Retrocedant

[Reported within Part Il —
Line 43 of Form 990 and
recorded within G/L
account #6 / Exp. Ref. Due
Insurance Comp. during
years 20XX-20XX, and
recorded within G/L
account #7 / Management
Fee Expense during year
20XX]

Year 20XX

0.00

-0

-0 -0

Year 20XX
1st Quarter amount is for
period of Jan 1 - Oct 31,
20XX.

0.00

-0

-0 -0

Year 20XX

0.00

Equals:

Cash Due
Retrocessionaire
[Calculated as 0% of the
retroceded premiums, or 0
x retroceded premiums.
Recorded within G/L
account 8 / Reinsurance
Balance Rec.]

Year 20XX

0.00

0.00 0.00

Year 20XX
1st Quarter amount is for
period of Jan 1 - Oct 31,
20XX.

0.00

0.00 0.00

Year 20XX

0.00

0.00 0.00

[CO-23 quarterly retrocession computations for years 20XX-20XX are illustrated within
Exhibits 27A, 27B, and 27C.]

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 72

On November 30, 20XX, ORG’s directors passed a resolution whereby financing under
a promissory note would be extended to the LP-1 under the following terms:

Maximum loan amount of $0

Interest rate of prime plus 0%
Effective date of 12/21/20XX
Loan origination fee of $0
Interest payments to be made monthly.
All accrued interest and principle due in full on on the 10" anniversary of the
date of the note (12/21/20XX).

i i i od

ORG accrued the $0 loan origination fee by a year-end 20XX general journal entry
described as “Accrue Line of Credit origination fee to LP-1”.

On February 27, 20XX, the LP-1 paid the $0 loan origination fee to ORG
through its check #0 of same date. ORG deposited this check into its bank account on
February 28, 20XX.

[ORG’s resolution passed on November 30, 20XX, approving line-of-credit financing to
the LP-1; a copy of the LP-1's check #0, dated 2/27/20XX, payable in the amount of $
to ORG for the accrued loan origination fee; and a copy of ORG’s bank statement for
the month of February 20XX, showing the deposit of the LP-1’s check #0 on 2/28/20XX
are illustrated within Exhibit 28.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 73

$0 Million Line of Credit with LP-1 Reported in Audited Financials
Note 3, “Finance Receivables”, (at Page 9) to the audited financial Statements for year
20XX identified the LP-1 as one of five limited partnership borrowers related by a
common shareholder to which ORG issued letters of credit during 20XX. The maturity
date and outstanding balance owed at year-end 20XX for the LP-1’s $0 million line of
credit and lines of credit effected with the other borrowers were also reported:

During 20XX, the Company issued letters of credit to various limited
partnerships, all of which are related to the Company by way of a common
shareholder. Borrowings on these letters of credit are unsecured and bear
interest on the unpaid principal balance at a floating rate equal to the U. S.
prime rate plus one percent (0%), or 0% at 31 December 20XX. Only
interest is payable annually; the principal balance plus any unpaid interest
is due at maturity of the borrowings. The borrowings against these letters
may be repaid, in full or in part, at any time up to the maturity date without

penalty.
Total Facility Maturity Outstanding
Balance at
20XX

LP-1 $0 21 December $0
20XX

LP-4 $0} 31 December $0
20XX

LP-13 $0| 31 December $0
20XX

LP-14 $0 31 December $0
20XX

LP-6 $0 | 31 December $0
20XX

Interest Receivable $0

ORG reported Other Investment Income within Part | - Line 7 / years 20XX-20XX of -

$0 (year 20XX)
$0 (year 20XX)

These amounts consist primarily of interest revenue from line of credit loans and
investment activity involving businesses described in ORG audited financials as
“associates”, “affiliates”, and “subsidiaries”. ORG’s response, dated 11/0/20XX, to
Items #22A through #22K of IDR 2 (years 20XX-20XX) explained that most of these

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 74

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX
13-E. Other Investment Income 20XX

businesses were formed for either making a specific real property loan or to make a
specific real estate investment:

IDR 2- ORG Affiliate / Associate/ Explanation Per ORG Response, dated 11/0/05
Item # and/or Borrower
22A CO-28 (EIN) This company was formed to make an investment
in a specific real property loan.
22B CO-19 (EIN) This company was formed to make an investment
in a specific real property loan
22C CO-29 (EIN) This company was formed to make an investment
in a specific real property ioan
22D CO-30 (EIN) This company was formed to make an investment
in a specific real property loan
22E CO-31 (EIN) This company was formed to make an investment
in a specific real property loan
22F CO-32 (EIN) This company was formed to make an investment
in a specific real property loan
22G CO-33 (EIN) This is a private equity fund.
22H CO-34 (EIN) This company was formed to make a specific
secured real estate investment.
22| CO-18 (EIN) This company was formed to make a specific real
estate investment
22J CO-35 (EIN) This company was formed to make a specific real
estate investment
22K CO-36 (EIN) This company was formed to make a specific real
estate investment

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 75

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX
13-E. Other Investment Income 20XX

Note 6, “Investment in Associates” (at Page 12) of ORG’s audited financials for year
20XX, reported ORG holding a 0% investment in three LLC “associates” at year-end
20XX, from which ORG received $0 of recognized gains and losses that was part of the
$0 of Other Income reported for year 20XX:

“The company has the flowing investments in associates:

Shareholder
Country Ownership
CO-28 0%
CO-29 0%
CO-32 0%

The Company’s share of post-acquisition total recognized gains and
losses in the above associates for the year ended 31 December 20XX
was $0 (20XX: $nil).”

Note 6, “Investment in Affiliates” (at Pages 0-11) of ORG’s audited financials for the
period ended 12/31/20XX, described ORG’s investment relationship with most of the
above businesses as “affiliates” and “subsidiaries”:

“Investment in affiliates comprise different ownership rates in CO-28,

CO-19., CO-29, CO-30, LLC., CO-32, CO-31, CO-34, CO-36, CO-

And CO-35.

The Company has two subsidiaries as at December 31, 20XX which
are CO-19 and CO-18. The Company has not prepared separate
consolidated financial Statements.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 76

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of items | Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX
13-E. Other Investment Income 20XX

$0 Reported as Other Investment Income for Year 20XX
The $0 of Other Investment Income reported in Form 990 / year 20XX was identified
within two G/L accounts —

$0 posted to G/L #9 / Interest Income
$0 posted to G/L Account 10 / Misc. Income as an insignificant amount written off.

The $0 posted to G/L #9 / Interest Income consists of two categories of revenue —

$0 of monthly accruals of interest receivable on line of credit loan made to sole
shareholder, LP-1.
$0 of Schedule K-1 income from three LLCs

CO-32 ($0) + CO-29 ($0) + CO-28 ($0) = $0
[The $0 of Schedule K-1 income from the three LLCs posted to G/L #9 was reported in
Note 6, “Investment in Associates”, discussed above.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 77

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX
Facts 20XX
13-E. Other Investment Income 20XX

$0 Reported as Other Investment Income for Year 20XX

The $0 reported as Other Investment Income for year 20XX came primarily from
companies described within ORG’s audited financials as “investment in affiliates”, and
was traced to two G/L accounts:

$0 posted to G/L Account 11 / Income (Loss) from Affiliates. Postings to G/L
Account 48 identified these affiliates and/or subsidiaries as CO-30, CO-19, CO-31,
CO-35, CO-36, and CO-18.
$0 posted to account #4808 / Interest Income. Postings to account #9 primarily
involved businesses having real estate operations -

CO-37 ($0 interest income)
CO-29 ($0 write-back of investment + $0 interest income)
LP-1 ($0 interest from line of credit loan)
CO-33 (-$0 return of capital)
CO-32 ($0 interest income)
; , and ($0 interest income from
investment accounts)
CO-28 ($0 interest income)
CO-30 ($0 interest Income)
Two miscellaneous transactions — a debit, dated 9/30/20XX ($0) and a
credit, dated 0/27/XX ($0) = $0 net debit

$0 (CO-37) + $0 + $0 (CO-29) + 0 (LP-1) - $0 (CO-33) + $0 (CO-32) +
$0 (investment accounts with , ' ) + $0
(CO-28) + $0 (CO-30) - $0 (Misc.) = $0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 78

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
Facts 20XX

Expenses Reported for Years 20XX-20XX 20XX

ORG’s expenses reported in Form 990 are identified here by line item for years 20XX-
XX. A substantial increase in management fees occurred in year 20XX — $0 reported
for year 20XX from $0 reported for year 20XX — evidences a liquidation distribution, due
to ORG audited financials for year 20XX reporting a plan to liquidate on/before

12/31/20XX

Form 990, Part Il, Line # Year 20XX Year 20XX Year 20XX
$$$ % $$$ % $$$ %

32 - Legal Fees 0 0.00% 0| 0.00% 0| 0.00%

33 - Supplies 0 0.00% 0| 0.00% 0| 0.00%

35 - Postage & Shipping 0 0.00% 0| 0.00% 0| 0.00%

41 Interest 0 0.00% 0| 0.00% 0| 0.00%

43 License & Fee 0 0.00% 0| 0.00% 0| 0.00%

43 Management Fee &

Prof. Services 0 0.00% 0| 0.00% 0 | 0.00%

43 Insurance Expense 0 0.00% 0} 0.00% 0 | 0.00%

43 Property Tax 0 0.00% 0| 0.00% 0| 0.00%

43 Incurred Claims &

Experience Refunds 0 0.00% 0 | 0.00% 0| 0.00%

43 Insurance

Commission 0 0.00% 0 | 0.00% 0| 0.00%

43 Experience Refund

Due Insurance Company 0 0.00% 0| 0.00% 0 | 0.00%

43 Incurred Claims 0 0.00% 0| 0.00% 0| 0.00%

43 Other Professional

Services 0 0.00% 0! 0.00% 0}; 0.00%

44 - Total Functional

Expenses 0 00% 0 00% 0 00%

ORG items of expense discussed in further detail are —

[A] Legal Fees

[B] Interest

[C] | Management Fee

{[D] Property Tax

[E] Incurred Claims and Experience Refunds Due to the Insurance Company
[F] Insurance Commission

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 79

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-A. Legal Fees

Part Il, Line 32 of ORG’s Form 990 reported legal fees for years 20XX-20XX of —

$0 (year 20XX)
$0 (year 20XX)
$0 (year 20XX)

Supporting documentation discussed here discloses that these amounts were expended
primarily for purposes other than conducting insurance activities.

$0 of Legal Fees Reported for Year 20XX
Legal fees of $0 reported within Part Il-Line 32 of Form 990 / year 20XX were paid
to three firms:

Law Firm-1, PC $0

Advisory Firm-1 0

«* Advisory Firm-2 0 8 $0

Law Firm-1 PC and Advisory Firm-1 are affiliates. The address of Law Firm-1 is the
same as ORG’s address — Address, City, State Zip code.

ORG’s director, Director-1, was an employee of the Advisory Firm-2 during year 20XX,
and provided the Advisory Firm-2 with real estate advisory and management services.
The Advisory Firm-2 provided ORG with administrative services such as handling daily
invoices and bill payments. Director-1’s employment with the Advisory Firm-2, and the
common address -- Address, City, State — that the Advisory Firm-2 had with the
Companies economic group indicates that the Advisory Firm-2 rendered similar services
to other companies within the Companies economic group.

Documents supporting the $0 reported as legal fees disclosed that this amount relates
primarily to monthly fees, for which there is no indication of legal services rendered
directly to conduct insurance activities.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 80

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-A. Legal Fees

Law Firm-1 ($0)

$0 paid by ORG check #0, dated 3/14/20XX, to Law Firm-1, for four invoices
billed by Law Firm-1 / Advisory Firm-1

$0 paid by ORG check #0, dated 3/23/20XX, to Law Firm-1, for invoice #6,
dated 3/15/20XX, billed by Advisory Firm-1 (“Advisory Firm-1”). Advisory
Firm-1 invoice #6 billed ORG $0 for a “legal service fee for March, 20XX”, and
shows the $0 payment by ORG check #0 as received on 3/15/20XX.
$0 paid by ORG check #0, dated 4/27/20XX, to Law Firm-1, for invoice #7,
dated 4/16/20XX, billed by Advisory Firm-1 (“Advisory Firm-1”). Advisory
Firm-1 invoice #7 billed ORG $0 for a “legal service fee for April, 20XX”, and
shows the $0 payment by ORG check #0 as received on 3/26/20XX.

$0 (ck #0) + $0 (ck #0) + $0 (ck #0) =

Advisory Firm-1 ($20XX.00)

$0 paid by ORG check #0, dated 5/25/20XX, to Advisory Firm-1 LLC
(“Advisory Firm-1”), for invoice #8, dated 5/15/20XX, billed by Advisory Firm-
1. Advisory Firm-1 invoice #8 billed ORG $0 for a “legal service fee for May,
20XxX”, and shows the $0 payment by ORG check #0 as received on
5/2/20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 81

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-A. Legal Fees

Advisory Firm-2 ($0)

$0 allocated to legal expense from $0 paid by ORG check #0, dated
5/11/20XX, to the Advisory Firm-2 Inc. (“Advisory Firm-2”). ORG’s check #0
paid $0 for three invoices billed by the Advisory Firm-2, one of which was
invoice #1738, dated 5/1/20XX, billed to ORG in the amount of $0. The
Advisory Firm-2’s invoice #9 relates to a billing made by a legal firm named
Law Firm-3 (Law Firm-3), dated 2/20/20XX, to the Companies, in the amount
of $0 for attorney fees. The Law Firm-3 billing refers to an invoice #1, and
has a hand-written annotation that ORG’s portion of the $0 is $0.

$0 allocated to legal expense from $0 paid by ORG check #0, dated
7/0/20XX, to the Advisory Firm-2 Inc. (“Advisory Firm-2”), for invoice #10,
dated 6/30/20XX, due on 7/30/20XX, and billed in the amount of $0 for
“monthly activity” services rendered -- $0 (admin/general) + $0 (entitlement
properties). The $0 admin/general portion of the $0 billed was recorded as
legal expense.

$0 allocated to legal expense from $0 paid by ORG check #0, dated
8/0/20XX, to the Advisory Firm-2 Inc. (“Advisory Firm-2”), for invoice #11,
dated 7/31/20XX. The Advisory Firm-2’s invoice has a due date of
8/30/20XX, and is billed in the amount of $0 for “monthly activity” services
rendered -- $0 (admin/general business line) + $0 (entitlement properties
business line). The $0 admin/general portion of the $0 billed was recorded as
legal expense.

$0 paid by ORG check #0, dated 8/13/20XX, to the Advisory Firm-2 Inc. for
invoice #12, billed by Advisory Firm-1 LLC (“Advisory Firm-1”). Advisory
Firm-1 invoice #12 is dated 8/15/20XX, and billed $0 to ORG for “legal service
fee for August, 20XX”.

$0 paid by ORG check #0, dated 9/19/20XX, to the Advisory Firm-2 Inc.
(“Advisory Firm-2”). Payment was for Advisory Firm-2’s invoice, dated
8/31/20XX, billed in amount of $0 for “monthly activity” for “admin / general
business line”.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 82

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-A. Legal Fees

$0 paid by ORG check #0, dated 0/11/20XX, to the Advisory Firm-2 Inc.

(“Advisory Firm-2”). Payment was for Advisory Firm-2’s invoice #13, dated
9/30/20XX, billed in amount of $0 for “monthly activity” for “admin / general
business line’.

$0 allocated to legal expense from $0 paid by ORG check #0, dated
11/9/20XX, to the Advisory Firm-2 Inc. (“Advisory Firm-2”), for Advisory Firm-
2’s invoice #0. Advisory Firm-2’s invoice #14 is billed “monthly activity”
services relating to $0 (admin/general), $0 (investment properties), and $0
(entitlement properties). The $0 admin/general portion of the $0 billed was
recorded as legal expense.

$0 paid by ORG check #0, dated 12/17/20XX, to the Advisory Firm-2 Inc.
(“Advisory Firm-2”). Payment was for Advisory Firm-2’s invoice #0, dated
12/30/20XX, billed in amount of $0 for “monthly activity’ service relating to the
“admin / general business line”. Hand-written on the Advisory Firm-2’s
invoice #15 was, “The difference of $0 was a payment that was received by
mgmt company on behalf of ORG”. The $0 paid by ORG’s check #0, plus the
$0 stated to have been paid on behalf of ORG was recorded as $0 of legal
expense.

$0 (ck #0) + $0 (ck #0) + $0 (ck #0) + $0 (ck #0) +
$0 (ck #0) + $0 (ck #0) + $0 (ck #0) + $0 (ck #0) =

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 83

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-A. Legal Fees

$0 of Legal Fees Reported for Year 20XX

The $0 reported as legal fees for year 20XX consisted of monthly invoices billed to ORG
by Advisory Firm-1 LLC (Advisory Firm-1) for a monthly legal service fee of $0. The
only deviations from this $0 monthly amount were —

a $0 fee for third party insurance billed in January 20XX, and
a $0 user fee for an IRS determination ruling application billed in March 20XX

None of the Advisory Firm-1 invoices describe services rendered on behalf of insurance
operations, but rather are identified as a monthly legal service fee.

ORG recorded the $0 reported as legal fees within ORG G/L account #12 — Prof.
Services-Legal. Many of these postings relate to monthly activity for the Advisory Firm-
2.

In response to Item #18 of IDR 2 (years 20XX-20XX), ORG explained that, “In 20XX,
the Advisory Firm-2 was a management company that acted as agent for ORG and
others in collecting cash receipts and making cash expenditures.”

$0 of Legal Fees Reported for Year 20XX

The $0 of legal fees reported for year 20XX was paid to four firms. An insignificant
difference of $0 exists between totals of invoice documentation provided by ORG and
the $0 balance of G/L account #12 / Prof Services-Legal:

Advisory Firm-1 LLC $

& Law Firm-2

Law Firm-4

Law Firm-5

TOTAL $

SooO000

Total of postings to G/L Account #12 - Prof Services-Legal 0

Insignificant Difference $0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 84

Form 886A Department of the Treasury - Internal Revenue Service

Schedule No or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

14-A. Legal Fees

The $0 paid to Advisory Firm-1 (“Advisory Firm-1”) consisted primarily of $0 monthly
administration service charges, totaling to $0. The $0 balance relates to three invoices

billed in January — February, 20XX, summarized here.

Description

Amount

Ten monthly “administration services” charges @ $0 =

Invoice #20, dated 1/16/20XX

Legal service fee for January, 20XX

Fee paid to insurance manager relating to addition of

director

Invoice #21, dated 2/17/20XX

Legal service fee for monthly administration services

Invoice #22, dated 2/17/20XX

ongoing tax planning and implementation”

One-fourth of $0 billed to the Advisory Firm-2 for “20XX

Total for Advisory Firm-1

The $0 paid to Law Firm-2 was primarily for one-fifth of monthly invoices billed for

“insurance company review’.

Description

Amount

One-fifth of invoice #23, dated 1/0/20XX, billed in amount of $0 to
Director-1/Attention: Individual-2 for “insurance company review’.
$21,220.53 x 0% =

One-fifth of invoice #24, dated 2/0/20XX, billed in amount of $0 to

$0 x 0% =

Director-1/Attention: Individual-2, for “insurance company review’.

One-fifth of invoice #25, dated 4/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.
$0 x 0% =

One-fifth of invoice #26, dated 5/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.
$0 x 0% =

One-fifth of invoice #27, dated 6/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.
$0 x 0% =

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 85

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

ORG (“ ”) 20XX

20XX

Facts 20XX

14-A. Legal Fees
Description Amount

One-fifth of invoice #28, dated 7/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.

$0 x 0% = 0
One-fifth of invoice #28, dated 7/0/20XX, billed in amount of $0 to
Director-1 for “telephone call from Individual-2 re: sale of limited liability
company reporting requirements’.

$0 x 0% = 0

One-fifth of invoice #29, dated 8/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.

$0 x 0% = )
One-fifth of invoice #30, dated 9/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.

$0 x 0% = 0
One-fifth of invoice #31, dated 0/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.

$0 x 0% = 0
One-fifth of invoice #32, dated 12/0/20XX, billed in amount of $0 to
Director-1 for “insurance company review’.

$0 x 0% = 0
Total for Law Firm-2 0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 86

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts . 20XX
14-A. Legal Fees

The $0 paid to Law Firm-4 consists of three invoices. Two of these invoices relate to
real property described as “Property-4”, of which 0% of the billed amount was allocated
to ORG. The nature of services relating to the third invoice were unidentifiable due to
the November 20XX invoice being one-half of the balance forward from the previous
month. These three invoices are summarized here.

Description Amount
One-fourth of charges incurred during month of September, 20XX, for
services relating to “Acct. #13 — Property-4” per invoice dated
9/30/20XX 0
$0 x 0% =
One-fourth of charges incurred during month of August, 20XX, for
services relating to “Acct. #13 — Property-4” per invoice dated

8/31/20XX 0
$0 x 0% =
One-half of balance forward from month of October, 20XX, per invoice 0
dated 11/30/20XX
$0 x 0% =

Total for Law Firm-4 0

The $0 paid to Law Firm-5 was an allocation of $0 billed to an affiliate of the Companies
economic group (LP-8) for an analysis of property described as “Property-5”.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 87

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-B. Interest

Part Il, Line 41 of ORG’s Form 990 / Year 20XX reported interest expense of $0.
This amount was not interest but rather a fee that ORG paid to an LLC named |
. The fee was based upon 0% of ORG’s initial capital contribution
investment
of $0 that ORG made to its affiliate, CO-34.

ORG’s investment affiliation with the CO-34 was reported within Note 6, “Investment in
Affiliates”, (at Pages 0-11) of ORG audited financials for year 20XX:

“Investment in affiliates comprise different ownership rates in CO-

28, CO-19., CO-29, CO-30, LLC., CO-32, CO-31, CO-34, CO-36,

CO-18. And CO-35.

ORG’s investment in the CO-34 is supported within Exhibit A to the Operating
Agreement of the CO-34, where capital contributions and ownership interests of ORG
and five other Class A members are identified:

Class A Member Initial Capital Contribution % interest

0%
0%
0%
0%
0%
0%
00%

ORG
CO-7
CO-39
CO-40
CO-41
CO-42
Total Equity Ownership

OlO;O/O/O;O|oO

[The $0 fee reported as interest expense was computed as 0% of ORG’s $0 capital
contribution. (i.e., $0 x 0% = $0)] C

The 0% fee of $0 was for a real estate loan (the “CO-43 loan”) that CO-34 made in the
amount of $0 million to another LLC named CO-43. The CO-43 loan made by CO-34 is
consistent with the purposes for which the CO-34 was formed, Stated within Article 1.5
(“Purpose”) of the CO-34’s Operating Agreement:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 88

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or

Explanation of Items Exhibit |

Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

14-B. Interest

“This Company has been formed to engage in the financing,

acquisition, ownership, operation, management, repair,

replacement, leasing and sale of real property, including without
limitation acting as a manager or member of any limited liability
company directly or indirectly engaged in such activities, and may
engage in any activities that are related to the accomplishment of

such purpose or for any other lawful business or purpose.”

The CO-43 loan made by CO-34 is also consistent with ORG’s explanation as to why

the CO-34 was formed:

“This company was formed to make a specific secured real estate

investment.”

[Response to Item #22H of IDR 2 (years 20XX-20XX).]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 89

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) ~ 20XX
20XX
Facts 20XX

14-C. Management Fee

Part Il-Line 43 of ORG’s Form 990 reported management fees for years 20XX-20XX of -

$0 (year 20XX)
$0 (year 20XX)
$0 (year 20XX)

Supporting documentation discussed here discloses that these amounts were expended

primarily for purposes other than conducting insurance activities.

$0 of Management Fees Reported for Year 20XX
The $0 reported as management fees for year 20XX was recorded within two G/L

accounts:

$0 recorded in account #12 / Prof. Services
$0 recorded in account #7 / Mgmt. Fee Expense

Form 886-A (Rev. 4-68)

Page 90

Department of the Treasury - Internal Revenue Service

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-C. Management Fee

The $0 recorded in G/L account #12 / Prof. Services consists of two
expenditures -

$0 paid to the Advisory Firm-2 for ORG’s one-third allocated clean-up and
zoning costs relating to an area referred to as “Property-6”. The one-third
allocated costs for clean-up and zoning (i.e., $0 / 0 = $0) involve a real estate
developer named “Real Estate Developer”. [Advisory Firm-2’s invoice #1867
paid by ORG’s Ck# __, dated 7/10/20XX]
$0 paid for investment fees [$0 recorded on 1/1/20XX + $0 recorded on
4/30/20XX = $0 total]

The $0 recorded in G/L account #7 / Management Fee Expense was a property
management fee paid by wire transfer on 8/13/20XX, to the CO-2 for managing real
property described as Property-3.

[ORG’s correspondence, dated 12/10/20XX, identified ORG and its captive affiliates —
CO-7 and CO-5 — as owning an equal one-third interest in the Property-3 property
during year 20XX. ORG’s sale of its one-third interest in the Property-3 property is
discussed above with respect to the $0 net gain reported for year 20XX.]

The CO-2 was an affiliate of the Companies economic group, as supported by ORG’s
response to Items #9A and #9B of IDR 9, where ownership and control of the CO-2 was
explained to have been held one-third equally by three limited partnerships:

LP-1
LP-3
LP-2

Each of these limited partnerships owning/controlling the CO-2 was the sole
shareholder of a Territory captive. LP-1 was ORG’s sole shareholder. LP-3 was sole
shareholder of ORG’s captive affiliate, CO-7 LP-2 was sole shareholder of ORG’s
captive affiliate, CO-5

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 91

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-C. Management Fee

$0 of Management Fees Reported for Year 20XX
The $0 reported as management fees for year 20XX was paid to the CO-2, to manage
the Property-3 property.

Five wire transfer payments to the CO-2, recorded in G/L account

7 / Management Fee Expense, comprise the $0 reported as management

fees for year 20XX:

$0 (4/15/20XX)
$0 (5/16/20XX)
$0 (6/13/20XX)

& $0 (7/26/20XX)

$0 (8/27/20XX)

~$0+0+0+0+0=$0

$0 of Management Fees Reported for Year 20XX

The $0 reported as management fees for year 20XX is comprised of five
amounts:

20XX Management Fee paid to LP-1

CO-23 Insurance

CO-39 — CO-28 Loan

Stock Analysis Fee

o000°

ORG authorized the $0 and $0 portions of management fees reported
under board resolutions passed on 12/31/20XX and 12/31/20XX, whereby ORG
would pay its sole shareholder, the LP-1, a management fee equal to 0% of net
assets for “asset management services provided during the year’. Both resolutions
were signed by ORG’s 3-member board —

* Director-1

Director-4 (wife of Director-1)

Manager-2 (son of Director-1 and Director-4)

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 92

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-C. Management Fee

Item #14 of IDR 2 (years 20XX-20XX) requested “contracts and agreements
supporting services rendered by the LP-1 relating to ORG’s board resolutions
for which management fees were to be paid to the LP-1 at the rate of 0% of
net assets. ORG’s response, dated 11/0/20XX, provided only copies of

the board resolutions passed at year-end 20XX-20XX, and did not explain what
specific asset management services were rendered in connection with the $0
and $0 fees expensed.

ORG recorded the $0 and $0 portions of management fees reported in its
general ledger as pay-downs of the line-of-credit loan owed by the LP-1 on
1/1/20XX ($0) and on 12/31/20XX ($0). The reductions in the line-of-credit
loan owed by the LP-1 were consistent with ORG’s liquidation plans reported within
Note 16, “Subsequent Events’, (at Page 15) of ORG audited financials for year 20XX,
stating:

“There are plans in place to liquidate the Company as at December

31, 20XX. Liquidating distributions will be made periodically until

the end of next year.”

The remaining portions of the $0 reported as management fees were -

$0 deducted as an “experience refund due retrocedant” by ORG’s assumed
reinsurance provider, CO-23, under the agreement that ORG had with CO-23.
[Computation of the $0 experience refund due retrocedant is discussed above
with respect to ORG’s revenue from assumed reinsurance premiums. ]}
$0 paid as a monthly management fee to a LLC named CO-38. The fee was
computed on the first day of each calendar month as one-twelfth (1/12) of two
percent (0%) of the then capital balance held by ORG in its subsidiary, CO-
19. [ORG’s response to Item #22B of IDR 2 (years 20XX-20XX) explained
that the CO-19 was formed to make an investment in a specific real property
loan.]
$0 stock analysis fee with

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 93

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-D. Property Taxes

Part Il-Line 43 of ORG’s Form 990 reported property tax expense for years 20XX-20XX
of:

$0 (year 20XX)
$0 (year 20XX)
$0 (year 20XX)

Supporting documentation discussed here discloses that these amounts were expended
primarily for purposes other than conducting insurance activities.

$0 of Property Taxes Reported for Year 20XX

The $0 reported as property taxes for year 20XX was comprised of four amounts -

$0 paid to the Advisory Firm-2 for one-half of year 20XX property taxes in the
amount of $0 that were owed to County County, State with respect to ORG's
receipt of a one-third interest in the Property-2 property during year 20XX.
Paid by ORG check #0, dated 5/11/20XX, for Advisory Firm-2 invoice #35.
[Computed as $0 total property tax owed x % owed for year 20XX x 1/3
property interest = $0] .

& $0 paid to the Advisory Firm-2 for year 20XX property taxes in the amount of
$0 that were owed to County County, STATE with respect to ORG’s receipt of
a one-third interest in the Property-1 property during year 20XX. Paid by
ORG check #0, dated 5/11/20XX, for Advisory Firm-2 invoice #36.
[Computed as $0 x 1/3 property interest = $0]

$0 paid to the Advisory Firm-2 for “investment properties”. Paid by ORG
check #0, dated 11/09/20XX, for Advisory Firm-2 invoice #37.
$0 paid to the Advisory Firm-2 for “entitlement properties”. Paid by ORG
check #0, dated 11/09/20XX, for Advisory Firm-2 invoice #37.

$0 + $0 + $0 + $0 = $0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 94

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-D. Property Taxes

$0 of Property Taxes Reported for Year 20XX
The $0 reported as property taxes for year 20XX was traced to transactions posted to
G/L accounts #15 / Property Tax and #6121 / Taxes, Licenses & Fees.

Two postings to G/L account #15 / Property Tax — described as “activity in Advisory
Firm-2” -- comprise $0 of the $0 property taxes reported.

G/L Account 15 — Property Tax

Amount
Date Reference | Journal Trans Description Debit Credit
Advisory Firm-2 — October 20XX
0/31/XX 0 PJ activity in Advisory Firm-2 0
The Advisory Firm-2 — April 20XX
4/30/XX 0 PJ activity in Advisory Firm-2 0
TOTAL 0

The remaining $0 portion of the $0 reported consists primarily of postings to G/L
account 6121 / Taxes, Licenses & Fees relating to Fidelity advisor fees.

G/L Account 6121 —Taxes, Licenses & Fees

Amount
Date Reference | Journal Trans Description Debit Credit
Advisory Firm-2 — January 20XX
1/31/XX 0 PJ activity in Advisory Firm-2 0
1/3 1/XX GJ 1 Gen J Advisor fees in Fidelity 0
4/30/XX GJ 1 Gen J Advisor fees in Fidelity 0
7/311XX GJ 3 Gen J Advisor fees in Fidelity 0
9/30/XX GJ #2 Gen J Write off per Rob 0/30/XX 0
0/31/XX GJ #1 Gen J Advisor fees for Fidelity 0
TOTAL 0
¥ $0 +0=$0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 95

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-D. Property Taxes

$0 of Property Taxes Reported for Year 20XX
The $0 reported as property taxes for year 20XX was traced to transactions posted to
G/L accounts #15 / Property Tax and #6121 / Taxes, Licenses & Fees.

A posting to G/L account #15 / Property Tax — described as “November 20XX monthly
activity in CO-37-property tax -- comprises $ of the $0 reported. The CO-37 was
identified as ORG’s agent under ORG’s response to Item #12 of IDR 2 (years 20XX-

20XX).
G/L Account 7009 — Property Tax
Amount
Date Reference | Journal Trans Description Debit Credit
CO-37 — November 20XX monthly
activity in CO-37 — property tax
11/30/XX 0 PJ expense 0
TOTAL 0

The remaining $0 portion of the $0 reported consists primarily of postings to G/L

account 16 / Taxes, Licenses & Fees relating to Fidelity advisor fees. [$0 — 0 = $0]

G/L Account 6121 —Taxes, Licenses & Fees |
Amount |
Date Reference Journal Trans Description Debit Credit |
1/311XX GJ #5 Gen J Advisor Fees for Fidelity 0
The Advisory Firm-2 — WAC/WRC Group —
monthly activity in Advisory Firm-2
WAC/WRC for ORG for March — Taxes,
3/31/XX 0 SJ Licenses, &Fees 0
4/30/XX GJ #8 Gen J Fidelity Advisor Fees 0
0/31/XX GJ 0/XX - 1 Gen J Advisor fees paid on Fidelity Account 0
CO-37 November 20XX monthly activity in
11/30/XX 0 PJ CO-37 — Taxes, Licenses & Fees 0
CO-37, LLC ~ Monthly activity in CO-37 for
12/31/XX 0 SJ ORG — Taxes Licenses & Fees 0
Adjustment to for Taxes Fees & Licenses
; originally coded to Capital Loss — Fidelity
12/31/XX_| Capital Gain Gen J Stock Sept 0
TOTAL 0 0

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 96

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit .
Name of Taxpayer | Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

14-E. Incurred Claims and Experience Refunds
Due to the Ceding Company

Part Il-Line 43 of ORG’s Form 990 reported incurred claims and experience refunds for
years 20XX-20XX of:

$0 incurred claims and $0 experience refund due to Insurance company (year 20XX)
«+ $0 incurred claims and experience refund due to Insurance company (year 20XX)

$0 incurred claims (year 20XX)

These amounts reported primarily relate to claims and experience refunds generated by
CO-23’s quarterly retrocession computations that are discussed here and also above
with respect to ORG’s revenue from assumed reinsurance premiums.

Of the $0 reported for year 20XX, an amount of $0 relates to a claim paid to the LP-3 for
events occurring prior to the commencement of coverage on its policy in effect during
year 20XX.

$0 of Incurred Claims Reported for Year 20XX

The $0 of incurred claims reported relate to three transactions from the CO-23 quarterly
retrocession computations recorded within G/L account #17 / Incurred Claims.

Date Reference Trans Description Amount
Retrocession for the Quarter Ending
31 Dec XX GJ 1 December 31 20XX 0
Retrocession for the Quarter Ending
31 Dec XX GJ5 September 30 20XX 0
Retrocession for the Quarter Ending
31 Dec XX GJ6 June 30 20XX 0
0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 97

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts ‘ 20XX

14-E. Incurred Claims and Experience Refunds
Due to the Ceding Company

$0 of Experience Refund Due to Insurance Company Reported for Year 20XX
The $0 amount reported as an experience refund due to Insurance company was
computed by the retrocedant, CO-23, as the difference between 0% of retroceded
premiums and what was net due to ORG as the retrocessionaire.

[ORG’s revenue from assumed reinsurance premiums, discussed above, identified the
$0 of incurred claims and the $0 experience refund due to Insurance company as
deductions to compute net premiums retroceded by CO-23 to ORG, the
retrocessionaire, during year 20XX.]

$0 of Incurred Claims and Experience Refunds Reported for Year 20XX
$0 Claim Paid to LP-3 for Events Prior to Policy Coverage Period

ORG paid $0 of the $0 reported as incurred claims and experience refunds
as a claim for its policy # 01 - 01 written for year 20XX. The payment
conflicts with the coverage period specified under policy # 01 - 01 because it
was for a claim filed by the LP-3 for one-third of a $0 amount billed for
drilling services rendered prior to the policy’s effective coverage date of January 1,
20XX.

The policy coverage period for ORG policy #01 - 01, in verbatim, is Stated as:
“Only for Insured Events occurring on or after January 1, 20XX, for which
claims are made and reported between 12:01 a.m. January 1, 20XX, and
12:01 a.m., January 1, 20XX.”

ORG supported its $0 payment with a “claim form” containing these fields of
information:

Policy Type: Administrative Action

Policy No.: 01-01

Claim Amount $0
Policy Period: January 1, 20XX — December 31, 20XX

The Claim Form had a field entitled, “Statement Regarding Nature of Claim’, for which
an explanation was typed in as:
“EPA clean-up expenses (survey, site assessments, drilling) on properties
located at Property-7 — City, State”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 98

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

14-E. Incurred Claims and Experience Refunds
Due to the Ceding Company

This explanation described services within an invoice billed by a business named CO-
44, Inc. (trade name is “CO-44”) that ORG provided to support the $0 claim amount.

The Claim Form had a field entitled, “Date of Insured Event”, for which was typed in:
“See Attached Invoice”. The attached invoice #40, dated 11/0/20XX, was billed by CO-
44 in the amount of $0 to a person having name/address of:

Address
City, State Zip code

CO-44’s invoice #40 disclosed that the $0 was billed for two units of “sub-contractor —
outside” services rendered on October 24, 20XX and on October 27, 20XX:

0/24/XX Sub-Contractor — Outside 1 Unit $0
0/27/XX Sub-Contractor — Outside 4 Unit 0
Outside Services Totals $0

CO-44’s invoice #40 referred to a project #10 that was described as “implement SCWP
& Initial Remedial Actions”, and specifically described the services rendered as:
“Drilling services provided through October 31, 20XX, for the property
located at Property-7, City, State.”

Hand-written on CO-44’s invoice #40 was a directive that one-third of the invoice
amount be billed to the LP-3:
“41/3 of invoice total is billed to LP-3
0/3=0"

In addition to CO-44’s services being rendered and billed prior to the effective date of
coverage for policy # 01 - 01, their being rendered in State were inconsistent with the
LP-3’s business operations described within Articles 4 and 5 of the Application and
Certificate of Insurance section of policy # 01 - 01 as being conducted in State and
State.:

0% devoted towards owning/operating retail petroleum facilities primarily in

State and State

0% engaged in real estate speculation and development in State; and

0% devoted in private and public equity investments.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 99

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

14-E. Incurred Claims and Experience Refunds
Due to the Ceding Company

[ORG’s claim form relating to the $0 claims payment; CO-44’s Invoice

41, dated November 0, 20XX, billed in the amount of $0; and ORG check

0, dated 9/16/20XX, paying the $0 claim to the LP-3 under policy

01 - 01 are illustrated within Exhibit 29.]

Expenses from CO-23 Quarterly Retrocession Computations
Two expense amounts from the CO-23 quarterly retrocession computations were part of
the $0 reported as incurred claims and experience refunds -

$0 of incurred claims from CO-23's quarterly retrocession computation
reports, recorded in two amounts — $0 + $0 -- within ORG’s G/L account #42 /
Incurred Claims:

G/L Account 650 — Incurred Claims
Date Reference Journal Trans Description Amount
Retrocession for the quarter
12/3 1/XX GJ #5 Gen J ending December 31, 20XX 0
Retrocession for the quarter
12/31/XX GJ #6 Gen J ending December 31, 20XX 0
Total of Postings 0

$0 of experience refund due to Insurance company was computed by the
retrocedant, CO-23, as the difference between 0% of retroceded premiums
and what was net due to ORG as the retrocessionaire. Two journal postings
to G/L 6520 / Experience Refund Due Insurance Commission support the
CO-23 quarterly reports as their source.

G/L Account 6520 - Exp. Ref. Due Insurance Com.
Date Reference Journal Trans Description Amount
Retrocession for the quarter
12/3 1/XX GJ #5 Gen J ending December 31, 20XX -0
Retrocession for the quarter
12/311XX GJ #6 Gen J ending December 31, 20XX 0
Balance @ 12/31/20XX 0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 100

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer . Year/Period Ended
ORG (* ”) 20XX
20XX
Facts 20XX

14-E. Incurred Claims and Experience Refunds
Due to the Ceding Company

IBNR Claims / Reserve
An amount of $0 described as “IBNR Claims” was part of the $0 reported as incurred
claims and experience refunds. This $0 amount was traced to two G/L accounts --

* Debit to expense account #10 / IBNR Claims

Credit to liabilities account #20 / IBNR Reserves

The transaction description of these postings (below) indicates a relationship to the
direct written insureds covered during year 20XX, whereby the $0 reported in ORG's Ss
Form 990 was allocated as $0 for CO-3 and $0 for the LP-3.

The $0 posted to account #2020 / IBNR reserves was reported as an Other Liability |
described as “IBNR Reserve’ within Part IV-Line 65 of Form 990 / Years 20XX-20XX.

G/L Accounts #10 — IBNR Claims and #20 / IBNR Reserve
Trans Amount

Total of G/L Postings 0.00 0.00

Section III-D, Technical / Claims and Accounting Techniques, within ORG’s Business
Plan identified “IBNR” as not expected to be a significant portion of ORG’s claim
reserves:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 101

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

14-E. Incurred Claims and Experience Refunds
Due to the Ceding Company

“The frequency of claims from CC is expected to be low and so all claims
will be dealt with on an adhoc basis in consultation with the Company’s
insurance manager. Where advised by the insurance manager or
otherwise determined, the services of third party loss adjusters and other
specialists may be used. The Company intends to adopt a conservative

approach to reserving for outstanding claims but IBNR is not expected to
form a significant proportion of those reserves.”

Item #14 of IDR 1 (years 20XX-20XX) requested documentation supporting the $0
IBNR claim. ORG’s response, dated 7/20/20XX, explained that the IBNR claim was
recommended by insurance consultants, but supporting documentation for it could not
be located:

“This item was based upon the recommendation of the Company's

insurance consultants. The Company has not been able to locate

the supporting documentation.”

$0 of Incurred Claims Reported for Year 20XX

The $0 of incurred claims reported was identified from the 3 ($0) and 4" ($0) quarters
of CO-23’'s quarterly retrocession computations for year 20XX. ORG recorded the $0
sum from these two quarters within G/L account #17 / Incurred Claims at year-end
20XxX:

Date Reference Trans Description Amount
31 Dec XX Insurance Pre | 20XX Reinsurance CO-23 0

ORG’s revenue from assumed reinsurance premiums, discussed above, identified the
$0 of incurred claims as a deduction to compute net premiums retroceded by CO-23 to
ORG, the retrocessionaire, during year 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 102

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
14-F. Ceding Commissions

Part Il-Line 43 of ORG’s Form 990 reported Insurance commissions for years 20XX-
20XX of:

« $0 (year 20XX)

These amounts were computed from CO-23’s quarterly retrocession computations,
whereby CO-23 deducted a 0% Insurance commission before retrolnsurance premiums
to ORG. ORG’s revenue from assumed reinsurance premiums, discussed above,
identified these Insurance commission amounts as deductions to compute premiums
retroceded from CO-23 to ORG.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 103

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Assets Reported for Years 20XX-20XX

Year-end asset balances reported by ORG in Forms 990 filed for years 20XX-20XX are

identified here.

Form 990, Part IV, Year 20XX Year 20XX Year 20XX
Line # $$$ % $$$ % $$$ %

45 -Non-Interest

Bearing Cash 0 0% 0 0%

46 - Savings & Temp.

Cash Inv. 0 0% 0 0% 0 0%
47 - Accounts

Receivable 0 0% 0 0% 0 0%
51 - Other Notes/Loans

Rec. 0 0 0% 0 0%
54 - Securities

Investments 0 0% 0 0% 0 0%
55 - Investments -

Land/Building/Equip. 0 0 0 0%
56 - Other Investments 0 0% 0 0% 0 0%
57 -

Land/Building/Equipment 0 0 0%

58 - Other Assets (Line

of Credit) 0 0% 0 0%

59 - Total Assets 0 | 00.0000% 0 {| 00.0000% 0; 00.0000%

Asset balance line items discussed in further detail are —

[A] Accounts Receivable

[B] Other Assets (Line of Credit)
[C] Other Notes / Loans Receivable
[D] Securities Investments

[E] Other Investments

[F] Land / Building / Equipment

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 104

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
15-A. Accounts Receivable

Part IV-Line 47 of ORG’s Form 990 reported accounts receivable year-end balances of

$0 (year 20XX)
$0 (year 20XX)
$0 (year 20XX)

Transactions posted to G/L accounts receivable accounts directly relating to insurance

activity are identified here as -

$0 year-end 20XX balance for cash due to ORG as retrocessionaire from CO-23
within account #18 / Reinsurance Balance Receivable
$Owithin the $0year-end 20XX balance of account #0 / Accounts Receivable, relating
to direct premiums for policies written in year 20XX
$Oyear-end 20XX balance for cash due to ORG as retrocessionaire from CO-23
within account #18 / Reinsurance Balance Receivable. [Includes $0 balance from
year 20XX.]

The remaining accounts receivable transactions involve activity primarily for real estate
investment purposes with businesses within the Companies economic group.

$0 of Accounts Receivable Reported for Year 20XX
The $0year-end 20XX balance reported as accounts receivable consisted
of two amounts relating to the line of credit loan with ORG’s sole shareholder, the LP-1.
Both amounts had no direct connection with insurance activity -

$0 origination fee for a $0 million line of credit effected on 12/21/20XX with
ORG’s sole shareholder, the LP-1, at an annual rate of prime + 0%.

$0.accrued interest for the line of credit with the LP-1

[A insignificant difference of $0 exists between the $0 reported and the sum of
the two components identified above. ]

Postings within ORG’s general ledger in year 20XX disclose that the $0 line of credit fee
was paid on or about 2/28/20XX. A $0 debit to G/L account #005 / Cash — Bank,
indicating that $0 was received as payment from the LP-1, was offset by a credit
removing the $0 beginning-of-year balance from G/L account #23 — AR LP-1.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 105

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or

Exhibit

Name of Taxpayer

Year/Period Ended

ORG (“ ”) 20XX
20XX
Facts 20XX
15-A. Accounts Receivable
Amount
Account ID Date Reference | Journal | Trans Description Debit Credit
005 / Cash
— Bank 2/28/XX 076 CRJ LP-1 0
1213/AR LP-1 — line of credit
LP-1 2/28/XX 076 CRJ origination fees 0
Total of G/L Account Postings 0 0

$0 of Accounts Receivable Reported for Year 20XX

The $0 year-end 20XX balance reported as accounts receivable consisted
of balances within four G/L accounts. The $0 within G/L account #18 / Reinsurance

Balance Receivable was the only receivable balance directly connected with insurance

activity.

Year-End

G/L Account Number / Name Balance
0 / Accounts Receivable 0
19 / Accrued Receivables 0
20 / AR LP-1 0
18 / Reinsurance Balance Rec. 0
TOTAL 0

$0 Balance Within G/L account #0 / Accounts Receivable

The $0 balance within G/L account #19 / Accounts Receivable was owed by the
Advisory Firm-2, a management company that functioned as an agent on behalf of ORG
to collect interest payments from four LLCs having real property loans in which ORG

had made investments in. The $0 of accrued interest for which the Advisory Firm-2 was

to collect on behalf of ORG was identified in ORG’s invoice #52 billed to the Advisory
Firm-2, for “monthly activity in Advisory Firm-2” in regard to four LLCs involved in real

estate loans:

Form 886-A (Rev. 4-68)

Page 106

Department of the Treasury - Internal Revenue Service

DESCRIPTION EXTENSION
1/3 of monthly activity in Advisory Firm-2 for CO-28
1/3 of monthly activity in Advisory Firm-2 for CO-29 °
1/3 of monthly activity in Advisory Firm-2 for CO-32 °
% of monthly activity in Advisory Firm-2 for CO-46 °
Total Invoice Amount 0

The Advisory Firm-2’s role as collection agent on behalf of ORG and the accrued
interest amounts owed by the LLCs within ORG invoice #112 was explained in ORG’s
response to Item #18 of IDR 2 (years 20XX-20XX):

“In 20XX, the Advisory Firm-2 was a management company that acted _as
agent for ORG and others in collecting cash receipts and making cash
expenditures. Invoice #112 dated 12/31/XX billed by Advisory Firm-2 for
payments due to ORG received by the Advisory Firm-2 (a copy is at Tab
9). These are interest payments on the loans that ORG had invested in.”

ORG's response to Item #22 of IDR 2 (years 20XX-20XX) explained that the CO-28 the
CO-29, and the CO-32 were “formed to make an investment in a specific real property
loan.”

During year 20XX, ORG held a 0% ownership in the CO-19, CO-29, and CO-32s, which
was reported in Note 6, “Investment in Associates”, (at Page 12) of ORG audited
financials for that year 20XX:

“The company has the following investments in associates.

Shareholdings
Country Ownership
CO-19 0%
CO-29 0%
CO-32 0%
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 107

$0 Balance Within G/L account # 20 / Accrued Receivables
The $0 balance within account #20 / Accrued Receivables relates to the line of credit
owed by ORG’s sole shareholder, the LP-1 —

$0 transferred from another receivable account — account #21 / Interest Receivable
[$0 + $0 = $0]
Although the amounts transferred were described as a “pay-down of line-of-
credit interest”, no pay-down actually occurred because cash and/or other
assets were not received as a payment.
$0 net adjustment to accrued interest income. [$0 — 0 = $0] This adjustment was
posted to G/L accounts #22 / Line of Credit-LP-1 and #9 / Interest Income.

G/L postings supporting the $0 balance within account #20 / Accrued Receivables are
identified here.

Amount
Account ID Date Reference | Journal | Trans Description Debit Credit
Account 20
— Accrued Paydown on line-of-
Receivables 12/31/XX GJ #4 Gen J_ | credit interest 0
Account 21
— Interest Paydown on line-of-
Receivable 12/31/XX GJ #4 Gen J_ | credit interest 0
Adjust interest
Account 21 receivable on line of
— Interest credit for formula
Receivable 12/31/XX GJ #4 Gen J_ | error 0
Account Overpayment on line
| 22 — Line of of credit interest due
Credit — LP- to formula
1 12/31/XX GJ #4 Gen J_ | calculation error 0
Adjust interest
Account 9 — receivable on line of
Interest credit for formula
Income 12/31/XX GJ #4 Gen J | error 0
Total of G/L Account Postings 0 0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 108

$0 Balance Within G/L account #23 / AR LP-1
The $0 balance within account #23 / AR LP-1 was for an investment made in two
increments -- $0 on 2/28/20XX and $0 on 3/31/20XX — in a business named “CO-45”
involving real estate referred to as “Property-8”. The $0 was transferred into account

23 / AR LP-1 under a year-end 20XX adjusting entry.

$0 Balance Within G/L account #18 / Reinsurance Balance Receivable
The $0 balance within account #18 / Reinsurance Balance Receivable was computed
from the CO-23 quarterly reports as cash due to ORG as “retrocessionaire” from CO-23.
This $0 reinsurance receivable amount due to ORG is discussed above within respect
to ORG’s revenue from assumed reinsurance premiums.

G/L Account 1240 — Reinsurance Balance Rec.

Amount
Date Reference | Journal Trans Description Debit Credit
Retrocession for the quarter ending
12/31/XX GJ #5 Gen J December 31, 20XX 0
Retrocession for the quarter ending
12/311XX GJ #6 Gen J December 31, 20XX 0
Total 0

$0 of Accounts Receivable Reported for Year 20XX
The $0 reported as AR for year 20XX is comprised of balances within six
G/L accounts identified here. Receivable amounts within these account balances
directly connected with insurance activity were —

$0 within the $0 balance of account #8 / Accounts Receivable, relating to direct
premiums for policies written in year 20XX
$0 cash due to ORG as retrocessionaire from CO-23 within account #18 /
Reinsurance Balance Receivable.

Year-End
G/L Account Number / Name Balance

0 / Accounts Receivable

24 / LP-8

25 / AR CO-48 - 3 - Net

26 / AR CO-37 Work

27 |! AR CO-49

18 / Reinsurance Balance Rec.

TOTAL

S/OlOl/oO;o;o|o

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 109

$0 Balance Within G/L Account #19 / Accounts Receivable
The $0 balance within account #19 / Accounts Receivable was supported by ORG
invoices billed in year 20XX.

All but one of these invoices were billed to ORG’s five insureds for direct policies written
in year 20XX, having aggregate premiums of $0 [¥ $0 (LP-3) + $0 (CO-3 Company) +
$ (CO-4) + $0 CO-6 + $0 (LP-10) = $]

The remaining $0 portion of the $0 balance for G/L account was
billed to the CO-37 for five items described as being for “monthly
activity in CO-37 for ORG” —

$0 rental revenue
$0 interest income
-$0 prof. services legal
-$0 taxes, licenses & fees
-$0 prof. svc. engineering

[> $0 (rental revenue) + $0 (interest income) - $0 (prof.
services legal) - $0 (taxes, licenses & fees) - $0 (prof. svc.
engineering) = $0]

ORG’s response to Item #19 of IDR 2 (years 20XX-20XX) explained that the CO-37
was invoiced because it was a management company that acted as an agent on
behalf of ORG to collect cash and make payments for ORG’s investments.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 110

Form 886A

Department of the Treasury - Internal Revenue Service

Schedule No or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
15-A. Accounts Receivable
ORG Invoice # / Date Inv. Amt. Invoice Description Explanation
ORG Invoice #130, Policy #03 - 01 for period
dated 1/15/20XX billed Administrative Actions of Jan 1 - Jan 1, 20XX-
to CO-17 0 | Insurance Policy 20XX 20XX
ORG Invoice #131, Policy #02 - 09 for period
dated 1/15/20XxX billed Administrative Actions of Jan 1 - Jan 1, 20XX-
to CO-3 0 | Insurance Policy 20XX 20XX
ORG Invoice #132, Policy # 13 - 33 for
dated 1/15/20XX billed 20XX Premium Payment for | period of Jan 1 - Jan 1,
to CO-4 0 | Liability Insurance 20XX-20XX
ORG Invoice #133, Policy #13 - 32 for period
dated 1/15/20XX billed 20XX Premium Payment for | of Jan 1 - Jan 1, 20XX-
to CO-6 0 | Liability insurance 20XX
ORG Invoice #134, Policy #13 - 31 for period
dated 1/15/20XX billed 20XX Premium Payment for | of Jan 1 - Jan 1, 20XX-
to CO-47 0 | Liability Insurance 20XX
Monthly Activity in CO-37
for ORG re: Rental
Revenue, Interest Income,
ORG Invoice #130, Legal,
dated 12/31/20XX billed Taxes/Licenses/Fees, and No Policies Relating to
to CO-37 0 | Engineering Invoice

$0 Balance Within G/L Account #24 / LP-8

The $0 balance within account E24 / LP-8 resulted from $0 paid to the LP-8 on or about
7/31/20XX. This funds transfer is identified here by postings to ORG G/L accounts
resulting in the creation of a $0 receivable against the LP-8 and an outflow of $0 cash.

G/L Account #24 / LP-8

Amount
_Date Reference | Journal Trans Description Debit Credit
07/31/XX GJ# 7/XX-1 | Gen J Transfer to LP-8 0.00
G/L Account #005 / Cash - Bank
Amount
Date Reference | Journal Trans Description Debit Credit
07/31/XX GJ# 7/XX-1 | Gen J Transfer to LP-8 0.00
Total of Postings 0.00 0.00

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 111

[The LP-8 (EIN) was identified above in the discussion concerning ORG’s $0 net gain
reported in year 20XX as one of three purchasers who bought a 0% portion of ORG’s
one-third interest in the Property-2 property that ORG sold on 7/30/20XX.]

A/R Balances for CO-48, CO-37, and CO-49
Year-end 20XX balances for the G/L accounts receivable accounts identified here
resulted from amounts transferred from the line of credit loan with ORG’s sole
shareholder, the LP-1. The amounts transferred were an assignment of accounts
receivable in the amount of $0 that was effected on 1/1/20XX between the LP-1, as
assignor, and ORG, as assignee.

The assignment of A/R converted $0 owed by the LP-1 under its line of credit with ORG
— charging an average interest rate of 0% during year 20XX, with principal and interest
payable on 12/31/20XxX -- to unsecured, interest-free loans that ORG had with three
companies — CO-48, CO-37, and CO-49

1214/ AR CO-48 - 3- Net

1216 / AR CO-37 Work

1218 /ARCO-49

ooo

$0 Balance Within G/L Account #18 / Reinsurance Balance Receivable
The $0 year-end 20XX balance within account #18 / Reinsurance Balance Rec.
is cash due to ORG as retrocessionaire, obtained from CO-23's quarterly
computations. The $0 amount consists of $0 due from year 20XX, plus
$0 due for year 20XX. ORG’s revenue from assumed reinsurance premiums,
discussed above, identified the $0 and $0 amounts as “cash due
retrocessionaire”.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 112

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
15-B. Other Assets (Line of Credit)

Part IV-Line 58 of ORG’s Form 990 reported other assets (line of credit) year-end

balances of —

$0 (year 20XX)
$0 (year 20XX)

These balances reported involved activity primarily for real estate investment purposes
with businesses within the Companies economic group.

$0 of Other Assets (Line of Credit) Reported for Year 20XX

Part IV-Line 58 of ORG’s Form 990 reported a year-end 20XX balance of $0 as Other
Assets (Line of Credit). This amount is comprised of two types of line of credit loans
issued within the Companies economic group —

$0 loaned to ORG’s sole shareholder, the LP-1, under a $0 million line of
credit issued on 12/21/20XX, at the rate of prime + 0% per annum. Principal
and accrued interest are due and payable on the 0" anniversary of the date of
the note (12/21/20XxX).

[Accounts receivable reported for year 20XX, discussed above, identified $0
reported as A/R, consisting of an accrued line of credit origination fee ($0)
and accrued interest ($0). Both A/R amounts relate to the $0 year-end 20XX
balance for the line of credit owed by the LP-1.]

« $0 loaned under $0 lines of credit issued separately with four limited
partnerships on 12/31/20XX, to provide investment capital for real estate

loan(s):
LP-4
CO-8
LP-14
LP-6

$0
$0
$0
$0 $0

The $0 lines of credit issued with the four limited partnerships were at a rate of
prime + 0% per annum. Principal and accrued interest were due and payable
on the 0" anniversary of the date of the note (12/31/20Xx).

$0 (LP-1) + $0 (four LPs) = $0 line of credit reported

Form 886-A (Rev. 4-68)

Page 113

Department of the Treasury - Internal Revenue Service

The five lines of credit issued by ORG during year 20XX were reported in Note 3,
“Finance Receivables”, (at Page 9) of ORG’s audited financials for that year:

During 20XX, the Company issued letters of credit to various limited
partnerships, all of which are related to the Company by way of a common
shareholder. Borrowings on these letters of credit are unsecured and bear
interest on the unpaid principal balance at a floating rate equal to the
prime rate plus zero percent (0%), or 0% at 31 December 20XX. Only
interest is payable annually; the principal balance plus any unpaid interest
is due at maturity of the borrowings. The borrowings against these letters
may be repaid, in full or in part, at any time up to the maturity date without

penalty.
Total Facility Maturity Outstanding

Balance at 20XX

LP-1 $0 21 December 20XX $0
LP-4 $0 31 December 20XX 0
LP-13 $0 31 December 20XX 0
LP-14 $0 31 December 20XX 0
LP-6 $0 31 December 20XX 0
Interest Receivable 0
$0

ORG explained that the four LPs were issued their respective $0 lines of credit so that
they could invest in three LLCs - CO-19, CO-29, and CO-32—who applied the
investment capital proceeds to make other loans:

“LP-4, LP-13, LP-5 and LP-6 (sic) borrowed money from ORG to be able

to invest in CO-28, CO-29 and CO-32 loans. For reference purposes

ORG used both names on the account description. The owners of LP-4,

CO-8 and LP-6 were employees of affiliated companies and were

considered creditable borrowers by ORG Business Insurance and allowed

them to participate in these loans.”

[ORG response to Item #20A of IDR 2 (years 20XX-20XX)]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 114

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

15-B. Other Assets (Line of Credit)

The four LPs invested the $0 aggregate of their lines of credit borrowed in year 20XX
only in the CO-28 LLC. Year-end 20XX balances of four G/L note receivable accounts
support the respective amounts borrowed by each LP, with the names of each G/L
account indicating that the borrowed proceeds were invested in the CO-19.

G/L Account Number / Name Year-End Balance

1551 / NR LP-4 - CO-28

1552 / NR LP-13 - CO-28

1553 / NR LP-5 - CO-28

1554 / NR LP-6 - CO-28

TOTAL

o/O;O;/O|o

ORG’s response to Item #22A of IDR 2 (years 20XX-20XX) explained that the CO-28

was formed to make an investment in a specific real property loan.

The four LPs having $0 lines of credit were managed by Director-1 family members
through control over their general partners and by ownership held in their limited
partnership equity:

Manager-2

Son of Director-1
Manager of CO-10 (General Partner of LP-4)
Holder of 0% limited partner equity in LP-4

Manager-1

Nephew of Director-1
Manager of CO-8 (General Partner of CO-8)
Holder of 0% limited partner equity in CO-8

Manager-3

Husband of Director-1’s niece

Manager of CO-11 (General Partner of LP-5 LP)
Holder of 0% limited partner equity in LP-5 LP

Manager-4

Husband of Director-1’s niece.
Manager of CO-12 (General Partner of LP-6)
Holder of 0% limited partner equity in LP-6

Form 886-A (Rev. 4-68)

Page 115

Department of the Treasury - Internal Revenue Service

LOC Borrower General Partner (0% Limited Partner (0% Interest)
Interest)
CO-10 Manager 2 & Wife (SSN)
LP-4 (EIN)
CO-8 Manager 1 & Wife
LP-13 (EIN)
CO-11 Manager-3 & Wife
LP-5 (EIN)
CO-12 Manager-4 & Wife
LP-6 (EIN)

$0 of Other Assets (Line of Credit) Reported for Year 20XX
The $0 reported as Other Assets (Line of Credit) within Part IV — Line 58 of
Form 990 was for the line of credit issued with ORG’s sole shareholder, the LP-1,
and was the year-end 20XX balance of G/L account #22 / Line of Credit — LP-1.
Activity during year 20XX within G/L account #22 / Line of Credit — LP-1 disclosed
that the LP-1 made no payments on its loan and that an additional $0 was
loaned to the LP-1.

Note 3, “Finance Receivables”, (at Page 11) of ORG’s audited financials for year 20XX
reported the LP-1 owing $0 on its line of credit borrowed. The $0 reported in the
audited financials was reported in ORG’s Form 990 within lines 47 and 58 of Part IV —

$0 reported as an account receivable within Part IV-Line 47
Discussed above as an accounts receivable owed by the LP-1 for $0
borrowed to invest in a business named “CO-45” involving real estate referred
to as “Property-8”, and recorded in G/L account #23 / AR LP-1.
$0 reported as Other Assets (Line of Credit) within Part IV — Line 58
Year-end 20XX balance of G/L account #22 / Line of Credit — LP-1.

Note 3, “Finance Receivables” of ORG audited financials for year 20XX reported the
increase in line of credit borrowings by the LP-1 and four LPs from 20XX to 20XX, and
described the lines of credit as being issued to limited partnerships related to ORG
through a common shareholder:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 116

“During 20XX and 20XX, the Company issued letters of credit to various
limited partnerships, all of which are related to the Company by way of a
common shareholder. Borrowings on these letters of credit are unsecured
and bear interest on the unpaid principal balance at a floating rate equal to
the U.S. prime rate plus one percent (0%), or 0% at 31 December 20XX
(20XX: 0%). Only interest is payable annually; the full principal balance
plus any unpaid interest is due at maturity of the borrowings. The
borrowings against these letters of credit may be repaid, in full or in part,
at any time up to the maturity date without penalty.

Outstanding Outstanding
Total Facility Maturity Balance at 20XX | Balance at 20XX
tP-4
$0 | 21 December 20XX $0 $0
LP-4
$0 | 31 December 20XX 0 0
LP-13
$0 | 31 December 20XX 0) 0)
LP-5
$0 | 31 December 20XX 0 0
LP-6
$0 | 31 December 20XX 0 )
Interest
Receivable 0 0
$0 $0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 117

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
15-C. Other Notes / Loans Receivable

Part IV-Line 51 of ORG’s Form 990 reported other notes/loan receivable year-end
balances of —

$0 (year 20XX)

$0 (year 20XX)

These balances reported involved activity primarily for real estate investment purposes
with businesses within the Companies economic group.

$0 of Other Notes / Loan Receivable Reported for Year 20XX

The $0 reported as Other Notes / Loans Receivable was for $0 lines of credit borrowed
by four LPs that invested their loan proceeds into three LLCs to make real estate loans.
The $0 reported consists of $0 borrowed during year 20XX that was unpaid in year
20XX, and additional borrowings during year 20XX to invest in two other LLCs — CO-29
($0) and CO-32 ($0).

Twelve G/L note receivable accounts identified here support the respective amounts
borrowed by each LP during 20XX-20XX. The name of each G/L note receivable

account indicates that proceeds borrowed by the four LPs during years 20XX-20XX
were invested in the CO-19, the CO-29, and the CO-32.

Supporting that the three LLCs applied the loan proceeds invested in them by the four
LPs towards making real estate loans is ORG’s response to Item #22 of IDR 2 (years
20XX-20XX), which explained that the CO-19, the CO-29, and the CO-32 were “formed
to make an investment in a specific real property loan.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 118

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (* ”) 20XX
20XX
Facts 20XX
15-C. Other Notes / Loans Receivable

Year-End 20XX Year-End 20XX
G/L Account Number / Name Balance Balance

1551 / NR LP-4 - CO-28

1556 / NR LP-4 - CO-29 LLC

1560 / NR LP-4 - CO-32

(—}lollio}llo)

1552 / NR LP-13 - CO-28

1557 / NR LP-13 - CO-29

1561 / NR LP-13 - CO-32

So1/oO|;o|;o

1553 / NR LP-5 - CO-28

1558 / NR LP-5 - CO-29

1562 / NR LP-5 - CO-32

f— lo} folfo)

1554 / NR LP-6 - CO-28

1559 / NR LP-6 - CO-29

1563 / NR LP-6 - CO-32

S/o;o|;o

TOTAL $0

—)

Y CO-19 (years 20XX-20XX) = $0 +0+0+
0 =$0
Y CO-29 (year 20XX) = $0 +0+0+0=$0

CO-32 (year 20XX) = $0 +0+0+0=
$0

Note 3, “Finance Receivables”, (at Page 11) of ORG’s audited financials for year 20XX,
reported that the line of credit loan of $0 (for CO-28) during
year 20XX, and the additional lending during year 20XX of $0 (for CO-29)
and $0 (for CO-32) were —

Letters of credit issued to LPs related to ORG by way of a common

shareholder.
4 Unsececured loans bearing interest at a floating rate of prime + 0%.

Only interest is payable annually, with the full principal balance and unpaid
interest due at the maturity of the borrowings.

Prepayment could be made in full or in part before the loans’ maturity.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 119

Outstanding Outstanding
Total Facility Maturity Balance at 20XX | Balance at 20XX
LP-1
$0 | 21 December 20XX $0 $0
LP-4
$0 | 31 December 20XX 0 0
LP-13
$0 | 31 December 20XX 0 0
LP-5
$0 | 31 December 20XX 0 0
LP-6
$0 | 31 December 20XX 0 0
Interest
Receivable 0 0
$0 $0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 120

$0 of Other Notes / Loan Receivable Reported for Year 20XX

The $0 year-end 20XX balance reported as Other Notes / Loans Receivable
was supported by G/L account balances -

$0 line of credit balances outstanding from year-end 20XX, borrowed by the
four LPs to invest in the CO-29 so that a real estate loan would be made.
[Identified above in the discussion concerning year 20XX line of credit
borrowings. Line of credit borrowings used by the four LPs to invest in CO-28
LLC and CO-32s LLC were paid off on 6/30/20XX and 7/31/20XX,
respectively.]

Year-End
20XX-20XX

G/L Account Number / Name Balances
1556 / NR LP-4 - CO-29 LLC 0
1557 / NR LP-13 - CO-29 LLC 0
1558 / NR LP-5 - CO-29 LLC 0
1559 / NR LP-6 - CO-29 LLC 0
TOTAL 0.00

$0 balance at year-end 20XX of G/L account #0 / NR - LP-1

The $0 year-end 20XX balance within G/L account #22 / NR - LP-1 is for
the line of credit borrowed by the LP-1, for which Note 9, “Amount Due On Issue
Line of Credit”, (at Page 12) of ORG audited financials for year 20XX reported that —

[twas an unsecured line of credit with maximum principal of $0 million, with
an annual rate of 0% until paid in full.
Payments of interest only were to commence monthly on 2/1/20XX.

Maturity will occur on 12/31/20XX, when a final installment of unpaid principal

and accrued interest was due.

ORG had the option to charge interest at a rate of 0% on unpaid principal and

accrued interest thereon, in the event that principal and/or interest were not
paid on the maturity date of 12/31/20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 121

“The non-negotiable line of credit is an unsecured line with a
maximum principal of $0 due from an State Limited

Partnership which is the sole shareholder to the Company. The
line of credit attracted interest at a rate of 0% per annum until

paid in full. Payments will be made in consecutive installments of
interest only at the first day of every month for a period of (3)
years, beginning on the 1° of February 20XX._A final installment of
all unpaid principal and accrued interest is due when the note
matures in December 31, 20XX. The average interest rate charged
in 20XX was 0% . Should the payment of principal and/or interest
not be paid when due, the entire principal sum, accrued interest,
and all other amounts shall become immediately due and

payable at the option of the Company with interest theron after the
date of the exercise of such option being 0%. The note can be
repaid, in full or in part, at any time up to maturity date without
penalty.”

Comparing Note 3, “Finance Receivables’, (at Page 11) of ORG’s audited financials for
year 20XX [discussed above] with Note 9, “Amount Due On Issue Line of Credit”, (at
Page 12) of ORG audited financials for year 20XX, identified changes in borrowing
terms
for the line of credit issued to the LP-1:

Maturity for full payment of principal and accrued interest changed from

12/21/20XX to 12/31/20XX.

The revised maturity date of 12/31/20XX is consistent with ORG’s intent to
liquidate by that date, as discussed within Note 16, “Subsequent Events” (at
Page 15) of ORG audited financials for year 20XX.
Interest accrued changed from a floating rate of prime + 0% to 0%.

Maximum principal changed from $0 million to $0 million.

ORG can exercise an option to charge interest at a rate of 0% on unpaid

principal and accrued interest thereon, in the event that principal and/or
interest are not paid on the maturity date of 12/31/20XX.

Activity within G/L account #22 / NR - LP-1 during year 20XX identified

$0 of additional funds loaned by ORG to increase the line of credit and

$0 of reductions to the line of credit, resulting in the year-end 20XX balance
of $0:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 122

Form 886A Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer
ORG (“ ”)

Facts
15-C. Other Notes / Loans Receivable

Year/Period Ended
20XX
20XX
20XX

G/L Account #0 / NR - LP-1

Amount

Beginning Balance at 1/1/20XX

Add: $0 Funds Loaned in 20XX

Cash payments described as “Transfer to LP-1 - Increase
line of credit’, recorded during year 20XX on -
01/31/XX (GJ #5)

02/28/XX (GJ #6)

05/31/XX (GJ #5/XX-1)

06/30/XX (6/XX-1)

07/31/XX (GJ # 7/XX — 1)

08/31/XX (GJ # 8/XX — 1)

12/31/XX (GJ 12/XX-1)

oo0o00o0°0

Payment from ORG’s cash operating account
with the Bank, recorded on 7/31/20XX

ojo

Loan for an investment in a business referred to as “CO-45”
relating to “Property-8” development, recorded on 09/30/XX
(AJE # 9/XX-1) .

Proceeds loaned from pay-downs of notes receivable owed
by CO-48 CO-49 Inc.; and CO-37 recorded in G/L as “used
by LP-1”.

09/09/XX (GJ 09/XX-2) 0

0/28/XX (GJ 10/XX-2) 0

12/3 1/XX (GJ 12/XX-3) 0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 123

G/L Account #0 /NR-—-LP-1 Amount
Subtract: Reductions of $0 in 20XX
Management fees expensed as 0% of net assets

01/01/XX (GJ 1/XX-2) -0

12/31/XX (GJ 12/XX-3) -0 -0
Cash operating account deposits

09/30/XX (AGE #9/XX-1) -0

0/31/XX (GJ O/XX-1 -0

11/30/XX (GJ 11/XX-1) -0 -0

Real property transfers
04/30/XX (GJ #8 described as “Property-4” )
0/27/XX (GJ 0/XX-3 described as add'l
money borrowed from LP-8 to buy
431”) -0
12/31/XX (GJ 12/XX-3 described as
“Transfer of Address Building to

offset LOC’) -0
12/31/XX (GJ 12/XX-3 described as “Transfer
of ”) -0

12/31/XX (GJ 12/XX-3 described as “Transfer

of | ” -0
12/31/XX (GJ 12/XX-3 described as “Transfer

of ”) -0

-0

Other assets transferred
01/31/XX (GJ 1/XX-2 additional paid-in capital

described as “money from LP-1”) -0
03/31/XX (GJ #7 escrow interest deposit for

“Property-4” property) -0
12/31/XX (GJ 12/XX-3 described as “Transfer

of CO-35 inv from LP-1”) -0 -0
Accounts receivable reclassifications
1214 / AR CO-48 - 3-— Net -0
1218 / AR CO-49 -0
1216 / AR CO-37 Work -0
1213 / AR LP-1 0 -0 -0
Ending Balance at 12/31/20XX 0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 124

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
15-D. Securities Investments

Part IV-Line 54 of ORG’s Form 990 reported securities investments year-end balances
of -

$0 (year 20XX)
$0 (year 20XX)
$0 (year 20XX)

$0 of Securities Investments Reported for Year 20XX
The $0 year-end 20XX balance reported as securities investments is supported
by balances within four G/L accounts. Three of the accounts have names disclosing
that they were for marketable securities transactions. The fourth account's name
discloses that it was for an investment in an LLC named CO-28 LLC.

G/L Account Number / Name Year-End Balance
28 / Marketable Sec - 0
29 / Marketable Securities - Address 0
30 / Marketable Securities - CS 0
31 / CO-28 0

TOTAL 0

Note 5, “Investment in Associate”, (at Page 0) of ORG audited financial for year 20XX,
identified ORG holding a 0% investment in an LLC named “CO-28” that was referred to
as an “associate”:

“The company has the following investment in associate:

Shareholdings
Country Ownership
CO-28 0%

The Company’s share of post-acquisition total recognized gains
and losses in the above associate for the year ended
31 December 20XX was $Nil.”

The balance sheet of CO-28 as of 12/31/20XX identified the $0 balance of G/L account

31 / CO-28 as a 0% ownership interest held by ORG in that LLC. Other equity holders

of the CO-28 were ORG captive affiliates - CO-5 and CO-7 — and four LPs that
borrowed from ORG to invest their loan proceeds into CO-28 LLC so that a real estate
loan could be made.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 125

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of items

Schedule No or
Exhibit

Name of Taxpayer

Year/Period Ended

ORG (“ ”) 20XX

20XX

Facts 20XX

15-D. Securities Investments

Member Owner Capital Contributors G/L Acct $ Capital % Ownership
ORG 01-001 0 0%
CO-5 02-001 0) 0%
CO-7 03-001 0 0%
LP-4 04-001 0 0%
CO-8 05-001 0 0%
LP-5 06-001 0 0%
LP-6 07-001 0 0%
TOTAL CAPITAL 0 0%

ORG’s response, dated 11/0/20XX, to Item #22A of IDR 2 explained that the CO-28

was “formed to make an investment in a specific real property loan.

Securities Investments Reported for Years 20XX-20XX
Year-end balances reported for 20XX ($0) and for 20XX ($0) as securities.
investments were supported by balances within three G/L accounts, all of which have
names disclosing that they were for marketable securities transactions.

Year-End 20XX Year-End 20XX
G/L Account Number / Name Balance Balance
28 / Marketable Sec - 0 0
29 / Marketable Securities - Address 0 0
30 / Marketable Securities - CS 0 0
TOTAL 0 0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 126

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
15-E. Other Investments

Part !\V of ORG’s Form 990 reported year-end balances for other investments of —

$0 reported in Line 56 as Other Investments (year 20XX)
$0 reported in Line 56 as Other Investments (year 20XX)

$0 of Other Investments Reported for Year 20XX

The $0 reported as Other Investment for year 20XX is supported by balances of

four G/L accounts relating to businesses in which ORG held capital investments. Three
of these accounts relate to capital investments within LLCs, of which ORG’s audited
financials identify ORG owning a 0% shareholder interest in each. The fourth account
relates to a capital investment in a LP described in ORG’s audited financials as a
private equity fund.

G/L Account Number / Name Year-End Balance
31 / CO-28 0
32 / CO-29 0
33 / CO-32 0
34 / CO-33 0
TOTAL 0

The three G/L accounts relating to capital investments in three LLCs correlate with Note
6, “Investment in Associates”, (at Page 12) of ORG audited financials for year 20XX,
whereby ORG was reported to own a 0% shareholder interest in three LLCs described
as “associates”:

“The company has the following investments in associates.

Shareholdings
Country Ownership
CO-28 0%
CO-29 0%
CO-32 0%

The Company's share of post-acquisition total recognized gains and
losses in the above associates for the year ended 31 December 20XX

was $0 (20XX: $nil).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 127

The G/L account relating to capital investment held in a LP correlates with Note 5,
“Available-for-Sale Investments”, (at Page 12) of ORG audited financials for year 20XX,
whereby ORG was reported to have invested in a private equity fund:

“During 20XX, the Company purchased shares in a private equity fund
that is domiciled in the United States. At 31 December 20XX, based on
the audited financial Statements for this private equity fund, the fair value
of this investment approximates cost.”

ORG’s response to Item #22 of IDR 2 (years 20XX-20XX) explained that the CO-19
(EIN), the CO-29 (EIN), and the CO-32 (EIN) were formed to “make an investment in a
specific real property loan”. This response also explained the CO-33 (EIN) to be a
private equity fund.

Minutes of ORG’s Board meeting held on February 17 20XX note that additional
investments were made during 20XX in real estate investment companies that loan
money secured by real estate:

“In 20XX, the Company made additional investments in companies whose
business is real estate investment. These companies loan money
secured by real estate.”

These minutes support ORG’s explanation that the LLCs discussed above were formed
to make an investment in a specific real property loan.

[Minutes of ORG’s Board meeting held on 2/17/20XX are illustrated within Exhibit 14.]

$0 of Other Investments Reported for Year 20XX
Reconciliation Between Form 990 and G/L
The $0 balance reported as Other Investments is supported by nine G/L accounts
identified here. With the exception of the account relating to the CO-33, all of these G/L
accounts have names indicating that they relate to capital investments in LLCs.

The $0 aggregate balance of these G/L accounts exceeds the $0 balance reported as
Other Investments by $0. The $0 was traced to two journal entries within G/L account

35 CO-34 (CO-43 Loan) -

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 128

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

15-E. Other Investments

04/30/XX (117), transaction described as, “The Advisory Firm-2 - Owners - Monthly
activity in Advisory Firm-2 for CO-43/Colorado Loan”. This entry recorded a $0
credit in G/L account #35 CO-34 (CO-43 Loan) as an offset to accounts receivable.
12/31/XX (CO-34 Adjustm), transaction described as, “Reclass payment received to
income from affiliate”. This entry reclassified the $0 recorded on 4/30/20XX to
income from affiliates.

Form 886-A (Rev. 4-68)

Page 129

Department of the Treasury - Internal Revenue Service

Form 886A Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or

Exhibit

Name of Taxpayer
ORG (“ ”)

Facts
15-E. Other Investments

Year/Period Ended

20XX
20XX
20XX

G/L Account Number / Name

Year-End Balance

1416 / CO-19s LLC

1418 / CO-29

1419 / CO-30s LLC

1424 / CO-31

1430 / CO-33

1433 CO-34 (CO-43 Loan)

1435 / CO-18 — CO-

1436 / CO-35

1437 / CO-36

Total of G/L account balances

OjOsO/O}/O/O;O/O|Oj;oO

entries, dated 4/30/20XX and
12/31/20XX

Amount Reported in Form 990

o|o

LLC Investments Reported in Audited Financials

Note 6 (at Page 10), “Investment in Affiliates”, of ORG’s audited financial Statements for
year 20XX, described the LLCs identified in the above G/L accounts as an “investment

in affiliates” in which ORG held “different ownership rates”:

“The components of investment in affiliates at December 31, 20XX are as

follows:

Opening balance
Purchases

Share in earnings and losses
Less: Distributions

Closing Balance

20XX
0
0
0

(0)
$0

Investment in affiliates comprise different ownership rates in CO-28, CO-19., CO-
29, CO-30, CO-32, CO-31., CO-34, CO-36, CO-18., and CO-35.”

The $0 closing balance reported for ORG’s investment in affiliates within the audited
financials was reconciled with the $0 total of G/L account balances reported within Form
990 by subtracting the $0 balance of G/L account #34 / CO-33:

Total of G/L account balances

34 / CO-33

Closing Balance per Audited Financials

Form 886-A (Rev. 4-68)

Page 130

Department of the Treasury - Internal Revenue Service

Business Investments Relate Primarily to Real Estate
ORG’s correspondence, dated 11/0/20XX, responding to Item #22 of IDR 2 (years
20XX-20XX) explained the nature of activities conducted by ORG affiliates relating to
the $0 reported as other investments in Form 990. With the exception of the CO-33 —
which was not identified as an “investment in affiliate” within ORG audited financials, all
of ORG’s investment in affiliated LLCs were explained to have been formed as an
investment in either a specific real property loan or a specific real estate investment.

A Statement that, “This company was formed to make an investment in a specific real
property loan” was explained for the operations of —

CO-28 (EIN)
CO-29 (EIN)

CO-30 (EIN)

CO-31 (EIN)

A Statement that, “This company was formed to make a specific real estate investment”
was explained for the operations of -

CO-34 (EIN)
CO-18 (EIN)

COQO-35 (EIN)

CO-36 (EIN)

A Statement that, “This is a private equity fund”, was given to explain the operations of
CO-33 (EIN).

Minutes of ORG’s Board meeting held on February 9 20XX note that ORG made
additional investments in real estate investment companies during 20XX:
“In 20XX, the Company continued to make additional investments in
companies whose business is real estate investment. Additionally, the
Company acquired land in payment of debt owed by its shareholder.”

The companies referred to in ORG’s Board meeting support ORG’s explanations that
the LLCs discussed above were formed to either make an investment in a specific real
property loan or to make a specific real estate investment.

[Minutes of ORG Board held on 2/9/20XX are illustrated within Exhibit 16.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 131

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX
15-F. Land, Building & Equipment

Part IV of ORG’s Form 990 reported year-end balances for land, building, and

equipment of —

$0 basis in 1/3 interest held in Property-3 property reported in Line 56 as Other
Investments (year 20XX)
$0 capital contribution to the CO-36 reported in Line 57 as Land/Building/Equipment
(year 20XX)
$0 of real property acquisitions reported in Line 57 as Land / Building / Equipment
(year 20XX)

$0 Basis in 1/3 Property Interest Reported as Other Investments
for Year 20XX
The $0 reported as Other Investment for year 20XX was the basis of a one-third interest
in property described as “Property-3” that ORG received from its sole shareholder, the
LP-1. ORG recorded receiving this one-third interest in the Property-3 property in G/L
account #36 / Land at year-end 20XxX:

G/L Account 36 — Land

Amount
Date Reference | Journal Trans Description Debit Credit
Contribution of 1/3 of 0% interest in
12/31/XX GJ8 Gen J Property-3 from LP-1 0

Support for the $0 posted is a special warranty deed, executed on 12/31/20XX, by the
LP-1, as Grantor, who transferred an “undivided one third (1/3) interest” in a property
located in County County, State, described as “Property-3”. Director-1’s nephew,
Manager-1, signed the Special Warranty Deed as manager of the CO-13. The CO-13
was identified in the Special Warranty Deed as general partner of the LP-1

ORG disposed of its one-third interest (0%) in the Property-3 property by two sales
transactions within year 20XX (discussed above) to obtain the $0 reported for that year

0% sold on 7/31/XX ($0 basis sold for net gain of $0)

0% sold on 8/31/XX ($0 basis sold for net gain of $0)

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 132

$0 Capital Contribution to CO-36 Reported

as Land/Building/Equipment for year 20XX
The $0 reported as land/building/equipment for year 20XX was a $0 capital
contribution that ORG made in that year to invest in a LLC named CO-36
(EIN). ORG’s correspondence, dated 11/0/20XX, responding to Item #22 of IDR
2 (years 20XX-20XX) explained that the CO-36 was formed to make a
specific real estate investment”.

Schedule K-1 filed for year 20XX by the CO-36 shows the LLC’s
address as Address, City, State Zip code. Part J - Column b of the
Schedule K-1 reported that ORG made a $0 capital contribution during year 20XX.
Part D of the Schedule K-1 reported ORG having investment member interests of -—

0% profit sharing
0% loss sharing

0% ownership of capital

ORG’s $0 capital contribution into the CO-36 was recorded within G/L account #36 /
Land on 11/30/20XX.

G/L Account 36 — Land

Amount
Date Reference | Journal Trans Description Debit Credit
Purchase of CO-36 on State limited
11/30/XX GJ #1 Gen J liability company 0.00

$0 of Land/Building/Equipment Reported for Year 20XX

Reconciliation of Amount Reported in Form 990 with G/L and Audited Financials
Year-end 20XX balances within two G/L accounts comprise the $0 reported as land and
building in Form 990.

G/L Account Number / Name Year-End Balance
36 / Land 0
37 / Building 0
TOTAL 0
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 133

Note 5, “Investment Properties”, (at Page 10) of ORG audited financials for year
20XX describe ORG’s land and building as parcels of land in State:

“The components of investment properties at December 31, 20XX
are as follows:

Cost Land Building Total
Opening Balance - - -
Purchases 0 0) 0
Closing Balance 0 0 0

Investment properties comprise interest in certain parcels of land situated in
State, , which were contributed by the shareholder in return for an interest in
the Company as well as property purchased during the year.”

A $0 difference exists between land balances reported within G/L account #36 / Land
$0) and land reported in the audited financials ($0). This $0 difference was traced to a
posting described as “Transfer of ” within account #36 / Land

G/L Postings to Land and Building Accounts
Transactions posted to G/L land and building accounts during year 20XX, supporting
the $0 reported as Land/Building in the Form 990 are identified here. Six of these
transactions had offsetting credits aggregating to $0 that were posted to G/L account

22 / NR —LP-1 to reduce the line of credit owed by the LP-1:

04/30/XX (GJ #8) “Property-4” $ 0

& 0/27/XX (GJ 0/XX-3) “add’l money borrowed from
LP-8 to buy 431” 0

12/31/XX (GJ 12/XX-3) “Transfer of Address Building

to offset LOC”
& 12/31/XX (GJ 12/XX-3) “Transfer of "
& 12/31/XX (GJ 12/XX-3) “Transfer of "
% 12/31/XX (GJ 12/XX-3) “Transfer of ”
TOTAL $

ooo°o

[The $0 aggregate of credits posted to G/L account #22 / NR — LP-1 are discussed
above as line of credit reductions occurring in year 20XX from real property transfers. ]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 134

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
. 20XX
Facts 20XX
15-F. Land, Building & Equipment

Account #36 / Land

Amount

Date Reference | Journal | Trans Description Debit Credit Balance
SMT Investors L/P -
Purchase of 0% of
02/18/XX PJ Gen J 0
Purchase of
03/31/XX GJ #7 Gen J_ | Property-4 0
The Advisory Firm-2 -
WAC/WRC Group -
Monthly activity in
Advisory Firm-2
WAC/WRC for CO-

- Refund of
  closing cost on
  04/30/XX 118 SJ Property-4 0
  Purchase of
  04/30/XX GJ #8 Gen J_ | Property-4 0
  Paydown on Line of
  Credit-Interest
  received escrow
  04/30/XX GJ #8 Gen J_ | deposit 0
  04/30/XX GJ #8 GenJ_ | Purchase of 0% 0
  Transfer escrow
  deposit to land,
  04/30/XX GJ #0 Gen J__| Property-4 0
  Add'l money
  borrowed from LP-8
  to buy 431 - See
  entries in LP-8 and
  0/27/XX | GJO/XX-3 | GenJ | LP-1 0
  Purchase of
  0/31/XX | GJ O/XX-1 GenJ_ | Building _ 0
  Purchase from CO-6
  0/31/XX_| GJ O/XX-1 GenJ | 0% of CG 431 0
  Purchase from CO-
  0/31/XX_| GJ O/XX-1 GenJ | 170% of CG 431 0
  GJ# Purchase of
  11/30/XX 11/XX-1 Gen J_ | Property-5 0
  12/31/XX | GJ 12/XX-1 | GenJ_ | Purchase of 0

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 135

Page 136

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX
20XX
Facts 20XX

Liabilities Reported for Years 20XX-20XX

Year-end liability balances reported by ORG in Forms 990 filed for years 20XX-20XX

are identified here.

Form 990, Part IV, Year 20XX Year 20XX Year 20XX
Line # $$$ % $$$ % $$$ %

60 - Accounts Payable

and Accrued Expenses 0 0% 0 0%

65 — Other Liabilities

(IBNR Reserve) 0 0% 0 0%
66 — Total Liabilities 0 0% 0 0% 0 0%

The $0 reported in years 20XX-20XX as Other Liabilities / IBNR Reserve, relate to $0 of
IBNR Claims expense discussed above that was part of $0 of incurred claims and
experience refunds reported for year 20XX.

ORG’s response, dated 7/20/20XX, to Item #14 of IDR 1 (years 20XX-20XX), explained

that supporting documentation for the $0 reported as claim expense and offsetting

$0 amount reported as Other Liabilities / IBNR Reserve could not be located:
“This item was based upon the recommendation of the Company's
insurance consultants. The Company has not been able to locate
the supporting documentation.”

Form 886-A (Rev. 4-68)

Page 137

Department of the Treasury - Internal Revenue Service

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
. Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

For tax periods subsequent to 12/31/20XX, non-life insurance companies can qualify as
being recognized as tax-exempt under Code § 501(c)(15) if their gross receipts meet
two criteria -

(1) Gross receipts for the taxable year do not exceed $0.

(2) | More than 0% of such gross receipts consist of premiums.

ORG ceased writing direct policies during year 20XX. This inactivity was consistent

with-

Gross receipts requirements under Code § 501(c)(15) that would became effective

on January 1, 20XX.

ORG’s historic pattern of earnings in years 20XX-20XX, where insurance premiums

never exceeded 0% of gross receipts. [Discussed above.]

& ORG’s audited financials for year 20XX reporting a plan in place to liquidate on /
before 12/31/20XX.

& Director-1’s resume’ acknowledging his intent to liquidate ORG upon determining
that better opportunities existed in other investment sectors after years of carrying
out limited insurance activities.

Special meetings held by ORG’s Board that discussed liquidating ORG pending an

investigation as to whether ORG will acquire insurance opportunities outside the
Companies economic group.

During September 20XX, all of ORG’s stock was transferred by the sole
shareholder, LP-1, to an State corporation named CO-51 under a “transaction
qualifying under Section 351 of the Code.”

On 4/30/20XX, ORG’s successor sole shareholder, CO-51, approved a consent
that ORG liquidate no later than December 31, 20XX under a plan of complete
liquidation.

Discussed below are a note to ORG’s audited financials reporting that ORG intends to
liquidate by 12/31/20XX, a verbatim Statement from Director-1’s resume’
acknowledging an intent to liquidate ORG, special meetings held by ORG’s Board of
Directors discussing liquidation, the consent by ORG’s sole shareholder to
liquidate/dissolve, and ORG’s Plan of Complete Liquidation.

Note to Audited Financials
Note 16, “Subsequent Events”, (at Page 15) of ORG audited financials for year 20XX,
reported ORG having a plan to dissolve on/before 12/31/20XX:
“There are plans in place to liquidate the Company as at December

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 138

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liguidate On/Before December 31, 20XX

31, 20XX. Liquidating distributions will be made periodically until
the end of next year.”

Resume’ of Director-1
In response to Item #1 of IDR 3 (years 20XX-20XX), Director-1's resume’ contained an
explanation as to why he intended to liquidate ORG:
“In light the experience and knowledge gained from his experience in the
insurance industry, Director-1 resolved to form a well-capitalized, small
insurance company to take advantage of perceived business opportunities
[ORG (‘ORG’)]. His intent was to grow ORG into a successful and thriving
insurance company. After years of diligent effort in carrying out limited
insurance activities pending pursuit of opportunities to grow through
acquisitions or otherwise, Director-1 concluded that there were better
opportunities in other investment sectors so ORG was liquidated.”

[Emphasis given to underlined areas.]
[Director-1’s resume’ is illustrated within Exhibit 8.]

ORG Board Meetings
Special meetings held by ORG’s Board of Directors on 2/13/20XX, 4/21/20XX,
6/24/20XX, and 4/30/20XX discussed liquidating ORG pending an investigation as to
whether ORG will acquire insurance opportunities outside the Companies economic
group. On 6/24/20XX, ORG’s Board decided to cease writing insurance business,
effective as of 6/30/20XX. On 4/30/20XX, ORG’s Board decided to liquidate ORG no
later than 12/31/20XX. To be noted is that from the first day on which the change in
gross receipts criteria under Code § 501(c)(15) became effective — 1/1/20XX — through
the date on which ORG decided to cease writing insurance business — 6/24/20XX —
ORG did not conduct any insurance business to write additional policies or to renew
policies that were in effect during 20XX.

Each board meeting is summarized here.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 139

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

Special Meeting of Board / Shareholders Held 2/1 3/20XX

Present —

sole shareholder: LP-1

Directors: Director-1 and Manager-2

Others for LP-1: Individual-3, CPA

Discussion/Actions —

The discussion, in verbatim below, involved dissatisfaction with ORG’s operations for

the last 3 years, instructions given to Manager-2 (ORG director) and Individual-3

(CPA for sole shareholder) to investigate acquiring external insurance business, and

liquidating ORG in the event that a purchase or equity interest in external insurance
business could not be found:

“After reviewing the operations of ORG for the last three years, the
Directors / Shareholder are not satisfied with the growth and direction of
ORG: the market was more difficult to penetrate than first anticipated. The
Directors discussed various proposals and options for increasing the
growth of the business. After lengthy debate, the Directors decided to
pursue a ‘two-pronged’ approach to growing the business.

The Directors instructed Manager-2, and Individual-3 to investigate
purchasing an existing insurance company or obtaining an equity interest
in a larger, more established insurance company. The strategy would
create a permanent source of reinsurance business of known risk that
would grow over time. Manager-2 Stated that he already was currently
reviewing insurance company purchases and would continue to do so per
direction of the Board.

In the event that a purchase or equity interest could not be found,
discussion turned to the possibility of liquidating ORG. Although no
Director/Shareholder was in favor of liquidating ORG as a first choice of
action, they also realized that if they were unsuccessful in finding a
suitable acquisition target or equity interest to secure good, stable
reinsurance business, the company should be liquidated.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 140

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”). 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

Director-1 suggested that everyone meet again after Manager-2 and
Individual-3 have had an opportunity to investigate and pursue the options
discussed.”

Next Meeting -
Scheduled for 4/1/20XX. (Actually held on 4/21/20XX.)

[Emphasis given to underlined areas.]

Special Meeting of Board Held 4/21/20XX

Present —

Directors: Director-1, Director-4, and Manager-2

Discussion/Actions -
Discussed, in verbatim, are possibilities of acquiring two insurance companies, with a

report back to be made at the next board meeting:

“Manaqer-2 reported to the Board in detail concerning the review of
insurance company acquisition opportunities undertaken by himself since
the February 13, 20XX Board Meeting. Attention focused in particular on

. Director-1 reviewed with the Board the due
diligence material that had been obtained on this acquisition opportunity.
Manager-2 also reported to the Board that another opportunity had
recently surfaced that would be aggressively pursued — CO-53 and its
subsidiary, CO-54.

After extensive discussion, the Board directly (sic) Manager-2 to intensify
their due diligence efforts concerning both acquisition opportunities, and
report back to the Board at the next meeting.”

Next Meeting -
Scheduled for 6/24/20XX.

[Emphasis given to underlined areas.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 141

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

Special Meeting of Board Held 6/24/20XX
Present —

Directors: Director-1, Director-4, and Manager-2

Discussion/Actions -
Discussed, in verbatim, is the ongoing consideration as to acquiring insurance
Companies, and to cease writing insurance business effective 6/30/20XX:

“Manager-2 reported to the Board on the extensive due diligence that had
been performed on CO-53 since the last Board meeting. Director-1
indicated there were many positive aspects of this potential acquisistion
and reviewed them with the Board. He Stated that there were also several
issues of concern with this potential acquisition. Those concerns were
discussed in detail by the Board.

Based upon the concerns described, the Board decided to table the
transaction for the time being and attempt to locate other promising
acquisition opportunities that may not bring with them the concerns
Director-1 identified with respect to the transaction. Manager-2
aqreed to confer with industry contacts and identify any other possible
opportunities that would meet the Company’s needs.

The Board unanimously resolved that the Company cease writing
insurance business effective June 30, 20XX so that, when the Board
examines the Company's options at the next meeting, no further insurance
risk will have been taken on to complicate the Board’s consideration of
alternatives for reorganizing and redeploying the corporation's investment
assets.

There being no further business, the meeting was duly adjourned.”

[Emphasis given to underlined areas.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 142

Form 886A - Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

Special Meeting of Board Held 4/30/20XX
Present —
« Directors: Director-1, Director-4, and Manager-2

Discussion/Actions -

Discussed, in verbatim, was the decision to not pursue acquiring outside insurance
business due to unacceptable risk factors, and to terminate operations no later than
12/31/20XX:

“Manager-2 reported that his search over the last several weeks had
resulted in no acquisition opportunities more promising than the

transaction. There was a further discussion of the transaction, and
the positives and negatives of that transaction were discussed. The Board
decided not to pursue the transaction.

The Chairman Stated that the next order of business was discussion of
possible liquidation and dissolution of the Company. After discussion, and
upon motion duly made and seconded, the following resolution was
adopted:

RESOLVED, that considering all business circumstances, that the Board
of Directors has determined in its exercise of business judgment that the
acquisition opportunities identified by the Company's management should
not be undertaken by the Company due to risk factors the Board finds
unacceptable;

FURTHER, RESOLVED, that, in the absence of suitable opportunities for
either the Company’s acquisition of or equity investment in any domestic
insurer, the Board of Directors has determined that the Company shall be
fully liquidated and dissolved;

FURTHER, RESOLVED, that it is in the best interest of the Company and
its sole shareholder that the business and affairs of the Company be
terminated and wound up, and the the cash, property, and other assets of
the Company be distributed to the sole shareholder of the Company (after
payment of or adequate provisions of the Company's debts, taxes,
obligations, policy claims, and liabilities, if any) no later than December 31,
20XX;

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 143

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

FURTHER, RESOLVED, that the directors and officers of the Company
shall continue in office solely for the purpose of winding up the business
affairs of the Company, and shall take no action which is, or which may be
construed to be, inconsistent with the process of complete liquidation and
dissolution of the Company;

FURTHER, RESOLVED, that the directors, officers and management of
the Company shall be and hereby are, in conjunction with legal counsel
and other advisees, authorized and directed to do any and all acts and
things (including the execution, attestation, acknowledgment, and delivery
of appropriate forms) as they may deem necessary or appropriate in
connection with the aforesaid complete liquidation and dissolution of the
Company, including but not limited to obtaining any approval required by
the Territory Registrar of International Business Companies, the Governor
of the Territory of the Territory, the Territory Financial Services
Department, or the Territory Commissioner of Insurance, and making any
and all filings as may be required with the Internal Revenue Service and
any other governmental agencies.

FURTHER, RESOLVED, that the Plan of Liquidation in the form attached
hereto as Exhibit A is hereby approved and adopted by the Board of
Directors and shall be submitted to the sole shareholder for approval.

There being no further business, the meeting was duly adjourned.”

[Minutes of ORG Board meetings held on 2/1 3/20XX, 4/21/20XX, 6/24/20XX, and
4/30/20XX are illustrated within Exhibits 30A, 30B, 30C, and 30D.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 144

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

Consent Approved by Sole Shareholder, on 4/30/20XX for ORG to Liquidate
On 4/30/20XX, ORG’s sole shareholder, CO-51, simultaneously approved a
Consent for ORG to liquidate and dissolve.

ORG’s correspondence, dated 11/15/20XX, responding to IDR 4 (years 20XX-20XX),
informed that CO-51 became ORG’s sole shareholder in September 20XX
by a stock transfer qualifying under Code §351:

“In September, 20XX, LP-1 transferred all of the stock of the Company to
CO-51, an State corporation, in exchange for CO-51 stock in a
transaction qualifying under Section 351 of the Code. The
shareholder consent of CO-51 is found at Tab 7.”

The Consent approved by CO-51 was signed by Manager-2 (son of ORG
director, Director-1), as President of CO-51, on 4/30/20XX, and is given
in verbatim below.

BACKGROUND: _ The Board of Directors has recommended that the
Company be fully liquidated and dissolved, and has approved a Plan of
Liquidation in the form attached hereto as Exhibit A (the “Plan”). The
Board of Directors has submitted the Plan to the sole shareholder for its
review and approval.

NOW, THEREFORE, BE IT:

RESOLVED, that it is in the best interest of the Company that the
business and affairs of the Company be terminated and wound up, and
that the cash, property, and other assets of the Company be distributed to
the sole shareholder of the Company (after payment of or adequate
provisions of the Company's debts, taxes, obligations, policy claims, and
liabilities, if any) no later than December 31, 20XX:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 145

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

FURTHER, RESOLVED, that the directors, officers and management of
the Company shall be, and hereby are, in conjunction with legal counsel
and other advisees, authorized and directed to do any and all acts and
things (including the execution, attestation, acknowledgment, and delivery
of appropriate forms) as they may deem necessary or appropriate in
connection with the aforesaid complete liquidation and dissolution of the
Company, including but not limited to obtaining any approval required by
the Territory Registrar of International Business Companies, the Governor
of the Territory of the Territory, the Territory Financial Services
Department, or the Territory Commissioner of Insurance, and making any
and all filings as may be required with the Internal Revenue Service and
any other governmental agencies.

FURTHER, RESOLVED, that the Plan is hereby approved and adopted.
Dated as of the 30" day of April, 20XX.

CO-51, an State corporation

by Manager-2, President (signed)

[The Shareholder Consent of ORG sole shareholder, CO-51, approved and adopted on
4/30/20XX, is illustrated within Exhibit 31.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 146

. S i
Form 886A Department of the Treasury - Internal Revenue Service Schedule No or

Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX

20XX
Facts 20XX
Plan to Liquidate On/Before December 31, 20XX

[1]

[2]

[3]

[4]

Plan of Complete Liquidation

The Plan of Liquidation referred to in ORG’s special board meeting held on 4/30/20XX
and in the Consent approved by CO-51 on 4/30/20XX contains 11 Articles, given
here in verbatim.

Plan of Liquidation

ORG a Territory International Business Company (the “Company’”), has issued
and outstanding zero (0) common shares, of the par value of Zero and no/00
Dollars ($0) each. The Company intends to cease the active conduct of its
business and wind up its affairs, and this Plan is intended to accomplish the
liquidation and distribution of all of the Company's assets in complete liquidation,
less any assets retained to meet claims, on or before December 31, 20XX.

Approval
The Plan shall be considered adopted by the Company when it has been

approved by its board of directors and sole shareholder.

Cessation of Business

Effective June 30, 20XX, the Company ceased writing any new insurance
business and has not conducted any insurance business other than
administration and payment of claims. The Company shall continue its efforts to
wind up the insurance business and its investment activity shall be consistent
with the winding up and liquidation of the Company.

Winding Down

The Company's board of directors shall manage the winding up of the Company
and the distribution of its assets to shareholders. Once that process is
concluded, the Company hereby appoints PROFESSIONAL SERVICE
COMPANY, from and after that date, to serve as liquidator for the Company to
effectuate the final liquidation of the Company.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 147

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

[5]

[6]

[7]

[8]

Authorization of Terms of Sale

After the Plan has thus been adopted and approved, the board of directors,
subject to Liquidator’s supervision, shall proceed to accomplish the liquidation of
the Company by a sale of those of its assets and properties as the sole
shareholder does not wish to receive in-kind for such consideration and upon
such terms and conditions as may be determined to be in the best interest of the
Company and its sole shareholder. The proposed terms and conditions of any
such sale shall be submitted to the sole shareholder and no agreement for sale
shall be executed or delivered on behalf of the Company until such sale and the
terms and conditions thereof have been authorized by the sole shareholder. The
Company shall pay, or make adequate provision for, the full amount of all creditor
claims and policyholder claims and shall make no distribution of amounts to the
sole shareholder that are required to pay in full all claims and potential claims of
creditors and policyholders.

Interim Distributions

The board of directors of the Company may from time to time authorize one or
more distributions of property of the Company, in cash or in kind, in a series of
distributions in complete liquidation, retaining such assets as they may dem
necessary to meet claims or liabilities of the Company, and to continue the
operation of such properties of the Company as have not been sold at the time of
any such intermediate distribution. Notwithstanding the foregoing, the
Company's admitted assets and statutorily required capital shall not be
distributed until all claims have been paid on policies written by the Company and
all requirements of the Territory Insurance Code have been satisfied.

Final Distribution
Final distribution to the sole shareholder shall occur no later than 12/31/20XX.

Cancellation of Outstanding Shares

Each of the foregoing distributions which constitutes a series of partial
liquidations or one complete liquidation shall be in exchange solely for, and a
complete redemption and cancellation of, and in complete payment for, all of the
outstanding common shares of the Company, and sole shareholder shall, if the
board of directors so determines, surrender their certificates for such shares for
recording thereon receipt of distributions prior to the final distribution, and shall
surrender such certificates for cancellation upon receipt of the final distribution
contemplated herein.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 148

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Facts 20XX

Plan to Liquidate On/Before December 31, 20XX

[9] Dissolution
The officers and directors of the Company shall proceed with the voluntary
dissolution of the Company under the laws of TERRITORY at such time as they
may deem appropriate prior to December 31, 20XX.

[10] Authorization of Necessary Acts
The officers and directors of the Company are authorized, empowered, and
directed to do any and all things in its name, including the execution and filing of
all necessary documents to carry out the purposes and intentions of this Plan,
which they deem necessary or advisable. The officers and directors shall be
held harmless by the Company for any action under the Plan taken in good faith,
and any expense or liability so incurred by them shall be that of the Company.

[11] Intent
It is intended that this Plan of Complete Liquidation shall be a plan of complete
liquidation within the terms of Sections 332 and 337 of the Internal Revenue
Code of 1954, as amended. This Plan shall be deemed to authorize such action
as, in the opinion of counsel for the Company, may be necessary to conform with
the provisions of those Sections.

[ORG’s Plan of Complete of Liquidation is illustrated within Exhibit 32.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 149

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

Code Sections 501(a) and 501(c)(15)

For taxable years prior to 2004, I.R.C. § 501 provides that certain entities are
exempt from taxation. Included in these entities are “[i]nsurance companies or
associations other than life (including interinsurers and reciprocal underwriters) if the net
written premiums (or, if greater, direct written premiums) for the taxable year do not
exceed $350,000.” [I.R.C. § 501(c)(15)(A)].

For taxable years beginning after December 31, 2003, section 501(c)(15) (A)(i)
provides, in relevant part, for exemption for “insurance companies other than life
(including interinsurers and reciprocal underwriters) if (i) (I) the gross receipts for the
taxable year do not exceed $600,000 and (ii) more than 0 percent of such gross
receipts consist of premiums.” For purposes of determining gross receipts, the gross
receipts of all members of a controlled group of which the company is part are taken
into account.

The Joint Committee Report for H.R. 308 States:

A company that does not meet the definition of an insurance company is
not eligible to be exempt from Federal income tax under the provision.
For this purpose, the term “insurance company” means any company,
more than half of the business of which during the taxable year is the
issuing of insurance or annuity contracts or the reinsuring of risks
underwritten by insurance companies (sec. 816(a) and new sec. 831(c). A
company whose investment activities outweigh its insurance activities is
not considered to be an insurance company for this purpose. See, e.g.
Inter-American Life Insurance Co. v. Commissioner, 56 T.C. 497, aff'd per
curiam, 469 F.2d 697 9th Cir. 1972). It is intended that IRS enforcement
activities address the misuse of present-law section 501(c)(15).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 150

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

Definition of an “Insurance Company”

Neither I.R.C. § 501(c)(15) nor its corresponding regulations define an “insurance
company.” Subchapter L of the Code (I.R.C. §§ 801-848), however, addresses the
taxation of insurance companies. The term "insurance company” has the same
meaning under section 501(c)(15) as it does in Subchapter L. See H. Conf. Rep. No.
99-841, 99th Cong., 2nd Sess. (Vol. Il) 370-71, reprinted in 1986-3 (Vol.4) C.B. 370-71.

I.R.C. § 816 (formerly IL.R.C. § 801) defines a life insurance company. As part of
this definition, I.R.C. § 816 provides, “the term ‘insurance company’ means any
company more than half of the business of which during the taxable year is the issuing
of insurance or annuity contracts or the reinsuring of risks underwritten by insurance
companies.”

Treas. Reg. § 1.801-3(a)(1) defines an insurance company as,

A company whose primary and predominant business
activity during the taxable year is the issuing of insurance or
annuity contracts or the reinsuring of risks underwritten by
insurance companies. Thus, though its name, charter
powers, and subjection to State insurance laws are
significant in determining the business which a company is
authorized and intends to carry on, it is the character of the
business actually done in the taxable year which determines
whether a company is taxable as an insurance company
under the Internal Revenue Code.

Treas. Reg. § 1.801-3(a)(1)(emphasis added). See also, Bowers v. Lawyers Mortgage
Co., 285 U.S. 182 (1932).

The IRS has not ruled on whether the more stringent “greater than half” test set
forth in I.R.C. § 816 applies to an insurance company other than a life insurance
company. Instead, to determine whether a non-life insurance company qualifies as an
insurance company for tax purposes, the “primary and predominant business activity”
test set forth in Treas. Reg. § 1.801-3(a)(1) applies. See Rev. Rul. 68-27, 1968-1 C.B.
315.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 151

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

The courts and the IRS have also, at times, looked to whether the transaction
has characteristics traditionally associated with insurance, and whether the company
conducts business like an insurance company. Several courts have addressed the
issue of whether a company qualifies as an insurance company based on the
company’s primary and predominant business activity. The seminal case addressing
this issue is Bowers v. Lawyers Mortgage Co., 285 U.S. 182 (1932). In Bowers, the
Supreme Court determined that the taxpayer was primarily engaged in “the lending of
money on real-estate security, the sale of bonds and mortgages given by borrowers and
use of the money received from purchasers to make additional loans similarly secured.”
Bowers, 285 U.S. at 188-89. Although the taxpayer in Bowers earned “premiums” that
amounted to approximately one-third of its income for the taxable years at issue, these
premiums were attributable to the excess of the interest paid to the taxpayer by
borrowers over the amount the taxpayer paid the purchasers to whom it subsequently
sold bonds and mortgages. Id. at 188 n.5. The premiums also included fees the
taxpayer charged for guaranteeing mortgage loans which it did not make or sell. Id. at

The Court noted that the “premiums” the taxpayer earned included agency and
other services provided by the taxpayer which were not generally provided under
traditional insurance contracts. Id. at 189.

Because the taxpayer’s premium income was incidental to its business of lending
money, the Bowers Court held that the taxpayer was not an insurance company for tax
purposes. Id, at 190. The Court explained, “[t]he lending fees, extension fees and
accrued interest appertain to the business of lending money rather than to insurance,
and may not reasonable be attributed to the subordinate element of guaranty in
[taxpayer's] mortgage loan business.” Id. at 189. Cf. United States v. Home Title
Insurance Co., 285 U.S. 191 (1932) (holding that taxpayer was insurance company
where taxpayer derived over 75% of its income from the insurance of titles and
guarantees of mortgages).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 152

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

In Inter-American Life Ins. Co. v. Commissioner, 56 T.C. 497 (1971), aff'd per
curiam, 469 F.2d 697 (9th Cir. 1972), the taxpayer issued and reinsured 17, 280, 325,
and 424 insurance policies earning premiums totaling $867.94, $1,554.76, $1,125.70,
and $1,421.98 during the taxable years 1958, 1959, 1960, and 1961, respectively.
Inter-American, 56 T.C. at 507. Virtually all of the reinsurance contracts issued by the
taxpayer came from another insurance company which was owned by the same two
shareholders as the taxpayer. Id. Similarly, almost all of the directly written insurance
policies issued by the taxpayer were issued to the same two shareholders of the
taxpayer. Id. The taxpayer also engaged in the sale of real property and stock, earning
investment income totaling $35,988.21, $31,195.60, $36,436.04, and $33,815.44 over
the four years at issue. Id.

In Inter-American, the Tax Court compared the taxpayer's income from its
insurance-related activities to its income from other activities, and held that the taxpayer
was not an insurance company. According to the Tax Court, the insurance premiums
the taxpayer earned were de minimis, comprising less than 0% of the taxpayer's gross
investment income. Id. In addition, the taxpayer had no sales force in place to sell
insurance contracts. Id. The Tax Court concluded that, because the taxpayer's primary
and predominant source of income was from its investments, and because the taxpayer
did not focus its primary and predominant efforts in pursuit of its insurance business, it
was not an insurance company. Id. at 508.

The Tax Court also acknowledged that it was cognizant of the “problems
indigenous to new life insurance companies, in particular, that the initial years of a new
life insurance company’s operations are generally difficult because the initial expenses
incurred in ‘putting policies on the books’ are greater than the premium received” Id.
(citing S. Rept. No. 291, 86th Cong., 1st Sess. (1959), 1959-2 C.B. 779). The Court
explained, however, that it was basing its decision on the fact that the taxpayer did not
focus its “capital and efforts primarily” on its insurance business, not on the fact that the
taxpayer’s insurance business was not profitable. Id. (citing Cardinal Life Ins. Co. v.
United States, 300 F. Supp. 387 (N.D. Tex. 1969).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 153

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (* ”) 20XX
20XX
Law 20XX

In Cardinal Life Ins. Co. v. United States, 300 F. Supp. 387 (N.D. Tex. 1969),
rev'd on other grounds, 425 F.2d 1328 (5th Cir. 1970), the taxpayer earned no income
from insurance in two of the five years under examination, and earned .66%, .87% and
9.10% of its total income from insurance during the remaining three taxable years at
issue. Cardinal Life, 300 F. Supp. at 389. Instead, the taxpayer earned a majority of its
income from dividends, interest, rent and capital gains. Id. Like Inter-American, the
taxpayer in Cardinal Life failed to employ any brokers, solicitors, agents or salesmen.
Id. It did, however, pay an actuary on a fee basis to determine the amounts of its
premiums. Id. The Court noted that the taxpayer's income from insurance policies was
“insignificant” compared to the total income earned by the taxpayer, explaining,

While Plaintiff's insurance activities were insignificant,
it was generating substantial income from dividends on
stocks, rental income on real estate, rental income on
trailers, interest income and capital gains upon disposal of
real estate and stocks. These types of income constitute ...
personal holding company income which Congress has
specifically Stated is subject to a tax in addition to ordinary
income tax. The Plaintiff is seeking to remove itself from the
grasp of the personal holding company provisions by
claiming life insurance company status through the issuance
of a small and insignificant amount of insurance contracts.

Id. at 382.

In Industrial Life Ins. Co. v. United States, 344 F. Supp. 870 (D.S.C. 1972), aff'd
per curiam, 481 F.2d 609 (4th Cir. 1973), the Fourth Circuit rejected the taxpayer's claim
that it was an insurance company where the taxpayer earned 0% of its income from
selling credit life insurance and issuing life insurance policies to its officers, and the
balance of its income from its investment portfolio and the sale and leasing of real
estate. The court explained,

It is obvious from the financial information ... that the
premium income for these years was small when compared
with income from real estate, mortgages and investment.

It is also important to note that more than half of the
premium income came from policies on the lives of the only
officers and stockholders of the company.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 154

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

Id. at 876. The Court likened the facts of Industrial Life to those of
Cardinal Life. Id.

By contrast, in Service Life Ins. Co. v. United States, 189 F. Supp. 282 (D. Neb.
1960), aff'd on other grounds, 293 F.2d 78 (8th Cir. 1961), the Court held that the
taxpayer was an insurance company where it had “over $22,000,000 worth of life
insurance on its books; over 70,000 individual policies in force; and approximately
$1,675,000 in premium income’ over a four year period. Id. at 286. The Service Life
Court acknowledged that whether a company is considered an insurance company
turns on the character of the business conducted by the company, not any percentage
of income. Id. at 285-86. The Court did, however, compare the taxpayer's premium
income to its investment income to determine the business activity of the taxpayer. Id.
at 286. Although the taxpayer also generated income from mortgage loans and
investments, over half of the taxpayer's income was from its insurance premiums, and
over half of its income-producing assets were held for insurance policy reserves. Id.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 155

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

What Constitutes “Insurance” and an “Insurance Contract”

The principal test for what constitutes “insurance” is set out in Helvering v.
LeGierse, 312 U.S. 531 (1941). In that case the Supreme Court States that
“[h]istorically and commonly insurance involves risk-shifting and risk-distribution....”
Further, the Court Stated that “the risk must be an ‘insurance risk’ as opposed to an
‘investment risk’ ....” The court in Epmeier v. United States, 199 F.2d 508, 509-0 (7th
Cir. 1952), defined an insurance contract as a “contract, whereby, for an adequate
consideration, one party undertakes to indemnify another against loss from certain
specified contingencies or perils...”

Neither the Internal Revenue Code nor the regulations specifically define the
term insurance contract. The courts have generally required that a transaction involve
both risk shifting (from the insured's perspective) and risk distribution (from the insurer's
perspective) in order to be characterized as insurance. Helvering v. LeGierse, 312 U.S.
531, 539 (1941); Gulf Oil Corp. v. Commissioner, 914 F.2d 396, 411 (3rd Cir. 1990).

Risk shifting occurs when a person facing the possibility of a loss transfers some
or all of the financial consequences of the loss to the insurer. Rev. Rul. 88-72, 1988-2
C.B. 31, clarified by Rev. Rul. 89-61, 1989-1 C.B. 75. The risk transferred pursuant to
an insurance contract must be a risk of economic loss. Allied Fidelity Corp. v.
Commissioner, 66 T.C. 068 (1976), aff'd, 572 F.2d 1190 (7th Cir. 1978), cert. denied,
439 U.S. 835 (1978).

Risk distribution incorporates the statistical phenomenon known as “the law of
large numbers”. When additional statistically independent risk exposure units are
insured, although the potential total losses increase, there is also an increase in the
predictability of average loss. This increase in the predictability of the average loss
decreases the amount of the capital that an insurance company needs per risk unit to
remain at a given solvency level. See Rev. Rul. 89-61, 1989-1 C.B. 75.

Distributing risk allows the insurer to reduce the possibility that a single costly
claim will exceed the amount taken in as premiums and set aside for the payment of
such a claim. By assuming numerous relatively small, independent risks that occur
randomly over time, the insurer smooths out losses to match more closely its receipt of
premiums. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir.
1987).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 156

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) | 20XX
20XX
Law 20XX

Risk distribution necessarily entails a pooling of premiums, so that a potential
insured is not in significant part paying for its own risks. In Humana Inc. v.
Commissioner, 881 F.2d 247, 257 (6th Cir. 1989), the United States Court of Appeals for
the Sixth Circuit held that arrangements between a parent corporation and its insurance
company subsidiary did not constitute insurance for federal income tax purposes. The
court also held, however, that arrangements between the insurance company subsidiary
and several dozen other subsidiaries of the parent (operating an even larger number of
hospitals) qualified as insurance for federal income tax purposes because the requisite
risk shifting and risk distribution were present. But see Malone & Hyde, Inc. v.
Commissioner, 62 F.3d 835 (6th Cir. 1995) (concluding the lack of a business purpose,
the undercapitalization of the offshore captive insurance subsidiary and the existence of
related party guarantees established that the substance of the transaction did not
support the taxpayer's characterization of the transaction as insurance). In Kidde
Industries, Inc. v. United States, 40 Fed. Cl. 42 (1997), the United States Court of
Federal Claims concluded that an arrangement between the captive insurance
subsidiary and each of the 00 operating subsidiaries of the same parent constituted
insurance for federal income tax purposes. As in Humana, the insurer in Kidde insured
only entities within its affiliated group during the taxable years at issue.

Rev. Rul. 2002-90, I.R.B. 2002-52, December 0, 2002, held that a subsidiary’s
arrangement to provide liability insurance coverage to 12 of its parent company's
subsidiaries constituted insurance contracts for federal tax purposes and, thus, the
amounts paid as premiums by each subsidiary were deductible as business expenses.
Under the arrangement, the subsidiaries were charged arm's length premiums,
according to customary industry ratings, and none had liability coverage for less than 5
percent, or more than 15 percent, of the total risk insured by the subsidiary. As a result,
the professional liability risks of the 12 subsidiaries were shifted to the insurer subsidiary
as required to constitute an insurance contract for federal tax purposes. The common
ownership of the subsidiaries, including the insurer, by the parent, did not affect the
determination that the arrangements constituted insurance contracts.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 157

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

Reliance Upon and Revocation of IRS Determination Letter

The exempt status of an organization may be recognized by the Internal Revenue
Service through the application process described in Rev. Proc. 90-27, 1990-1 C.B.

Although not required to apply for a determination letter in order to claim exempt
status, organizations seeking recognition of exemption from the Internal Revenue
Service under I.R.C. § 501(c)(15) must file a Form 1024, Application for Recognition of
Exemption under Section 501(a).

A determination letter recognizing tax exempt status is issued by the Internal Revenue
Service to an organization where its application and supporting documents establish
that it meets the requirements of the category of exemption it claims. Rev. Proc. 90-27,
§ 5.01, 1990-1 C.B. 514. All information by the applicant must be provided under
penalties of perjury. Rev. Proc. 2003-4, § 9.13, 2003-1 I.R.B. 123, 140-141. The
application process ends with the issuance of a determination letter. A “determination
letter’ is a written Statement issued by the Internal Revenue Service in response to a
written inquiry by an individual or an organization that applies to the particular facts.
Treas. Reg. § 601.201(a)(3).

An organization may ordinarily rely on a favorable determination letter received from
the Internal Revenue Service. Treas. Reg. § 1.501(a)-1(a)(2); Rev. Proc. 2003-4,
§14.01 (cross-referencing § 13.01 et seq.), 2003-1 C.B. 123. An organization may not
rely on a favorable determination letter, however, if the organization omitted or
misstated a material fact in its application or in supporting documents. In addition, an
organization may not rely on a favorable determination if there is a material change,
inconsistent with exemption, in the organization’s character, purposes, or methods of
operation after the determination letter is issued. Treas. Reg. § 601 .201(n)(3)(ii); Rev.
Proc. 90-27, § 13.02, 1990-1 C.B. 514. Any such changes must be reported to the
Service so that continuing recognition of exempt status can be evaluated. [The
determination letter issued to ESP contains this requirement.]

The Commissioner may revoke a favorable determination letter for good cause. Treas.
Reg. § 1.501(a)-1(a)(2). A favorable determination letter may be revoked by written
notice to the organization to whom the determination originally was issued. Treas. Reg.
§ 601.201(m) (cross-referencing Reg. § 601.201(I)); Rev. Proc. 90-27, § 14, 1990-1
C.B. 514, 518.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 158

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (* ”) 20XX
20XX
Law 20XX

if the Commissioner revokes the tax-exempt status of an organization, the remaining
question is whether the revocation should be applied prospectively or retroactively.
Generally, revocation of a determination letter is prospective. Rev. Proc. 2003-4, §
14.01 (cross-referencing § 13.01 et seq.). Revocation of a determination letter may,
however, be retroactive if the organization omitted or misstated a material fact or
operated in a manner materially different from that originally represented. Treas. Reg. §
601.201(n)(6)(i); Rev. Proc. 90-27, §14.01; Rev. Proc. 2003-4, § 14.01 (cross-
referencing § 13.01 et seq.).

In cases where the organization omitted or misstated a material fact, revocation may be
retroactive to all open years under the statute. See Treas. Reg. § 601 .201(1)(1). In
cases where revocation is due to a material change, inconsistent with exempt status, in
the character, the purpose, or the method of operation, revocation will ordinarily take
effect as of the date of the material change. Treas. Reg. § 601.201(n)(6)(i); Rev. Proc.
90-27. In any event, revocation will ordinarily take effect no later than the time at which
the organization received written notice that its exemption ruling or determination letter
might be revoked. Treas. Reg. § 601.201(n)(6)(i).

Qualification for Relief Under Code Section 7805(b)

Under certain circumstances, however, the Commissioner may, in his discretion, grant
relief from retroactive revocation under I.R.C. § 7805(b) of the Code. Section
7805(b)(8) of the Internal Revenue Code provides:

APPLICATION TO RULINGS. The Secretary may prescribe the extent, if
any, to which any ruling (including any judicial decision or any
administrative determination other than by regulation) relating to the
internal revenue laws, shall be applied without retroactive effect. Section
301.7805-1(b) of the regulations delegates authority granted by I.R.C. §
7805(b) to the Commissioner (or the Commissioner's delegate).

An organization that wishes to limit the retroactive effect of revocation must request that
the Commissioner, Tax Exempt and Government Entities Division, the Commissioner of
Internal Revenue’s delegate, exercise discretionary authority under I.R.C. § 7805(b) to
limit the retroactive effect of revocation. Rev. Proc. 2003-4, § 14.02. To make sucha
request, the organization must follow the procedures provided for in Rev. Proc. 2003-4,
§ 14.02 (cross-referencing Rev. Proc. 2003-5, § 19, 2003-1 C.B. 163).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 159

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
: 20XX
Law 20XX

To request I.R.C. § 7805(b) relief, the organization must submit a Statement in support
of the application of I.R.C. § 7805(b), as described in Rev. Proc. 2003-4, §14.02. See
also Rev. Proc. 2003-5, § 19. The organization’s Statement must expressly assert that
the request is being made pursuant to I.R.C. § 7805(b). The organization’s Statement
must also indicate the relief requested and give the reasons and arguments in support
of the relief requested. It must also be accompanied by any documents bearing on the
request. The organization’s explanation and arguments should discuss the five factors
bearing on retroactivity listed in Rev. Proc. 2003-4, §14.02(1) (cross-referencing §
13.05), as they relate to the situation at issue. These five items are, in effect, the same
as the factors provided in Treas. Reg. §§ 601.201(I)(5) and 601.201(m), Statement of
Procedural Rules, which States:

Except in rare or unusual circumstances, the revocation or
modification of a ruling will not be applied retroactively with
respect to the taxpayer to whom the ruling was originally issued or
to a taxpayer whose tax liability was directly involved in such
ruling if:

(1) there has been no misstatement or omission of material facts;

(2) the facts at the time of the transaction are not materially
different from the facts on which the [determination letter] was
based;

(3) there has been no change in the applicable law;

(4) the [determination letter] was originally issued for a proposed
transaction; and

(5) the taxpayer directly involved in the [determination letter] acted
in good faith in reliance upon the [determination letter] and
revoking or modifying the [determination letter] retroactively
would be to the taxpayer's detriment.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 160

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Law 20XX

If relief is granted under I.R.C. § 7805(b), the effective date of revocation of a
determination letter is no later than the date on which the organization first received
written notice that its exemption might be revoked. Treas. Reg. § 601.201(n)(6)(i);
Virginia Education Fund v. Commissioner, 85 T.C. 743, 7522-3 (1985), aff'd 799 F. 2d
903 (4th Cir. 1986). This does not preclude the effective date of revocation being earlier
than the date on which the organization first received written notice that its exemption
might be revoked. Virginia Education Fund v. Commissioner, 85 T.C. at 753.

The Supreme Court has held that the Commissioner has broad discretion under I.R.C. §
7805(b) (and its predecessor) in deciding whether to revoke a ruling retroactively.
Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 184 (1957). See also
Dixon v. United States, 381 U.S. 68, 74-75 (1965). The Commissioner's determination
is reviewable by the courts only for abuse of that discretion. Virginia Education Fund v.
Commissioner, 85 T.C. 743, 752 (1985).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 161

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

ORG Does Not Meet the Definition of an Insurance Company Under I.R.C. §
501(c)(15)

To be exempt from federal income tax under I.R.C. section 501(a) as an entity
described in I.R.C. section 501(c)(15), the entity must be an insurance company or
association, other than life (including inter-insurers and reciprocal underwriters). In
addition, it must meet a premium income requirement.

The government holds that ORG did meet the definition of an “insurance
company or association” for purposes of I.R.C. §501(c)(15) during the period(s) covered
within this report. Facts discussed below supporting this conclusion show that —

[a] Investments were ORG’s primary and predominant activity

[b] ORG failed to use its capital and efforts primarily to earn income from its

insurance activity.

[c] ORG insurance policies lacked risk shifting and risk distribution

a. Investments were ORG’s Primary and Predominant Activity

Here, ORG should not be classified as an insurance company for tax purposes because
its primary and predominant activity was investments, not insurance. This is evidenced
by ORG’s sources of revenue, where revenue from ORG’s sales of real property
interests was 0% and 0% of aggregate revenue, respectively for years 20XX-20XX; and
investment revenue was 0% of aggregate revenue for year 20XX.

ORG’s reported revenue for 20XX-XX is summarized below.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 162

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government's Position 20XX
Form 990, Part I, Line # Year 20XX Year 20XX Year 20XX
$$$ % $$$ % $$$ %
2 - Program Service
Revenue

Premiums Written 0 0.0% 0 0.0%
Premiums Assumed 0 0.0% 0 0.0%
4 - Interest on
Savings / Temp Cash
Inv 0 0.0%
5 - Dividends and Interest 0 0.0%

Net Rental Income 0 0.0%
7 - Other Investment
Income 0 0.0% 0 0.0%
8 - Net Gain from Sale of
Non-Inventory Assets
Securities -0 0.0% -0 -0.0%
Non-Securities 0 0.0% 0 0.0% 0 0.0%
11 - Other Revenue

Premiums Insurance 0 0.0%
Premiums Subject to
Reinsurance 0 0.0%
Misc. Revenue —
Line of Credit Fee i) 0.0%
12 - Total Revenue 0 00% 0 00% 0 00%

ORG’s sales of real property interests in 20XX-20XX (Line #8), clearly involved a
pattern of investment activity beginning in year 20XX and continuing through year 20XX,
whereby property interests having a low basis were contributed by ORG’s sole
shareholder, the LP-1, and sold by ORG for substantial tax-sheltered gains in the
following year. This pattern of investment activity involved businesses controlled/owned
by Director-1 Family members.

On 12/29/20XX, the LP-1 contributed to ORG, one-third interests in two properties
having a total basis of $0-

Property-1 - County County, State ($0)
Property-2 — County County, State ($0)

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 163

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

During year 20XX, ORG sold the one-third interests in these properties to obtain the $0
net gain reported in Form 990 (Line #8). Five limited partnerships and one limited
liability company controlled/owned by Director-1 Family members purchased the one-
third interests in these properties. The remaining two-thirds interests in these properties
were sold by ORG’s Territory captive affiliates - CO-7 and CO-5 — that were also
controlled/owned by Director-1 Family members.

On 12/31/20XX, the LP-1 contributed to ORG a one-third interest in property described
as “Property-3”, within County County, State, having a basis of $0. During year 20XX,
ORG sold its one-third interest in this property to obtain the $0 gain reported in Form
990 (Line #8). The CO-6, one of the five limited partnerships that purchased property
interests from ORG in year 20XX, was the sole purchaser of this property interest.

Minutes of ORG’s Board meeting held on 2/17/20XX evidence this pattern of investment
activity, where assets and net income were noted to have increased substantially as a
result of ORG’s sale of the Property-3 property interest, which was referred to as
appreciated property carried on the books at basis:

“It was noted that the Company now has $0 in Assets compared with $0 in
the prior year. The increase is mainly a result of the sale of appreciated
property (Property-3) which was carried on the books at basis. The
breakdown of total assets is as follows:

Cash and cash equivalents: $0 -— Cash and
money market account

Investments and Receivables: $0 — Money invested in real estate
and real estate investment companies

In 20XX, the Company made additional investments in companies whose
business is real estate investment. These companies loan money
secured by real estate.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 164

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Manager-2 completed his review of the balance sheet and then conducted
a brief review of the Income Statement for the year noting the Company
showed Net income of $0 compared with $0 in the prior year. This was
mainly attributable to the sale of Property-3. Total investment revenue
was $0 compared with $0 for the prior year.”

[Emphasis added to above underlined areas.]

This pattern of investment activity is further evident in the minutes of ORG’s Board
meeting held on February 9, 20XX, where ORG’s Board acknowledged that a
substantial decrease in net income resulted from sales of interests in appreciated real
property not recurring in year 20XX:

“The balance sheet review was finished and then a brief review of the
Income Statement for the year was conducted. It was noted that the
Company showed a net loss of $0 compared with net income of $0 in the
prior year. The decrease is due to the sale of appreciated property in prior
years not recurring this year. Total investment revenue was $0 compared
with $0 in the prior year. Premium income for the year was $0 compared
with $0 for the prior year.”

[Emphasis added to underlined area.]

ORG’s investment operations were also evident within its Other Investment income that
came from equity held in limited liability companies whose business was real estate
investment (see ORG Board meetings held on 2/17/20XX and 2/9/20XX). These LLCs
were described in ORG audited financials as “associates”, “affiliates”, and
“subsidiaries”, and were explained by ORG to have been formed for the purpose of
making an investment in a specific real property loan or to make a specific real estate
investment. ORG reported its Other Investment income from this source on Part |—Line
_ #7 as $0 for year 20XX and $0 for year 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 165

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

b. ORG Failed to Use its Capital and Efforts Primarily to Earn Income
from its Insurance Activity.

The courts also consider the manner in which the company conducts its business
activities in determining whether it qualifies as an insurance company for federal income
tax purposes. A taxpayer “must use its capital and efforts primarily in earning income
from the issuance of contracts of insurance.” Cardinal Life, 300 F.Supp. at 391.

ORG's capital and efforts were not focused primarily on insurance operations, as
supported by having only two direct-written policies in effect during 20XX-20XX, and
having only five direct-written policies in effect during 20XX.

In addition to the low volume of direct-written insurance activity during 20XX-20XX,
other facts reveal that ORG’s capital and efforts were focused substantially upon
investments rather than conducting insurance -

[1] ORG was substantially over-capitalized relative to its insurance activities.

[2] ORG’s expenses were not directed towards marketing and/or promoting an
insurance program, but rather towards investments within the diversified
conglomerate of businesses known as the “Companies”. [The term “Companies”
is defined within ORG’s Business Plan.]

[3] ORG did not use any internal or independent actuarial risk analysis to determine
premium charges for its direct-written policies.

[4] ORG treated its insurance arrangements informally.

[5] ORG ceased writing insurance when the change in gross receipts requirements
became effective to qualify as a non-life insurance company under Code §
501(c)(15).

First, ORG failed to use its capital and efforts primarily to earn income from its
insurance activity by being substantially over-capitalized relative to its insurance
activities. Short-term cash investments (e.g., money market funds) that could be
liquidated quickly to make real-estate related loans were a substantial portion of asset
balances in years 20XX-20XX. These short-term investments in years 20XX-20XX
came from the tax-sheltered gains that ORG realized from selling property interests
acquired from its sole shareholder, the LP-1.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 166

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government's Position 20XX

Account receivable and notes/loans receivable balances increased substantially during
20XX-20XX, supporting that ORG loaned its funds from the tax-sheltered gains to
benefit investments within the diversified conglomerate of businesses known as the

“Companies”.

The summary of asset balances reported for years 20XX-20XX, given below, discloses
short-term cash investments decreasing while receivable balances increased.

Form 990, Part IV, Year 20XX Year 20XX Year 20XX
Line # $$$ % $$$ % $$$ %
46 - Savings & Temp. 0.00% 0.00%
Cash Inv. 0 0.00% 0 0
54 - Securities 0.00% 0.00%
Investments 0 0.00% 0 0
55 - Investments - 0.00% 0.00%
Land/Building/Equip. 0 0.00% 0 0
56 - Other Investments 0 0.00% 0 0.00% 0 0.00%
57 — Land / Building/ 0.00%
Equipment 0 0.00% 0 0.00% 0.00
Total Investment
Assets 0 0.00% 0 0.00% 0 0.00%
45 - Non-Interest
Bearing Cash 0 0.00% 0 0.00%
47 - Accounts 0.00%
Receivable 0 0.00% 0 0.00% 0
51 - Other Notes/Loans 0.00%
Rec. 0 0.00% 0
57 -
Land/Building/Equipment 0 0.00%
58 - Other Assets (Line
of Credit) 0 0.00% 0 0.00%
59 - Total Assets 0 0.00% 0{ 00.0000% 0 0.00%%

Further evidence of ORG being substantially over-capitalized relative to its insurance
activities was ORG’s management not believing that a loss reserve for its policies was
necessary. Having no reserve set aside to cover policy losses demonstrates that
ORG’s assets were not dedicated towards insurance operations, but rather towards
investments within the diversified conglomerate of businesses known as the

“Companies”.

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page 167

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No or
Exhibit

Name of Taxpayer

ORG (“

Government’s Position

Year/Period Ended

20XX
20XX
20XX

Notes within ORG’s audited financials report that ORG’s management did not believe
that a reserve for policy losses was necessary. For example, Note 2(e), “Loss Reserve”
(at Page 10) of ORG audited financials for year 20XX stated:

“Management does not believe that_a reserve for policy losses and related

expenses is necessary. However, because of the length of time required

for the ultimate liability for losses and loss expenses to be determined, the
net amounts that will ultimately be paid to settle any liability may vary
significantly from the nil amount provided for in the Statement of assets
and liabilities.

The Company does not provide for losses on incurred but not yet reported

cases. It has been the Company’s experience that incidents which may

give rise to claims are invariably reported almost immediately and

therefore any additional provision for this category of claim is

unnecessary. Although management believes that no additional provision
is necessary, any reserve to cover the ultimate payment of such amounts
is not presently determinable.”

ORG's liabilities reported for years 20XX-20XX consisted of accounts payable and other
liabilities described as “IBNR Reserve”. In response to Item #14 of IDR 1 (years 20XX-
20XX), that requested support for the $0 IBNR Reserve, ORG explained that this
documentation could not be located:

“This item was based upon the recommendation of the Company’s
insurance consultants. The Company has not been able to locate

the supporting documentation.”

Form 990, Part IV, Year 20XX Year 20XX Year 20XX
Line # $$$ % $$$ % $$$ %

60 - Accounts Payable

and Accrued Expenses 0 00.00% 0 00.00%

65 — Other Liabilities

(IBNR Reserve) 0.00 00.00% 0.00 | 00.00%
66 — Total Liabilities 0 00.00% 0 00.00% 0.00 | 00.00%

Form 886-A (Rev. 4-68)

Page 168

Department of the Treasury - Internal Revenue Service

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Second, ORG failed to use its capital and efforts primarily to earn income from its
insurance activity by devoting most of its expenses towards investments within

the diversified conglomerate of businesses known as the “Companies” rather

than towards marketing an insurance program. ORG’s only expenses that directly
supported insurance activities were those within the quarterly CO-23 computations

for ORG’s assumed re-insurance premiums -- Insurance commissions, incurred claims,
and experience refunds.

In both Cardinal Life and Inter-American Life, where the courts determined that the
primary and predominate business of each company was not insurance, neither
company employed a sales force. In Cardinal Life, although the taxpayer sold some
reinsurance contracts during the years at issue, the District Court noted,

Plaintiff did not have an active sales force soliciting or selling insurance
policies. Each of the insurance policies actually written by Plaintiff was as
the result of reinsurance agreements wherein other companies ceded to
Plaintiff certain amounts of insurance written by them. These reinsurance
contracts were negotiated either by the president and sole stockholder of
Plaintiff and/or the company’s actuary who rendered services to Plaintiff
on a fee basis. Plaintiff otherwise did not have any employees, brokers,
agents or salesmen soliciting and selling insurance for it, and the only
insurance written by Plaintiff was through reinsurance agreements.

Cardinal Life, 300 F. Supp. at 392. Similarly, in Inter-American Life, the Court
considered the fact that the taxpayer did not “maintain an active sales staff soliciting or
selling insurance policies” during the taxable years at issue as evidence of the
taxpayer's “lack of concentrated effort” on the insurance business. Inter-American Life,
56 T.C. 497, 507. (1971).

ORG’s payment of a claim for one of its direct written policies and management fees
support expenses being devoted towards investment activities of the Companies
economic group rather than towards insurance.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 169

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

ORG paid a $0 claim to the LP-3 in year 20XX for its direct policy #01 -01 written for
year 20XX. This payment was for one-third of a $0 amount billed for drilling services
rendered by CO-44, Inc. (trade name is “CO-44”). ORG’s Claim Form described these
costs as “EPA clean-up expenses”, which were consistent with the LP-3’s business
operations:

0% devoted towards owning/operating retail petroleum facilities primarily in

State and State
& 0% engaged in real estate speculation and development in State; and

0% devoted in private and public equity investments.

ORG paid management fees of $0 (year 20XX) and $0 (year 20XX) to a Director-1
Companies affiliate, the CO-2 (“CO-2”), to manage the Property-3. Real estate
activities were further evident by ORG’s sole shareholder, the LP-1, transferring a one
third interest in the Property-3 property to ORG at a basis of $0 in 20XX, which ORG
disposed of for a $0 tax-sheltered gain in 20XX. CO-2 was one-third equally owned
by the sole shareholders of ORG and its two captive affiliates -

LP-1— sole shareholder of ORG

LP-3- sole shareholder of CO-7

LP-2—-sole shareholder of CO-5

ORG reported $0 of management fees for “asset management services provided
during the year’ by its sole shareholder, the LP-1, for year 20XX. No documentation
was provided to substantiate that any services were rendered for the $0
management fees reported, which were based upon 0% of ORG’s net assets in 20XX-
20XX:

20XX Management Fee paid to LP-1 0.00

[See ORG correspondence, dated 11/0/20XX, responding to Item #14 of IDR 2 (years
20XX-20XX)]

ORG recorded the $0 and $0 management fees in its G/L as pay-downs of

the line-of-credit loan owed by the LP-1. The reductions in the line-of-credit loan
owed by the LP-1 are actually liquidating distributions consistent with ORG's
liquidation plans reported within Note 16, “Subsequent Events”, (at Page 15) of ORG
audited financials for year 20XX, stating:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 170

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government's Position 20XX

“There are plans in place to liquidate the Company as at December
31, 20XX. Liquidating distributions will be made periodically until
the end of next year.”

In addition to ORG’s paid claim and management fees supporting investment activities,
other instances where ORG expenses were devoted towards investments within the
“Companies” rather than to market an insurance program include -

Legal fees of $0 (year 20XX); $0 (year 20XX); and $0 (year 20XX) consisting
primarily of $0 monthly charges for general/administrative services having no direct
connection with policies in effect during 20XX-20XX. The Advisory Firm-2 — one of
the legal fee recipients - employed ORG director, Director-1, during 20XX to provide
real estate advisory and management services.
Interest expense of $0 (year 20XX) actually being a fee for a real estate loan made
by ORG’s investment affiliate, CO-34. The fee was based upon 0% of ORG’s initial
capital contribution investment in the amount of $0 that ORG made within the CO-
34.

& Property taxes of $0 (year 20XX); $0 (year 20XX); and $0 (year 20XX) paid primarily
for investment properties and investment fees.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 171

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Third, ORG failed to use its capital and efforts primarily to earn income from its insurance
activity by not using actuarial risk analysis to determine premium charges for its direct-
written policies. This is supported by documentation requested during the IRS field
exam to determine whether ORG conducted any actuarial risk analysis in computing
premium charges for policies in effect during years 20XX-20XX.

In response to a request for rate charts and actuarial reports to support whether risk
transfer and risk distribution existed for ORG’s direct premium policies #01 - 09
and #01 - 01, ORG Stated that actuarial documentation was not available and
that risk was personally assessed by management:
The risks insured under these policies are non-standard risks concerning
which actuarial information and analysis were not available. Management
of the Company personally assessed this risk based _upon their knowledge
of the insureds and the insureds’ businesses. The Company engaged
outside insurance counsel to tailor the policy coverages and limitations to
match their business assessments of risk. The policies clearly transfer
risk from the insureds to the Company. The direct written policies together
with reinsurance business also clearly distribute risk among many
insureds.” (Response to Item #6 of IDR 1 issued for year 20XX)

The IRS’ follow-up request for documentation supporting “ORG management's
personal assessment of risk based upon their knowledge of the insureds and the
insureds’ business” resulted in ORG stating that no documentation existed:
“The Company’s management was very familiar from personal
observation and evaluation with the direct insured risks. Because of the
familiarity, no ‘underwriting memo’ or similar document exists.”

(Response to Item #2A of IDR 8 issued for year 20XX.)

In response to the IRS request for an actuarial analysis supporting computation of
premium charges, risk transfer, and risk distribution for policies in effect during the 12-
month periods ended December 31, 20XX-20XX, ORG Stated that actuarial analysis
was not necessary:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 172

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

“The directly written policies were of risks well known to the company and
no actuarial analysis was necessary. CO-23 advises that its retrocession
arrangement was never subjected to actuarial analysis and that it had no
reason to do so.”

(Response to Item #4E of IDR 1 issued for years 20XX-20XX)

[Emphasis added to above underlined areas.]

Fourth, ORG failed to use its capital and efforts primarily to earn income from its
insurance activity by treating its insurance arrangements informally. This was evident
in the payment pattern of ORG’s direct insureds, where premiums were paid
substantially after their policies’ coverage commenced on January 1 of years 20XX
20XX. The industry practice for companies primarily engaged in the insurance business
is to obtain at least a portion of the insurance premium on or about the time when policy
coverage begins. In contrast, ORG’s direct insureds paid their premiums substantially
after January 1 -

For policies in effect for year 20XX, ORG’s insureds paid their respective premiums

on
8/17/20XX (LP-3) and on 10/25/20XX (CO-3 Company).

For policies in effect for year 20XX, ORG’s insureds paid their respective premiums
on
12/18/20XX (CO-3 Company) and on 12/23/20XX (LP-3).

For policies in effect for year 20XX, ORG’s insureds -- CO-4, LP-10, CO-6, CO-3

Company, and LP-3 -- paid their premiums on 12/31/20XX. ORG deposited these
payments on 1/15/20XX.

Fifth, ORG ceased writing insurance business in 20XX, with no policies written and /
or renewed in that year. This decision resulted in ORG’s capital and efforts not being
committed for ORG to continue qualification as an “insurance company” described
under Code § 501(c)(15) that primarily earned its income from insurance activities
meeting gross receipts criteria that would be in effect for tax years after 12/31/20XX:

Gross receipts for the taxable year not to exceed $0.
More than 0% of such gross receipts to consist of premiums

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 173

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

The Government emphasizes that ORG’s cessation of insurance writing occurred
simultaneous with changes in gross receipts criteria for continued qualification as an
“insurance company” described under Code § 501(c)(15) becoming effective as of
1/1/20XX, and was consistent with predominant operations as an investment company,
as evidenced by the relationship of ORG’s revenue, expenses, and assets to
investments — particularly real estate.

In summary, ORG’s primary and predominant business activity was not insurance, but
investments. ORG did not devote its capital and efforts primarily to its insurance
business. ORG’s expenses were not made to employ knowledgeable employees or a
sales force. Neither did ORG advertise or otherwise promote its insurance business.
ORG treated its insurance business too informally for the transactions to be respected
as true insurance. For the taxable years at issue, ORG is held to have operated
primarily as an investments holding company (or a shell). Like Cardinal Life, ORG is
seeking to avoid tax by claiming tax exempt small insurance company status through
I.R.C. section 501(c)(15) based on its reinsurance of an insignificant amount of
insurance contracts.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 174

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

¢, ORG Insurance Policies Lacked Risk Shifting and Risk Distribution

ORG’s policy contracts do not constitute “insurance” because they do not involve
both risk-shifting and risk-distribution, as established in Helvering v. LeGierse, 312 U.S.
531 (1941). In making this determination, the terms “risk-shifting” and “risk-distribution,”
as defined within Rev. Rul. 2002-90, were applied.

No Risk Shifting

ORG’s Business Plan evidences the Companies’ having exclusive control over selection
and risk management of ORG’s insured parties, which negated any risk shifting of a
potential economic loss to ORG as the insurer. Sections 1A, 1B, HA, IIB, IC, and IIB of
ORG’s Business Plan, given here, support this fact with an emphasis added for
underlined areas:

Section IA — General Description / Overview
“The company will insure various business activities of The Director-1
Companies, a diversified conglomerate of businesses located primarily in
State, (“Companies”). The Company will also accept third-party
Insurance as described herein.”

Section IB — General Description / Purpose
“The purpose of the Company is to provide access to non-traditional
insurance policies with which risks of loss businesses are commonly faced
but to which limited or no insurance coverage is currently available. The
Company believes that it faces several risks over the next few years for
which traditional insurance is either too expensive or unavailable. Also,
the Company hopes to obtain profitable reinsurance business. In addition,
the Company may cede certain risks to reinsurers.”

Section IIA — Marketing / Planned Areas and Type of Business
“The Company will operate as a property and casualty insurance company
and will not issue life insurance policies. Insurance will be written on The
Company, to enable better risk management, and allow The Company to
obtain non-traditional insurance at better price points.”

Section IIB — Marketing / Method of Solicitation
“The Company does not presently intend to have insurance agents or
solicitors. All insurance initially will either come directly from The
Company, or be obtained by the Company’s insurance manager.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 175

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items | Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Section IIC — Marketing / Source of Business
“The Company expects that zero percent (0%) or more of its business will
come from The Company. The Company is a diversified conglomerate of
companies, with numerous employees and assets and is currently faced
with all of the below-described insurable risks. The Company will seek to
engage in management of its risks and containing the cost of acquiring the
foregoing classes of insurance.

The balance of the insurance underwriting business will be accepted by
way of reinsurance of unrelated, licensed insurance companies.”

Section IIIB — Details of Underwriting
“The Company will be highly selective as to the risks, which it will
underwrite in the early stages of its development. The company will
continue to obtain regular commercial property and casualty insurance
from standard providers, and will primarily use the Company to provide
non-traditional insurance and to access the reinsurance market.”

No Risk Distribution
Distributing risk allows the insurer to reduce the possibility that a single costly claim will
exceed the amount taken in as premiums and set aside for the payment of such a claim.
By assuming numerous relatively small, independent risks that occur randomly over
time, the insurer smooths out losses to match more closely its receipt of premiums.
Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987). Risk
distribution necessarily entails a pooling of premiums so that a potential insured is not,
in significant part, paying for its own risks. [See Humana Inc. v. Commissioner, 881 F.
2d 247, 257 (6th Cir. 1989).]

ORG’s direct insurance policies did not involve risk distribution, which requires the
statistical phenomenon known as the law of large numbers. During years 20XX-20XX,
ORG had only two policies in effect, covering two insureds. In year 20XX, ORG had
only five policies in effect, covering five insureds. Risk distribution did not, therefore,
exist under the law of large numbers within the very small populations of policies in
effect during these years:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 176

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Year 20XX -

CO-3 Company (Policy 01- 09)
LP-3 (Policy XX - 01)

Year 20XX -

CO-3 Company (Policy 02- 09)

LP-3 (Policy XX - 01)

Year 20XX -

CO-3 Company (Policy 03- 09)
LP-3 (Policy 03 - 01)

CO-6 (Policy 13 - 32)

LP-10 (Policy 13 - 31)

CO-4 (Policy 13 - 33)

eee &

The lack of risk distribution in ORG’s policies is further evident by comparing them with
the liability insurance coverage provided by the captive insurer discussed within Rev.
Rul. 2002-90. In Rev. Rul. 2002-90, twelve subsidiaries comprising the insured parties
and the insurer had common ownership by a parent company. None of the insured
parties had less than 5 percent or more than 15 percent of the total risk insured by their
affiliated, meaning that the parent company’s common ownership of the insured
subsidiaries and the insurer did not impact the determination that the arrangements
constituted insurance contracts. In contrast, the parties covered under ORG's direct
insured policies had substantially larger percentages of the total risk because they
involved substantially smaller populations of policies. [Also, see Humana Inc. v.
Commissioner, supra.]

Years 20XX-20XX: 2 policies (total risk distributed per policy = 0%)
Year 20XX: 5 policies (total risk distributed per policy = 0%)

With respect to ORG’s assumed reinsurance from CO-23, the Government emphasizes
that ORG reinsured pro-rata shares of group disability insurance and related claims
involved small portions of CO-23’s aggregate reinsurance. Any risk distribution
assumed from CO-23 was therefore irrelevant in determining whether ORG was
predominately involved with “insurance” for federal tax purposes. In support, the
Government notes that ORG’s pro-rata share of group disability insurance and related
claims assumed from CO-23 were only 0% during 20XX-20XX, and 0% in 20XX

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 177

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

ORGcannot continue to rely upon its determination ruling letter, dated
October 19, 20XX, recognizing the organization’s exempt status under I.R.C.
§ 501(c)(15) for the tax year(s) at issue because it did not operate as an
“insurance company” as that term is used in I.R.C. § 501(c)(15).

When the Internal Revenue Service's issued a favorable ruling to ORG in its
determination letter, dated October 19, 20XX, the ruling was based upon information
that ORG provided at the application stage. The IRS clearly Stated within this letter that
the ruling was not only contingent upon ORG actually operating as it represented that it
would within its application, but also required that ORG inform the IRS as to any change
in purposes, character, or method of operation:

kkk

[Emphasis added for underlined].

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 178

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government's Position 20XX

An organization may not rely on a favorable determination letter if the organization
omitted or misstated a material fact in its application or in supporting documents. An
organization also may not rely on a favorable determination if there is a material
change, inconsistent with exemption, in the organization’s character, purposes, or
methods of operation after the determination letter is issued. Treas. Reg. section
601.201(n)(3)(ii); Rev. Proc. 2004-1, 2004-1 I.R.B. 1; Rev. Proc. 90-27, 1990-1 C.B.
514.

The Government's conclusion that ORG cannot rely upon its favorable
determination letter, dated October 19, 20XX, is based upon a comparison
between information submitted by ORG to the IRS within its Form 1024
application for tax-exempt status with ORG’s financial and operational
information identified within this report. In concluding that ORG cannot rely on its
favorable determination letter, dated October 19, 20XX, the Government
emphasizes that the signing of ORG’s Form 1024 under penalties of perjury by
ORG’s director, Director-1, on 7/17/20XX, occurred 2 weeks after ORG engaged
in its first sale of real property interests on 7/3/20XX. This sale involved ORG’s
one-third interest in the Property-2 real property, resulting in gross proceeds of
$0 and a net gain of $0. The Form 1024 gave no disclosure about this sale and
subsequent sales of real property interests that occurred in November-
December, 20XX, even though ORG had already held interests in the Property-2
and Property-1 properties when Director-1 signed it on 7/17/20XX.

The Government further emphasizes that it was critical for ORG to have
submitted complete financial information and an accurate description of its
proposed activities during the application process in consideration of Director-1’s
position as officer/director, his level of education, and his 30+ years of business
experience, which placed him in a position that he knew about ORG’s real
property sales occurring in July, November, and December of year 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 179

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Misrepresentation of Sources of Financial Support and Nature of Expenses

In response to Part Il — Line 2 of Form 1024, which requires an applicant to list its
present and future sources of financial support, beginning with the largest source, ORG
represented to the IRS that insurance premiums would be its largest source of financial
support, followed by investment income and shareholder capital contributions. In
response to Part Ill-Section A and Schedule | of Form 1024, ORG represented to the
IRS that its revenues were entirely from premiums and expenses related entirely to its
exempt purpose without making any projections with respect to tax-sheltered sales of
real property interests.

Five factors support that ORG misrepresented its financial information within Form
1024:

First, during year 20XX, ORG had a gain from the sale of its real property

interests that was 0% of aggregate revenue, relative to ORG’s premium revenue
being 0% of aggregate revenue (0.0% direct written premiums + 0.0%
reinsurance premiums = 0.0% total premiums).

Second, ORG’s Form 1024 application failed to disclose the sale of its land

interest in the Property-2 property on 7/3/20XX, for which it obtained sales
proceeds of $0 and a net gain of $0. [As discussed above, ORG’s
officer/director, Director-1, signed the Form 1024 on 7/17/20XX, and was in
position to have known about this transaction due to his position with ORG, his
level of education, and his 30+ years of business experience.]

Third, ORG’s Form 1024 application failed to make any projection as to the

subsequent sales of its interests in the Property-2 and Property-1 properties that
occurred on 11/6/20XX and 12/19/20XX; along with expenses relating to these
sales such as legal costs and property taxes.

Fourth, ORG’s Form 1024 application did not disclose legal and management
expenses having no connection with insurance operations that were paid in
20XX. These expenses included $0 paid to the Advisory Firm-2 (check #0, dated
6/30/20XX) as monthly activity for entitlement properties; $0 paid to the CO-2
(wire transfer on 8/13/20XX) to manage property described as “Property-3”; and
$0 paid for an invoice (#1, dated 2/20/20XX) billed to the Companies by the legal
firm of Law Firm-3.
Fifth, Director-1’s education and business experience described within his
resume’, along with his being an officer/director of ORG, support his being
knowledgeable about ORG’s financial and operational information when he
signed ORG’s Form 1024 on 7/17/20XX under penalties of perjury.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 180

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Misrepresentations of Proposed Activities

In response to Part Il-Item 1 of Form 1024, ORG represented the following description
in regard to proposed activities:
“ORG is a small property and casualty insurance company formed
and licensed under the laws of the Territory. In such capacity, it is
licensed to conduct property and casualty related insurance
activities. Its activities are specifically limited to the underwriting of
property and casualty related risks on both a direct and reinsurance
basis. These are as follows:
Underwriting select lines of property and casualty
insurance coverages for business entities that are both
related and unrelated hereto. These insurance risks can
be categorized, by way of example, errors and
omissions insurance, business economic loss, business
interruption, bankruptcy protection, employment
practices, loss of key employee services, and other lines
of property and casualty related risks. Total
organizational time devoted to underwriting and
administration of insurance estimated to be 0% to 0%.

Accepting and issuing reinsurance coverage for select
lines of property and casualty insurance risks, including
credit disability insurance. No credit life is envisioned
within the company. Total organizational time devoted
to reinsurance related administration is estimated to be
0% to 0%.”

[Emphasis added to underlined areas.]

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 181

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Three factors support that ORG misrepresented its proposed activities within Form

1024:
*

First, proposed activities were stated to be “specifically limited to the underwriting
of property and casualty related risks on both a direct and reinsurance basis”.
This Statement conflicts with ORG’s assets, sources of revenue, and nature of
expenses being based primarily upon investment activities rather than from
operating an insurance business; by ORG not applying actuarial risk
computations to determine its direct policy premium charges; and by ORG having
no program and staff to expand its insurance market. ORG failed to represent
within its Form 1024 that it would not have risk distribution by having 2 policies in
effect during 20XX-20XX, and 5 policies in effect during 20XX.

Second, total organizational time was stated to be devoted at an estimated 0% to

0% towards the underwriting and administration of insurance, which conflicts with

[a] ORG’s direct insurance being limited to the various business activities of
its director. [Note 1, “General Information’, (at Page 5) of ORG’s financial
Statements for the 12-month period ended December 31, 20XX]

[b] ORG not employing insurance agents or market solicitors. The
Companies was expected to provide at least 0% of ORG’s business and
to engage in risk management and cost containment. [Sections IIB and
IC of ORG Business Plan]

[c] Premiums for ORG’s direct insured policies not being based upon
actuarial risk computations, and had no documentation supporting how
they were computed. Instead, Director-1 - as ORG’s “Management? —
personally assessed the risk of the direct insureds based upon his
knowledge of them. [ e.g., ORG response to Item #6 of IDR 3 (year
20XX), requesting rate charts and actuarial reports to support risk transfer
and risk distribution between ORG and its direct insureds.]

[d] ORG's expectation to have a low frequency of claims that would be dealt
with on an ad hoc basis. [Section IIID of ORG Business Plan] ORG’s ad
hoc handling of claims was evident in the informality in paying $0 for a
claim filed by the LP-3 by waiving policy deductibles and allowing the
claim to be paid for an event occurring outside of the policy coverage
period. ORG paid the claim under what it described as a “business
decision made outside the terms of the policy” and “related to possible
future business from this insured and its affiliates.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 182

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Third, total organizational time was Stated to be devoted at an estimated 0% to

0% towards reinsurance related administration, which conflicts with -

[a] ORG’s reinsuring a 0% pro-rata portion of group coverage through its
agreement with CO-23 not justifying 0% - 0% of organizational time
devoted towards reinsurance related administration.

[b] CO-23, not ORG, functioning as the reinsurance administrator by
providing ORG with its quarterly retrocession computations that ORG
used to report its assumed premium and related deductions within Form
990.

ORG is recommended to not qualify for relief under I.R.C. §7805(b) in the
circumstances presented because it cannot continue to rely upon its initial
determination letter.

The government recommends retroactive revocation of ORG’s determination letter
because there were omissions and misstatements of material fact during the application
process, and material changes in operation after the determination letter was issued.
Accordingly, it is recommended that ORG's revocation be effective as of January 1,
20XX, the first day of the first tax period covered under this report, and retroactive
revocation of ORG’s determination letter, dated October 19, 20XX.

While revocation of a determination letter is generally not retroactive, revocation of a
determination letter may be retroactive if the organization omitted or misstated a
material fact or operated in a manner materially different from that originally
represented. Treas. Reg. § 601.201(n)(6)(i); Rev. Proc. § 14.01 (cross-referencing §
13.01 et seq.), 1990-1 C.B. 514. In cases where the organization omitted or misstated
a material fact, revocation may be retroactive to all open years under the statute. See
Treas. Reg. § 601.201(I)(1). In cases where revocation is due to a material change,
inconsistent with exempt status, in the character, the purpose, or the method of
operation, revocation will ordinarily take effect as of the date of the material change.
Treas. Reg. § 601.201(n)(6)(i); Rev. Proc. 90-27. In any event, revocation will ordinarily
take effect no later than the time at which the organization received written notice that
its exemption ruling or determination letter might be revoked. Treas. Reg. §
601.201(n)(6)(i).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 183

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
Government’s Position 20XX

Effective date of ORG’s revocation if the Commissioner exercises
discretion to grant relief under I.R.C. §7805(b).

Upon request by ORG, the Commissioner TE/GE may grant relief from retroactive
revocation under I.R.C. § 7805(b)(8) of the Code. Should ORG make a request for
relief from retroactive revocation, following the procedures under Rev. Proc. 2003-4
(which cross references Rev. Proc. 2003-5), the Commissioner is urged to deny such
relief.

In requesting relief under I.R.C. § 7805(b)(8), ORG must address each of the following

factors:

[1] there has been no misstatement or omission of material facts;

[2] the facts subsequently developed are not materially different from the facts on which
the ruling was based;

[3] there has been no change in the applicable law;

[4] the ruling was originally issued with respect to a prospective or proposed transaction;
and

[5] the taxpayer directly involved in the ruling acted in good faith in reliance upon the
ruling and the retroactive revocation would be to his detriment.

(Treas. Reg. § 601.201(I)(5), Statement of Procedural Rules; Rev. Proc. 96-4, § 12,
1996-1 I.R.B. 94; Rev. Proc. 90-27, § 14, 1990-1 C.B. 514, 518.]

If the Commissioner grants relief to ORG under I.R.C. § 7805(b), the effective date for
revocation of ORG’s determination letter should be not later than the date on which the
organization first received written notice that its exemption might be revoked. Treas.
Reg. § 601.201(n)(6)(i); Virginia Education Fund v. Commissioner, 85 T.C. 743, 752-3
(1985), aff'd 799 F. 2d 903 (4th Cir. 1986). This does not preclude the effective date of
revocation being earlier than the date on which the organization first received written
notice that its exemption might be revoked. Virginia Education Fund v. Commissioner,
85 T.C. at 753.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 184

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
20XX

Taxpayer’s Position

To date, ORG’s position is unknown with respect to the issues, facts, applicable law,
and Government's position discussed in this report. ORG will be allowed a reasonable
amount of time to review this report and respond with a rebuttal if considered
necessary.

[1]

[2]

Conclusion Summary

For tax periods ended December 31, 20XX-20XX, ORG is not an insurance
company described under I.R.C. § 501(c)(15) and cannot continue to rely upon
its initial determination letter, dated October 19, 20XX, recognizing it as exempt
under that Code section. This determination was based upon ORG not qualifying
as an “insurance company”, and ORG policy contracts not constituting
“insurance” as supported by —
[a] Investments were ORG’s primary and predominant activity.
[b] ORG failed to use its capital and efforts primarily to earn income

from its insurance activity.
[c] ORG Insurance policies lacked risk shifting and risk distribution.

ORG cannot continue to rely upon its determination ruling letter, dated October
19, 20XX, recognizing the organization's exempt status under I.R.C. § 501(c)(15)
because that ruling was contingent not only upon ORG actually operating as it
represented that it would within its application, but also that ORG would inform
the IRS as to any change in purposes, character, or method of operation. Facts
identified within this examination report that were compared with information from
ORG’s Form 1024 application disclose that ORG misrepresented information
during the application process with respect to sources of financial support, the
nature of expenditures, and proposed activities.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 185

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
20XX

[3]

[4]

ORG is recommended to not qualify for relief under I.R.C. §7805(b) in the
circumstances presented because it cannot continue to rely upon its initial
determination letter, dated October 19, 20XX. The government recommends that
ORG’s revocation be effective as of January 1, 20XX — the first day of the first tax
period covered under this report -- and retroactive revocation of ORG’s
determination letter, dated October 19, 20XX. This recommendation is based
upon omissions and misstatements of material fact during the application
process of ORG’s Form 1024, and material changes in operation after ORG’s
determination ruling letter was issued.

If the Commissioner grants relief to ORG under I.R.C. § 7805(b), the effective
date for revocation of ORG’s determination letter should be not later than the
date on which the organization first received written notice that its exemption
might be revoked. This does not preclude the effective date of revocation being
earlier than the date on which the organization first received written notice that its
exemption might be revoked.

Exhibits

Exhibits supporting facts presented within this report are listed below.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 186

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
20XX
| Exhibit # | Exhibit Description |
1 ORG Memorandum of Association
ORG License No. 9924 under Sections 16(1) and 17 of the Territory
2 Insurance Act of 1994
3A
& ORG Form 990, filed for years 19XX-20XX, prelnsurance application
3B for tax-exempt status
4 ORG foreign insurance company election under Code §953(d)

ORG Form 1024, Application for Recognition of Exemption Under
5 Section 501(a)
IRS ruling letter, dated October 19, 20XX, issued to ORG and

6 recognizing ORG as exempt from federal income tax
7 ORG Business Plan

8 Resume’ of Director-1

Thru ORG general ledger for — (A) Year 20XX, (B) Year 20XX, and
9C (C) Year 20XX
OA
Thru ORG audited financial Statements for — (A) Year 20XX, (B) Year
0C 20XX, and (C) Year 20XX
11A .
Thru ORG Forms 990 filed for - (A) Year 20XX, (B) Year 20XX, and (C)
11C Year 20XX
Special Warranty Deeds executed by the LP-1 on 12/29/20XX, to
12A transfer an “undivided one third (1/3) interest” in two properties

& located in the State of State — (A) County County and (B) County
12B County
Special Warranty Deed executed by the LP-1 on 12/31/20XX, to
13 transfer an “undivided one third (1/3) interest” in a property located in

County County, State, described as “Property-3
14 Minutes of ORG’s Board meeting held on 2/17/20XX
Schedule K-1 filed for year 20XX by the CO-18 (EIN)

15
16 Minutes of ORG Board held on 2/9/20XX

17 ORG policy #01 - 01 written for year 20XX
18 ORG policy #01 - 09 written for year 20XX

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 187

Form 886A Department of the Treasury - Internal Revenue Service Schedule No or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG (“ ”) 20XX
20XX
20XX
| Exhibit # | Exhibit Description |
Law Firm-3 invoice #1, dated 2/20/20XX, billed in the amount of $0 to
19 The Companies
20 ORG policy #02 - 01 written for year 20XX
21 ORG policy #02 - 09 written for year 20XX
22 ORG policy #03 - 01 written for year 20XX
23 ORG policy #03 - 09 written for year 20XX
24 ORG policy #13 - 32 written for year 20XX
25 ORG policy #13 - 31 written for year 20XX
26 ORG policy #13 - 33 written for year 20XX
27A
Thru ORG Agreement with CO-23; and CO-23 quarterly retrocession
27C computations for — (A) Year 20XX, (B) Year 20XX, and (C) Year 20XX
ORG’s resolution passed on November 30, 20XX, approving line-of-
credit financing to the LP-1; copy of the LP-1’s check #0,
dated 2/27/20XX, payable in the amount of $0 to ORG for the
28 accrued loan origination fee; and copy of ORG’s bank Statement for
month of February 20XX, showing 2/28/20XX deposit of the LP-1’s
check #076
ORG claim form relating to the $0 claims payment; CO-44's
Invoice #130899, dated November 0, 20XX, billed in the amount of
29 $0; and ORG check #0, dated 9/16/20XX, paying the
$00 claim to the LP-3 under policy #01 - 01
30A Minutes of ORG Board meetings held on 2/13/20XX, 4/21/20XX,
Thru 6/24/20XX, and 4/30/20XX
30D
31 Shareholder Consent of ORG sole shareholder, CO-51, approved and
adopted on 4/30/20XX
32 ORG Plan of Complete of Liquidation
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page 188

Get today's answer for your situation

You just read what the IRS ruled for one taxpayer in 2015, and it can't be cited as precedent. Ezel checks the current Internal Revenue Code and IRS guidance and answers your specific situation, with citations.

Opens in Ezel Pro. Every answer cites the authority it relies on.

Apply this to your situation

This page covers one taxpayer's ruling from 2015, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.

On this page

Document type

Determination Letter

IRS subject

Insurance Companies or Associations With Net Written Premiums of $350,000Or Less

Topics

Tax-exempt organizations

Code sections

§ 332, § 337, § 501, § 801, § 816, § 831, § 953, § 6110, § 7805

Ruling dated

March 6, 2015

Publicly released

June 19, 2015

View Official PDF