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Federal Register / Vol. 68, No. 180 / Wednesday, September 17, 2003 / Rules and Regulations
OMB determined that this rule is a
‘‘significant regulatory action’’ as
defined in section 3(f) of the Order
(although not economically significant,
as provided in section 3(f)(1) of the
Order). Any changes made to the rule
subsequent to its submission to OMB
are identified in the docket file, which
is available for public inspection in the
Regulations Division, Room 10276,
Office of General Counsel, Department
of Housing and Urban Development,
451 Seventh Street, SW., Washington,
DC 20410–0500.
Environmental Impact
A Finding of No Significant Impact
with respect to the environment was
made at the interim rule stage in
accordance with HUD regulations at 24
CFR part 50, which implement section
102(2)(C) of the National Environmental
Policy Act of 1969 (42 U.S.C. 4332). The
Finding remains applicable to this final
rule and is available for public
inspection between the hours of 8 a.m.
and 5 p.m. weekdays in the Regulations
Division, Room 10276, Office of General
Counsel, Department of Housing and
Urban Development, 451 Seventh Street,
SW., Washington, DC 20410–0500.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 (2 U.S.C. 1531–
1538) establishes requirements for
federal agencies to assess the effects of
their regulatory actions on state, local,
and tribal governments and the private
sector. This rule does not impose any
federal mandates on any state, local, or
tribal governments or the private sector
within the meaning of the Unfunded
Mandates Reform Act of 1995.
Executive Order 13132, Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial
direct compliance costs on state and
local governments and is not required
by statute, or the rule preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order. This
rule is exclusively concerned with
homeownership voucher assistance.
This rule does not have federalism
implications and does not impose
substantial direct compliance costs on
state and local governments or preempt
state law within the meaning of the
Executive Order.
Impact on Small Entities
The Secretary, in accordance with the
Regulatory Flexibility Act (5 U.S.C.
605(b)) (RFA), has reviewed and
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approved this rule and in so doing
certifies that this rule will not have a
significant economic impact on a
substantial number of small entities.
The reasons for HUD’s determination
are as follows:
(1) A Substantial Number of Small
Entities Will Not be Affected. rule is
exclusively concerned with public
housing agencies that administer tenantbased housing assistance under section
8 of the United States Housing Act of
1937. Under the definition of ‘‘small
governmental jurisdiction’’ in section
601(5) of the RFA, the provisions of the
RFA are applicable only to those few
PHAs that are part of a political
jurisdiction with a population of under
50,000 persons. The number of entities
potentially affected by this rule is
therefore not substantial.
(2) No Significant Economic Impact.
The rule does not change the amount of
funding available under the Housing
Choice Voucher Program. Accordingly,
the economic impact of this rule will
not be significant, and it will not affect
a substantial number of small entities.
Catalog of Domestic Assistance Number
The Catalog of Domestic Assistance
Number for the Housing Choice
Voucher Program is 14.871.
List of Subjects in 24 CFR Part 982
Grant programs—housing and
community development, Housing, Rent
subsidies, Reporting and recordkeeping
requirements.
■ Accordingly, for the reasons stated in
the preamble, the interim rule for part
982 of title 24 of the Code of Federal
Regulations, published on October 28,
2003, 67 FR 65864, as corrected on
November 6, 2003, 67 FR 67522, is
promulgated as final, without change.
Dated: September 9, 2003.
Michael M. Liu,
Assistant Secretary for Public and Indian
Housing.
[FR Doc. 03–23636 Filed 9–16–03; 8:45 am]
BILLING CODE 4210–33–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, and 602
[TD 9092]
RIN 1545–BA44
Split-Dollar Life Insurance
Arrangements
AGENCY: Internal Revenue Service (IRS),
Treasury.
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ACTION:
Final regulations.
SUMMARY: This document contains final
regulations relating to the income,
employment, and gift taxation of splitdollar life insurance arrangements. The
final regulations provide needed
guidance to persons who enter into
split-dollar life insurance arrangements.
DATES: Effective Date: These regulations
are effective September 17, 2003.
Applicability Dates: For dates of
applicability of the final regulations, see
§§ 1.61–22(j), 1.83–3(e), 1.83–6(a)(5)(ii),
1.301–1(q)(4), and 1.7872–15(n).
FOR FURTHER INFORMATION CONTACT:
Concerning the section 61 regulations,
please contact Elizabeth Kaye at (202)
622–4920; concerning the section 83
regulations, please contact Erinn
Madden at (202) 622–6030; concerning
the section 301 regulations, please
contact Krishna Vallabhaneni at (202)
622–7550; concerning the section 7872
regulations, please contact Rebecca Asta
at (202) 622–3930; and concerning the
application of these regulations to the
Federal gift tax, please contact Lane
Damazo at (202) 622–3090.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1792. The
collections of information are in
§ 1.7872–15(d)(2) and (j)(3)(ii).
Responses to these collections of
information are required by the IRS to
verify consistent treatment by the
borrower and lender of split-dollar loans
with nonrecourse or contingent
payments. In addition, in the case of a
split-dollar loan that provides for
nonrecourse payments, the collections
of information are voluntary and are
required to obtain a benefit (that is, the
treatment of a nonrecourse split-dollar
loan as a noncontingent split-dollar
loan).
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number
assigned by the Office of Management
and Budget.
The estimated annual burden per
respondent varies from 15 minutes to 30
minutes, depending on individual
circumstances, with an estimated
average of 17 minutes.
Comments concerning the accuracy of
this burden estimate and suggestions for
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Federal Register / Vol. 68, No. 180 / Wednesday, September 17, 2003 / Rules and Regulations
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
W:CAR:MP:T:T:SP, Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background and Explanation of
Provisions
1. Summary of the Prior Notices of
Proposed Rulemaking
On July 9, 2002, a notice of proposed
rulemaking (REG–164754–01) was
published in the Federal Register (67
FR 45414) proposing comprehensive
rules for the income, gift, employment,
and self-employment taxation of equity
and non-equity split-dollar life
insurance arrangements (the 2002
proposed regulations). In general, a
split-dollar life insurance arrangement
is an arrangement between two or more
parties to allocate the policy benefits
and, in some cases, the costs of a life
insurance contract. Under an equity
split-dollar life insurance arrangement,
one party to the arrangement typically
receives an interest in the policy cash
value (or equity) of the life insurance
contract disproportionate to that party’s
share of policy premiums. That party
also typically receives the benefit of
current life insurance protection under
the arrangement. Under a non-equity
split-dollar life insurance arrangement,
one party typically provides the other
party with current life insurance
protection but not any interest in the
policy cash value.
The 2002 proposed regulations
provide two mutually exclusive regimes
for taxation of split-dollar life insurance
arrangements—a loan regime and an
economic benefit regime. Under the
loan regime (which is set forth in
§ 1.7872–15 of the 2002 proposed
regulations), the non-owner of the life
insurance contract is treated as loaning
the amount of its premium payments to
the owner of the contract. The loan
regime generally governs the taxation of
collateral assignment arrangements.
Under the economic benefit regime
(which is set forth in § 1.61–22(d)
through (g) of the 2002 proposed
regulations), the owner of the life
insurance contract is treated as
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providing economic benefits to the nonowner of the contract. The economic
benefit regime generally governs the
taxation of endorsement arrangements.
The 2002 proposed regulations reserved
on the rules for valuing economic
benefits provided to the non-owner
under an equity split-dollar life
insurance arrangement governed by the
economic benefit regime, pending
receipt of comments from interested
parties.
On May 9, 2003, a notice of proposed
rulemaking (REG–164754–01) was
published in the Federal Register (68
FR 24898) proposing rules for the
valuation of economic benefits under an
equity split-dollar life insurance
arrangement governed by the economic
benefit regime (the 2003 proposed
regulations). The 2003 proposed
regulations provide that, in the case of
an equity split-dollar life insurance
arrangement, the value of the economic
benefits provided to the non-owner
under the arrangement for a taxable year
equals the cost of any current life
insurance protection provided to the
non-owner, the amount of policy cash
value to which the non-owner has
current access (to the extent that such
amount was not actually taken into
account for a prior taxable year), and the
value of any other economic benefits
provided to the non-owner (to the extent
not actually taken into account for a
prior taxable year).
A public hearing on the 2002
proposed regulations was held on
October 23, 2002, and a public hearing
on the 2003 proposed regulations was
held on July 29, 2003. In addition,
interested parties submitted comments
on the 2002 proposed regulations and
on the 2003 proposed regulations.
2. Overview of the Final Regulations
These final regulations provide
guidance on the taxation of split-dollar
life insurance arrangements and apply
for purposes of Federal income,
employment, self-employment, and gift
taxes. After consideration of all
comments, the 2002 and 2003 proposed
regulations are adopted as amended by
this Treasury decision. In general, the
amendments are discussed below.
Definition of Split-Dollar Life Insurance
Arrangement
The final regulations generally define
a split-dollar life insurance arrangement
as any arrangement between an owner
of a life insurance contract and a nonowner of the contract under which
either party to the arrangement pays all
or part of the premiums, and one of the
parties paying the premiums is entitled
to recover (either conditionally or
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unconditionally) all or any portion of
those premiums and such recovery is to
be made from, or is secured by, the
proceeds of the contract. The definition
does not cover the purchase of an
insurance contract in which the only
parties to the arrangement are the policy
owner and the life insurance company
acting only in its capacity as issuer of
the contract.
The final regulations also retain the
special rules from the 2002 proposed
regulations that treat certain
arrangements entered into either in
connection with the performance of
services or between a corporation and
another person in that person’s capacity
as a shareholder in the corporation as
split-dollar life insurance arrangements
regardless of whether the arrangements
otherwise satisfy the general definition
of a split-dollar life insurance
arrangement. Neither the general rule
nor the special rules cover so-called
‘‘key man’’ life insurance arrangements
under which a company purchases a life
insurance contract to insure the life of
a ‘‘key’’ employee or shareholder but
retains all the rights and benefits of the
contract (including the rights to all
death benefits and cash value).
The IRS and Treasury are concerned
that certain arrangements may be
inappropriately structured to avoid the
application of these regulations (for
example, by using separate life
insurance contracts that are, in
substance, one life insurance contract).
The Commissioner will use existing
authority to challenge any such
transaction.
Mutually Exclusive Regimes
The final regulations retain the
approach of using two mutually
exclusive regimes—an economic benefit
regime and a loan regime—for
determining the tax treatment of splitdollar life insurance arrangements. As
under the 2002 proposed regulations,
ownership of the life insurance contract
determines which regime applies.
Several commentators on both the 2002
and the 2003 proposed regulations
argued that the use of the two mutually
exclusive regimes is an artificial and
rigid approach that fails to account
adequately for the economic reality of a
split-dollar life insurance arrangement.
However, the IRS and Treasury believe
that the final regulations, like the 2002
and 2003 proposed regulations, properly
account for the division of the costs and
benefits of a split-dollar life insurance
arrangement.
Several commentators asked that
taxpayers be permitted to elect which
regime would apply to their split-dollar
life insurance arrangements. However,
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in the view of the IRS and the Treasury,
taxpayers effectively have the ability to
elect which regime will apply by
designating one party or the other as the
owner of the life insurance contract.
One commentator asserted that there
is no authority under section 7872 to
treat payments made pursuant to splitdollar life insurance arrangements as
loans. Therefore, this commentator
recommends that taxation of split-dollar
life insurance arrangements under
section 7872 should occur only if
affirmatively elected by the parties to
the arrangement. The IRS and Treasury
believe there is sufficient authority to
require the application of section 7872
to split-dollar life insurance
arrangements. There is no legislative
history indicating that Congress did not
intend section 7872 to apply to
payments made pursuant to these
arrangements.
A number of commentators expressed
concern about the possible application
of section 402 of the Sarbanes-Oxley Act
of 2002 (Sarbanes-Oxley), Public Law
107–204, to all or certain split-dollar life
insurance arrangements entered into by
companies subject to Sarbanes-Oxley.
These regulations do not address this
issue, as interpretation and
administration of Sarbanes-Oxley fall
within the jurisdiction of the Securities
and Exchange Commission.
The final regulations adopt the
general rule in the 2002 proposed
regulations for determining which
regime applies to a split-dollar life
insurance arrangement. The 2002
proposed regulations provided a special
rule that the economic benefit regime
applied to a split-dollar life insurance
arrangement if the arrangement is
entered into in connection with the
performance of services, and the
employee or service provider is not the
owner of the life insurance contract; or
the arrangement is entered into between
a donor and a donee (for example, a life
insurance trust) and the donee is not the
owner of the life insurance contract. The
final regulations adopt this special rule,
but provide that this rule applies when
the employer, service recipient or donor
is the owner.
The final regulations add a rule
regarding the treatment of a transfer of
a life insurance contract under a splitdollar life insurance arrangement from
an owner to a non-owner when
payments under the arrangement had
been treated, prior to transfer, as splitdollar loans under § 1.7872–15. Under
this rule, the economic benefit regime
applies to the split-dollar life insurance
arrangement from the date of the
transfer and the payments made (both
before and after the transfer) are not
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treated as split-dollar loans on or after
the date of the transfer. The transferor
of the life insurance contract must fully
take into account all economic benefits
provided under the split-dollar life
insurance arrangement.
Owners and Non-Owners
The final regulations generally retain
the rules in the 2002 proposed
regulations for determining the owner
and the non-owner of the life insurance
contract. Thus, the owner generally is
the person named as the policy owner.
If two or more persons are designated as
the policy owners, the first-named
person generally is treated as the owner
of the entire contract.
Several commentators argued that
determining tax ownership based on
whom the parties name as the policy
owner of the life insurance contract
represents a departure from general tax
principles. Commentators suggested that
a split-dollar life insurance arrangement
is like any co-ownership situation in
which two or more parties agree to share
in the costs and benefits of a policy such
that each party will be entitled to
exercise certain rights with respect to
the underlying policy and will have
certain responsibilities.
The IRS and Treasury disagree with
that argument. Split-dollar life
insurance arrangements are structured
in myriad ways, some formally as loans
to the employee (for example, collateralassignment arrangements), some
formally as co-ownership arrangements
between the employer and the
employee, and some as arrangements in
which the employer is, in form, the sole
owner (for example, endorsement
arrangements). In addition, split-dollar
life insurance arrangements ordinarily
involve division of the benefits and
costs of the life insurance contract, but
the division of benefits ordinarily does
not correspond to the division of costs.
Because the division of the burdens and
benefits of the life insurance contract
vary widely in split-dollar life insurance
arrangements, and because title
ownership generally is a factor in
determining tax ownership, it is
reasonable to determine tax ownership
based on who is the named owner of the
policy. In addition, this rule provides a
clear objective standard so that both
taxpayers and the IRS can readily
determine which regime applies under
the final regulations.
If two or more persons are named as
policy owners of a life insurance
contract and each person has, at all
times, all the incidents of ownership
with respect to an undivided interest in
the contract, those persons are treated as
owners of separate contracts for
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purposes of these regulations (although
not for purposes of section 7702 and
other rules for the taxation of life
insurance contracts). An undivided
interest in a life insurance contract
consists of an identical fractional or
percentage interest or share in each
right, benefit, and obligation with
respect to the contract. For example, if
an employer and an employee own a life
insurance contract and share equally in
all rights, benefits and obligations under
the contract, they are treated as owning
two separate contracts; ordinarily
neither contract would be treated as part
of a split-dollar life insurance
arrangement. However, if the employer
and the employee agree to enter into a
split-dollar life insurance arrangement
with respect to what otherwise would
have been treated as the employer’s (or
the employee’s) separate contract, the
purported undivided interests will be
disregarded, and the entire arrangement
will be treated as a split-dollar life
insurance arrangement. The
Commissioner will consider all of the
facts and circumstances of an
arrangement to determine whether the
parties have appropriately characterized
the arrangement as one involving
undivided interests and, therefore, not
subject to these regulations.
The final regulations provide
attribution rules for compensatory splitdollar life insurance arrangements.
Under these rules, the employer or
service recipient will be treated as the
owner of the life insurance contract if
the contract is owned by a member of
the employer’s controlled group
(determined under the rules of sections
414(b) and 414(c)), a trust described in
section 402(b) (sometimes referred to as
a ‘‘secular trust’’), a grantor trust treated
as owned by the employer (including a
rabbi trust), or a welfare benefit fund
(within the meaning of section
419(e)(1)).
The final regulations retain the
special rule for non-equity split-dollar
life insurance arrangements. Under this
special rule, non-equity arrangements
entered into in a compensatory context
or a gift context will be subject to the
economic benefit regime. The final
regulations provide rules for
determining the tax treatment of the
arrangement if the parties subsequently
modify the arrangement so that it is no
longer a non-equity arrangement. If,
immediately after the modification, the
employer, service recipient, or donor is
the owner of the life insurance contract
(determined without regard to the
special rule for non-equity
arrangements), the employer, service
recipient, or donor continues to be
treated as the owner of the life
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insurance contract (such that the normal
rules of the economic benefit regime for
equity split-dollar life insurance
arrangements will apply). If,
immediately after the modification, the
employer, service recipient, or donor is
not the owner, the employer, service
recipient, or donor is treated as having
made a transfer of the contract to the
employee, service provider, or donee as
of the date of the modification. For
purposes of these rules, the replacement
of a non-equity arrangement with a
successor equity arrangement will be
treated as a modification of the nonequity arrangement.
3. Taxation Under the Economic Benefit
Regime
a. In General
The final regulations retain the basic
rules for taxation under the economic
benefit regime that had been set forth in
the 2002 and 2003 proposed regulations.
Thus, the final regulations provide that,
for these arrangements, the owner of the
life insurance contract is treated as
providing economic benefits to the nonowner of the contract, and those
economic benefits must be accounted
for fully and consistently by both the
owner and the non-owner. The value of
the economic benefits, reduced by any
consideration paid by the non-owner to
the owner, is treated as provided from
the owner to the non-owner.
The tax consequences of the provision
of economic benefits will depend on the
relationship between the owner and the
non-owner. Thus, the provision of the
benefit may constitute a payment of
compensation, a distribution under
section 301, a capital contribution, a
gift, or a transfer having a different tax
character. The benefit must be taken
into account based on its character. For
example, in a split-dollar life insurance
arrangement in which an employer
provides an employee with economic
benefits, the employee would take those
economic benefits into account by
reporting them as compensation on the
employee’s Federal income tax return
for the year in which the benefits are
provided and the employer would take
the economic benefits into account by
reporting them on the appropriate
employment tax and information
returns. In a split-dollar life insurance
arrangement in which a donor provides
economic benefits to an irrevocable life
insurance trust, the donor would take
those economic benefits into account by
reporting them on the Federal gift tax
return required to be filed by the donor;
the trust, however, generally would not
be required to take any action to take the
benefits into account because those
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economic benefits would be excludable
from gross income under section 102.
Non-Equity Split-Dollar Life Insurance
Arrangements
Under the final regulations, the tax
treatment of a non-equity split-dollar
arrangement generally follows the tax
treatment of a non-equity split-dollar
arrangement under Rev. Rul. 64–328
(1964–2 C.B. 11) and its progeny. The
proposed regulations required that the
average death benefit for the taxable
year be used to compute current life
insurance protection. Commentators
objected to the use of an ‘‘average’’
death benefit. They explained that the
computation of the average death
benefit imposed additional
administrative burdens on life insurance
companies as well as both owners and
non-owners. In addition, the
commentators stated that the proposed
regulations were not clear on how the
average death benefit for the taxable
year was to be determined. As an
alternative, the commentators suggested
that the death benefit as of the policy
anniversary date would be an
appropriate measure of the death benefit
for purposes of determining current life
insurance protection. In response to
these commentators, the final
regulations provide that, subject to an
anti-abuse rule, current life insurance
protection is determined on the last day
of the non-owner’s taxable year unless
the parties agree to use the policy
anniversary date. Taxpayers may change
the valuation date with the consent of
the Commissioner.
Equity Split-Dollar Life Insurance
Arrangements
The final regulations generally retain
the rules set out in the 2002 and 2003
proposed regulations for the taxation of
equity split-dollar life insurance
arrangements. Therefore, the value of
the economic benefits provided by the
owner to the non-owner for a taxable
year equals the cost of any current life
insurance protection provided to the
non-owner, the amount of policy cash
value to which the non-owner has
current access (to the extent that such
amount was not actually taken into
account for a prior taxable year), and the
value of any other economic benefits
provided to the non-owner (to the extent
not actually taken into account for a
prior taxable year). The owner and the
non-owner also must account fully and
consistently for any right in, or benefit
of, a life insurance contract provided to
the non-owner under an equity splitdollar life insurance arrangement.
The final regulations provide that the
non-owner has current access to any
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54339
portion of the policy cash value to
which the non-owner has a current or
future right and that currently is directly
or indirectly accessible by the nonowner, inaccessible to the owner, or
inaccessible to the owner’s general
creditors. As indicated in the preamble
of the 2003 proposed regulations, the
IRS and Treasury intend that the
concept of ‘‘‘access’ ’’ be construed
broadly to include any direct or indirect
right under the arrangement allowing
the non-owner to obtain, use, or realize
potential economic value from the
policy cash value. Thus, for example, a
non-owner has access to policy cash
value if the non-owner can directly or
indirectly make a withdrawal from the
policy, borrow from the policy, or effect
a total or partial surrender of the policy.
Similarly, for example, the non-owner
has access if the non-owner can
anticipate, assign (either at law or in
equity), alienate, pledge, or encumber
the policy cash value or if the policy
cash value is available to the nonowner’s creditors by attachment,
garnishment, levy, execution, or other
legal or equitable process. Policy cash
value is inaccessible to the owner if the
owner does not have the full rights to
policy cash value normally held by an
owner of a life insurance contract.
Policy cash value is inaccessible to the
owner’s general creditors if, under the
terms of the split-dollar life insurance
arrangement or by operation of law or
any contractual undertaking, the
creditors cannot, for any reason,
effectively reach the policy cash value
in the event of the owner’s insolvency.
Commentators on the 2003 proposed
regulations generally objected to the
rule requiring the non-owner under an
equity arrangement to include in
income the portion of the policy cash
value to which the non-owner has
current access. Several commentators
argued that section 72(e) specifically
provides for tax-free inside build-up
under a life insurance contract,
precluding any taxation of policy cash
value to the non-owner prior to a
‘‘realization event’’ (such as rollout of
the policy). That argument ignores the
plain language of section 72(e)(1), which
states that the rules of section 72(e)
apply only if no other provision of
subtitle A of the Internal Revenue Code
(Code) applies. In the case of an equity
arrangement subject to the economic
benefit regime, the relationship between
the owner and the non-owner and the
terms of the arrangement between them
ordinarily make other provisions of
subtitle A applicable, such as section
61(a)(1).
The tax-deferred inside build-up
provided by section 72(e) properly
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applies only to the taxpayer that owns
the life insurance contract. If the owner
of the contract provides any of the rights
or benefits under the contract to another
taxpayer, that provision of rights and
benefits is subject to tax under the rules
that otherwise follow from the
relationship between the parties. For
example, this result applies whenever
an employer that owns a life insurance
contract compensates an employee by
giving the employee rights to the policy
cash value. In that case, the employer
(as the owner of the contract) enjoys taxdeferred inside build-up under section
72(e), but the employee has gross
income under section 61(a)(1) equal to
the value of the economic benefit
attributable to the employee’s rights to
the policy cash value. Thus, the
regulations are consistent with section
72(e).
Other commentators generally
acknowledged that the 2003 proposed
regulations properly tax the non-owner
whenever the non-owner has ‘‘current
access’’ to the policy cash value in an
equity arrangement but argued that the
tax should be imposed under section 83
rather than under section 61. In effect,
these commentators argued that the
employee’s current access to policy cash
value should give rise to transfers of
property with respect to portions of the
life insurance contract. The
commentators argued that the primary
difference between this suggested
approach and the approach set out in
the 2003 proposed regulations would be
the treatment of inside build-up on
amounts already taxed to the nonowner. Specifically, the commentators
argued that, under the proposed section
83 approach, inside build-up on
amounts already taxed to the non-owner
would be tax-free to the non-owner
under section 72(e); under the approach
of the 2003 proposed regulations, the
subsequent inside build-up is taxdeferred to the owner but not to the
non-owner.
The IRS and Treasury believe that the
approach set out in the 2003 proposed
regulations remains appropriate and so
have not followed the suggestion to
adopt a section 83 approach. Section 83
applies only in connection with a
transfer of property, but a non-owner
may have currently includible income
by reason of another rule—such as the
doctrines of constructive receipt, cash
equivalence, or economic benefit. It
would be inappropriate to limit current
taxation to circumstances that constitute
transfers of property under section 83,
and it would be inappropriate in this
context to apply section 83 to
circumstances that give rise to income
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under other Code provisions or judicial
doctrines.
Several commentators raised
questions about the effect of state law
limitations on access to policy cash
value by the owner’s creditors. These
commentators read Example 2 in the
2003 proposed regulations as stating
that any such state law restriction
would in and of itself cause the nonowner to have current access to the
policy cash value. Thus, these
commentators argued, the 2003
regulations potentially imposed current
tax on the policy cash value of any nonequity arrangement where state law
limited the rights of the owner’s
creditors to reach the policy cash value.
However, Example 2 indicated that the
owner there had the right to receive the
lesser of the policy cash value or total
premiums; in other words, Example 2
indicated that the arrangement was an
equity arrangement. The final
regulations clarify that the non-owner
has current access to policy cash value
only if, under the arrangement, the nonowner has a current or future right to
policy cash value; the non-owner will
not have any such right in a true nonequity arrangement. If the non-owner
does have such a right, any restriction
on the owner’s creditors to reach policy
cash value, whether established by
contract or by local law, results in an
economic benefit to the non-owner.
Several commentators objected to the
rule in the 2003 proposed regulations
that the non-owner has current access to
any portion of the policy cash value that
cannot be accessed by the owner. These
commentators argued that as long as
policy cash value can be accessed by the
owner’s creditors in the event of
insolvency, the owner should not be
viewed as providing any economic
benefit to the non-owner. That
objection, however, overlooks the
economic reality of an equity splitdollar life insurance arrangement. If the
owner commits funds to a life insurance
contract and undertakes that it will not
withdraw those funds from the
insurance contract, the amounts so
committed do not remain a general asset
of the owner. The owner of the life
insurance contract in such an
arrangement has parted with the
ownership and use of the funds for the
benefit of the non-owner. This contrasts
with an irrevocable rabbi trust, where
the employer effectively remains the tax
owner of the assets held by the trustee
and the rabbi trust assets may still be
(and very often are) invested in the
employer’s business.
In response to the suggestions of
commentators, the final regulations
provide that the policy cash value, like
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the amount of current life insurance
protection, is determined as of the last
day of the non-owner’s taxable year
unless the parties agree to use the policy
anniversary date. The final regulations
retain the anti-abuse rule preventing the
parties from manipulating the policy
cash value for purposes of determining
the value of the economic benefit that
the non-owner must take into account
and extend that rule to the value of the
current life insurance protection.
Taxpayers should note that, in certain
cases, a separate tax rule may require a
non-owner to include an amount in
gross income under an equity splitdollar life insurance arrangement at a
time earlier than would be required
under these regulations. For example,
section 457(f) generally requires an
employee of a tax-exempt organization
(other than a church organization under
section 3121(w)(3)) or of a state or local
government to include deferred
compensation in gross income when the
employee’s rights to the deferred
compensation are not subject to a
substantial risk of forfeiture. An equity
split-dollar life insurance arrangement
governed by the economic benefit
regime constitutes a deferred
compensation arrangement.
Accordingly, an employee of a taxexempt organization or of a state or local
government may have to include an
amount in gross income attributable to
an equity split-dollar life insurance
arrangement even if the employee does
not have current access to the policy
cash value under these regulations.
Other Tax Consequences
These final regulations retain the rule
of the 2002 proposed regulations that
the non-owner has no investment in the
contract under section 72(e) prior to a
transfer of the contract. The final
regulations also retain the rule that any
amount paid by the non-owner to the
owner for any economic benefit is
included in the owner’s gross income.
Several commentators objected to the
rule providing no investment in the
contract to the non-owner for amounts
paid to the owner. They argued that
section 72(e)(6) provides for such
investment in the contract.
Commentators also objected to the rule
requiring that the owner include in
gross income any amount paid by the
non-owner. These commentators argued
that the owner does not have an
accession to wealth as a result of the
non-owner’s payments because such
payments ordinarily are made to fulfill
the non-owner’s obligation under the
split-dollar life insurance arrangement
to pay part of the premiums of the life
insurance contract.
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The regulations generally treat only
one person as the owner of the life
insurance contract. Because only the
owner of a life insurance contract can
have an investment in that contract, a
non-owner employee cannot have basis
in the contract for any of the costs of
current life insurance protection. In
addition, such costs should not be
included in the non-owner’s basis or
investment in the contract if and when
the non-owner becomes the owner of
the contract because those payments
were made for annual life insurance
protection, which protection was
exhausted prior to the non-owner’s
acquisition of the contract. Similarly,
the fact that the split-dollar life
insurance arrangement may require the
non-owner to reimburse the owner for
the cost of the death benefit protection
provided to the non-owner does not
mean that such payment is not income
to the owner. In these cases, the owner
is ‘‘renting’’ out part of the benefit of the
life insurance contract to the non-owner
for consideration; such consideration
constitutes income to the owner.
b. Taxation of Amounts Received Under
the Life Insurance Contract
The final regulations retain the rule in
the 2002 proposed regulations that any
amount received under the life
insurance contract (other than an
amount received by reason of death) and
provided, directly or indirectly, to the
non-owner is treated as though paid by
the insurance company to the owner
and then by the owner to the nonowner. As under the 2002 proposed
regulations, this rule applies to certain
policy loans (referred to in the
regulations as ‘‘specified policy loans’’).
Although several commentators
objected to this treatment of policy
loans, the IRS and Treasury believe that
the rule is necessary to ensure that
parties to a split-dollar life insurance
arrangement do not avoid current
taxation of the non-owner with respect
to amounts provided to the non-owner
through the contract.
The final regulations retain the rule
that section 101(a) applies to exclude
death benefit proceeds paid to a
beneficiary (other than the owner of the
life insurance policy) from the gross
income of the beneficiary only to the
extent such amount is allocable to
current life insurance protection
provided to the non-owner under the
split-dollar life insurance arrangement,
the cost of which was paid by the nonowner, or the value of which the nonowner actually took into account as an
economic benefit provided by the owner
to the non-owner. Commentators
objected to this rule, arguing that the
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section 101(a) exclusion extends to the
entire amount of death benefit proceeds
paid on the death of the insured. They
asserted that there is no authority to
limit the exclusion to death proceeds
allocable to current life insurance
protection provided to the non-owner
pursuant to the split-dollar life
insurance arrangement, the cost of
which was paid by the non-owner, or
the value of which the non-owner
actually took into account.
The IRS and Treasury disagree with
that argument. Under the regulations,
the owner is treated as providing
economic benefits to the non-owner.
Although the section 101(a) exclusion
extends to the entire amount of death
benefit proceeds, the IRS and Treasury
believe that only the amount of the
death benefit proceeds attributable to
the current life insurance protection for
which the non-owner paid or which the
non-owner took into account under
these regulations is excludable from the
income of the non-owner’s estate or
designated beneficiary.
To the extent the non-owner has
neither paid for nor taken into account
the current life insurance protection, the
proceeds paid to the estate or designated
beneficiary of the non-owner is a
separate transfer of cash that is not
shielded from tax by the section 101(a)
exclusion. Specifically, those proceeds
are deemed payable to the owner, and
are excluded from the owner’s income
by reason of the section 101(a)
exclusion, and then paid by the owner
to the non-owner’s beneficiary (whether
or not paid to the beneficiary directly by
the insurance company) in a transfer to
be taken into account under these
regulations.
The character of death benefit
proceeds transferred or deemed
transferred by the owner to the nonowner is determined by the relationship
between the owner and the non-owner.
Thus, death benefit proceeds received
by the beneficiary of a shareholder who
is a non-owner that were paid or
payable to a corporation will be treated
as a taxable distribution to the
shareholder. The same principle applies
where death benefit proceeds under a
life insurance contract subject to a splitdollar life insurance arrangement are
payable to a beneficiary of a service
provider who is a non-owner, except
that the death benefit proceeds would
constitute a compensation payment to
the service provider for past services
rather than a corporate distribution.
This treatment is similar to the situation
in Rev. Rul. 61–134 (1961–2 C.B. 250)
which also denied exclusion under
section 101(a) to death benefits paid
under a corporate-owned life insurance
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54341
policy. In Rev. Rul. 61–134, various
shareholders were the beneficiaries of a
corporate-owned life insurance policy
by reason of their capacity as
shareholders. The ruling concluded that
the death benefit proceeds received by
the shareholders directly from the
insurer constituted a taxable
distribution of property from the
corporation to the shareholders, even
though the proceeds would have been
excludable from the corporation’s
income if they had been paid directly to
the corporation.
c. Transfer of Life Insurance Contract to
the Non-Owner
The final regulations follow the 2002
proposed regulations in determining the
tax treatment of a transfer of the life
insurance contract from the owner to
the non-owner. Consistent with the
general rule for determining ownership,
the final regulations provide that a
transfer of a life insurance contract (or
an undivided interest therein)
underlying a split-dollar life insurance
arrangement occurs on the date that the
non-owner becomes the owner of the
entire contract (or the undivided
interest therein). Unless and until
ownership of the contract is formally
changed, the owner will continue to be
treated as the owner for all Federal
income, employment, and gift tax
purposes. The fair market value of an
undivided interest must be the
proportionate share of the fair market
value of the entire contract without
regard to any discounts or other
arrangements between the parties.
After a transfer of an entire life
insurance contract, the transferee
generally becomes the owner for Federal
income, employment, and gift tax
purposes, including for purposes of
these final regulations. Thus, if the
transferor pays premiums after the
transfer, the payment of those premiums
may be includible in the transferee’s
gross income if the payments are not
split-dollar loans under § 1.7872–15.
Alternatively, the arrangement will be
subject to the loan regime if the
payments constitute split-dollar loans
under § 1.7872–15.
4. Taxation Under the Loan Regime
a. In General
The final regulations generally adopt
the rules of the 2002 proposed
regulations for the loan regime. Under
§ 1.7872–15, a payment made pursuant
to a split-dollar life insurance
arrangement is a split-dollar loan and
the owner and non-owner are treated,
respectively, as borrower and lender if
(i) the payment is made either directly
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or indirectly by the non-owner to the
owner; (ii) the payment is a loan under
general principles of Federal tax law or,
if not a loan under general principles of
Federal tax law, a reasonable person
would expect the payment to be repaid
in full to the non-owner (whether with
or without interest); and (iii) the
repayment is to be made from, or is
secured by, either the policy’s death
benefit proceeds or its cash surrender
value, or both.
Commentators questioned whether
the additional standard (‘‘if not a loan
under general principles of Federal tax
law, a reasonable person would expect
the payment to be repaid in full to the
non-owner (whether with or without
interest)’’) is necessary. The IRS and
Treasury recognize that, in the earlier
years during which a split-dollar life
insurance arrangement is in effect,
policy surrender and load charges may
significantly reduce the policy’s cash
surrender value, resulting in undercollateralization of a non-owner’s right
to be repaid its premium payments.
Nevertheless, so long as a reasonable
person would expect the payment to be
repaid in full, the payment is a splitdollar loan under § 1.7872–15, rather
than a transfer under § 1.61–22(b)(5) on
the date the payment is made. However,
the rules in § 1.7872–15(a)(2) do not
cause a payment to be treated as a loan
for Federal tax purposes if, because of
an agreement between the owner and
non-owner, the arrangement does not
provide for repayment by the owner to
the non-owner. For example, if a nonowner makes a payment purported to be
a split-dollar loan to an owner, and the
non-owner and owner enter into a
separate agreement providing that the
non-owner will make a transfer to the
owner in an amount sufficient to repay
the purported split-dollar loan,
§ 1.7872–15(a)(2) will not cause the
payment to be treated as a loan. See
§ 1.61–22(b)(5) for the treatment of
payments by a non-owner that are not
split-dollar loans. The final regulations
include a new rule under § 1.7872–
15(a)(4) that disregards certain stated
interest if such interest is to be paid
directly or indirectly by the lender (or
person related to the lender).
Under § 1.7872–15, each payment
under a split-dollar life insurance
arrangement is treated as a separate loan
for Federal tax purposes. Commentators
have suggested that treating each
payment as a separate loan will be
difficult to administer and overly
burdensome for certain taxpayers and
have suggested allowing an election to
treat all payments made during a single
year (or single calendar quarter) as one
loan (made on a specified date during
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the year). However, the final regulations
adopt the approach in the 2002
proposed regulations that each premium
payment is treated as a separate loan.
Treating separate extensions of credit as
separate loans is consistent with the
1985 proposed regulations under
section 7872 and the legislative history
of section 7872, and most accurately
accounts for the benefits provided by
the lender to the borrower when the
loans are below-market.
If a payment on a split-dollar loan is
nonrecourse to the borrower and the
loan does not otherwise provide for
contingent payments, § 1.7872–15 treats
the loan as a split-dollar loan that
provides for contingent payments unless
the parties to the split-dollar life
insurance arrangement provide a
written representation with respect to
the loan. In response to a commentator,
the final regulations delete the
requirement in the proposed regulations
that a nonrecourse split-dollar loan
provide for interest payable at a stated
rate.
If a split-dollar loan does not provide
for sufficient interest, the loan is a
below-market split-dollar loan subject to
section 7872 and § 1.7872–15. If the
split-dollar loan provides for sufficient
interest, then, except as provided in
§ 1.7872–15, the loan is subject to the
general rules for debt instruments
(including the rules for OID). In general,
interest on a split-dollar loan is not
deductible by the borrower under
sections 264 and 163(h). Section
1.7872–15 provides special rules for
split-dollar loans that provide for
certain variable rates of interest,
contingent interest payments, and
lender or borrower options. Section
1.7872–15 also provides rules for belowmarket split-dollar loans with indirect
participants.
If a split-dollar loan is a below-market
loan, then, in general, the loan is
recharacterized as a loan with interest at
the applicable Federal rate (AFR),
coupled with an imputed transfer by the
lender to the borrower. The timing,
amount, and characterization of the
imputed transfers between the lender
and borrower of the loan will depend
upon the relationship between the
lender and the borrower (for example,
the imputed transfer is generally
characterized as a compensation
payment if the lender is the borrower’s
employer), and whether the loan is a
demand loan or a term loan.
on the future performance of substantial
services by an individual, and gift splitdollar term loans. Under § 1.7872–15,
these split-dollar loans are split-dollar
term loans for purposes of determining
whether the loan provides for sufficient
interest. However, if the loan does not
provide for sufficient interest when the
loan is made, forgone interest is
determined on the loan annually similar
to a split-dollar demand loan.
Commentators requested clarification on
whether the rate used for purposes of
imputation under § 1.7872–15(e)(5) for
these split-dollar loans is the AFR for
the month in which the loan is made
(redetermined annually) or the AFR as
of the month in which the loan is made
(determined on the date the loan is
made). The rate used to determine the
amount of forgone interest each year is
the AFR based on the term of the loan,
determined on the date the split-dollar
loan is made, and the rate is not
redetermined annually.
b. Special Rules for Certain Term Loans
Special rules are provided for splitdollar term loans payable upon the
death of an individual, certain splitdollar term loans that are conditioned
d. Payment Ordering Rules
Payments made by a borrower to a
lender pursuant to a split-dollar life
insurance arrangement are applied in
the following order: To accrued but
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c. Split-Dollar Loans With Stated
Interest That Is Subsequently Waived,
Cancelled or Forgiven
If a split-dollar loan provides for
stated interest that is subsequently
waived, cancelled or forgiven,
appropriate adjustments are required to
be made by the parties to reflect the
difference between the interest payable
at the stated rate and the interest
actually paid by the borrower at that
time. Further, the final regulations
provide that, if stated interest is
subsequently waived, cancelled or
forgiven, an amount is treated as
retransferred from the lender to the
borrower. The final regulations add a
new rule under which this amount
generally is increased by a deferral
charge. The final regulations provide a
new rule that a payment by the lender
to the borrower that, in substance, is a
waiver, cancellation or forgiveness is
treated as a waiver, cancellation, or
forgiveness under the final regulations.
The final regulations also provide a new
rule that, if a split-dollar loan is
nonrecourse and the parties to the splitdollar life insurance arrangement had
made the representation under
§ 1.7872–15(d)(2), although adjustments
are required to be made by the parties
if the interest paid on the split-dollar
loan is less than the interest payments
required under the split-dollar loan if all
payments were made, a deferral charge
is not imposed.
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unpaid interest (including any OID) on
all outstanding split-dollar loans in the
order the interest accrued; to principal
on the outstanding split-dollar loans in
the order in which the loans were made;
to payments of amounts previously paid
by the lender pursuant to the splitdollar life insurance arrangement that
were not reasonably expected to be
repaid; and to any other payment with
respect to a split-dollar life insurance
arrangement. One commentator
suggested limiting the payments to
which the payment ordering rule
applies to those that are made to or for
the benefit of the lender. The final
regulations adopt this suggestion in the
payment ordering rule in § 1.7872–
15(k).
e. Employment Taxes and SelfEmployment Tax
An imputed transfer under § 1.7872–
15 that is treated as an imputed transfer
of compensation will have
consequences for the Federal Insurance
Contributions Act (FICA) and the
Federal Unemployment Tax Act (FUTA)
if the adjustment represents wages to
the borrower. In response to questions
regarding the consequences of an
imputed transfer for employment and
self-employment tax purposes, the
regulations under sections 1402(a),
3121(a), 3231(e), and 3306(b) were
clarified to reference § 1.7872–15 as
well as § 1.61–22.
5. Gift Tax Treatment of Split-Dollar
Life Insurance Arrangements
The final regulations apply for gift tax
purposes, including private split-dollar
life insurance arrangements. Thus, if an
irrevocable life insurance trust is the
owner of the life insurance contract
underlying the split-dollar life
insurance arrangement, and a
reasonable person would expect that the
donor, or the donor’s estate, will recover
an amount equal to the donor’s
premium payments, those premium
payments are treated as loans made by
the donor to the trust and are subject to
§ 1.7872–15. In such a case, payment of
a premium by the donor is treated as a
split-dollar loan to the trust in the
amount of the premium payment. If the
loan is repayable upon the death of the
donor, the term of the loan is the
donor’s life expectancy determined
under the appropriate table under
§ 1.72–9 as of the date of the payment
and the value of the gift is the amount
of the premium payment less the
present value (determined under section
7872 and § 1.7872–15) of the donor’s
right to receive repayment. If, however,
the donor makes premium payments
that are not split-dollar loans, then the
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premium payments are governed by
general gift tax principles. In such a
case, with each premium payment, the
donor is treated as making a gift to the
trust equal to the amount of that
payment.
Different rules apply, however, if the
donor is treated under § 1.61–22(c) as
the owner of the life insurance contract
underlying the split-dollar life
insurance arrangement. Under these
circumstances, the donor is treated as
making a gift to the trust. The value of
the gift is the value of the economic
benefits provided to the trust, less the
amount of any premium paid by the
trustee. For example, assume that under
the terms of the split-dollar life
insurance arrangement, on termination
of the arrangement or the donor’s death,
the donor or donor’s estate is entitled to
receive an amount equal to the greater
of the aggregate premiums paid by the
donor or the cash surrender value of the
contract. In this case, the donor makes
a gift to the trust equal to the cost of the
current life insurance protection
provided to the trust less any premium
amount paid by the trustee. (Thus, a
payment by the donor will not
constitute a gift if the trust pays the
portion of the premium equal to the cost
of the current life insurance protection
and the donor pays the balance of the
premium.) On the other hand, if the
donor or the donor’s estate is entitled to
receive an amount equal to the lesser of
the aggregate premiums paid by the
donor, or the cash surrender value of the
contract, the amount of the economic
benefits provided to the trust by the
donor equals the cost of any current life
insurance protection provided to the
trust, the amount of policy cash value to
which the trust has current access (to
the extent that such amount was not
actually taken into account for a prior
taxable year), and the value of any other
economic benefits provided to the trust
(to the extent not actually taken into
account for a prior taxable year). The
value of the donor’s gift of economic
benefits equals the value of those
economic benefits provided to the trust
for the year minus the amount of
premiums paid by the trustee.
As discussed earlier, the final
regulations treat the donor as the owner
of a life insurance contract where the
donee is named as the policy owner if,
under the split-dollar life insurance
arrangement, the only economic benefit
provided to the donee by the donor
under the arrangement is the value of
current life insurance protection. Any
amount paid by a donee, directly or
indirectly, to the donor for such current
life insurance protection would
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54343
generally be included in the donor’s
gross income.
Where the donor is the owner of the
life insurance contract that is part of the
split-dollar life insurance arrangement,
amounts received by the irrevocable
insurance trust (either directly or
indirectly) under the contract (for
example, as a policy owner dividend or
proceeds of a specified policy loan) are
treated as gifts by the donor to the
irrevocable insurance trust as provided
in § 1.61–22(e). The donor must also
treat as a gift to the trust the amount set
forth in § 1.61–22(g) upon the transfer of
the life insurance contract (or undivided
interest therein) from the donor to the
trust.
The gift tax consequences of the
transfer of an interest in a life insurance
contract to a third party will continue to
be determined under established gift tax
principles notwithstanding who is
treated as the owner of the life
insurance contract under the final
regulations. See, for example, Rev. Rul.
81–198 (1981–2 C.B. 188). Similarly, for
estate tax purposes, regardless of who is
treated as the owner of a life insurance
contract under the final regulations, the
inclusion of the policy proceeds in a
decedent’s gross estate will continue to
be determined under section 2042.
Thus, the policy proceeds will be
included in the decedent’s gross estate
under section 2042(1) if receivable by
the decedent’s executor, or under
section 2042(2) if the policy proceeds
are receivable by a beneficiary other
than the decedent’s estate and the
decedent possessed any incidents of
ownership with respect to the policy.
One commentator requested that these
regulations address the extent to which
a decedent’s interest in a co-owned
policy is included in that decedent’s
gross estate under section 2042, but the
IRS and Treasury believe that issue is
beyond the scope of these regulations
and may be addressed in future
guidance.
6. Effective Date and Obsolescence of
Prior Guidance
These final regulations apply to any
split-dollar life insurance arrangement
entered into after September 17, 2003.
Additionally, these final regulations
apply to any split-dollar life insurance
arrangement entered into on or before
September 17, 2003 if the arrangement
is materially modified after September
17, 2003. However, a split-dollar life
insurance arrangement that is otherwise
described in Section IV, Paragraph 4 of
Notice 2002–8 (2002–1 C.B. 398) will
not be treated as materially modified for
these purposes if the change in the splitdollar life insurance arrangement is
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made solely to comply with Section IV,
Paragraph 4 of Notice 2002–8.
These final regulations provide a nonexclusive list of changes that will not
result in a material modification for
purposes of the effective date. For
example, the final regulations provide
that a change solely in the mode of
premium payment or a change solely in
the interest rate payable on a policy loan
under the life insurance contract will
not be treated as a material
modification.
The 2002 and 2003 proposed
regulations provided rules under which
taxpayers were permitted to rely on the
2002 and 2003 proposed regulations for
arrangements entered into on or before
September 17, 2003. This reliance also
was intended to be available in
circumstances under which taxpayers
relied on the proposed regulations to
determine that the arrangement would
not be subject to the proposed
regulations (for example, if the
arrangement does not fall with the
definition of a split-dollar life insurance
arrangement).
Concurrent with the publication of
these final regulations in the Federal
Register, the IRS and Treasury are
issuing Rev. Rul. 2003–105 (2003–40
I.R.B.) to obsolete certain revenue
rulings with respect to split-dollar life
insurance arrangements entered into or
materially modified after September 17,
2003.
Chief Counsel for Advocacy did not
submit any comments on the
regulations.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory flexibility assessment is not
required. It is hereby certified that the
collection of information requirements
in these regulations will not have a
significant economic impact on a
substantial number of small entities.
This certification is based on the fact
that the regulations merely require a
taxpayer to prepare a written
representation that contains minimal
information (if the loan provides for
nonrecourse payments) or a projected
payment schedule (if the loan provides
for contingent payments). In addition,
the preparation of these documents
should take no more than .28 hours per
taxpayer. Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking preceding this
regulation was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business. The
Proposed Amendments to the
Regulations
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Drafting Information
The principal authors of these final
regulations are Rebecca Asta of the
Office of Associate Chief Counsel
(Financial Institutions and Products),
Lane Damazo of the Office of Associate
Chief Counsel (Passthroughs and
Special Industries), Elizabeth Kaye of
the Office of Associate Chief Counsel
(Income Tax and Accounting), Erinn
Madden of the Office of Associate Chief
Counsel (Tax-Exempt and Governmental
Entities), and Krishna Vallabhaneni of
the Office of Associate Chief Counsel
(Corporate). However, other personnel
from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad retirement,
Reporting and recordkeeping
requirements, Social security,
Unemployment compensation.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Accordingly, 26 CFR parts 1, 31, and
602 are amended as follows:
■
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Section 1.7872–15 also issued under 26
U.S.C. 1275 and 7872. * * *
Par. 2. Section 1.61–2 is amended by:
1. Redesignating paragraphs
(d)(2)(ii)(a) and (b) as paragraphs
(d)(2)(ii)(A) and (B), respectively.
■ 2. Adding two sentences immediately
following the second sentence in newly
designated paragraph (d)(2)(ii)(A).
The additions read as follows:
■
■
§ 1.61–2 Compensation for services,
including fees, commissions, and similar
items.
*
*
*
*
*
(d) * * *
(2) * * *
(ii)(A) Cost of life insurance on the life
of the employee. * * * For example, if
an employee or independent contractor
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is the owner (as defined in § 1.61–
22(c)(1)) of a life insurance contract and
the payments with regard to such
contract are not split-dollar loans under
§ 1.7872–15(b)(1), the employee or
independent contractor must include in
income the amount of any such
payments by the employer or service
recipient with respect to such contract
during any year to the extent that the
employee’s or independent contractor’s
rights to the life insurance contract are
substantially vested (within the
meaning of § 1.83–3(b)). This result is
the same regardless of whether the
employee or independent contractor has
at all times been the owner of the life
insurance contract or the contract
previously has been owned by the
employer or service recipient as part of
a split-dollar life insurance arrangement
(as defined in § 1.61–22(b)(1) or (2)) and
was transferred by the employer or
service recipient to the employee or
independent contractor under § 1.61–
22(g). * * *
*
*
*
*
*
■ Par. 3. Section 1.61–22 is added to
read as follows:
§ 1.61–22 Taxation of split-dollar life
insurance arrangements.
(a) Scope—(1) In general. This section
provides rules for the taxation of a splitdollar life insurance arrangement for
purposes of the income tax, the gift tax,
the Federal Insurance Contributions Act
(FICA), the Federal Unemployment Tax
Act (FUTA), the Railroad Retirement
Tax Act (RRTA), and the SelfEmployment Contributions Act of 1954
(SECA). For the Collection of Income
Tax at Source on Wages, this section
also provides rules for the taxation of a
split-dollar life insurance arrangement,
other than a payment under a splitdollar life insurance arrangement that is
a split-dollar loan under § 1.7872–
15(b)(1). A split-dollar life insurance
arrangement (as defined in paragraph (b)
of this section) is subject to the rules of
paragraphs (d) through (g) of this
section, § 1.7872–15, or general tax
rules. For rules to determine which
rules apply to a split-dollar life
insurance arrangement, see paragraph
(b)(3) of this section.
(2) Overview. Paragraph (b) of this
section defines a split-dollar life
insurance arrangement and provides
rules to determine whether an
arrangement is subject to the rules of
paragraphs (d) through (g) of this
section, § 1.7872–15, or general tax
rules. Paragraph (c) of this section
defines certain other terms. Paragraph
(d) of this section sets forth rules for the
taxation of economic benefits provided
under a split-dollar life insurance
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arrangement. Paragraph (e) of this
section sets forth rules for the taxation
of amounts received under a life
insurance contract that is part of a splitdollar life insurance arrangement.
Paragraph (f) of this section provides
rules for additional tax consequences of
a split-dollar life insurance
arrangement, including the treatment of
death benefit proceeds. Paragraph (g) of
this section provides rules for the
transfer of a life insurance contract (or
an undivided interest in the contract)
that is part of a split-dollar life
insurance arrangement. Paragraph (h) of
this section provides examples
illustrating the application of this
section. Paragraph (j) of this section
provides the effective date of this
section.
(b) Split-dollar life insurance
arrangement—(1) In general. A splitdollar life insurance arrangement is any
arrangement between an owner and a
non-owner of a life insurance contract
that satisfies the following criteria—
(i) Either party to the arrangement
pays, directly or indirectly, all or any
portion of the premiums on the life
insurance contract, including a payment
by means of a loan to the other party
that is secured by the life insurance
contract;
(ii) At least one of the parties to the
arrangement paying premiums under
paragraph (b)(1)(i) of this section is
entitled to recover (either conditionally
or unconditionally) all or any portion of
those premiums and such recovery is to
be made from, or is secured by, the
proceeds of the life insurance contract;
and
(iii) The arrangement is not part of a
group-term life insurance plan
described in section 79 unless the
group-term life insurance plan provides
permanent benefits to employees (as
defined in § 1.79–0).
(2) Special rule—(i) In general. Any
arrangement between an owner and a
non-owner of a life insurance contract is
treated as a split-dollar life insurance
arrangement (regardless of whether the
criteria of paragraph (b)(1) of this
section are satisfied) if the arrangement
is described in paragraph (b)(2)(ii) or
(iii) of this section.
(ii) Compensatory arrangements. An
arrangement is described in this
paragraph (b)(2)(ii) if the following
criteria are satisfied—
(A) The arrangement is entered into in
connection with the performance of
services and is not part of a group-term
life insurance plan described in section
79;
(B) The employer or service recipient
pays, directly or indirectly, all or any
portion of the premiums; and
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(C) Either—
(1) The beneficiary of all or any
portion of the death benefit is
designated by the employee or service
provider or is any person whom the
employee or service provider would
reasonably be expected to designate as
the beneficiary; or
(2) The employee or service provider
has any interest in the policy cash value
of the life insurance contract.
(iii) Shareholder arrangements. An
arrangement is described in this
paragraph (b)(2)(iii) if the following
criteria are satisfied—
(A) The arrangement is entered into
between a corporation and another
person in that person’s capacity as a
shareholder in the corporation;
(B) The corporation pays, directly or
indirectly, all or any portion of the
premiums; and
(C) Either—
(1) The beneficiary of all or any
portion of the death benefit is
designated by the shareholder or is any
person whom the shareholder would
reasonably be expected to designate as
the beneficiary; or
(2) The shareholder has any interest
in the policy cash value of the life
insurance contract.
(3) Determination of whether this
section or § 1.7872–15 applies to a splitdollar life insurance arrangement—(i)
Split-dollar life insurance arrangements
involving split-dollar loans under
§ 1.7872–15. Except as provided in
paragraph (b)(3)(ii) of this section,
paragraphs (d) through (g) of this section
do not apply to any split-dollar loan as
defined in § 1.7872–15(b)(1). Section
1.7872–15 applies to any such loan. See
paragraph (b)(5) of this section for the
treatment of a payment made by a nonowner under a split-dollar life insurance
arrangement if the payment is not a
split-dollar loan.
(ii) Exceptions. Paragraphs (d)
through (g) of this section apply (and
§ 1.7872–15 does not apply) to any splitdollar life insurance arrangement if—
(A) The arrangement is entered into in
connection with the performance of
services, and the employer or service
recipient is the owner of the life
insurance contract (or is treated as the
owner of the contract under paragraph
(c)(1)(ii)(A)(1) of this section); or
(B) The arrangement is entered into
between a donor and a donee (for
example, a life insurance trust) and the
donor is the owner of the life insurance
contract (or is treated as the owner of
the contract under paragraph
(c)(1)(ii)(A)(2) of this section).
(4) Consistency requirement. A splitdollar life insurance arrangement
described in paragraph (b)(1) or (2) of
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54345
this section must be treated in the same
manner by the owner and the nonowner of the life insurance contract
under either the rules of this section or
§ 1.7872–15. In addition, the owner and
non-owner must fully account for all
amounts under the arrangement under
paragraph (b)(5) of this section,
paragraphs (d) through (g) of this
section, or § 1.7872–15.
(5) Non-owner payments that are not
split-dollar loans. If a non-owner of a
life insurance contract makes premium
payments (directly or indirectly) under
a split-dollar life insurance
arrangement, and the payments are
neither split-dollar loans nor
consideration for economic benefits
described in paragraph (d) of this
section, then neither the rules of
paragraphs (d) through (g) of this section
nor the rules in § 1.7872–15 apply to
such payments. Instead, general income
tax, employment tax, self-employment
tax, and gift tax principles apply to the
premium payments. See, for example,
§ 1.61–2(d)(2)(ii)(A).
(6) Waiver, cancellation, or
forgiveness. If a repayment obligation
described in § 1.7872–15(a)(2) is
waived, cancelled, or forgiven at any
time, then the parties must take the
amount waived, cancelled, or forgiven
into account in accordance with the
relationships between the parties (for
example, as compensation in the case of
an employee-employer relationship).
(7) Change in the owner. If payments
made by a non-owner to an owner were
treated as split-dollar loans under
§ 1.7872–15 and the split-dollar life
insurance arrangement is modified such
that, after the modification, the nonowner is the owner (within the meaning
of paragraph (c)(1) of this section) of the
life insurance contract under the
arrangement, paragraphs (d) through (g)
of this section apply to the split-dollar
life insurance arrangement from the date
of the modification. The payments made
(both before and after the modification)
are not treated as split-dollar loans
under § 1.7872–15 on or after the date
of the modification. The non-owner of
the life insurance contract under the
modified split-dollar life insurance
arrangement must fully take into
account all economic benefits provided
under the arrangement under paragraph
(d) of this section on or after the date of
the modification. For the treatment of a
transfer of the contract when the
unmodified arrangement is governed by
paragraphs (d) through (g) of this
section, see paragraph (g) of this section.
(c) Definitions. The following
definitions apply for purposes of this
section:
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(1) Owner—(i) In general. With
respect to a life insurance contract, the
person named as the policy owner of
such contract generally is the owner of
such contract. If two or more persons
are named as policy owners of a life
insurance contract and each person has,
at all times, all the incidents of
ownership with respect to an undivided
interest in the contract, each person is
treated as the owner of a separate
contract to the extent of such person’s
undivided interest. If two or more
persons are named as policy owners of
a life insurance contract but each person
does not have, at all times, all the
incidents of ownership with respect to
an undivided interest in the contract,
the person who is the first-named policy
owner is treated as the owner of the
entire contract.
(ii) Special rule for certain
arrangements—(A) In general.
Notwithstanding paragraph (c)(1)(i) of
this section—
(1) An employer or service recipient
is treated as the owner of a life
insurance contract under a split-dollar
life insurance arrangement that is
entered into in connection with the
performance of services if, at all times,
the only economic benefit that will be
provided under the arrangement is
current life insurance protection as
described in paragraph (d)(3) of this
section; and
(2) A donor is treated as the owner of
a life insurance contract under a splitdollar life insurance arrangement that is
entered into between a donor and a
donee (for example, a life insurance
trust) if, at all times, the only economic
benefit that will be provided under the
arrangement is current life insurance
protection as described in paragraph
(d)(3) of this section.
(B) Modifications. If an arrangement
described in paragraph (c)(1)(ii)(A) of
this section is modified such that the
arrangement is no longer described in
paragraph (c)(1)(ii)(A) of this section,
the following rules apply:
(1) If, immediately after such
modification, the employer, service
recipient, or donor is the owner of the
life insurance contract under the splitdollar life insurance arrangement
(determined without regard to
paragraph (c)(1)(ii)(A) of this section),
the employer, service recipient, or
donor continues to be treated as the
owner of the life insurance contract.
(2) If, immediately after such
modification, the employer, service
recipient, or donor is not the owner of
the life insurance contract under the
split-dollar life insurance arrangement
(determined without regard to
paragraph (c)(1)(ii)(A) of this section),
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the employer, service recipient, or
donor is treated as having made a
transfer of the entire life insurance
contract to the employee, service
provider, or donee under the rules of
paragraph (g) of this section as of the
date of such modification.
(3) For purposes of this paragraph
(c)(1)(ii)(B), entering into a successor
split-dollar life insurance arrangement
that has the effect of providing any
economic benefit in addition to that
described in paragraph (d)(3) of this
section is treated as a modification of
the prior split-dollar life insurance
arrangement.
(iii) Attribution rules for
compensatory arrangements. For
purposes of this section, if a split-dollar
life insurance arrangement is entered
into in connection with the performance
of services, the employer or service
recipient is treated as the owner of the
life insurance contract if the owner
(within the meaning of paragraph
(c)(1)(i) of this section) of the life
insurance contract under the split-dollar
life insurance arrangement is—
(A) A trust described in section
402(b);
(B) A trust that is treated as owned
(within the meaning of sections 671
through 677) by the employer or the
service recipient;
(C) A welfare benefit fund within the
meaning of section 419(e)(1); or
(D) A member of the employer or
service recipient’s controlled group
(within the meaning of section 414(b))
or a trade or business that is under
common control with the employer or
service recipient (within the meaning of
section 414(c)).
(iv) Life insurance contracts owned by
partnerships. [Reserved]
(2) Non-owner—(i) Definition. With
respect to a life insurance contract, a
non-owner is any person (other than the
owner of such contract under paragraph
(c)(1) of this section) that has any direct
or indirect interest in such contract (but
not including a life insurance company
acting only in its capacity as the issuer
of a life insurance contract).
(ii) Example. The following example
illustrates the provisions of this
paragraph (c)(2):
Example. (i) On January 1, 2009, Employer
R and Trust T, an irrevocable life insurance
trust that is not treated under sections 671
through 677 as owned by a grantor or other
person, enter into a split-dollar life insurance
arrangement in connection with the
performance of services under which R will
pay all the premiums on the life insurance
contract until the termination of the
arrangement or the death of E, an employee
of R. C, the beneficiary of T, is E’s child. R
is the owner of the contract under paragraph
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(c)(1)(i) of this section. E is the insured under
the life insurance contract. Upon termination
of the arrangement or E’s death, R is entitled
to receive the lesser of the aggregate
premiums or the policy cash value of the
contract and T will be entitled to receive any
remaining amounts. Under the terms of the
arrangement and applicable state law, the
policy cash value is fully accessible by R and
R’s creditors but T has the right to borrow or
withdraw at any time the portion of the
policy cash value exceeding the amount
payable to R.
(ii) Because E and T each have an indirect
interest in the life insurance contract that is
part of the split-dollar life insurance
arrangement, each is a non-owner under
paragraph (c)(2)(i) of this section. E and T
each are provided economic benefits
described in paragraph (d)(2) of this section
pursuant to the split-dollar life insurance
arrangement. Economic benefits are provided
by owner R to E as a payment of
compensation, and separately provided by E
to T as a gift.
(3) Transfer of entire contract or
undivided interest therein. A transfer of
the ownership of a life insurance
contract (or an undivided interest in
such contract) that is part of a splitdollar life insurance arrangement occurs
on the date that a non-owner becomes
the owner (within the meaning of
paragraph (c)(1) of this section) of the
entire contract or of an undivided
interest in the contract.
(4) Undivided interest. An undivided
interest in a life insurance contract
consists of an identical fractional or
percentage interest or share in each
right, benefit, and obligation with
respect to the contract. In the case of
any arrangement purporting to create
undivided interests where, in substance,
the rights, benefits or obligations are
shared to any extent among the holders
of such interests, the arrangement will
be treated as a split-dollar life insurance
arrangement.
(5) Employment tax. The term
employment tax means any tax imposed
by, or collected under, the Federal
Insurance Contributions Act (FICA), the
Federal Unemployment Tax Act
(FUTA), the Railroad Retirement Tax
Act (RRTA), and the Collection of
Income Tax at Source on Wages.
(6) Self-employment tax. The term
self-employment tax means the tax
imposed by the Self-Employment
Contributions Act of 1954 (SECA).
(d) Economic benefits provided under
a split-dollar life insurance
arrangement—(1) In general. In the case
of a split-dollar life insurance
arrangement subject to the rules of
paragraphs (d) through (g) of this
section, economic benefits are treated as
being provided to the non-owner of the
life insurance contract. The non-owner
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(and the owner for gift and employment
tax purposes) must take into account the
full value of all economic benefits
described in paragraph (d)(2) of this
section, reduced by the consideration
paid directly or indirectly by the nonowner to the owner for those economic
benefits. Depending on the relationship
between the owner and the non-owner,
the economic benefits may constitute a
payment of compensation, a distribution
under section 301, a contribution to
capital, a gift, or a transfer having a
different tax character. Further,
depending on the relationship between
or among a non-owner and one or more
other persons (including a non-owner or
non-owners), the economic benefits may
be treated as provided from the owner
to the non-owner and as separately
provided from the non-owner to such
other person or persons (for example, as
a payment of compensation from an
employer to an employee and as a gift
from the employee to the employee’s
child).
(2) Value of economic benefits. The
value of the economic benefits provided
to a non-owner for a taxable year under
the arrangement equals—
(i) The cost of current life insurance
protection provided to the non-owner as
determined under paragraph (d)(3) of
this section;
(ii) The amount of policy cash value
to which the non-owner has current
access within the meaning of paragraph
(d)(4)(ii) of this section (to the extent
that such amount was not actually taken
into account for a prior taxable year);
and
(iii) The value of any economic
benefits not described in paragraph
(d)(2)(i) or (ii) of this section provided
to the non-owner (to the extent not
actually taken into account for a prior
taxable year).
(3) Current life insurance protection—
(i) Amount of current life insurance
protection. In the case of a split-dollar
life insurance arrangement described in
paragraph (d)(1) of this section, the
amount of the current life insurance
protection provided to the non-owner
for a taxable year (or any portion thereof
in the case of the first year or the last
year of the arrangement) equals the
excess of the death benefit of the life
insurance contract (including paid-up
additions thereto) over the total amount
payable to the owner (including any
outstanding policy loans that offset
amounts otherwise payable to the
owner) under the split-dollar life
insurance arrangement, less the portion
of the policy cash value actually taken
into account under paragraph (d)(1) of
this section or paid for by the nonowner under paragraph (d)(1) for the
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current taxable year or any prior taxable
year.
(ii) Cost of current life insurance
protection. The cost of current life
insurance protection provided to the
non-owner for any year (or any portion
thereof in the case of the first year or the
last year of the arrangement) equals the
amount of the current life insurance
protection provided to the non-owner
(determined under paragraph (d)(3)(i) of
this section) multiplied by the life
insurance premium factor designated or
permitted in guidance published in the
Internal Revenue Bulletin (see
§ 601.601(d)(2)(ii) of this chapter).
(4) Policy cash value—(i) In general.
For purposes of this paragraph (d),
policy cash value is determined
disregarding surrender charges or other
similar charges or reductions. Policy
cash value includes policy cash value
attributable to paid-up additions.
(ii) Current access. For purposes of
this paragraph (d), a non-owner has
current access to that portion of the
policy cash value—
(A) To which, under the arrangement,
the non-owner has a current or future
right and;
(B) That currently is directly or
indirectly accessible by the non-owner,
inaccessible to the owner, or
inaccessible to the owner’s general
creditors.
(5) Valuation date—(i) General rules.
For purposes of this paragraph (d), the
amount of the current life insurance
protection and the policy cash value
shall be determined on the same
valuation date. The valuation date is the
last day of the non-owner’s taxable year,
unless the owner and non-owner agree
to instead use the policy anniversary
date as the valuation date.
Notwithstanding the previous sentence,
if the split-dollar life insurance
arrangement terminates during the
taxable year of the non-owner, the value
of such economic benefits is determined
on the day that the arrangement
terminates.
(ii) Consistency requirement. The
owner and non-owner of the split-dollar
arrangement must use the same
valuation date. In addition, the same
valuation date must be used for all years
prior to termination of the split-dollar
life insurance arrangement unless the
parties receive consent of the
Commissioner to change the valuation
date.
(iii) Artifice or device.
Notwithstanding paragraph (d)(5)(i) of
this section, if any artifice or device is
used to understate the amount of any
economic benefit on the valuation date
in paragraph (d)(5)(i) of this section,
then, for purposes of this paragraph (d),
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54347
the date on which the amount of the
economic benefit is determined is the
date on which the amount of the
economic benefit is greatest during that
taxable year.
(iv) Special rule for certain taxes. For
purposes of employment tax (as defined
in paragraph (c)(5) of this section), selfemployment tax (as defined in
paragraph (c)(6) of this section), and
sections 6654 and 6655 (relating to the
failure to pay estimated income tax), the
portions of the current life insurance
protection and the policy cash value
that are treated as provided by the
owner to the non-owner shall be treated
as so provided on the last day of the
taxable year of the non-owner.
Notwithstanding the previous sentence,
if the split-dollar life insurance
arrangement terminates during the
taxable year of the non-owner, such
portions of the current life insurance
protection and the policy cash value
shall be treated as so provided on the
day that the arrangement terminates.
(6) Examples. The following examples
illustrate the rules of this paragraph (d).
Except as otherwise provided, both
examples assume the following facts:
employer (R) is the owner (as defined in
paragraph (c)(1)(i) of this section) and
employee (E) is the non-owner (as
defined in paragraph (c)(2)(i) of this
section) of a life insurance contract that
is part of a split-dollar life insurance
arrangement that is subject to the
provisions of paragraphs (d) through (g)
of this section; the contract is a life
insurance contract as defined in section
7702 and not a modified endowment
contract as defined in section 7702A; R
does not withdraw or obtain a loan of
any portion of the policy cash value and
does not surrender any portion of the
life insurance contract; the
compensation paid to E is reasonable; E
is not provided any economic benefits
described in paragraph (d)(2)(iii) of this
section; E does not make any premium
payments; E’s taxable year is the
calendar year; the value of the economic
benefits is determined on the last day of
E’s taxable year; and E reports on E’s
Federal income tax return for each year
that the split-dollar life insurance
arrangement is in effect the amount of
income required to be reported under
paragraph (d) of this section. The
examples are as follows:
Example 1. (i) Facts. On January 1 of year
1, R and E enter into the split-dollar life
insurance arrangement. Under the
arrangement, R pays all of the premiums on
the life insurance contract until the
termination of the arrangement or E’s death.
The arrangement provides that upon
termination of the arrangement or E’s death,
R is entitled to receive the lesser of the
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aggregate premiums paid or the policy cash
value of the contract and E is entitled to
receive any remaining amounts. Under the
terms of the arrangement and applicable state
law, the policy cash value is fully accessible
by R and R’s creditors but E has the right to
borrow or withdraw at any time the portion
of the policy cash value exceeding the
amount payable to R. To fund the
arrangement, R purchases a life insurance
contract with constant death benefit
protection equal to $1,500,000. R makes
premium payments on the life insurance
contract of $60,000 in each of years 1, 2, and
3. The policy cash value equals $55,000 as
of December 31 of year 1, $140,000 as of
December 31 of year 2, and $240,000 as of
December 31 of year 3.
(ii) Analysis. Under the terms of the splitdollar life insurance arrangement, E has the
right for year 1 and all subsequent years to
borrow or withdraw the portion of the policy
cash value exceeding the amount payable to
R. Thus, under paragraph (d)(4)(ii) of this
section, E has current access to such portion
of the policy cash value for each year that the
arrangement is in effect. In addition, because
R pays all of the premiums on the life
insurance contract, R provides to E all of the
economic benefits that E receives under the
arrangement. Therefore, under paragraph
(d)(1) of this section, E includes in gross
income the value of all economic benefits
described in paragraphs (d)(2)(i) and (ii) of
this section provided to E under the
arrangement.
(iii) Results for year 1. For year 1, E is
provided, under paragraph (d)(2)(ii) of this
section, $0 of policy cash value (excess of
$55,000 policy cash value determined as of
December 31 of year 1 over $55,000 payable
to R). For year 1, E is also provided, under
paragraph (d)(2)(i) of this section, current life
insurance protection of $1,445,000
($1,500,000 minus $55,000 payable to R).
Thus, E includes in gross income for year 1
the cost of $1,445,000 of current life
insurance protection.
(iv) Results for year 2. For year 2, E is
provided, under paragraph (d)(2)(ii) of this
section, $20,000 of policy cash value
($140,000 policy cash value determined as of
December 31 of year 2 minus $120,000
payable to R). For year 2, E is also provided,
under paragraph (d)(2)(i) of this section,
current life insurance protection of
$1,360,000 ($1,500,000 minus the sum of
$120,000 payable to R and the aggregate of
$20,000 of policy cash value that E actually
includes in income on E’s year 1 and year 2
federal income tax returns). Thus, E includes
in gross income for year 2 the sum of $20,000
of policy cash value and the cost of
$1,360,000 of current life insurance
protection.
(v) Results for year 3. For year 3, E is
provided, under paragraph (d)(2)(ii) of this
section, $40,000 of policy cash value
($240,000 policy cash value determined as of
December 31 of year 3 minus the sum of
$180,000 payable to R and $20,000 of
aggregate policy cash value that E actually
included in gross income on E’s year 1 and
year 2 federal income tax returns). For year
3, E is also provided, under paragraph
(d)(2)(i) of this section, current life insurance
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protection of $1,260,000 ($1,500,000 minus
the sum of $180,000 payable to R and
$60,000 of aggregate policy cash value that E
actually includes in gross income on E’s year
1, year 2, and year 3 federal income tax
returns). Thus, E includes in gross income for
year 3 the sum of $40,000 of policy cash
value and the cost of $1,260,000 of current
life insurance protection.
Example 2. (i) Facts. The facts are the
same as in Example 1 except that E cannot
directly or indirectly access any portion of
the policy cash value, but the terms of the
split-dollar life insurance arrangement or
applicable state law provide that the policy
cash value in excess of the amount payable
to R is inaccessible to R’s general creditors.
(ii) Analysis. Under the terms of the splitdollar life insurance arrangement or
applicable state law, the portion of the policy
cash value exceeding the amount payable to
R is inaccessible to R’s general creditors and
E has a current or future right to that portion
of the cash value. Thus, under paragraph
(d)(4)(ii) of this section, E has current access
to such portion of the policy cash value for
each year that the arrangement is in effect. In
addition, because R pays all of the premiums
on the life insurance contract, R provides to
E all of the economic benefits that E receives
under the arrangement. Therefore, under
paragraph (d)(1) of this section, E includes in
gross income the value of all economic
benefits described in paragraphs (d)(2)(i) and
(ii) of this section provided to E under the
arrangement.
(iii) Results for years 1, 2 and 3. The
results for this example are the same as
the results in Example 1.
(e) Amounts received under the
contract—(1) In general. Except as
otherwise provided in paragraph (f)(3)
of this section, any amount received
under a life insurance contract that is
part of a split-dollar life insurance
arrangement subject to the rules of
paragraphs (d) through (g) of this section
(including, but not limited to, a policy
owner dividend, proceeds of a specified
policy loan described in paragraph (e)(2)
of this section, or the proceeds of a
withdrawal from or partial surrender of
the life insurance contract) is treated, to
the extent provided directly or
indirectly to a non-owner of the life
insurance contract, as though such
amount had been paid to the owner of
the life insurance contract and then paid
by the owner to the non-owner. The
amount received is taxable to the owner
in accordance with the rules of section
72. The non-owner (and the owner for
gift tax and employment tax purposes)
must take the amount described in
paragraph (e)(3) of this section into
account as a payment of compensation,
a distribution under section 301, a
contribution to capital, a gift, or other
transfer depending on the relationship
between the owner and the non-owner.
(2) Specified policy loan. A policy
loan is a specified policy loan to the
extent—
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(i) The proceeds of the loan are
distributed directly from the insurance
company to the non-owner;
(ii) A reasonable person would not
expect that the loan will be repaid by
the non-owner; or
(iii) The non-owner’s obligation to
repay the loan to the owner is satisfied
or is capable of being satisfied upon
repayment by either party to the
insurance company.
(3) Amount required to be taken into
account. With respect to a non-owner
(and the owner for gift tax and
employment tax purposes), the amount
described in this paragraph (e)(3) is
equal to the excess of—
(i) The amount treated as received by
the owner under paragraph (e)(1) of this
section; over
(ii) The amount of all economic
benefits described in paragraphs
(d)(2)(ii) and (iii) of this section actually
taken into account by the non-owner
(and the owner for gift tax and
employment tax purposes) plus any
consideration described in paragraph
(d)(1) of this section paid by the nonowner for such economic benefits
described in paragraphs (d)(2)(ii) and
(iii) of this section. The amount
determined under the preceding
sentence applies only to the extent that
neither this paragraph (e)(3)(ii) nor
paragraph (g)(1)(ii) of this section
previously has applied to such
economic benefits.
(f) Other tax consequences—(1)
Introduction. In the case of a split-dollar
life insurance arrangement subject to the
rules of paragraphs (d) through (g) of
this section, this paragraph (f) sets forth
other tax consequences to the owner
and non-owner of a life insurance
contract that is part of the arrangement
for the period prior to the transfer (as
defined in paragraph (c)(3) of this
section) of the contract (or an undivided
interest therein) from the owner to the
non-owner. See paragraph (g) of this
section and § 1.83–6(a)(5) for tax
consequences upon the transfer of the
contract (or an undivided interest
therein).
(2) Investment in the contract—(i) To
the non-owner. A non-owner does not
receive any investment in the contract
under section 72(e)(6) with respect to a
life insurance contract that is part of a
split-dollar life insurance arrangement
subject to the rules of paragraphs (d)
through (g) of this section.
(ii) To owner. Any premium paid by
an owner under a split-dollar life
insurance arrangement subject to the
rules of paragraphs (d) through (g) of
this section is included in the owner’s
investment in the contract under section
72(e)(6). No premium or amount
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described in paragraph (d) of this
section is deductible by the owner
(except as otherwise provided in § 1.83–
6(a)(5)). Any amount paid by a nonowner, directly or indirectly, to the
owner of the life insurance contract for
current life insurance protection or for
any other economic benefit under the
life insurance contract is included in the
owner’s gross income and is included in
the owner’s investment in the life
insurance contract for purposes of
section 72(e)(6) (but only to the extent
not otherwise so included by reason of
having been paid by the owner as a
premium or other consideration for the
contract).
(3) Treatment of death benefit
proceeds—(i) Death benefit proceeds to
beneficiary (other than the owner). Any
amount paid to a beneficiary (other than
the owner) by reason of the death of the
insured is excluded from gross income
by such beneficiary under section 101(a)
as an amount received under a life
insurance contract to the extent such
amount is allocable to current life
insurance protection provided to the
non-owner pursuant to the split-dollar
life insurance arrangement, the cost of
which was paid by the non-owner, or
the value of which the non-owner
actually took into account pursuant to
paragraph (d)(1) of this section.
(ii) Death benefit proceeds to owner as
beneficiary. Any amount paid or
payable to an owner in its capacity as
a beneficiary by reason of the death of
the insured is excluded from gross
income of the owner under section
101(a) as an amount received under a
life insurance contract to the extent
such amount is not allocable to current
life insurance protection provided to the
non-owner pursuant to the split-dollar
life insurance arrangement, the cost of
which was paid by the non-owner, or
the value of which the non-owner
actually took into account pursuant to
paragraph (d)(1) of this section.
(iii) Transfers of death benefit
proceeds. Death benefit proceeds paid to
a party to a split-dollar life insurance
arrangement (or the estate or beneficiary
of that party) that are not excludable
from that party’s income under section
101(a) to the extent provided in
paragraph (f)(3)(i) or (ii) of this section,
are treated as transferred to that party in
a separate transaction. The death benefit
proceeds treated as so transferred will
be taxed in a manner similar to other
transfers. For example, if death benefit
proceeds paid to an employee, the
employee’s estate, or the employee’s
beneficiary are not excludable from the
employee’s gross income under section
101(a) to the extent provided in
paragraph (f)(3)(i) of this section, then
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such payment is treated as a payment of
compensation by the employer to the
employee.
(g) Transfer of entire contract or
undivided interest therein—(1) In
general. Upon a transfer within the
meaning of paragraph (c)(3) of this
section of a life insurance contract (or
an undivided interest therein) to a nonowner (transferee), the transferee (and
the owner (transferor) for gift tax and
employment tax purposes) takes into
account the excess of the fair market
value of the life insurance contract (or
the undivided interest therein)
transferred to the transferee at that time
over the sum of—
(i) The amount the transferee pays to
the transferor to obtain the contract (or
the undivided interest therein); and
(ii) The amount of all economic
benefits described in paragraph (d)(2)(ii)
and (iii) of this section actually taken
into account by the transferee (and the
transferor for gift tax and employment
tax purposes), plus any consideration
described in paragraph (d)(1) of this
section paid by the transferee for such
economic benefits described in
paragraphs (d)(2)(ii) and (iii) of this
section. The amount determined under
the preceding sentence applies only to
the extent that neither this paragraph
(g)(1)(ii) nor paragraph (e)(3)(ii) of this
section previously has applied to such
economic benefits.
(2) Determination of fair market
value. For purposes of paragraph (g)(1)
of this section, the fair market value of
a life insurance contract is the policy
cash value and the value of all other
rights under such contract (including
any supplemental agreements thereto
and whether or not guaranteed), other
than the value of current life insurance
protection. Notwithstanding the
preceding sentence, the fair market
value of a life insurance contract for gift
tax purposes is determined under
§ 25.2512–6(a) of this chapter.
(3) Exception for certain transfers in
connection with the performance of
services. To the extent the ownership of
a life insurance contract (or undivided
interest in such contract) is transferred
in connection with the performance of
services, paragraph (g)(1) of this section
does not apply until such contract (or
undivided interest in such contract) is
taxable under section 83. For purposes
of paragraph (g)(1) of this section, fair
market value is determined disregarding
any lapse restrictions and at the time the
transfer of such contract (or undivided
interest in such contract) is taxable
under section 83.
(4) Treatment of non-owner after
transfer—(i) In general. After a transfer
of an entire life insurance contract
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54349
(except when such transfer is in
connection with the performance of
services and the transfer is not yet
taxable under section 83), the person
who previously had been the non-owner
is treated as the owner of such contract
for all purposes, including for purposes
of paragraph (b) of this section and for
purposes of § 1.61–2(d)(2)(ii)(A). After
the transfer of an undivided interest in
a life insurance contract (or, if later, at
the time such transfer is taxable under
section 83), the person who previously
had been the non-owner is treated as the
owner of a separate contract consisting
of that interest for all purposes,
including for purposes of paragraph (b)
of this section and for purposes of
§ 1.61–2(d)(2)(ii)(A).
(ii) Investment in the contract after
transfer—(A) In general. The amount
treated as consideration paid to acquire
the contract under section 72(g)(1), in
order to determine the aggregate
premiums paid by the transferee for
purposes of section 72(e)(6)(A) after the
transfer (or, if later, at the time such
transfer is taxable under section 83),
equals the greater of the fair market
value of the contract or the sum of the
amounts determined under paragraphs
(g)(1)(i) and (ii) of this section.
(B) Transfers between a donor and a
donee. In the case of a transfer of a
contract between a donor and a donee,
the amount treated as consideration
paid by the transferee to acquire the
contract under section 72(g)(1), in order
to determine the aggregate premiums
paid by the transferee for purposes of
section 72(e)(6)(A) after the transfer,
equals the sum of the amounts
determined under paragraphs (g)(1)(i)
and (ii) of this section except that—
(1) The amount determined under
paragraph (g)(1)(i) of this section
includes the aggregate of premiums or
other consideration paid or deemed to
have been paid by the transferor; and
(2) The amount of all economic
benefits determined under paragraph
(g)(1)(ii) of this section actually taken
into account by the transferee does not
include such benefits to the extent such
benefits were excludable from the
transferee’s gross income at the time of
receipt.
(C) Transfers of an undivided interest
in a contract. If a portion of a contract
is transferred to the transferee, then the
amount to be included as consideration
paid to acquire the contract is
determined by multiplying the amount
determined under paragraph (g)(4)(ii)(A)
of this section (as modified by
paragraph (g)(4)(ii)(B) of this section, if
the transfer is between a donor and a
donee) by a fraction, the numerator of
which is the fair market value of the
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portion transferred and the denominator
of which is the fair market value of the
entire contract.
(D) Example. The following example
illustrates the rules of this paragraph
(g)(4)(ii):
Example. (i) In year 1, donor D and donee
E enter into a split-dollar life insurance
arrangement as defined in paragraph (b)(1) of
this section. D is the owner of the life
insurance contract under paragraph (c)(1) of
this section. The life insurance contract is not
a modified endowment contract as defined in
section 7702A. In year 5, D gratuitously
transfers the contract, within the meaning of
paragraph (c)(3) of this section, to E. At the
time of the transfer, the fair market value of
the contract is $200,000 and D had paid
$50,000 in premiums under the arrangement.
In addition, by the time of the transfer, E had
current access to $80,000 of policy cash value
which was excludable from E’s gross income
under section 102.
(ii) E’s investment in the contract is
$50,000, consisting of the $50,000 of
premiums paid by D. The $80,000 of policy
cash value to which E had current access is
not included in E’s investment in the
contract because such amount was
excludable from E’s gross income when E
had current access to that policy cash value.
(iii) No investment in the contract for
current life insurance protection. Except
as provided in paragraph (g)(4)(ii)(B) of
this section, no amount allocable to
current life insurance protection
provided to the transferee (the cost of
which was paid by the transferee or the
value of which was provided to the
transferee) is treated as consideration
paid to acquire the contract under
section 72(g)(1) to determine the
aggregate premiums paid by the
transferee for purposes of determining
the transferee’s investment in the
contract under section 72(e) after the
transfer.
(h) Examples. The following examples
illustrate the rules of this section.
Except as otherwise provided, each of
the examples assumes that the employer
(R) is the owner (as defined in
paragraph (c)(1) of this section) of a life
insurance contract that is part of a splitdollar life insurance arrangement
subject to the rules of paragraphs (d)
through (g) of this section, that the
employee (E) is not provided any
economic benefits described in
paragraph (d)(2)(iii) of this section, that
the life insurance contract is not a
modified endowment contract under
section 7702A, that the compensation
paid to E is reasonable, and that E
makes no premium payments. The
examples are as follows:
Example 1. (i) In year 1, R purchases a life
insurance contract on the life of E. R is
named as the policy owner of the contract.
R and E enter into an arrangement under
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which R will pay all the premiums on the life
insurance contract until the termination of
the arrangement or E’s death. Upon
termination of the arrangement or E’s death,
R is entitled to receive the greater of the
aggregate premiums or the policy cash value
of the contract. The balance of the death
benefit will be paid to a beneficiary
designated by E.
(ii) Because R is designated as the policy
owner of the contract, R is the owner of the
contract under paragraph (c)(1)(i) of this
section. In addition, R would be treated as
the owner of the contract regardless of
whether of R were designated as the policy
owner under paragraph (c)(1)(i) of this
section because the split-dollar life insurance
arrangement is described in paragraph
(c)(1)(ii)(A)(1) of this section. E is a nonowner of the contract. Under the arrangement
between R and E, a portion of the death
benefit is payable to a beneficiary designated
by E. The arrangement is a split-dollar life
insurance arrangement under paragraph
(b)(1) or (2) of this section. Because R pays
all the premiums on the life insurance
contract, R provides to E the entire amount
of the current life insurance protection E
receives under the arrangement. Therefore,
for each year that the split-dollar life
insurance arrangement is in effect, E must
include in gross income under paragraph
(d)(1) of this section the value of current life
insurance protection described in paragraph
(d)(2)(i) of this section provided to E in each
year.
Example 2. (i) The facts are the same as in
Example 1 except that, upon termination of
the arrangement or E’s death, R is entitled to
receive the lesser of the aggregate premiums
or the policy cash value of the contract.
Under the terms of the arrangement and
applicable state law, the policy cash value is
fully accessible by R and R’s creditors but E
has the right to borrow or withdraw at any
time the portion of the policy cash value
exceeding the amount payable to R.
(ii) Because R is designated as the policy
owner, R is the owner of the contract under
paragraph (c)(1)(i) of this section. E is a nonowner of the contract. For each year that the
split-dollar life insurance arrangement is in
effect, E has the right to borrow or withdraw
at any time the portion of the policy cash
value exceeding the amount payable to R.
Thus, under paragraph (d)(4)(ii) of this
section, E has current access to such portion
of the policy cash value for each year that the
arrangement is in effect. In addition, because
R pays all the premiums on the life insurance
contract, R provides to E all the economic
benefits that E receives under the
arrangement. Therefore, for each year that the
split-dollar life insurance arrangement is in
effect, E must include in gross income under
paragraph (d)(1) of this section, the value of
all economic benefits described in paragraph
(d)(2)(i) and (ii) of this section provided to E
in each year.
Example 3. (i) The facts are the same as in
Example 1 except that in year 5, R and E
modify the split-dollar life insurance
arrangement to provide that, upon
termination of the arrangement or E’s death,
R is entitled to receive the greater of the
aggregate premiums or one-half the policy
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cash value of the contract. Under the terms
of the modified arrangement and applicable
state law, the policy cash value is fully
accessible by R and R’s creditors but E has
the right to borrow or withdraw at any time
the portion of the policy cash value
exceeding the amount payable to R.
(ii) For each year that the split-dollar
life insurance arrangement is in effect,
E must include in gross income under
paragraph (d)(1) of this section the value
of the economic benefits described in
paragraph (d)(2)(i) of this section
provided to E under the arrangement
during that year. In year 5 (and
subsequent years), E has the right to
borrow or withdraw at any time the
portion of the policy cash value
exceeding the amount payable to R.
Thus, under paragraph (d)(4)(ii) of this
section, E has current access to such
portion of the policy cash value. Thus,
in year 5 (and each subsequent year), E
must also include in gross income under
paragraph (d)(1) of this section the value
of the economic benefits described in
paragraph (d)(2)(ii) of this section
provided to E in each year.
(iii) The arrangement is not described in
paragraph (c)(1)(ii)(A)(1) of this section after
it is modified in year 5. Because R is the
designated owner of the life insurance
contract, R continues to be treated as the
owner of the contract under paragraph
(c)(1)(ii)(B)(1) of this section after the
arrangement is modified. In addition,
because the modification made by R and E
in year 5 does not involve the transfer
(within the meaning of paragraph (c)(3) of
this section) of an undivided interest in the
life insurance contract from R to E, the
modification is not a transfer for purposes of
paragraph (g) of this section.
Example 4. (i) The facts are the same as in
Example 2 except that in year 7, R and E
modify the split-dollar life insurance
arrangement to provide that, upon
termination of the arrangement or E’s death,
R will be paid the lesser of 80 percent of the
aggregate premiums or the policy cash value
of the contract. Under the terms of the
modified arrangement and applicable state
law, the policy cash value is fully accessible
by R and R’s creditors but E has the right to
borrow or withdraw at any time the portion
of the policy cash value exceeding the lesser
of 80 percent of the aggregate premiums paid
by R or the policy cash value of the contract.
(ii) Commencing in year 7 (and in each
subsequent year), E must include in gross
income the economic benefits described in
paragraph (d)(2)(ii) of this section as
provided in this Example 4(ii) rather than as
provided in Example 2(ii). Thus, in year 7
(and in each subsequent year) E must include
in gross income under paragraph (d) of this
section, the excess of the policy cash value
over the lesser of 80 percent of the aggregate
premiums paid by R or the policy cash value
of the contract (to the extent E did not
actually include such amounts in gross
income for a prior taxable year). In addition,
in year 7 (and each subsequent year) E must
also include in gross income the value of the
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economic benefits described in paragraph
(d)(2)(i) of this section provided to E under
the arrangement during in each such year.
Example 5. (i) The facts are the same as in
Example 3 except that in year 7, E is
designated as the policy owner. At that time,
E’s rights to the contract are substantially
vested as defined in § 1.83–3(b).
(ii) In year 7, R is treated as having made
a transfer (within the meaning of paragraph
(c)(3) of this section) of the life insurance
contract to E. E must include in gross income
the amount determined under paragraph
(g)(1) of this section.
(iii) After the transfer of the contract to E,
E is the owner of the contract and any
premium payments by R will be included in
E’s income under paragraph (b)(5) of this
section and § 1.61–2(d)(2)(ii)(A) (unless R’s
payments are split-dollar loans as defined in
§ 1.7872–15(b)(1)).
Example 6. (i) In year 1, E and R enter into
a split-dollar life insurance arrangement as
defined in paragraph (b)(2) of this section.
Under the arrangement, R is required to make
annual premium payments of $10,000 and E
is required to make annual premium
payments of $500. In year 5, a $500 policy
owner dividend payable to E is declared by
the insurance company. E directs the
insurance company to use the $500 as E’s
premium payment for year 5.
(ii) For each year the arrangement is in
effect, E must include in gross income the
value of the economic benefits provided
during the year, as required by paragraph
(d)(2) of this section, over the $500 premium
payments paid by E. In year 5, E must also
include in gross income as compensation the
excess, if any, of the $500 distributed to E
from the proceeds of the policy owner
dividend over the amount determined under
paragraph (e)(3)(ii) of this section.
(iii) R must include in income the
premiums paid by E during the years the
split-dollar life insurance arrangement is in
effect, including the $500 of the premium E
paid in year 5 with proceeds of the policy
owner dividend. R’s investment in the
contract is increased in an amount equal to
the premiums paid by E, including the $500
of the premium paid by E in year 5 from the
proceeds of the policy owner dividend. In
year 5, R is treated as receiving a $500
distribution under the contract, which is
taxed pursuant to section 72.
Example 7. (i) The facts are the same as in
Example 2 except that in year 10, E
withdraws $100,000 from the cash value of
the contract.
(ii) In year 10, R is treated as receiving a
$100,000 distribution from the insurance
company. This amount is treated as an
amount received by R under the contract and
taxed pursuant to section 72. This amount
reduces R’s investment in the contract under
section 72(e). R is treated as paying the
$100,000 to E as cash compensation, and E
must include that amount in gross income
less any amounts determined under
paragraph (e)(3)(ii) of this section.
Example 8. (i) The facts are the same as in
Example 7 except E receives the proceeds of
a $100,000 specified policy loan directly
from the insurance company.
(ii) The transfer of the proceeds of the
specified policy loan to E is treated as a loan
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by the insurance company to R. Under the
rules of section 72(e), the $100,000 loan is
not included in R’s income and does not
reduce R’s investment in the contract. R is
treated as paying the $100,000 of loan
proceeds to E as cash compensation. E must
include that amount in gross income less any
amounts determined under paragraph
(e)(3)(ii) of this section.
(i) [Reserved]
(j) Effective date—(1) General rule—(i)
In general. This section applies to any
split-dollar life insurance arrangement
(as defined in paragraph (b)(1) or (2) of
this section) entered into after
September 17, 2003.
(ii) Determination of when an
arrangement is entered into. For
purposes of paragraph (j) of this section,
a split-dollar life insurance arrangement
is entered into on the latest of the
following dates:
(A) The date on which the life
insurance contract under the
arrangement is issued;
(B) The effective date of the life
insurance contract under the
arrangement;
(C) The date on which the first
premium on the life insurance contract
under the arrangement is paid;
(D) The date on which the parties to
the arrangement enter into an agreement
with regard to the policy; or
(E) The date on which the
arrangement satisfies the definition of a
split-dollar life insurance arrangement
(as defined in paragraph (b)(1) or (2) of
this section).
(2) Modified arrangements treated as
new arrangements—(i) In general. For
purposes of paragraph (j)(1) of this
section, if an arrangement entered into
on or before September 17, 2003 is
materially modified after September 17,
2003, the arrangement is treated as a
new arrangement entered into on the
date of the modification.
(ii) Non-material modifications. The
following is a non-exclusive list of
changes that are not material
modifications under paragraph (j)(2)(i)
of this section (either alone or in
conjunction with other changes listed in
paragraphs (j)(2)(ii)(A) through (I) of this
section)—
(A) A change solely in the mode of
premium payment (for example, a
change from monthly to quarterly
premiums);
(B) A change solely in the beneficiary
of the life insurance contract, unless the
beneficiary is a party to the
arrangement;
(C) A change solely in the interest rate
payable under the life insurance
contract on a policy loan;
(D) A change solely necessary to
preserve the status of the life insurance
contract under section 7702;
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54351
(E) A change solely to the ministerial
provisions of the life insurance contract
(for example, a change in the address to
send payment);
(F) A change made solely under the
terms of any agreement (other than the
life insurance contract) that is a part of
the split-dollar life insurance
arrangement if the change is nondiscretionary by the parties and is made
pursuant to a binding commitment
(whether set forth in the agreement or
otherwise) in effect on or before
September 17, 2003;
(G) A change solely in the owner of
the life insurance contract as a result of
a transaction to which section 381(a)
applies and in which substantially all of
the former owner’s assets are transferred
to the new owner of the policy;
(H) A change to the policy solely if
such change is required by a court or a
state insurance commissioner as a result
of the insolvency of the insurance
company that issued the policy; or
(I) A change solely in the insurance
company that administers the policy as
a result of an assumption reinsurance
transaction between the issuing
insurance company and the new
insurance company to which the owner
and the non-owner were not a party.
(iii) Delegation to Commissioner. The
Commissioner, in revenue rulings,
notices, and other guidance published
in the Internal Revenue Bulletin, may
provide additional guidance with
respect to other modifications that are
not material for purposes of paragraph
(j)(2)(i) of this section. See
§ 601.601(d)(2)(ii) of this chapter.
■ Par. 4. Section 1.83–1 is amended by:
■ 1. Removing the second sentence of
paragraph (a)(2).
■ 2. Adding a sentence at the end of
paragraph (a)(2).
The addition reads as follows:
§ 1.83–1 Property transferred in
connection with the performance of
services.
(a) * * *
(2) Life insurance. * * * For the
taxation of life insurance protection
under a split-dollar life insurance
arrangement (as defined in § 1.61–
22(b)(1) or (2)), see § 1.61–22.
*
*
*
*
*
■ Par. 5. Section 1.83–3 is amended by:
■ 1. Adding a sentence at the end of
paragraph (a)(1).
■ 2. Adding a sentence immediately
prior to the last sentence in paragraph
(e).
The additions read as follows:
§ 1.83–3
Meaning and use of certain terms.
(a) * * * (1) * * * For special rules
applying to the transfer of a life
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insurance contract (or an undivided
interest therein) that is part of a splitdollar life insurance arrangement (as
defined in § 1.61–22(b)(1) or (2)), see
§ 1.61–22(g).
*
*
*
*
*
(e) * * * Notwithstanding the
previous sentence, in the case of a
transfer of a life insurance contract,
retirement income contract, endowment
contract, or other contract providing life
insurance protection, or any undivided
interest therein, that is part of a splitdollar life insurance arrangement (as
defined in § 1.61–22(b)(1) or (2)) that is
entered into, or materially modified
(within the meaning of § 1.61–22(j)(2)),
after September 17, 2003, the policy
cash value and all other rights under
such contract (including any
supplemental agreements thereto and
whether or not guaranteed), other than
current life insurance protection, are
treated as property for purposes of this
section. * * *
*
*
*
*
*
Par. 6. Section 1.83–6 is amended as
follows:
■ 1. Redesignating paragraph (a)(5) as
paragraph (a)(6).
■ 2. Adding a new paragraph (a)(5).
The addition reads as follows:
■
§ 1.83–6
Deduction by employer.
(a) * * *
(5) Transfer of life insurance contract
(or an undivided interest therein)—(i)
General rule. In the case of a transfer of
a life insurance contract (or an
undivided interest therein) described in
§ 1.61–22(c)(3) in connection with the
performance of services, a deduction is
allowable under paragraph (a)(1) of this
section to the person for whom the
services were performed. The amount of
the deduction, if allowable, is equal to
the sum of the amount included as
compensation in the gross income of the
service provider under § 1.61–22(g)(1)
and the amount determined under
§ 1.61–22(g)(1)(ii).
(ii) Effective date—(A) General rule—
Paragraph (a)(5)(i) of this section applies
to any split-dollar life insurance
arrangement (as defined in § 1.61–
22(b)(1) or (2)) entered into after
September 17, 2003. For purposes of
this paragraph (a)(5), an arrangement is
entered into as determined under
§ 1.61–22(j)(1)(ii).
(B) Modified arrangements treated as
new arrangements. If an arrangement
entered into on or before September 17,
2003 is materially modified (within the
meaning of § 1.61–22(j)(2)) after
September 17, 2003, the arrangement is
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treated as a new arrangement entered
into on the date of the modification.
*
*
*
*
*
■ Par. 7. In § 1.301–1, paragraph (q) is
added to read as follows:
§ 1.301–1 Rules applicable with respect to
distributions of money and other property.
*
*
*
*
*
(q) Split-dollar and other life
insurance arrangements—(1) Splitdollar life insurance arrangements—(i)
Distribution of economic benefits. The
provision by a corporation to its
shareholder pursuant to a split-dollar
life insurance arrangement, as defined
in § 1.61–22(b)(1) or (2), of economic
benefits described in § 1.61–22(d) or of
amounts described in § 1.61–22(e) is
treated as a distribution of property, the
amount of which is determined under
§ 1.61–22(d) and (e), respectively.
(ii) Distribution of entire contract or
undivided interest therein. A transfer
(within the meaning of § 1.61–22(c)(3))
of the ownership of a life insurance
contract (or an undivided interest
therein) that is part of a split-dollar life
insurance arrangement is a distribution
of property, the amount of which is
determined pursuant to § 1.61–22(g)(1)
and (2).
(2) Other life insurance arrangements.
A payment by a corporation on behalf
of a shareholder of premiums on a life
insurance contract or an undivided
interest therein that is owned by the
shareholder constitutes a distribution of
property, even if such payment is not
part of a split-dollar life insurance
arrangement under § 1.61–22(b).
(3) When distribution is made—(i) In
general. Except as provided in
paragraph (q)(3)(ii) of this section,
paragraph (b) of this section shall apply
to determine when a distribution
described in paragraph (q)(1) or (2) of
this section is taken into account by a
shareholder.
(ii) Exception. Notwithstanding
paragraph (b) of this section, a
distribution described in paragraph
(q)(1)(ii) of this section shall be treated
as made by a corporation to its
shareholder at the time that the life
insurance contract, or an undivided
interest therein, is transferred (within
the meaning of § 1.61–22(c)(3)) to the
shareholder.
(4) Effective date—(i) General rule.
This paragraph (q) applies to split-dollar
and other life insurance arrangements
entered into after September 17, 2003.
For purposes of this paragraph (q)(4), a
split-dollar life insurance arrangement
is entered into as determined under
§ 1.61–22(j)(1)(ii).
(ii) Modified arrangements treated as
new arrangements. If a split-dollar life
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insurance arrangement entered into on
or before September 17, 2003 is
materially modified (within the
meaning of § 1.61–22(j)(2)) after
September 17, 2003, the arrangement is
treated as a new arrangement entered
into on the date of the modification.
■ Par. 8. Section 1.1402(a)–18 is added
to read as follows:
§ 1.1402(a)–18 Split-dollar life insurance
arrangements.
See §§ 1.61–22 and 1.7872–15 for
rules relating to the treatment of splitdollar life insurance arrangements.
■ Par. 9. Section 1.7872–15 is added to
read as follows:
§ 1.7872–15
Split-dollar loans.
(a) General rules—(1) Introduction.
This section applies to split-dollar loans
as defined in paragraph (b)(1) of this
section. If a split-dollar loan is not a
below-market loan, then, except as
provided in this section, the loan is
governed by the general rules for debt
instruments (including the rules for
original issue discount (OID) under
sections 1271 through 1275 and the
regulations thereunder). If a split-dollar
loan is a below-market loan, then,
except as provided in this section, the
loan is governed by section 7872. The
timing, amount, and characterization of
the imputed transfers between the
lender and borrower of a below-market
split-dollar loan depend upon the
relationship between the parties and
upon whether the loan is a demand loan
or a term loan. For additional rules
relating to the treatment of split-dollar
life insurance arrangements, see § 1.61–
22.
(2) Loan treatment—(i) General rule.
A payment made pursuant to a splitdollar life insurance arrangement is
treated as a loan for Federal tax
purposes, and the owner and non-owner
are treated, respectively, as the borrower
and the lender, if—
(A) The payment is made either
directly or indirectly by the non-owner
to the owner (including a premium
payment made by the non-owner
directly or indirectly to the insurance
company with respect to the policy held
by the owner);
(B) The payment is a loan under
general principles of Federal tax law or,
if it is not a loan under general
principles of Federal tax law (for
example, because of the nonrecourse
nature of the obligation or otherwise), a
reasonable person nevertheless would
expect the payment to be repaid in full
to the non-owner (whether with or
without interest); and
(C) The repayment is to be made from,
or is secured by, the policy’s death
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benefit proceeds, the policy’s cash
surrender value, or both.
(ii) Payments that are only partially
repayable. For purposes of § 1.61–22
and this section, if a non-owner makes
a payment pursuant to a split-dollar life
insurance arrangement and the nonowner is entitled to repayment of some
but not all of the payment, the payment
is treated as two payments: One that is
repayable and one that is not. Thus,
paragraph (a)(2)(i) of this section refers
to the repayable payment.
(iii) Treatment of payments that are
not split-dollar loans. See § 1.61–
22(b)(5) for the treatment of payments
by a non-owner that are not split-dollar
loans.
(iv) Examples. The provisions of this
paragraph (a)(2) are illustrated by the
following examples:
Example 1. Assume an employee owns a
life insurance policy under a split-dollar life
insurance arrangement, the employer makes
premium payments on this policy, there is a
reasonable expectation that the payments
will be repaid, and the repayments are
secured by the policy. Under paragraph
(a)(2)(i) of this section, each premium
payment is a loan for Federal tax purposes.
Example 2. (i) Assume an employee owns
a life insurance policy under a split-dollar
life insurance arrangement and the employer
makes premium payments on this policy.
The employer is entitled to be repaid 80
percent of each premium payment, and the
repayments are secured by the policy. Under
paragraph (a)(2)(ii) of this section, the
taxation of 20 percent of each premium
payment is governed by § 1.61–22(b)(5). If
there is a reasonable expectation that the
remaining 80 percent of a payment will be
repaid in full, then, under paragraph (a)(2)(i)
of this section, the 80 percent is a loan for
Federal tax purposes.
(ii) If less than 80 percent of a premium
payment is reasonably expected to be repaid,
then this paragraph (a)(2) does not cause any
of the payment to be a loan for Federal tax
purposes. If the payment is not a loan under
general principles of Federal tax law, the
taxation of the entire premium payment is
governed by § 1.61–22(b)(5).
(3) No de minimis exceptions. For
purposes of this section, section 7872 is
applied to a split-dollar loan without
regard to the de minimis exceptions in
section 7872(c)(2) and (3).
(4) Certain interest provisions
disregarded—(i) In general. If a splitdollar loan provides for the payment of
interest and all or a portion of the
interest is to be paid directly or
indirectly by the lender (or a person
related to the lender), then the
requirement to pay the interest (or
portion thereof) is disregarded for
purposes of this section. All of the facts
and circumstances determine whether a
payment to be made by the lender (or
a person related to the lender) is
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sufficiently independent from the splitdollar loan for the payment to not be an
indirect payment of the interest (or a
portion thereof) by the lender (or a
person related to the lender).
(ii) Examples. The provisions of this
paragraph (a)(4) are illustrated by the
following examples:
54353
(1) A split-dollar loan is a loan
described in paragraph (a)(2)(i) of this
section.
(2) A split-dollar demand loan is any
split-dollar loan that is payable in full
at any time on the demand of the lender
(or within a reasonable time after the
lender’s demand).
(3) A split-dollar term loan is any
Example 1— (i) On January 1, 2009,
split-dollar loan other than a split-dollar
Employee B issues a split-dollar term loan to
demand loan. See paragraph (e)(5) of
Employer Y. The split-dollar term loan
this section for special rules regarding
provides for five percent interest,
compounded annually. Interest and principal certain split-dollar term loans payable
on the death of an individual, certain
on the split-dollar term loan are due at
split-dollar term loans conditioned on
maturity. On January 1, 2009, B and Y also
enter into a fully vested non-qualified
the future performance of substantial
deferred compensation arrangement that will services by an individual, and gift splitprovide a payment to B in an amount equal
dollar term loans.
to the accrued but unpaid interest due at the
(c) Interest deductions for split-dollar
maturity of the split-dollar term loan.
loans. The borrower may not deduct any
(ii) Under paragraph (a)(4)(i) of this
qualified stated interest, OID, or
section, B’s requirement to pay interest on
imputed interest on a split-dollar loan.
the split-dollar term loan is disregarded for
See sections 163(h) and 264(a). In
purposes of this section, and the split-dollar
certain circumstances, an indirect
term loan is treated as a loan that does not
participant may be allowed to deduct
provide for interest for purposes of this
qualified stated interest, OID, or
section.
Example 2— (i) On January 1, 2004,
imputed interest on a deemed loan. See
Employee B and Employer Y enter into a
paragraph (e)(2)(iii) of this section
fully vested non-qualified deferred
(relating to indirect loans).
compensation arrangement that will provide
(d) Treatment of split-dollar loans
a payment to B equal to B’s salary in the three providing for nonrecourse payments—
years preceding the retirement of B. On
(1) In general. Except as provided in
January 1, 2009, B and Y enter into a splitparagraph (d)(2) of this section, if a
dollar life insurance arrangement and, under
payment on a split-dollar loan is
the arrangement, B issues a split-dollar term
nonrecourse to the borrower, the
loan to Y on that date. The split-dollar term
payment is a contingent payment for
loan provides for five percent interest,
compounded annually. Interest and principal purposes of this section. See paragraph
on the split-dollar term loan are due at
(j) of this section for the treatment of a
maturity. Over the period in which the nonsplit-dollar loan that provides for one or
qualified deferred compensation arrangement more contingent payments.
is effective, the terms and conditions of B’s
(2) Exception for certain loans with
non-qualified deferred compensation
respect to which the parties to the splitarrangement do not change in a way that
dollar life insurance arrangement make
indicates that the payment of the nona representation—(i) Requirement. An
qualified deferred compensation is related to
otherwise noncontingent payment on a
B’s requirement to pay interest on the splitsplit-dollar loan that is nonrecourse to
dollar term loan. No other facts and
the borrower is not a contingent
circumstances exist to indicate that the
payment of the non-qualified deferred
payment under this section if the parties
compensation is related to B’s requirement to to the split-dollar life insurance
pay interest on the split-dollar term loan.
arrangement represent in writing that a
(ii) The facts and circumstances indicate
reasonable person would expect that all
that the payment by Y of non-qualified
payments under the loan will be made.
deferred compensation is independent from
(ii) Time and manner for providing
B’s requirement to pay interest under the
written representation. The
split-dollar term loan. Under paragraph
Commissioner may prescribe the time
(a)(4)(i) of this section, the fully vested nonand manner for providing the written
qualified deferred compensation does not
representation required by paragraph
cause B’s requirement to pay interest on the
split-dollar term loan to be disregarded for
(d)(2)(i) of this section. Until the
purposes of this section. For purposes of this
Commissioner prescribes otherwise, the
section, the split-dollar term loan is treated
written representation that is required
as a loan that provides for stated interest of
by paragraph (d)(2)(i) of this section
five percent, compounded annually.
must meet the requirements of this
paragraph (d)(2)(ii). Both the borrower
(b) Definitions. For purposes of this
and the lender must sign the
section, the terms split-dollar life
insurance arrangement, owner, and non- representation not later than the last day
(including extensions) for filing the
owner have the same meanings as
Federal income tax return of the
provided in § 1.61–22(b) and (c). In
borrower or lender, whichever is earlier,
addition, the following definitions
for the taxable year in which the lender
apply for purposes of this section:
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makes the first split-dollar loan under
the split-dollar life insurance
arrangement. This representation must
include the names, addresses, and
taxpayer identification numbers of the
borrower, lender, and any indirect
participants. Unless otherwise stated
therein, this representation applies to all
subsequent split-dollar loans made
pursuant to the split-dollar life
insurance arrangement. Each party
should retain an original of the
representation as part of its books and
records and should attach a copy of this
representation to its Federal income tax
return for any taxable year in which the
lender makes a loan to which the
representation applies.
(e) Below-market split-dollar loans—
(1) Scope—(i) In general. This paragraph
(e) applies to below-market split-dollar
loans enumerated under section
7872(c)(1), which include gift loans,
compensation-related loans, and
corporation-shareholder loans. The
characterization of a split-dollar loan
under section 7872(c)(1) and of the
imputed transfers under section
7872(a)(1) and (b)(1) depends upon the
relationship between the lender and the
borrower or the lender, borrower, and
any indirect participant. For example, if
the lender is the borrower’s employer,
the split-dollar loan is generally a
compensation-related loan, and any
imputed transfer from the lender to the
borrower is generally a payment of
compensation. The loans covered by
this paragraph (e) include indirect loans
between the parties. See paragraph (e)(2)
of this section for the treatment of
certain indirect split-dollar loans. See
paragraph (f) of this section for the
treatment of any stated interest or OID
on split-dollar loans. See paragraph (j)
of this section for additional rules that
apply to a split-dollar loan that provides
for one or more contingent payments.
(ii) Significant-effect split-dollar
loans. If a direct or indirect belowmarket split-dollar loan is not
enumerated in section 7872(c)(1)(A),
(B), or (C), the loan is a significant-effect
loan under section 7872(c)(1)(E).
(2) Indirect split-dollar loans—(i) In
general. If, based on all the facts and
circumstances, including the
relationship between the borrower or
lender and some third person (the
indirect participant), the effect of a
below-market split-dollar loan is to
transfer value from the lender to the
indirect participant and from the
indirect participant to the borrower,
then the below-market split-dollar loan
is restructured as two or more
successive below-market loans (the
deemed loans) as provided in this
paragraph (e)(2). The transfers of value
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described in the preceding sentence
include (but are not limited to) a gift,
compensation, a capital contribution,
and a distribution under section 301 (or,
in the case of an S corporation, under
section 1368). The deemed loans are—
(A) A deemed below-market splitdollar loan made by the lender to the
indirect participant; and
(B) A deemed below-market splitdollar loan made by the indirect
participant to the borrower.
(ii) Application. Each deemed loan is
treated as having the same provisions as
the original loan between the lender and
borrower, and section 7872 is applied to
each deemed loan. Thus, for example, if,
under a split-dollar life insurance
arrangement, an employer (lender)
makes an interest-free split-dollar loan
to an employee’s child (borrower), the
loan is restructured as a deemed
compensation-related below-market
split-dollar loan from the lender to the
employee (the indirect participant) and
a second deemed gift below-market
split-dollar loan from the employee to
the employee’s child. In appropriate
circumstances, section 7872(d)(1) may
limit the interest that accrues on a
deemed loan for Federal income tax
purposes. For loan arrangements
between husband and wife, see section
7872(f)(7).
(iii) Limitations on investment interest
for purposes of section 163(d). For
purposes of section 163(d), the imputed
interest from the indirect participant to
the lender that is taken into account by
the indirect participant under this
paragraph (e)(2) is not investment
interest to the extent of the excess, if
any, of—
(A) The imputed interest from the
indirect participant to the lender that is
taken into account by the indirect
participant; over
(B) The imputed interest to the
indirect participant from the borrower
that is recognized by the indirect
participant.
(iv) Examples. The provisions of this
paragraph (e)(2) are illustrated by the
following examples:
Example 1. (i) On January 1, 2009,
Employer X and Individual A enter into a
split-dollar life insurance arrangement under
which A is named as the policy owner. A is
the child of B, an employee of X. On January
1, 2009, X makes a $30,000 premium
payment, repayable upon demand without
interest. Repayment of the premium payment
is fully recourse to A. The payment is a
below-market split-dollar demand loan. A’s
net investment income for 2009 is $1,100,
and there are no other outstanding loans
between A and B. Assume that the blended
annual rate for 2009 is 5 percent,
compounded annually.
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(ii) Based on the relationships among the
parties, the effect of the below-market splitdollar loan from X to A is to transfer value
from X to B and then to transfer value from
B to A. Under paragraph (e)(2) of this section,
the below-market split-dollar loan from X to
A is restructured as two deemed belowmarket split-dollar demand loans: a
compensation-related below-market splitdollar loan between X and B and a gift belowmarket split-dollar loan between B and A.
Each of the deemed loans has the same terms
and conditions as the original loan.
(iii) Under paragraph (e)(3) of this section,
the amount of forgone interest deemed paid
to B by A in 2009 is $1,500 ([$30,000 ×
0.05]—0). Under section 7872(d)(1), however,
the amount of forgone interest deemed paid
to B by A is limited to $1,100 (A’s net
investment income for the year). Under
paragraph (e)(2)(iii) of this section, B’s
deduction under section 163(d) in 2009 for
interest deemed paid on B’s deemed loan
from X is limited to $1,100 (the interest
deemed received from A).
Example 2. (i) The facts are the same as the
facts in Example 1, except that T, an
irrevocable life insurance trust established
for the benefit of A (B’s child), is named as
the policy owner. T is not a grantor trust.
(ii) Based on the relationships among the
parties, the effect of the below-market splitdollar loan from X to T is to transfer value
from X to B and then to transfer value from
B to T. Under paragraph (e)(2) of this section,
the below-market split-dollar loan from X to
T is restructured as two deemed belowmarket split-dollar demand loans: a
compensation-related below-market splitdollar loan between X and B and a gift belowmarket split-dollar loan between B and T.
Each of the deemed loans has the same terms
and conditions as the original loan.
(iii) Under paragraph (e)(3) of this section,
the amount of forgone interest deemed paid
to B by T in 2009 is $1,500 ([$30,000 ×
0.05]—0). Section 7872(d)(1) does not apply
because T is not an individual. The amount
of forgone interest deemed paid to B by T is
$1,500. Under paragraph (e)(2)(iii) of this
section, B’s deduction under section 163(d)
in 2009 for interest deemed paid on B’s
deemed loan from X is $1,500 (the interest
deemed received from T).
(3) Split-dollar demand loans—(i) In
general. This paragraph (e)(3) provides
rules for testing split-dollar demand
loans for sufficient interest, and, if the
loans do not provide for sufficient
interest, rules for the calculation and
treatment of forgone interest on these
loans. See paragraph (g) of this section
for additional rules that apply to a splitdollar loan providing for certain
variable rates of interest.
(ii) Testing for sufficient interest. Each
calendar year that a split-dollar demand
loan is outstanding, the loan is tested to
determine if the loan provides for
sufficient interest. A split-dollar
demand loan provides for sufficient
interest for the calendar year if the rate
(based on annual compounding) at
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which interest accrues on the loan’s
adjusted issue price during the year is
no lower than the blended annual rate
for the year. (The Internal Revenue
Service publishes the blended annual
rate in the Internal Revenue Bulletin in
July of each year (see § 601.601(d)(2)(ii)
of this chapter).) If the loan does not
provide for sufficient interest, the loan
is a below-market split-dollar demand
loan for that calendar year. See
paragraph (e)(3)(iii) of this section to
determine the amount and treatment of
forgone interest for each calendar year
the loan is below-market.
(iii) Imputations—(A) Amount of
forgone interest. For each calendar year,
the amount of forgone interest on a
split-dollar demand loan is treated as
transferred by the lender to the borrower
and as retransferred as interest by the
borrower to the lender. This amount is
the excess of—
(1) The amount of interest that would
have been payable on the loan for the
calendar year if interest accrued on the
loan’s adjusted issue price at the
blended annual rate (determined in
paragraph (e)(3)(ii) of this section) and
were payable annually on the day
referred to in paragraph (e)(3)(iii)(B) of
this section; over
(2) Any interest that accrues on the
loan during the year.
(B) Timing of transfers of forgone
interest—(1) In general. Except as
provided in paragraphs (e)(3)(iii)(B)(2)
and (3) of this section, the forgone
interest (as determined under paragraph
(e)(3)(iii)(A) of this section) that is
attributable to a calendar year is treated
as transferred by the lender to the
borrower (and retransferred as interest
by the borrower to the lender) on the
last day of the calendar year and is
accounted for by each party to the splitdollar loan in a manner consistent with
that party’s method of accounting.
(2) Exception for death, liquidation, or
termination of the borrower. In the
taxable year in which the borrower dies
(in the case of a borrower who is a
natural person) or is liquidated or
otherwise terminated (in the case of a
borrower other than a natural person),
any forgone interest is treated, for both
the lender and the borrower, as
transferred and retransferred on the last
day of the borrower’s final taxable year.
(3) Exception for repayment of belowmarket split-dollar loan. Any forgone
interest is treated, for both the lender
and the borrower, as transferred and
retransferred on the day the split-dollar
loan is repaid in full.
(4) Split-dollar term loans—(i) In
general. Except as provided in
paragraph (e)(5) of this section, this
paragraph (e)(4) provides rules for
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testing split-dollar term loans for
sufficient interest and, if the loans do
not provide for sufficient interest, rules
for imputing payments on these loans.
See paragraph (g) of this section for
additional rules that apply to a splitdollar loan providing for certain
variable rates of interest.
(ii) Testing a split-dollar term loan for
sufficient interest. A split-dollar term
loan is tested on the day the loan is
made to determine if the loan provides
for sufficient interest. A split-dollar
term loan provides for sufficient interest
if the imputed loan amount equals or
exceeds the amount loaned. The
imputed loan amount is the present
value of all payments due under the
loan, determined as of the date the loan
is made, using a discount rate equal to
the AFR in effect on that date. The AFR
used for purposes of the preceding
sentence must be appropriate for the
loan’s term (short-term, mid-term, or
long-term) and for the compounding
period used in computing the present
value. See section 1274(d)(1). If the
split-dollar loan does not provide for
sufficient interest, the loan is a belowmarket split-dollar term loan subject to
paragraph (e)(4)(iv) of this section.
(iii) Determining loan term. This
paragraph (e)(4)(iii) provides rules to
determine the term of a split-dollar term
loan for purposes of paragraph (e)(4)(ii)
of this section. The term of the loan
determined under this paragraph
(e)(4)(iii) (other than paragraph
(e)(4)(iii)(C) of this section) applies to
determine the split-dollar loan’s term,
payment schedule, and yield for all
purposes of this section.
(A) In general. Except as provided in
paragraph (e)(4)(iii)(B), (C), (D) or (E) of
this section, the term of a split-dollar
term loan is based on the period from
the date the loan is made until the
loan’s stated maturity date.
(B) Special rules for certain options—
(1) Payment schedule that minimizes
yield. If a split-dollar term loan is
subject to one or more unconditional
options that are exercisable at one or
more times during the term of the loan
and that, if exercised, require payments
to be made on the split-dollar loan on
an alternative payment schedule (for
example, an option to extend or an
option to call a split-dollar loan), then
the rules of this paragraph
(e)(4)(iii)(B)(1) determine the term of the
loan. However, this paragraph
(e)(4)(iii)(B)(1) applies only if the timing
and amounts of the payments that
comprise each payment schedule are
known as of the issue date. For purposes
of determining a split-dollar loan’s term,
the borrower is projected to exercise or
not exercise an option or combination of
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options in a manner that minimizes the
loan’s overall yield. Similarly, the
lender is projected to exercise or not
exercise an option or combination of
options in a manner that minimizes the
loan’s overall yield. If different
projected patterns of exercise or nonexercise produce the same minimum
yield, the parties are projected to
exercise or not exercise an option or
combination of options in a manner that
produces the longest term.
(2) Change in circumstances. If the
borrower (or lender) does or does not
exercise the option as projected under
paragraph (e)(4)(iii)(B)(1) of this section,
the split-dollar loan is treated for
purposes of this section as retired and
reissued on the date the option is or is
not exercised for an amount of cash
equal to the loan’s adjusted issue price
on that date. The reissued loan must be
retested using the appropriate AFR in
effect on the date of reissuance to
determine whether it is a below-market
loan.
(3) Examples. The following examples
illustrate the rules of this paragraph
(e)(4)(iii)(B):
Example 1. Employee B issues a 10-year
split-dollar term loan to Employer Y. B has
the right to prepay the loan at the end of year
5. Interest is payable on the split-dollar loan
at 1 percent for the first 5 years and at 10
percent for the remaining 5 years. Under
paragraph (e)(4)(iii)(B)(1) of this section, this
arrangement is treated as a 5-year split-dollar
term loan from Y to B, with interest payable
at 1 percent.
Example 2. The facts are the same as the
facts in Example 1, except that B does not in
fact prepay the split-dollar loan at the end of
year 5. Under paragraph (e)(4)(iii)(B)(2) of
this section, the first loan is treated as retired
at the end of year 5 and a new 5-year splitdollar term loan is issued at that time, with
interest payable at 10 percent.
Example 3. Employee A issues a 10-year
split-dollar term loan on which the lender,
Employer X, has the right to demand
payment at the end of year 2. Interest is
payable on the split-dollar loan at 7 percent
each year that the loan is outstanding. Under
paragraph (e)(4)(iii)(B)(1) of this section, this
arrangement is treated as a 10-year splitdollar term loan because the exercise of X’s
put option would not reduce the yield of the
loan (the yield of the loan is 7 percent,
compounded annually, whether or not X
demands payment).
(C) Split-dollar term loans providing
for certain variable rates of interest. If a
split-dollar term loan is subject to
paragraph (g) of this section (a splitdollar loan that provides for certain
variable rates of interest), the term of the
loan for purposes of paragraph (e)(4)(ii)
of this section is determined under
paragraph (g)(3)(ii) of this section.
(D) Split-dollar loans payable upon
the death of an individual. If a split-
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dollar term loan is described in
paragraph (e)(5)(ii)(A) or (v)(A) of this
section, the term of the loan for
purposes of paragraph (e)(4)(ii) of this
section is determined under paragraph
(e)(5)(ii)(C) or (v)(B)(2) of this section,
whichever is applicable.
(E) Split-dollar loans conditioned on
the future performance of substantial
services by an individual. If a splitdollar term loan is described in
paragraph (e)(5)(iii)(A)(1) or (v)(A) of
this section, the term of the loan for
purposes of paragraph (e)(4)(ii) of this
section is determined under paragraph
(e)(5)(iii)(C) or (v)(B)(2) of this section,
whichever is applicable.
(iv) Timing and amount of imputed
transfer in connection with belowmarket split-dollar term loans. If a splitdollar term loan is a below-market loan,
then the rules applicable to belowmarket term loans under section 7872
apply. In general, the loan is
recharacterized as consisting of two
portions: an imputed loan amount (as
defined in paragraph (e)(4)(ii) of this
section) and an imputed transfer from
the lender to the borrower. The imputed
transfer occurs at the time the loan is
made (for example, when the lender
makes a premium payment on a life
insurance policy) and is equal to the
excess of the amount loaned over the
imputed loan amount.
(v) Amount treated as OID. In the case
of any below-market split-dollar term
loan described in this paragraph (e)(4),
for purposes of applying sections 1271
through 1275 and the regulations
thereunder, the issue price of the loan
is the amount determined under
§ 1.1273–2, reduced by the amount of
the imputed transfer described in
paragraph (e)(4)(iv) of this section.
Thus, the loan is generally treated as
having OID in an amount equal to the
amount of the imputed transfer
described in paragraph (e)(4)(iv) of this
section, in addition to any other OID on
the loan (determined without regard to
section 7872(b)(2)(A) or this paragraph
(e)(4)).
(vi) Example. The provisions of this
paragraph (e)(4) are illustrated by the
following example:
Example. (i) On July 1, 2009, Corporation
Z and Shareholder A enter into a split-dollar
life insurance arrangement under which A is
named as the policy owner. On July 1, 2009,
Z makes a $100,000 premium payment,
repayable without interest in 15 years.
Repayment of the premium payment is fully
recourse to A. The premium payment is a
split-dollar term loan. Assume the long-term
AFR (based on annual compounding) at the
time the loan is made is 7 percent.
(ii) Based on a 15-year term and a discount
rate of 7 percent, compounded annually (the
long-term AFR), the present value of the
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payments under the loan is $36,244.60,
determined as follows: $100,000/[1+(0.07/
1)] 15. This loan is a below-market split-dollar
term loan because the imputed loan amount
of $36,244.60 (the present value of the
amount required to be repaid to Z) is less
than the amount loaned ($100,000).
(iii) In accordance with section 7872(b)(1)
and paragraph (e)(4)(iv) of this section, on the
date that the loan is made, Z is treated as
transferring to A $63,755.40 (the excess of
$100,000 (amount loaned) over $36,244.60
(imputed loan amount)). Under section 7872
and paragraph (e)(1)(i) of this section, Z is
treated as making a section 301 distribution
to A on July 1, 2009, of $63,755.40. Z must
take into account as OID an amount equal to
the imputed transfer. See § 1.1272–1 for the
treatment of OID.
(5) Special rules for certain splitdollar term loans—(i) In general. This
paragraph (e)(5) provides rules for splitdollar loans payable on the death of an
individual, split-dollar loans
conditioned on the future performance
of substantial services by an individual,
and gift term loans. These split-dollar
loans are split-dollar term loans for
purposes of determining whether the
loan provides for sufficient interest. If,
however, the loan is a below-market
split-dollar loan, then, except as
provided in paragraph (e)(5)(v) of this
section, forgone interest is determined
annually, similar to a demand loan, but
using an AFR that is appropriate for the
loan’s term and that is determined when
the loan is issued.
(ii) Split-dollar loans payable not later
than the death of an individual—(A)
Applicability. This paragraph (e)(5)(ii)
applies to a split-dollar term loan
payable not later than the death of an
individual.
(B) Treatment of loan. A split-dollar
loan described in paragraph (e)(5)(ii)(A)
of this section is tested under paragraph
(e)(4)(ii) of this section to determine if
the loan provides for sufficient interest.
If the loan provides for sufficient
interest, then section 7872 does not
apply to the loan, and the interest on the
loan is taken into account under
paragraph (f) of this section. If the loan
does not provide for sufficient interest,
then section 7872 applies to the loan,
and the loan is treated as a belowmarket demand loan subject to
paragraph (e)(3)(iii) of this section. For
each year that the loan is outstanding,
however, the rate used in the
determination of forgone interest under
paragraph (e)(3)(iii) of this section is not
the blended annual rate but rather is the
AFR (based on annual compounding)
appropriate for the loan’s term as of the
month in which the loan is made. See
paragraph (e)(5)(ii)(C) of this section to
determine the loan’s term.
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(C) Term of loan. For purposes of
paragraph (e)(5)(ii)(B) of this section, the
term of a split-dollar loan payable on
the death of an individual (including
the death of the last survivor of a group
of individuals) is the individual’s life
expectancy as determined under the
appropriate table in § 1.72–9 on the day
the loan is made. If a split-dollar loan
is payable on the earlier of the
individual’s death or another term
determined under paragraph (e)(4)(iii) of
this section, the term of the loan is
whichever term is shorter.
(D) Retirement and reissuance of loan.
If a split-dollar loan described in
paragraph (e)(5)(ii)(A) of this section
remains outstanding longer than the
term determined under paragraph
(e)(5)(ii)(C) of this section because the
individual outlived his or her life
expectancy, the split-dollar loan is
treated for purposes of this section as
retired and reissued as a split-dollar
demand loan at that time for an amount
of cash equal to the loan’s adjusted issue
price on that date. However, the loan is
not retested at that time to determine
whether the loan provides for sufficient
interest. For purposes of determining
forgone interest under paragraph
(e)(5)(ii)(B) of this section, the
appropriate AFR for the reissued loan is
the AFR determined under paragraph
(e)(5)(ii)(B) of this section on the day the
loan was originally made.
(iii) Split-dollar loans conditioned on
the future performance of substantial
services by an individual—(A)
Applicability—(1) In general. This
paragraph (e)(5)(iii) applies to a splitdollar term loan if the benefits of the
interest arrangements of the loan are not
transferable and are conditioned on the
future performance of substantial
services (within the meaning of section
83) by an individual.
(2) Exception. Notwithstanding
paragraph (e)(5)(iii)(A)(1) of this section,
this paragraph (e)(5)(iii) does not apply
to a split-dollar loan described in
paragraph (e)(5)(v)(A) of this section
(regarding a split-dollar loan that is
payable on the later of a term certain
and the date on which the condition to
perform substantial future services by
an individual ends).
(B) Treatment of loan. A split-dollar
loan described in paragraph
(e)(5)(iii)(A)(1) of this section is tested
under paragraph (e)(4)(ii) of this section
to determine if the loan provides for
sufficient interest. Except as provided in
paragraph (e)(5)(iii)(D) of this section, if
the loan provides for sufficient interest,
then section 7872 does not apply to the
loan and the interest on the loan is
taken into account under paragraph (f)
of this section. If the loan does not
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provide for sufficient interest, then
section 7872 applies to the loan and the
loan is treated as a below-market
demand loan subject to paragraph
(e)(3)(iii) of this section. For each year
that the loan is outstanding, however,
the rate used in the determination of
forgone interest under paragraph
(e)(3)(iii) of this section is not the
blended annual rate but rather is the
AFR (based on annual compounding)
appropriate for the loan’s term as of the
month in which the loan is made. See
paragraph (e)(5)(iii)(C) of this section to
determine the loan’s term.
(C) Term of loan. The term of a splitdollar loan described in paragraph
(e)(5)(iii)(A)(1) of this section is based
on the period from the date the loan is
made until the loan’s stated maturity
date. However, if a split-dollar loan
described in paragraph (e)(5)(iii)(A)(1)
of this section does not have a stated
maturity date, the term of the loan is
presumed to be seven years.
(D) Retirement and reissuance of loan.
If a split-dollar loan described in
paragraph (e)(5)(iii)(A)(1) of this section
remains outstanding longer than the
term determined under paragraph
(e)(5)(iii)(C) of this section because of
the continued performance of
substantial services, the split-dollar loan
is treated for purposes of this section as
retired and reissued as a split-dollar
demand loan at that time for an amount
of cash equal to the loan’s adjusted issue
price on that date. The loan is retested
at that time to determine whether the
loan provides for sufficient interest.
(iv) Gift split-dollar term loans—(A)
Applicability. This paragraph (e)(5)(iv)
applies to gift split-dollar term loans.
(B) Treatment of loan. A split-dollar
loan described in paragraph (e)(5)(iv)(A)
of this section is tested under paragraph
(e)(4)(ii) of this section to determine if
the loan provides for sufficient interest.
If the loan provides for sufficient
interest, then section 7872 does not
apply to the loan and the interest on the
loan is taken into account under
paragraph (f) of this section. If the loan
does not provide for sufficient interest,
then section 7872 applies to the loan
and the loan is treated as a belowmarket demand loan subject to
paragraph (e)(3)(iii) of this section. For
each year that the loan is outstanding,
however, the rate used in the
determination of forgone interest under
paragraph (e)(3)(iii) of this section is not
the blended annual rate but rather is the
AFR (based on annual compounding)
appropriate for the loan’s term as of the
month in which the loan is made. See
paragraph (e)(5)(iv)(C) of this section to
determine the loan’s term.
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(C) Term of loan. For purposes of
paragraph (e)(5)(iv)(B) of this section,
the term of a gift split-dollar term loan
is the term determined under paragraph
(e)(4)(iii) of this section.
(D) Limited application for gift splitdollar term loans. The rules of
paragraph (e)(5)(iv)(B) of this section
apply to a gift split-dollar term loan
only for Federal income tax purposes.
For purposes of Chapter 12 of the
Internal Revenue Code (relating to the
gift tax), gift below-market split-dollar
term loans are treated as term loans
under section 7872(b) and paragraph
(e)(4) of this section. See section
7872(d)(2).
(v) Split-dollar loans payable on the
later of a term certain and another
specified date—(A) Applicability. This
paragraph (e)(5)(v) applies to any splitdollar term loan payable upon the later
of a term certain or—
(1) The death of an individual; or
(2) For a loan described in paragraph
(e)(5)(iii)(A)(1) of this section, the date
on which the condition to perform
substantial future services by an
individual ends.
(B) Treatment of loan—(1) In general.
A split-dollar loan described in
paragraph (e)(5)(v)(A) of this section is
a split-dollar term loan, subject to
paragraph (e)(4) of this section.
(2) Term of the loan. The term of a
split-dollar loan described in paragraph
(e)(5)(v)(A) of this section is the term
certain.
(3) Appropriate AFR. The appropriate
AFR for a split-dollar loan described in
paragraph (e)(5)(v)(A) of this section is
based on a term of the longer of the term
certain or the loan’s expected term as
determined under either paragraph
(e)(5) (ii) or (iii) of this section,
whichever is applicable.
(C) Retirement and reissuance. If a
split-dollar loan described in paragraph
(e)(5)(v)(A) of this section remains
outstanding longer than the term
certain, the split-dollar loan is treated
for purposes of this section as retired
and reissued at the end of the term
certain for an amount of cash equal to
the loan’s adjusted issue price on that
date. The reissued loan is subject to
paragraph (e)(5) (ii) or (iii) of this
section, whichever is applicable.
However, the loan is not retested at that
time to determine whether the loan
provides for sufficient interest. For
purposes of paragraph (e)(3)(iii) of this
section, the appropriate AFR for the
reissued loan is the AFR determined
under paragraph (e)(5)(v)(B)(3) of this
section on the day the loan was
originally made.
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(vi) Example. The provisions of this
paragraph (e)(5) are illustrated by the
following example:
Example. (i) On January 1, 2009,
Corporation Y and Shareholder B, a 65 yearold male, enter into a split-dollar life
insurance arrangement under which B is
named as the policy owner. On January 1,
2009, Y makes a $100,000 premium payment,
repayable, without interest, from the death
benefits of the underlying contract upon B’s
death. The premium payment is a split-dollar
term loan. Repayment of the premium
payment is fully recourse to B. Assume the
long-term AFR (based on annual
compounding) at the time of the loan is 7
percent. Both Y and B use the calendar year
as their taxable years.
(ii) Based on Table 1 in § 1.72–9, the
expected term of the loan is 15 years. Under
paragraph (e)(5)(ii)(C) of this section, the
long-term AFR (based on annual
compounding) is the appropriate test rate.
Based on a 15-year term and a discount rate
of 7 percent, compounded annually (the
long-term AFR), the present value of the
payments under the loan is $36,244.60,
determined as follows: $100,000/[1+(0.07/
1)]15. Under paragraph (e)(5)(ii)(B) of this
section, this loan is a below-market splitdollar term loan because the imputed loan
amount of $36,244.60 (the present value of
the amount required to be repaid to Y) is less
than the amount loaned ($100,000).
(iii) Under paragraph (e)(5)(ii)(B) of this
section, the amount of forgone interest for
2009 (and each subsequent full calendar year
that the loan remains outstanding) is $7,000,
which is the amount of interest that would
have been payable on the loan for the
calendar year if interest accrued on the loan’s
adjusted issue price ($100,000) at the longterm AFR (7 percent, compounded annually).
Under section 7872 and paragraph (e)(1)(i) of
this section, on December 31, 2009, Y is
treated as making a section 301 distribution
to B of $7,000. In addition, Y has $7,000 of
imputed interest income for 2009.
(f) Treatment of stated interest and
OID for split-dollar loans—(1) In
general. If a split-dollar loan provides
for stated interest or OID, the loan is
subject to this paragraph (f), regardless
of whether the split-dollar loan has
sufficient interest. Except as otherwise
provided in this section, split-dollar
loans are subject to the same Internal
Revenue Code and regulatory provisions
for stated interest and OID as other
loans. For example, the lender of a splitdollar loan that provides for stated
interest must account for any qualified
stated interest (as defined in § 1.1273–
1(c)) under its regular method of
accounting (for example, an accrual
method or the cash receipts and
disbursements method). See § 1.446–2
to determine the amount of qualified
stated interest that accrues during an
accrual period. In addition, the lender
must account under § 1.1272–1 for any
OID on a split-dollar loan. However,
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§ 1.1272–1(c) does not apply to any
split-dollar loan. See paragraph (h) of
this section for a subsequent waiver,
cancellation, or forgiveness of stated
interest on a split-dollar loan.
(2) Term, payment schedule, and
yield. The term of a split-dollar term
loan determined under paragraph
(e)(4)(iii) of this section (other than
paragraph (e)(4)(iii)(C) of this section)
applies to determine the split-dollar
loan’s term, payment schedule, and
yield for all purposes of this section.
(g) Certain variable rates of interest—
(1) In general. This paragraph (g)
provides rules for a split-dollar loan that
provides for certain variable rates of
interest. If this paragraph (g) does not
apply to a variable rate split-dollar loan,
the loan is subject to the rules in
paragraph (j) of this section for splitdollar loans that provide for one or more
contingent payments.
(2) Applicability—(i) In general.
Except as provided in paragraph
(g)(2)(ii) of this section, this paragraph
(g) applies to a split-dollar loan that is
a variable rate debt instrument (within
the meaning of § 1.1275–5) and that
provides for stated interest at a qualified
floating rate (or rates).
(ii) Interest rate restrictions. This
paragraph (g) does not apply to a splitdollar loan if, as a result of interest rate
restrictions (such as an interest rate
cap), the expected yield of the loan
taking the restrictions into account is
significantly less than the expected
yield of the loan without regard to the
restrictions. Conversely, if reasonably
symmetric interest rate caps and floors
or reasonably symmetric governors are
fixed throughout the term of the loan,
these restrictions generally do not
prevent this paragraph (g) from applying
to the loan.
(3) Testing for sufficient interest—(i)
Demand loan. For purposes of
paragraph (e)(3)(ii) of this section
(regarding testing a split-dollar demand
loan for sufficient interest), a split-dollar
demand loan is treated as if it provided
for a fixed rate of interest for each
accrual period to which a qualified
floating rate applies. The projected fixed
rate for each accrual period is the value
of the qualified floating rate as of the
beginning of the calendar year that
contains the last day of the accrual
period.
(ii) Term loan. For purposes of
paragraph (e)(4)(ii) of this section
(regarding testing a split-dollar term
loan for sufficient interest), a split-dollar
term loan subject to this paragraph (g)
is treated as if it provided for a fixed rate
of interest for each accrual period to
which a qualified floating rate applies.
The projected fixed rate for each accrual
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period is the value of the qualified
floating rate on the date the split-dollar
term loan is made. The term of a splitdollar loan that is subject to this
paragraph (g)(3)(ii) is determined using
the rules in § 1.1274–4(c)(2). For
example, if the loan provides for interest
at a qualified floating rate that adjusts at
varying intervals, the term of the loan is
determined by reference to the longest
interval between interest adjustment
dates. See paragraph (e)(5) of this
section for special rules relating to
certain split-dollar term loans, such as
a split-dollar term loan payable not later
than the death of an individual.
(4) Interest accruals and imputed
transfers. For purposes of paragraphs (e)
and (f) of this section, the projected
fixed rate or rates determined under
paragraph (g)(3) of this section are used
for purposes of determining the accrual
of interest each period and the amount
of any imputed transfers. Appropriate
adjustments are made to the interest
accruals and any imputed transfers to
take into account any difference
between the projected fixed rate and the
actual rate.
(5) Example. The provisions of this
paragraph (g) are illustrated by the
following example:
Example. (i) On January 1, 2010, Employer
V and Employee F enter into a split-dollar
life insurance arrangement under which F is
named as the policy owner. On January 1,
2010, V makes a $100,000 premium payment,
repayable in 15 years. The premium payment
is a split-dollar term loan. Under the
arrangement between the parties, interest is
payable on the split-dollar loan each year on
January 1, starting January 1, 2011, at a rate
equal to the value of 1-year LIBOR as of the
payment date. The short-term AFR (based on
annual compounding) at the time of the loan
is 7 percent. Repayment of both the premium
payment and the interest due thereon is
nonrecourse to F. However, the parties made
a representation under paragraph (d)(2) of
this section. Assume that the value of 1-year
LIBOR on January 1, 2010, is 8 percent,
compounded annually.
(ii) The loan is subject to this paragraph (g)
because the loan is a variable rate debt
instrument that bears interest at a qualified
floating rate. Because the interest rate is reset
each year, under paragraph (g)(3)(ii) of this
section, the short-term AFR (based on annual
compounding) is the appropriate test rate
used to determine whether the loan provides
for sufficient interest. Moreover, under
paragraph (g)(3)(ii) of this section, to
determine whether the loan provides for
sufficient interest, the loan is treated as if it
provided for a fixed rate of interest equal to
8 percent, compounded annually. Based on
a discount rate of 7 percent, compounded
annually (the short-term AFR), the present
value of the payments under the loan is
$109,107.91. The loan provides for sufficient
interest because the loan’s imputed loan
amount of $109,107.91 (the present value of
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the payments) is more than the amount
loaned of $100,000. Therefore, the loan is not
a below-market split-dollar term loan, and
interest on the loan is taken into account
under paragraph (f) of this section.
(h) Adjustments for interest paid at
less than the stated rate—(1)
Application—(i) In general. To the
extent required by this paragraph (h), if
accrued but unpaid interest on a splitdollar loan is subsequently waived,
cancelled, or forgiven by the lender,
then the waiver, cancellation, or
forgiveness is treated as if, on that date,
the interest had in fact been paid to the
lender and retransferred by the lender to
the borrower. The amount deemed
transferred and retransferred is
determined under paragraph (h) (2) or
(3) of this section. Except as provided in
paragraph (h)(1)(iv) of this section, the
amount treated as retransferred by the
lender to the borrower under paragraph
(h) (2) or (3) of this section is increased
by the deferral charge determined under
paragraph (h)(4) of this section. To
determine the character of any
retransferred amount, see paragraph
(e)(1)(i) of this section. See § 1.61–
22(b)(6) for the treatment of amounts
other than interest on a split-dollar loan
that are waived, cancelled, or forgiven
by the lender.
(ii) Certain split-dollar term loans. For
purposes of this paragraph (h), a splitdollar term loan described in paragraph
(e)(5) of this section (for example, a
split-dollar term loan payable not later
than the death of an individual) is
subject to the rules of paragraph (h)(3)
of this section.
(iii) Payments treated as a waiver,
cancellation, or forgiveness. For
purposes of this paragraph (h), if a
payment by the lender (or a person
related to the lender) to the borrower is,
in substance, a waiver, cancellation, or
forgiveness of accrued but unpaid
interest, the payment by the lender (or
person related to the lender) is treated
as an amount retransferred to the
borrower by the lender under this
paragraph (h) and is subject to the
deferral charge in paragraph (h)(4) of
this section to the extent that the
payment is, in substance, a waiver,
cancellation, or forgiveness of accrued
but unpaid interest.
(iv) Treatment of certain nonrecourse
split-dollar loans. For purposes of this
paragraph (h), if the parties to a splitdollar life insurance arrangement make
the representation described in
paragraph (d)(2) of this section and the
interest actually paid on the split-dollar
loan is less than the interest required to
be accrued on the split-dollar loan, the
excess of the interest required to be
accrued over the interest actually paid
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is treated as waived, cancelled, or
forgiven by the lender under this
paragraph (h). However, the amount
treated as retransferred under paragraph
(h)(1)(i) of this section is not increased
by the deferral charge in paragraph
(h)(4) of this section.
(2) Split-dollar term loans. In the case
of a split-dollar term loan, the amount
of interest deemed transferred and
retransferred for purposes of paragraph
(h)(1) of this section is determined as
follows:
(i) If the loan’s stated rate is less than
or equal to the appropriate AFR (the
AFR used to test the loan for sufficient
interest under paragraph (e) of this
section), the amount of interest deemed
transferred and retransferred pursuant
to this paragraph (h) is the excess of the
amount of interest payable at the stated
rate over the interest actually paid.
(ii) If the loan’s stated rate is greater
than the appropriate AFR (the AFR used
to test the loan for sufficient interest
under paragraph (e) of this section), the
amount of interest deemed transferred
and retransferred pursuant to this
paragraph (h) is the excess, if any, of the
amount of interest payable at the AFR
over the interest actually paid.
(3) Split-dollar demand loans. In the
case of a split-dollar demand loan, the
amount of interest deemed transferred
and retransferred for purposes of
paragraph (h)(1) of this section is equal
to the aggregate of—
(i) For each year that the split-dollar
demand loan was outstanding in which
the loan was a below-market split-dollar
demand loan, the excess of the amount
of interest payable at the stated rate over
the interest actually paid allocable to
that year; plus
(ii) For each year that the split-dollar
demand loan was outstanding in which
the loan was not a below-market splitdollar demand loan, the excess, if any,
of the amount of interest payable at the
appropriate rate used for purposes of
imputation for that year over the interest
actually paid allocable to that year.
(4) Deferral charge. The
Commissioner may prescribe the
method for determining the deferral
charge treated as retransferred by the
lender to the borrower under paragraph
(h)(1) of this section. Until the
Commissioner prescribes otherwise, the
deferral charge is determined under
paragraph (h)(4)(i) of this section for a
split-dollar term loan subject to
paragraph (h)(2) of this section and
under paragraph (h)(4)(ii) of this section
for a split-dollar demand loan subject to
paragraph (h)(3) of this section.
(i) Split-dollar term loan. The deferral
charge for a split-dollar term loan
subject to paragraph (h)(2) of this
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section is determined by multiplying
the hypothetical underpayment by the
applicable underpayment rate,
compounded daily, for the period from
the date the split-dollar loan was made
to the date the interest is waived,
cancelled, or forgiven. The hypothetical
underpayment is equal to the amount
determined under paragraph (h)(2) of
this section, multiplied by the highest
rate of income tax applicable to the
borrower (for example, the highest rate
in effect under section 1 for individuals)
for the taxable year in which the splitdollar term loan was made. The
applicable underpayment rate is the
average of the quarterly underpayment
rates in effect under section 6621(a)(2)
for the period from the date the splitdollar loan was made to the date the
interest is waived, cancelled, or
forgiven.
(ii) Split-dollar demand loan. The
deferral charge for a split-dollar demand
loan subject to paragraph (h)(3) of this
section is the sum of the following
amounts determined for each year the
loan was outstanding (other than the
year in which the waiver, cancellation,
or forgiveness occurs): For each year the
loan was outstanding, multiply the
hypothetical underpayment for the year
by the applicable underpayment rate,
compounded daily, for the applicable
period. The hypothetical underpayment
is equal to the amount determined
under paragraph (h)(3) of this section for
each year, multiplied by the highest rate
of income tax applicable to the borrower
for that year (for example, the highest
rate in effect under section 1 for
individuals). The applicable
underpayment rate is the average of the
quarterly underpayment rates in effect
under section 6621(a)(2) for the
applicable period. The applicable
period for a year is the period of time
from the last day of that year until the
date the interest is waived, cancelled, or
forgiven.
(5) Examples. The provisions of this
paragraph (h) are illustrated by the
following examples:
Example 1. (i) On January 1, 2009,
Employer Y and Employee B entered into a
split-dollar life insurance arrangement under
which B is named as the policy owner. On
January 1, 2009, Y made a $100,000 premium
payment, repayable on December 31, 2011,
with interest of 5 percent, compounded
annually. The premium payment is a splitdollar term loan. Assume the short-term AFR
(based on annual compounding) at the time
the loan was made was 5 percent. Repayment
of both the premium payment and the
interest due thereon was fully recourse to B.
On December 31, 2011, Y is repaid $100,000
but Y waives the remainder due on the loan
($15,762.50). Both Y and B use the calendar
year as their taxable years.
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54359
(ii) When the split-dollar term loan was
made, the loan was not a below-market loan
under paragraph (e)(4)(ii) of this section.
Under paragraph (f) of this section, Y was
required to accrue compound interest of 5
percent each year the loan remained
outstanding. B, however, was not entitled to
any deduction for this interest under
paragraph (c) of this section.
(iii) Under paragraph (h)(1) of this section,
the waived amount is treated as if, on
December 31, 2011, it had in fact been paid
to Y and was then retransferred by Y to B.
The amount deemed transferred to Y and
retransferred to B equals the excess of the
amount of interest payable at the stated rate
($15,762.50) over the interest actually paid
($0), or $15,762.50. In addition, the amount
deemed retransferred to B is increased by the
deferral charge determined under paragraph
(h)(4) of this section. Because of the
employment relationship between Y and B,
the total retransferred amount is treated as
compensation paid by Y to B.
Example 2. (i) On January 1, 2009,
Employer Y and Employee B entered into a
split-dollar life insurance arrangement under
which B is named as the policy owner. On
January 1, 2009, Y made a $100,000 premium
payment, repayable on the demand of Y, with
interest of 7 percent, compounded annually.
The premium payment is a split-dollar
demand loan. Assume the blended annual
rate (based on annual compounding) in 2009
was 5 percent and in 2010 was 6 percent.
Repayment of both the premium payment
and the interest due thereon was fully
recourse to B. On December 31, 2010, Y
demands repayment and is repaid its
$100,000 premium payment in full; however,
Y waives all interest due on the loan. Both
Y and B use the calendar year as their taxable
years.
(ii) For each year that the split-dollar
demand loan was outstanding, the loan was
not a below-market loan under paragraph
(e)(3)(ii) of this section. Under paragraph (f)
of this section, Y was required to accrue
compound interest of 7 percent each year the
loan remained outstanding. B, however, was
not entitled to any deduction for this interest
under paragraph (c) of this section.
(iii) Under paragraph (h)(1) of this section,
a portion of the waived interest is treated as
if, on December 31, 2010, it had in fact been
paid to Y and was then retransferred by Y to
B. The amount of interest deemed transferred
to Y and retransferred to B equals the excess,
if any, of the amount of interest payable at
the blended annual rate for each year the
loan is outstanding over the interest actually
paid with respect to that year. For 2009, the
interest payable at the blended annual rate is
$5,000 ($100,000 x 0.05). For 2010, the
interest payable at the blended annual rate is
$6,000 ($100,000 x 0.06). Therefore, the
amount of interest deemed transferred to Y
and retransferred to B equals $11,000. In
addition, the amount deemed retransferred to
B is increased by the deferral charge
determined under paragraph (h)(4) of this
section. Because of the employment
relationship between Y and B, the total
retransferred amount is treated as
compensation paid by Y to B.
(i) [Reserved]
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(j) Split-dollar loans that provide for
contingent payments—(1) In general.
Except as provided in paragraph (j)(2) of
this section, this paragraph (j) provides
rules for a split-dollar loan that provides
for one or more contingent payments.
This paragraph (j), rather than § 1.1275–
4, applies to split-dollar loans that
provide for one or more contingent
payments.
(2) Exceptions—(i) Certain
contingencies. For purposes of this
section, a split-dollar loan does not
provide for contingent payments merely
because—
(A) The loan provides for options
described in paragraph (e)(4)(iii)(B) of
this section (for example, certain call
options, put options, and options to
extend); or
(B) The loan is described in paragraph
(e)(5) of this section (relating to certain
split-dollar term loans, such as a splitdollar term loan payable not later than
the death of an individual).
(ii) Insolvency and default. For
purposes of this section, a payment is
not contingent merely because of the
possibility of impairment by insolvency,
default, or similar circumstances.
However, if any payment on a splitdollar loan is nonrecourse to the
borrower, the payment is a contingent
payment for purposes of this paragraph
(j) unless the parties to the arrangement
make the written representation
provided for in paragraph (d)(2) of this
section.
(iii) Remote and incidental
contingencies. For purposes of this
section, a payment is not a contingent
payment merely because of a
contingency that, as of the date the splitdollar loan is made, is either remote or
incidental (within the meaning of
§ 1.1275–2(h)).
(iv) Exceptions for certain split-dollar
loans. This paragraph (j) does not apply
to a split-dollar loan described in
§ 1.1272–1(d) (certain debt instruments
that provide for a fixed yield) or a splitdollar loan described in paragraph (g) of
this section (relating to split-dollar loans
providing for certain variable rates of
interest).
(3) Contingent split-dollar method—(i)
In general. If a split-dollar loan provides
for one or more contingent payments,
then the parties account for the loan
under the contingent split-dollar
method. In general, except as provided
in this paragraph (j), this method is the
same as the noncontingent bond method
described in § 1.1275–4(b).
(ii) Projected payment schedule—(A)
Determination of schedule. No
comparable yield is required to be
determined. The projected payment
schedule for the loan includes all
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noncontingent payments and a
projected payment for each contingent
payment. The projected payment for a
contingent payment is the lowest
possible value of the payment. The
projected payment schedule, however,
must produce a yield that is not less
than zero. If the projected payment
schedule produces a negative yield, the
schedule must be reasonably adjusted to
produce a yield of zero.
(B) Split-dollar term loans payable
upon the death of an individual. If a
split-dollar term loan described in
paragraph (e)(5)(ii)(A) or (v)(A)(1) of this
section provides for one or more
contingent payments, the projected
payment schedule is determined based
on the term of the loan as determined
under paragraph (e)(5)(ii)(C) or (v)(B)(2)
of this section, whichever is applicable.
(C) Certain split-dollar term loans
conditioned on the future performance
of substantial services by an individual.
If a split-dollar term loan described in
paragraph (e)(5)(iii)(A)(1) or (v)(A)(2) of
this section provides for one or more
contingent payments, the projected
payment schedule is determined based
on the term of the loan as determined
under paragraph (e)(5)(iii)(C) or (v)(B)(2)
of this section, whichever is applicable.
(D) Demand loans. If a split-dollar
demand loan provides for one or more
contingent payments, the projected
payment schedule is determined based
on a reasonable assumption as to when
the lender will demand repayment.
(E) Borrower/lender consistency.
Contrary to § 1.1275–4(b)(4)(iv), the
lender rather than the borrower is
required to determine the projected
payment schedule and to provide the
schedule to the borrower and to any
indirect participant as described in
paragraph (e)(2) of this section. The
lender’s projected payment schedule is
used by the lender, the borrower, and
any indirect participant to compute
interest accruals and adjustments.
(iii) Negative adjustments. If the
issuer of a split-dollar loan is not
allowed to deduct interest or OID (for
example, because of section 163(h) or
264), then the issuer is not required to
include in income any negative
adjustment carryforward determined
under § 1.1275–4(b)(6)(iii)(C) on the
loan, except to the extent that at
maturity the total payments made over
the life of the loan are less than the issue
price of the loan.
(4) Application of section 7872—(i)
Determination of below-market status.
The yield based on the projected
payment schedule determined under
paragraph (j)(3) of this section is used to
determine whether the loan is a below-
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market split-dollar loan under
paragraph (e) of this section.
(ii) Adjustment upon the resolution of
a contingent payment. To the extent that
interest has accrued under section 7872
on a split-dollar loan and the interest
would not have accrued under this
paragraph (j) in the absence of section
7872, the lender is not required to
recognize income under § 1.1275–4(b)
for a positive adjustment and the
borrower is not treated as having
interest expense for a positive
adjustment. To the same extent, there is
a reversal of the tax consequences
imposed under paragraph (e) of this
section for the prior imputed transfer
from the lender to the borrower. This
reversal is taken into account in
determining adjusted gross income.
(5) Examples. The following examples
illustrate the rules of this paragraph (j).
For purposes of this paragraph (j)(5),
assume that the contingent payments
are neither remote nor incidental. The
examples are as follows:
Example 1. (i) On January 1, 2010,
Employer T and Employee G enter into a
split-dollar life insurance arrangement under
which G is named as the policy owner. On
January 1, 2010, T makes a $100,000
premium payment. On December 31, 2013, T
will be repaid an amount equal to the
premium payment plus an amount based on
the increase, if any, in the price of a specified
commodity for the period the loan is
outstanding. The premium payment is a
split-dollar term loan. Repayment of both the
premium payment and the interest due
thereon is recourse to G. Assume that the
appropriate AFR for this loan, based on
annual compounding, is 7 percent. Both T
and G use the calendar year as their taxable
years.
(ii) Under this paragraph (j), the split-dollar
term loan between T and G provides for a
contingent payment. Therefore, the loan is
subject to the contingent split-dollar method.
Under this method, the projected payment
schedule for the loan provides for a
noncontingent payment of $100,000 and a
projected payment of $0 for the contingent
payment (because it is the lowest possible
value of the payment) on December 31, 2013.
(iii) Based on the projected payment
schedule and a discount rate of 7 percent,
compounded annually (the appropriate AFR),
the present value of the payments under the
loan is $76,289.52. Under paragraphs (e)(4)
and (j)(4)(i) of this section, the loan does not
provide for sufficient interest because the
loan’s imputed loan amount of $76,289.52
(the present value of the payments) is less
than the amount loaned of $100,000.
Therefore, the loan is a below-market splitdollar term loan and the loan is
recharacterized as consisting of two portions:
an imputed loan amount of $76,289.52 and
an imputed transfer of $23,710.48 (amount
loaned of $100,000 minus the imputed loan
amount of $76,289.52).
(iv) In accordance with section 7872(b)(1)
and paragraph (e)(4)(iv) of this section, on the
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date the loan is made, T is treated as
transferring to G $23,710.48 (the imputed
transfer) as compensation. In addition, T
must take into account as OID an amount
equal to the imputed transfer. See § 1.1272–
1 for the treatment of OID.
Example 2. (i) Assume, in addition to the
facts in Example 1, that on December 31,
2013, T receives $115,000 (its premium
payment of $100,000 plus $15,000).
(ii) Under the contingent split-dollar
method, when the loan is repaid, there is a
$15,000 positive adjustment ($15,000 actual
payment minus $0 projected payment).
Under paragraph (j)(4) of this section,
because T accrued imputed interest under
section 7872 on this split-dollar loan to G
and this interest would not have accrued in
the absence of section 7872, T is not required
to include the positive adjustment in income,
and G is not treated as having interest
expense for the positive adjustment. To the
same extent, T must include in income, and
G is entitled to deduct, $15,000 to reverse
their respective prior tax consequences
imposed under paragraph (e) of this section
(T’s prior deduction for imputed
compensation deemed paid to G and G’s
prior inclusion of this amount). G takes the
reversal into account in determining adjusted
gross income. That is, the $15,000 is an
‘‘above-the-line’’ deduction, whether or not G
itemizes deductions.
Example 3. (i) Assume the same facts as in
Example 2, except that on December 31,
2013, T receives $127,000 (its premium
payment of $100,000 plus $27,000).
(ii) Under the contingent split-dollar
method, when the loan is repaid, there is a
$27,000 positive adjustment ($27,000 actual
payment minus $0 projected payment).
Under paragraph (j)(4) of this section,
because T accrued imputed interest of
$23,710.48 under section 7872 on this splitdollar loan to G and this interest would not
have accrued in the absence of section 7872,
T is not required to include $23,710.48 of the
positive adjustment in income, and G is not
treated as having interest expense for the
positive adjustment. To the same extent, in
2013, T must include in income, and G is
entitled to deduct, $23,710.48 to reverse their
respective prior tax consequences imposed
under paragraph (e) of this section (T’s prior
deduction for imputed compensation deemed
paid to G and G’s prior inclusion of this
amount). G and T take these reversals into
account in determining adjusted gross
income. Under the contingent split-dollar
method, T must include in income $3,289.52
upon resolution of the contingency ($27,000
positive adjustment minus $23,710.48).
(k) Payment ordering rule. For
purposes of this section, a payment
made by the borrower to or for the
benefit of the lender pursuant to a splitdollar life insurance arrangement is
applied to all direct and indirect splitdollar loans in the following order—
(1) A payment of interest to the extent
of accrued but unpaid interest
(including any OID) on all outstanding
split-dollar loans in the order the
interest accrued;
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(2) A payment of principal on the
outstanding split-dollar loans in the
order in which the loans were made;
(3) A payment of amounts previously
paid by a non-owner pursuant to a splitdollar life insurance arrangement that
were not reasonably expected to be
repaid by the owner; and
(4) Any other payment with respect to
a split-dollar life insurance
arrangement, other than a payment
taken into account under paragraphs
(k)(1), (2), and (3) of this section.
(l) [Reserved]
(m) Repayments received by a lender.
Any amount received by a lender under
a life insurance contract that is part of
a split-dollar life insurance arrangement
is treated as though the amount had
been paid to the borrower and then paid
by the borrower to the lender. Any
amount treated as received by the
borrower under this paragraph (m) is
subject to other provisions of the
Internal Revenue Code as applicable (for
example, sections 72 and 101(a)). The
lender must take the amount into
account as a payment received with
respect to a split-dollar loan, in
accordance with paragraph (k) of this
section. No amount received by a lender
with respect to a split-dollar loan is
treated as an amount received by reason
of the death of the insured.
(n) Effective date—(1) General rule.
This section applies to any split-dollar
life insurance arrangement entered into
after September 17, 2003. For purposes
of this section, an arrangement is
entered into as determined under
§ 1.61–22(j)(1)(ii).
(2) Modified arrangements treated as
new arrangements. If an arrangement
entered into on or before September 17,
2003 is materially modified (within the
meaning of § 1.61–22(j)(2)) after
September 17, 2003, the arrangement is
treated as a new arrangement entered
into on the date of the modification.
PART 31—EMPLOYMENT TAXES AND
COLLECTION OF INCOME TAX AT
SOURCE
Par. 10. The authority citation for part
31 continues to read in part as follows:
Par. 12. In § 31.3231(e)–1, paragraph
(a)(6) is added to read as follows:
■
§ 31.3231(e)–1
Compensation.
(a) * * *
(6) Split-dollar life insurance
arrangements. See §§ 1.61–22 and
1.7872–15 of this chapter for rules
relating to the treatment of split-dollar
life insurance arrangements.
*
*
*
*
*
■ Par. 13. In § 31.3306(b)–1, paragraph
(l) is added to read as follows:
§ 31.3306(b)–-1
Wages.
*
*
*
*
*
(l) Split-dollar life insurance
arrangements. Except as otherwise
provided under section 3306(r), see
§§ 1.61–22 and 1.7872–15 of this
chapter for rules relating to the
treatment of split-dollar life insurance
arrangements.
■ Par. 14. In § 31.3401(a)–1, paragraph
(b)(15) is added to read as follows:
§ 31.3401(a)–1
Wages.
*
*
*
*
*
(b) * * *
(15) Split-dollar life insurance
arrangements. See § 1.61–22 of this
chapter for rules relating to the
treatment of split-dollar life insurance
arrangements.
*
*
*
*
*
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 15. The authority citation for part
602 continues to read as follows:
■
Authority: 26 U.S.C. 7805. * * *
Par. 16. In section 602.101, paragraph
(b) is amended by adding an entry in
numerical order for § 1.7872–15 to read
as follows:
■
§ 602.101
*
OMB Control numbers.
*
*
(b) * * *
*
*
CFR part or section where
identified and described
Current OMB
control No.
■
Authority: 26 U.S.C. 7805. * * *
Par. 11. In § 31.3121(a)-1, paragraph
(k) is added to read as follows:
*
*
*
1.7872–15 .............................
*
*
1545–1792
■
§ 31.3121(a)–1
Wages.
*
*
*
*
*
(k) Split-dollar life insurance
arrangements. Except as otherwise
provided under section 3121(v), see
§§ 1.61–22 and 1.7872–15 of this
chapter for rules relating to the
treatment of split-dollar life insurance
arrangements.
PO 00000
Frm 00035
Fmt 4700
Sfmt 4700
*
*
*
*
*
Robert E. Wenzel,
Deputy Commissioner for Services and
Enforcement.
Approved: September 11, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03–23596 Filed 9–11–03; 4:13 pm]
BILLING CODE 4830–01–P
E:\FR\FM\17SER1.SGM
17SER1
| File Type | application/pdf |
| File Title | Document |
| Subject | Extracted Pages |
| Author | U.S. Government Printing Office |
| File Modified | 2003-09-16 |
| File Created | 2003-09-16 |