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pdfSECTION 8. DRAFTING
INFORMATION
The principal authors of the revenue
procedure are Christopher C. Woodin,
Tax Exempt Bonds, Compliance and
Program Management, and Timothy L.
Jones, Office of Chief Counsel (Financial Institutions and Products), Internal
Revenue Service. For further information regarding this revenue procedure,
contact Mr. Woodin at 202–283–9780 or
Mr. Jones at 202–622–3980 (not toll-free
numbers).
26 CFR 301.7121–1: Closing agreements.
(Also Part I, §§ 7702, 7702A.)
Rev. Proc. 2008–38
SECTION 1. PURPOSE
This revenue procedure provides a procedure by which an issuer of a life insurance contract may remedy a failure to account for charges for qualified additional
benefits (QABs) under the expense charge
rule of § 7702(c)(3)(B)(ii) of the Internal
Revenue Code. Rev. Rul. 2005–6, 2005–1
C.B. 471, is amplified.
SECTION 2. BACKGROUND
.01 Definition of a life insurance contract.
(1) Section 7702(a) provides that, for a
contract to qualify as a life insurance contract for Federal income tax purposes, the
contract must be a life insurance contract
under the applicable law and must either—
(a) satisfy the cash value accumulation
test of § 7702(b), or
(b) both meet the guideline premium
requirements of § 7702(c) and fall within
the cash value corridor of § 7702(d).
(2) A contract meets the cash value accumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender
value of the contract may not at any time
exceed the net single premium that would
have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline premium requirements of § 7702(c) if the sum
of the premiums paid under the contract
does not at any time exceed the guideline
premium limitation as of that time. The
July 21, 2008
guideline premium limitation as of any
date is the greater of the guideline single
premium, or the sum of the guideline level
premiums to that date. The guideline single premium is the premium that would be
required on the date the contract is issued
to fund the future benefits under the contract.
(4) A contract falls within the cash
value corridor of § 7702(d) if the death
benefit under the contract at any time is
not less than the applicable percentage
of the cash surrender value, based on the
table set forth in § 7702(d)(2).
(5) Section 7702 is effective for contracts issued after December 31, 1984, in
tax years ending after that date.
.02 Definition of a modified endowment
contract (MEC).
(1) Section 7702A(a) provides that a
life insurance contract is a MEC if the contract—
(a) is entered into on or after June 21,
1988, and fails to meet the 7-pay test of
§ 7702A(b), or
(b) is received in exchange for a contract described in paragraph (a) of this section 2.02(1).
(2) A contract fails to meet the 7-pay
test if the accumulated amount paid under
the contract at any time during the first 7
contract years exceeds the sum of the net
level premiums that would have to be paid
on or before such time if the contract were
to provide for paid-up future benefits after
the payment of 7 level annual premiums.
(3) Section 72(e)(12) provides that, for
purposes of determining amounts includible in gross income, all MECs issued by
the same company to the same contract
holder during any calendar year are treated
as one MEC.
.03 Accounting for charges for QABs.
Section 7702(f)(5) identifies five categories of benefits as QABs: guaranteed
insurability; accidental death or disability
benefit; family term coverage; disability
waiver benefit; or other benefits prescribed under regulations. These benefits
are not treated as future benefits under
the contract, but charges for the benefits are treated as future benefits. For
purposes of the cash value accumulation test of § 7702(b), § 7702(b)(2)(B)
requires that charges for QABs be accounted for using the expense charge rule
of § 7702(c)(3)(B)(ii), rather than the mortality charge rule of § 7702(c)(3)(B)(i).
139
Section 7702A(c)(1) requires that the same
rule be used for purposes of the 7-pay test
as well. Although § 7702 is silent on the
treatment of charges for QABs for purposes of applying the guideline premium
requirements, Rev. Rul. 2005–6 concludes that charges for such benefits are to
be taken into account under the expense
charge rule of § 7702(c)(3)(B)(ii) for that
purpose as well.
.04 Authority to enter into closing
agreements. Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liability of such person (or of the person
or estate for whom he acts) in respect of
any internal revenue tax for any period.
Such agreement is generally final and conclusive, except upon a showing of fraud,
malfeasance, or misrepresentation of a
material fact.
.05 Correction procedure for QABs.
Rev. Rul. 2005–6 sets forth three alternatives for issuers whose compliance systems do not currently account for charges
for QABs under the expense charge rule
of § 7702(c)(3)(B)(ii):
(1) Alternative A provides that, if an
issuer’s compliance system does not properly account for charges for QABs but
no contracts have failed to satisfy the requirements of § 7702(a) as a result of the
system’s deficiency, the issuer may correct
its compliance system to account for those
charges using the expense charge rule
without contacting the Internal Revenue
Service (Service).
(2) Alternative B provides a correction procedure for closing agreements that
were requested on or before February 7,
2006.
(3) Alternative C provides that an issuer
whose compliance system does not properly account for charges for QABs may
request a closing agreement under terms
and conditions that are enumerated in Rev.
Rul. 2005–6.
.06 Changes to correction procedure.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how various correction procedures — including
those for improper accounting for charges
for QABs under Rev. Rul. 2005–6 —
may be improved. This revenue procedure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Most significantly, this revenue
procedure sets forth a model closing agree-
2008–29 I.R.B.
ment and explains in more detail the terms
and conditions that apply under Alternative C of Rev. Rul. 2005–6.
holder under a contract originally issued
by another company.
SECTION 4. PROCEDURE
SECTION 3. SCOPE
This revenue procedure applies to any
issuer of one or more contracts that failed
to meet the definition of a life insurance
contract under § 7702(a) or to meet the
requirements of § 7702A by reason of a
compliance system that does not account
for charges for QABs under the expense
charge rule of § 7702(c)(3)(B)(ii). For this
purpose, the term “issuer” means any company that issues a contract that is intended
to satisfy the definition of a life insurance
contract under § 7702. The term also includes a company that insures a contract
.01 Request for a ruling. An issuer
that seeks relief under this revenue procedure must submit a request for a ruling
that meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any successor). Additionally, the submission must
contain an exhibit setting forth the policy
number for each contract for which relief
is requested.
.02 Closing Agreement. The issuer also
must submit a proposed closing agreement, in triplicate, executed by the issuer,
in the same form as the model closing
agreement in section 5 of this revenue
Number of Contracts
Amount Due
20 or fewer
$1,500.00
21 to 50
$2,000.00
51 to 100
$5,000.00
101 to 500
$10,000.00
501 to 1,000
$16,000.00
1,001 to 5,000
$30,000.00
5,001 to 10,000
$40,000.00
Over 10,000
$50,000.00
.04 Payment of amount. The issuer
is required to pay the amount determined
under section 4.03 of this revenue procedure within 60 days of the date of execution of the closing agreement by the Service. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05 Correction of contracts and compliance system. With respect to each contract that is in force on the effective date
of the closing agreement, the issuer must
bring the contract into compliance with
§ 7702 (or § 7702A, as applicable), either
by increasing the contract’s death benefit
2008–29 I.R.B.
or returning the contract’s excess premiums and earnings thereon to the contract
holder. The issuer also must correct its
compliance system to account properly for
charges for QABs as provided in Rev. Rul.
2005–6. The issuer must take the corrective action required under this section 4.05
within 90 days of the date of execution of
the closing agreement by the Service.
.06 Representations. The submission
must include representations to the effect
that the issuer is within the scope of section
3 of this revenue procedure and that the
amount due to the Service under the closing agreement is computed correctly under section 4.03. The representations must
be executed under penalties of perjury by
an appropriate party (as set forth in section
7.01 of Rev. Proc. 2008–1 (or its succes-
140
procedure. The amount shown in Section
1(A) of the proposed closing agreement
is the amount required to be paid (determined under section 4.03 of this revenue
procedure) for all of the contracts covered
by the agreement.
.03 Determination of amount required
to be paid. The amount required to be
paid is based on the aggregate number of
contracts for which relief is requested, as
set forth in the following schedule:
sor)). The issuer must retain documentation available for audit to support the representations.
.07 Electronic Submissions. The exhibit required under section 4.01 of this
revenue procedure may be submitted to
the Service electronically, in read-only format, on a CD-ROM. Adobe Portable Document format is a suitable format. Other
formats may be arranged on a case-by-case
basis. The issuer must provide a total of
three CD-ROMs, one for each of the three
copies of the closing agreement. See Notice 2005–35, 2005–1 C.B. 1087.
SECTION 5. MODEL CLOSING
AGREEMENT
July 21, 2008
Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER REV. PROC. 2008–38
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to § 7121 of the Internal Revenue Code (the “Code”) by and
between [Insert Taxpayer name, address and EIN] (“Taxpayer”) and the Commissioner of Internal Revenue (the “Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more contracts that were intended to qualify as life insurance contracts under § 7702 [;that
were not intended to be treated as modified endowment contracts under § 7702A;] and that provided qualified additional benefits
(QABs) within the meaning of § 7702(f)(5).
B. Pursuant to Rev. Proc. 2008–38, 2008–29 I.R.B. 139, the Service under certain circumstances will waive civil penalties for
failure of a taxpayer to satisfy the reporting, withholding and/or deposit requirements for income received or deemed received under
§ 7702(g).
C. By letter dated [Insert date],Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B.1 [or successor
Rev. Proc., if applicable], a request for this Agreement covering [Insert number] life insurance contracts identified in Exhibit A
attached to this Agreement (the “Contracts”).
D. Taxpayer intended that each of the Contracts meet the definition of a life insurance contract under § 7702 [and not be a
modified endowment contract under § 7702A]. Taxpayer, however, maintained a compliance system for the contracts that did not
account properly for charges for qualified additional benefits (QABs) under § 7702(c)(3)(B)(ii). As a result, the Contracts identified
in Exhibit A failed to satisfy the requirements of § 7702 or § 7702A.
E. Taxpayer represents that the errors described in D above qualify the Taxpayer for the remedy described in Rev. Proc. 2008–38.
F. Taxpayer represents that the amount determined under section 4.03 of Rev. Proc. 2008–38 is $ [Insert amount]. Taxpayer
represents that this amount has been computed correctly under the provisions of Rev. Proc. 2008–38.
G. Taxpayer represents that it has corrected its compliance system, or will correct the compliance system within the time limit
prescribed in Section 1(F), to account properly for charges for QABs.
H. To ensure that the Contracts satisfy the requirements of § 7702 [and § 7702A, if applicable], Taxpayer and the Service have
entered into this Agreement.
NOW THEREFORE IT IS HEREBY FURTHER DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SERVICE AS FOLLOWS:
1. In consideration for the agreement of the Service as set forth in Section 2 below, Taxpayer agrees as follows:
(A)
To pay the Service the amount of $ [Insert amount] at the time and in the manner described in Section 3 below.
(B)
The amount paid pursuant to Section 1(A) above is not deductible, nor is such amount refundable, subject to credit
or offset, or otherwise recoverable from the Service.
(C)
For purposes of Taxpayer’s complying with its reporting and withholding obligations under the Code,
(D)
(i)
neither the investment in the contract for purposes of § 72, nor the premiums paid for purposes of § 7702,
on any Contract can be increased by any portion of the amount set forth in Section 1(A) above. If any such
increases are made, they are entitled to no effect.
(ii)
neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702, on
any Contract can be increased by any portion of the amount which Taxpayer represents to be the income on the
contract for all of the Contracts in the aggregate. If any such increases are made, they are entitled to no effect.
With respect to each Contract that is in force on the effective date of this Agreement, to the extent necessary in order
to bring such Contract into compliance with § 7702 [and § 7702A, if applicable]:
(i)
July 21, 2008
If the sum of the premiums paid as of the effective date of this Agreement exceeds the amount necessary to
keep the Contracts in compliance with the requirements of § 7702 [and § 7702A, if applicable], Taxpayer
will take the following corrective action:
141
2008–29 I.R.B.
(ii)
(a)
Increase the death benefit to not less than an amount that will ensure compliance with § 7702 [and
§ 7702A, if applicable], or
(b)
Refund to the Contract holder the amount of such excess with interest; or
If the sum of the premiums paid as of the effective date of this Agreement does not exceed the amount
necessary to keep the contracts in compliance with the requirements of § 7702 [and § 7702A, if applicable],
Taxpayer will take no corrective action.
(E)
With respect to any Contract which terminated by reason of the death of the insured (i) prior to the date this
Agreement is executed by the Service and (ii) at a time when the premiums paid exceeded the guideline premium
limitation for the Contract, Taxpayer will pay the Contract holder or the Contract holder’s estate such excess
with interest.
(F)
Taxpayer represents that it, if it has not already done so, will correct its compliance system within 90 days of the
effective date of this Agreement to account properly for charges for QABs.
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A)
To treat each Contract that is still in force as of the effective date of this Agreement as having satisfied the
requirements of § 7702 [and § 7702A, if applicable], during the period from the date of issuance of the Contract
through and including the latest of (i) the date this Agreement is executed by the Service, (ii) the date of any corrective
action described in Section 1(D) above, or (iii) the date of any corrective action described in Section 1(F) above;
(B)
To treat each Contract that terminated prior to the effective date of this Agreement as having satisfied the
requirements of § 7702 [and § 7702A, if applicable] during the period from date of issuance of the Contract through
and including the date of the Contract’s termination;
(C)
To treat the failures described above, and any corrective action described in Section 1(D) or 1(E) above, as having
no effect on the date the Contract was issued, entered into, or purchased for purposes of any provision of the
Code or the regulations thereunder;
(D)
To treat any amount paid to any beneficiary prior to the effective date of this Agreement under a Contract by
reason of the death of the insured as paid under a life insurance contract for purposes of the exclusion from gross
income under § 101(a)(1);
(E)
To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, or deposit requirements that
would be applicable but for the relief otherwise provided by this Agreement; and
(F)
To treat no portion of the amount described in Section 1(A) above as income to the Contract holders.
3. Any action required of Taxpayer in Section 1(D) or 1(E) above shall be taken by Taxpayer no later than 90 days after the
date of execution of this Agreement by the Service. Payment of the amount described in Section 1(A) above shall be made within
60 days after the date of execution of this Agreement by the Service by check payable to the “United States Treasury” delivered
together with a copy of this executed Agreement, to Internal Revenue Service, Receipt & Control Stop 31, 201 W. Rivercenter
Blvd., Covington, KY 41011.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. Contract holders covered by this Agreement
are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of Taxpayer to the
Contract holders.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that the Service and Taxpayer mutually agree that the matters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that they
have read and agreed to the terms of this document.
2008–29 I.R.B.
142
July 21, 2008
[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 2005–6 is amplified to provide terms and conditions and a model
closing agreement for use by taxpayers
seeking the relief described in Alternative
C.
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have 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 1545–1752.
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
OMB control number.
Books and records relating to a 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
return information are confidential, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Katherine A. Hossofsky of
the Office of Associate Chief Counsel
(Financial Institutions & Products). For
further information regarding this revenue
procedure, contact Branch 4 of that office
at (202) 622–3970 (not a toll-free call).
July 21, 2008
26 CFR 301.7121–1: Closing agreements.
(Also Part I, § 7702A.)
Rev. Proc. 2008–39
SECTION 1. PURPOSE
This revenue procedure provides a procedure by which an issuer of a life insurance contract may remedy an inadvertent
non-egregious failure to comply with the
modified endowment contract rules under
§ 7702A of the Internal Revenue Code.
Rev. Proc. 2001–42, 2001–2 C.B. 212,
and Rev. Proc. 2007–19, 2007–1 C.B.
515, are superseded.
SECTION 2. BACKGROUND
.01 Definition of a modified endowment
contract (MEC).
(1) Section 7702A(a) provides that a
life insurance contract is a MEC if the contract—
(a) is entered into on or after June 21,
1988, and fails to meet the 7-pay test of
§ 7702A(b), or
(b) is received in exchange for a contract described in paragraph (a) of this section 2.01(1).
(2) A contract fails to meet the 7-pay
test if the accumulated amount paid under the contract at any time during the first
7 contract years exceeds the sum of the
net level premiums which would have to
be paid on or before such time if the contract were to provide for paid-up future
benefits (as defined in §§ 7702A(c)(3) and
7702(f)(4)) after the payment of 7 level annual premiums.
(3) Section 72(e)(12) provides that, for
purposes of determining amounts includible in gross income, all MECs issued by
the same company to the same contract
holder during any calendar year are treated
as one MEC.
143
.02 Tax treatment of amounts received
under a MEC. Section 72(e)(10) provides that a MEC is subject to the rules
of § 72(e)(2)(B), which tax non-annuity
distributions on an income-out-first basis,
and the rules of § 72(e)(4)(A) (as modified
by §§ 72(e)(10)(A)(ii) and 72(e)(10)(B)),
which generally deem loans and assignments or pledges of any portion of the
value of a MEC to be non-annuity distributions. Moreover, under § 72(v), the
portion of any annuity or non-annuity distribution received under a MEC that is
includible in gross income is subject to a
10% additional tax unless the distribution
is made on or after the date on which the
taxpayer attains age 591/2, is attributable to
the taxpayer’s becoming disabled (within
the meaning of § 72(m)(7)), or is part of a
series of substantially equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and the
taxpayer’s beneficiary.
.03 Authority to enter into closing
agreements. Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liability of such person (or of the person
or estate for whom he acts) in respect of
any internal revenue tax for any period.
Such agreement is generally final and conclusive, except upon a showing of fraud,
malfeasance, or misrepresentation of a
material fact.
.04 Correction procedure for inadvertent MECs. Rev. Proc. 2001–42 set
forth circumstances under which the Internal Revenue Service (Service) would enter
into closing agreements under which life
insurance contracts would be treated as if
they were not MECs, notwithstanding inadvertent non-egregious failures to comply with the rules of § 7702A. Under Rev.
Proc. 2001–42, an issuer was required
2008–29 I.R.B.
to provide information about the contracts
that were subject to the closing agreement,
including a template for each contract setting forth the cumulative amounts paid under the contract, the contract’s cumulative
7-pay premium, the overage, if any, for
each contract year, the earnings rate applicable for each contract year, and the overage earnings for each contract year. In addition, the issuer was required to pay under
the closing agreement an amount based on
the contract’s overage, overage earnings,
and tax and interest thereon. Rev. Proc.
2001–42 was modified and amplified by
Rev. Proc. 2007–19, primarily to use indices that are more accessible to taxpayers
than those previously required to be used
and to permit the submission of information in an electronic format.
.05 Changes to correction procedure.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how various correction procedures — including
those for inadvertent MECs under Rev.
Proc. 2001–42 — may be improved. This
revenue procedure incorporates a number
of changes that taxpayers suggested in response to Notice 2007–15. Significant
changes include providing an alternative
computation of the amount required to be
paid under a closing agreement with regard
to an inadvertent MEC, eliminating certain informational items that must be submitted, and revising some language of the
model closing agreement.
SECTION 3. DEFINITIONS
The following definitions and rules apply solely for purposes of this revenue procedure.
.01 Testing period. The 7-year period
described in § 7702A(b) or such additional period as may be required under
§ 7702A(c)(3) if a contract undergoes a
material change.
.02 Amount paid. The amount paid (as
defined in § 7702A(e)(1)) under a contract in any contract year (as defined in
2008–29 I.R.B.
§ 7702A(e)(2)) equals the premiums paid
for the contract during the year, reduced by
amounts to which § 72(e) applies (determined without regard to § 72(e)(4)(A)) but
not including amounts includible in gross
income. For this purpose, premiums paid
do not include—
(1) any portion of any premium paid
during the contract year that is returned
(with interest) to the contract holder within
60 days after the end of the contract year in
order to comply with the 7-pay test, or
(2) the cash surrender value (as defined
in § 7702(f)(2)(A)) of another life insurance contract (other than a contract that
fails the 7-pay test) exchanged for the contract.
.03 7-pay premium.
(1) In general. Except as otherwise provided in section 3.03(2) of this revenue
procedure, the 7-pay premium for a contract is the net level premium (computed in
accordance with the rules in § 7702A(c))
that would have to be paid for the contract
if the contract were to provide for paid up
future benefits after the payment of 7 level
annual premiums.
(2) 7-pay premium for a contract that
undergoes a material change. If a contract
(other than a contract that fails the 7-pay
test) is materially changed, the contract is
treated as newly issued on the date of the
material change and the 7-pay premium for
the changed contract is an amount equal to
the excess, if any, of—
(a) the net level premium (computed in
accordance with the rules in § 7702A(c))
that would have to be paid for the changed
contract if the contract were to provide for
paid up future benefits after the payment
of 7 level annual premiums, over
(b) a proportionate share of the cash surrender value (as defined in section 3.04 of
this revenue procedure) under the contract.
.04 Proportionate share of cash surrender value. The proportionate share of the
cash surrender value of a contract is the
amount obtained by multiplying—
144
(1) the cash surrender value (as defined
in § 7702(f)(2)(A)) of the contract, by
(2) a fraction, the numerator of which
is the net level premium (computed in accordance with the rules in § 7702A(c)) that
would have to be paid for the changed or
new contract if such contract were to provide for paid up future benefits after the
payment of 7 level annual premiums, and
the denominator of which is the net single premium (determined using the rules in
§ 7702) for such contract at that time.
.05 Overage. A contract’s overage is
the amount of the excess, if any, of—
(1) the sum of amounts paid under the
contract during the testing period for the
contract year and all prior contract years,
over
(2) the sum of the 7-pay premiums for
the contract year and all prior contract
years of the testing period.
.06 Overage earnings. The overage
earnings for a contract year is the amount
obtained by multiplying—
(1) the sum of a contract’s overage for
the contract year and its cumulative overage earnings for all prior contract years,
by—
(2) the earnings rate set forth in section
3.07 of this revenue procedure.
.07 Earnings rates.
(1) Contracts other than variable contracts. Except as otherwise provided in
sections 3.07(3) and 3.07(8) of this revenue procedure, the earnings rate applicable to a contract year is the general account
total return (as defined in section 3.07(2)
of this revenue procedure) for the calendar
year in which the contract year begins.
(2) General account total return.
(a) Pre-2008 contract years. The general account total return applicable to a
contract year that begins before January 1,
2008, is the rate set forth in the following table for the calendar year in which the
contract year begins.
July 21, 2008
Year
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
General Account Total Return
10.2%
9.7%
9.8%
9.2%
8.6%
7.5%
8.3%
7.8%
7.7%
7.6%
6.9%
7.4%
8.0%
7.5%
7.2%
6.2%
6.1%
5.6%
6.0%
6.0%
(b) Post-2007 contract years. The general account total return applicable to a
contract year that begins after December 31, 2007, is the arithmetic average
(weighted on a 50–50 basis) of the following two rates:
(i) Moody’s Seasoned Corporate Aaa
Bond Yield, frequency annual, or any successor thereto; and
Year
Variable Contracts Earnings Rate
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
13.5%
17.4%
1.4%
25.4%
5.9%
13.9%
-1.0%
23.0%
14.3%
17.8%
19.7%
12.8%
-5.5%
-7.1%
-14.1%
19.6%
6.9%
2.1%
10.0%
3.6%
(b) Post-2007 contract years. Except
as otherwise provided in section 3.07(8) of
July 21, 2008
(ii) Moody’s Seasoned Corpofrequency
rate Baa Bond Yield,
annual, or any successor thereto.
Both rates are publicly available at
Thus, for
www.federalreserve.gov.
example, under this methodology the
general account total return for 2007 is
(5.555833 + 6.4825)/2 = 6.0191665 =
6.0%.
this revenue procedure, the earnings rate
applicable to a contract year that begins
145
(3) Variable contracts described in
§ 817(d).
(a) Pre-2008 contract years. The earnings rate applicable to a contract year that
begins before January 1, 2008, is the rate
set forth in the following table for the calendar year in which the contract year begins.
after December 31, 2007, is equal to the
sum of—
2008–29 I.R.B.
(i) 10 percent of the general account
total return (as defined in section 3.07(2)
of this revenue procedure), and
(ii) 90 percent of the separate account
total return (as defined in section 3.07(4)
of this revenue procedure) for the calendar
year in which the contract year begins.
(4) Separate account total return. Except as otherwise provided in section
3.07(8) of this revenue procedure, the separate account total return equals—
(a) 75 percent of the equity fund total
return (as defined in section 3.07(5) of this
revenue procedure), plus
(b) 25 percent of the bond fund total
return (as defined in section 3.07(6) of this
revenue procedure), less
(c) 1.1 percentage point.
(5) Equity fund total return. The equity
fund total return equals—
(a) the calendar year percentage return
(as defined in section 3.07(7) of this revenue procedure) represented by the endof-year values of the Standard and Poor’s
(S&P) 500 Total Return Index, with daily
dividend reinvestment, or any successor
thereto, less
(b) 1.5 percentage point.
(6) Bond fund total return. The bond
fund total return equals—
(a) the calendar year percentage return
(as defined in section 3.07(7) of this revenue procedure) represented by the end-ofyear values of the Merrill Lynch U.S. Corporate Master Index (C0A0), or any successor thereto, less
(b) 1.0 percentage point.
The Merrill Lynch U.S. Corporate Master Index (C0A0) is publicly available at
www.mlindex.ml.com. Under this methodology, the bond fund total return for 2007
is (1689.135-1614.188) /1614.188 - .01 =
3.64301 percent.
(7) Calendar year percentage return.
The calendar year percentage return for an
index described in section 3.07(5) or section 3.07(6) of this revenue procedure is
calculated by—
(a) dividing the end-of-year value of the
index for the calendar year by the end-ofyear value of the index for the immediately
preceding calendar year, and
(b) subtracting 1 from the result obtained under paragraph (a) of this section
3.07(7).
(8) Incomplete calendar year. If the
general account total return or the separate account total return for a calendar year
2008–29 I.R.B.
cannot be determined because the calendar
year in which the contract year begins has
not ended, then the earnings rate for the
contract year (or portion thereof) is determined using the general account total return and, if applicable, the average separate account total return, for the 3 calendar
years immediately preceding the calendar
year in which the contract year begins.
.08 Proportionate share of overage
earnings allocable to taxable distributions. The proportionate share of overage
earnings allocable to taxable distributions
under a contract is the amount obtained by
multiplying—
(1) the total amount of the taxable distributions under the contract, by
(2) a fraction, the numerator of which is
the contract’s cumulative overage earnings
and the denominator of which is the total
income on the contract.
.09 Total income on a contract. The
total income on a contract as of any date is
an amount equal to the excess, if any, of—
(1) the contract’s cash surrender value
(as defined in § 7702(f)(2)(A)) on such
date, over
(2) the premiums paid under the contract before such date, reduced by amounts
to which § 72(e) applies (determined without regard to § 72(e)(4)(A)) but not including amounts includible in the contract
holder’s gross income.
.10 Distribution frequency factor. The
distribution frequency factor for a contract
is—
(1) .8, if—
(a) the interest rate with respect to any
portion of a policy loan that could be made
under the contract at any time (including
policy loans that could be made after a
contractually specified date in the future)
is guaranteed not to exceed the sum of:
(i) 1 percentage point, plus
(ii) the rate at which earnings are
credited to the portion of the contract’s
cash surrender value (as defined in
§ 7702(f)(2)(A)) that is allocable to such
portion of the policy loan; or
(b) the contract holder has an option to
make a partial withdrawal of the contract’s
cash surrender value that reduces the death
benefit (as defined in § 7702(f)(3)) under
the contract by less than an amount determined by multiplying—
(i) the death benefit under the contract immediately before the withdrawal,
by (ii) the percentage obtained by divid-
146
ing the withdrawn amount by the contract’s cash surrender value (as defined in
§ 7702(f)(2)(A)) immediately before the
withdrawal; and
(2) .5 for all other contracts.
.11 Applicable percentage.
(1) In general. The applicable percentage for a contract is—
(a) 15%, if the death benefit under the
contract is less than $50,000,
(b) 28%, if the death benefit under the
contract is equal to or exceeds $50,000 but
is less than $180,000, and
(c) 36%, if the death benefit under the
contract is equal to or exceeds $180,000.
(2) Determination of amount of death
benefit. For purposes of determining the
applicable percentage, the death benefit
under the contract is the death benefit (as
defined in § 7702(f)(3)) as of any date
within 120 days of the date of the request
for closing agreement, or the last day the
contract is in force.
.12 Reported amount. The reported
amount for a contract is the amount that—
(1) the issuer reports on a timely filed
information return as includible in the contract holder’s gross income, or
(2) the contract holder includes in gross
income on a timely filed income tax return.
.13 Aggregation of contracts.
All
MECs issued by the same issuer to the
same contract holder during any calendar
year are treated as one MEC.
SECTION 4. SCOPE
.01 Applicability. Except as provided
in section 4.02, this revenue procedure applies to any issuer of one or more life insurance contracts that desires to remedy the
inadvertent non-egregious failure of contracts to comply with the requirements of
§ 7702A. For this purpose, the term “issuer” means any company that issues a
contract that is intended to satisfy the definition of a life insurance contract under
§ 7702 and comply with the MEC rules
under § 7702A. The term also includes a
company that insures a contract holder under a contract originally issued by another
company.
.02 Inapplicability. The Service may
exclude a contract from the correction
mechanism provided under this revenue
procedure if the contract’s status as a MEC
resulted from a failure to comply with the
requirements of § 7702A that—
July 21, 2008
(1) is attributable to one or more defective interpretations or positions that the
Service determines to be a significant feature of a program to sell investment oriented contracts, or
(2) arises where the controlling statutory provision, as supplemented by any
legislative history or guidance published
by the Service, is clear on its face and
the Service determines that failure to follow the provision results in a significant
increase in the investment orientation of a
contract.
.03 Example. Pursuant to section 4.02 of this revenue procedure, the Service generally will not apply
the correction mechanism under this revenue procedure to a MEC if the contract provides for paid-up
future benefits after the payment of less than 7 level
annual premiums.
SECTION 5. PROCEDURE
.01 Request for a ruling. An issuer
that seeks relief under this revenue procedure must submit a request for a ruling
that meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any successor). Additionally, the submission must
contain the following information:
(1) the policy number for each contract;
(2) a description of the defect[s] that
caused the contract[s] to fail to comply
with the 7-pay test, including an explanation of how and why the defect[s] arose;
and
(3) a description of the administrative
procedures the issuer has implemented to
ensure that none of its contracts will inadvertently fail the 7-pay test in the future.
.02 Closing agreement. The issuer also
must submit a proposed closing agreement, in triplicate, executed by the issuer,
in the same form as the model closing
agreement in section 6 of this revenue
procedure. The amount shown in Section
1(A) of the proposed closing agreement
is the amount required to be paid (determined under section 5.03 of this revenue
procedure) for all of the contracts covered
by the agreement.
.03 Determination of amount required
to be paid with regard to a contract. The
amount required to be paid with regard to a
contract under this section 5.03 is either the
amount determined based on overage earnings under section 5.03(1) or, at the election of the issuer, the amount determined
based on overage under section 5.03(2).
(1) Amount determined based on overage earnings.
(a) In general. Except as provided in
section 5.03(1)(b) of this revenue procedure, the amount determined based
on overage earnings under this section
5.03(1) is the sum of—
(i) the income tax (determined using,
in lieu of the contract holder’s actual tax
rate, the applicable percentage for the contract under section 3.11 of this revenue
procedure) and the additional tax under
§ 72(v) with regard to amounts (other than
reported amounts (as defined in section
3.12 of this revenue procedure)) received
(or deemed received) under the contract
during the period commencing with the
date 2 years before the date on which the
contract first failed to satisfy the MEC
rules and ending on the effective date of
the closing agreement;
(ii) any interest computed under
§ 6621(a)(2) as if the amounts determined
under section 5.03(1)(a)(i) of this revenue
procedure are underpayments by the contract holder[s] for the tax year[s] in which
the amounts are received (or deemed received); and
(iii) an amount, not less than $0, obtained by multiplying— (A) the excess, if
any, of the contract’s cumulative overage
earnings over the proportionate share of
overage earnings allocable to taxable distributions under the contract, by
(B) the applicable percentage for the
contract, and by
(C) the distribution frequency factor for
the contract under section 3.10 of this revenue procedure.
(b) Special rule for contracts with de
minimis overage earnings. If the overage
earnings of a contract at all times during
the testing period do not exceed $100, then
the amount determined under this section
5.03(1) of this revenue procedure is determined without regard to paragraphs (i) and
(ii) of section 5.03(1)(a) of this revenue
procedure.
(2) Amount determined based on overage. An issuer may elect to pay an amount
equal to 100% of the overage as defined
in section 3.05 of this revenue procedure,
rather than the amount determined under
section 5.03(1)(a) of this revenue procedure based on overage earnings with respect to a contract.
(3) Examples of the determination of the
amount required to be paid with regard to
a contract.
(a) Example 1. A, an individual, purchases a life
insurance contract other than a contract described in
sections 3.07(3) or 4.02 of this revenue procedure.
The death benefit of the contract exceeds $180,000
on every day within 120 days of the date of the request for closing agreement. The net level premium
(assuming paid-up future benefits after seven annual
premium payments) for the contract is $10,490. The
contract provides that, within 60 days after the end of
a contract year, the issuer will return (with interest)
the amount of any excess premium that would cause
the contract to be a MEC under § 7702A.
The interest rate on all portions of any policy
loans will always exceed the rate at which interest
is credited to the contract’s associated cash value by
more than 1 percentage point. A partial withdrawal
of the cash surrender value (within the meaning of
§ 7702(f)(2)(A)) always reduces the death benefit by
an amount not less than the amount determined by
multiplying the death benefit immediately before the
withdrawal by the percentage obtained by dividing
the withdrawn amount by the cash surrender value
immediately before the withdrawal.
A pays a premium of $10,000 when the contract is
issued on January 1, 2001. At the beginning of each
of the next 6 contract years, A pays additional premiums of $10,750, $10,800, $10,700, $11,500, $11,000,
and $10,000, respectively. Due to an inadvertent error, the issuer fails to return any of the excess premiums.
The issuer desires to enter into a closing agreement to remedy the failure to comply with § 7702A.
The issuer prepares the following template with regard to the contract.
Contract Year
Cumulative Amounts
Paid
Cumulative 7-pay
Premium
1 (2001)
10,000
10,490
0
7.5%
0
2 (2002)
20,750
20,980
0
7.2%
0
3 (2003)
31,550
31,470
80
6.2%
4.96
4 (2004)
42,250
41,960
290
6.1%
17.99
July 21, 2008
Overage
147
Earnings Rate
Overage Earnings
2008–29 I.R.B.
Contract Year
Cumulative Amounts
Paid
Cumulative 7-pay
Premium
Overage
Earnings Rate
5 (2005)
53,750
52,450
1,300
5.6%
74.09
6 (2006)
64,750
62,940
1,810
6.0%
114.42
7 (2007)
74,750
73,430
1,320
6.0%
91.89
Prior to A’s payment of the $10,800 premium at
the beginning of contract year 3, the cumulative premiums paid for the contract do not exceed the contract’s cumulative 7-pay premiums. Therefore, there
are no overage earnings in contract years 1 and 2.
Upon payment of the $10,800 premium at the beginning of contract year 3, however, the cumulative
amount paid for the contract ($31,550) exceeds the
contract’s cumulative 7-pay premiums ($31,470) by
$80. As the earnings rate for the calendar year in
which contract year 3 begins is 6.2%, the contract’s
overage earnings for contract year 3 equal $4.96 ($80
x 6.2%).
For contract year 4, the overage is $290 ($42,250
- $41,960). The cumulative overage earnings for all
prior contract years equal $4.96. The earnings rate is
6.1%. The overage earnings for contract year 4 equal
$17.99 (($290 + $4.96) x 6.1%).
For contract year 5, the overage is $1,300
($53,750 - $52,450). The cumulative overage earnings for all prior contract years equal $22.95 ($4.96
+ $17.99). The earnings rate is 5.6%. The overage
earnings for contract year 5 equal $74.09 (($1,300 +
$22.95) x 5.6%).
For contract year 6, the overage is $1,810
($64,750 - $62,940). The cumulative overage earnings for all prior contract years equal $97.04 ($4.96
+ $17.99 + $74.09). The earnings rate is 6.0%. The
overage earnings for contract year 6 equal $114.42
($1,810 + $97.04) x 6.0%).
For contract year 7, the overage is $1,320
($74,750 - $73,430). The cumulative overage earnings for all prior contract years equal $211.46 ($4.96
+ $17.99 + $74.09 + $114.42). The earnings rate is
6.0%. The overage earnings for contract year 7 equal
$91.89 (($1,320 + $211.46) x 6.0%).
The cumulative overage earnings for the contract
equal $303.35 ($4.96 + $17.99 + $74.09 + $114.42 +
$91.89). Under sections 3.10 and 3.11 of this revenue
procedure, the distribution frequency factor is .5 and
the applicable percentage is 36%. Accordingly, the
amount determined based on overage earnings under
section 5.03(1) of this revenue procedure is $54.60
($303.35 x .5 x 36%).
The amount determined based on overage under
section 5.03(2) of this revenue procedure is equal to
100% of the overage, or $1,320. The issuer may
elect to pay either this amount or the amount determined under section 5.03(1) of this revenue procedure ($54.60) under the terms of the closing agreement with regard to the contract.
(b) Example 2. The facts are the same as in Example 1 except that, at the beginning of contract year 5, A
receives $3,000 as a policy loan. The contract’s cash
value (within the meaning of § 72(e)(3)(A)(i)) immediately prior to the loan is $58,500, which exceeds
A’s investment in the contract ($53,750) by $4,750.
Each year A pays the interest on the policy loan. The
2008–29 I.R.B.
issuer does not file a timely information return with
regard to the deemed distribution resulting from the
policy loan and A does not include the distribution in
gross income reported on the income tax return for
the taxable years in which the deemed distribution is
received. The total income on the contract (as defined
in section 3.09 of this revenue procedure) is $14,500.
The amount determined based on overage earnings under section 5.03(1) of this revenue procedure
is the sum of—
(1) an amount equal to the income tax (determined using an applicable percentage of 36%) and the
additional tax under § 72(v) with regard to the $3,000
deemed distribution in contract year 5;
(2) interest computed under § 6621(a)(2) as if the
amounts determined under (1) were underpayments
for the taxable year in which the distributions are
deemed to have occurred; and
(3) 36% of $120.30, which is the excess of the
contract’s cumulative overage earnings over the proportionate share of the overage earnings allocable to
taxable distributions ($303.35 - $62.76), multiplied
by the distribution frequency factor (.5). (The proportionate share of overage earnings allocable to taxable distributions is obtained by multiplying the total
amount of the taxable distribution under the contract
($3,000), by a fraction, the numerator of which is the
contract’s cumulative overage earnings ($303.35) and
the denominator of which is the total income on the
contract ($14,500).)
The amount determined based on overage under
section 5.03(2) of this revenue procedure is equal to
100% of the overage, or $1,320. The issuer may elect
to pay either this amount or the amount determined
under section 5.03(1) of this revenue procedure under
the terms of the closing agreement with regard to the
contract.
.04 Payment of amount. The issuer
is required to pay the amount determined
under section 5.03 of this revenue procedure within 60 days of the date of execution of the closing agreement by the Service. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05 Correction of contracts.
(1) General rules. If, on the date of the
execution of the closing agreement by the
Service, the testing period (as defined in
section 3.01 of this revenue procedure) for
148
Overage Earnings
a contract has more than 90 days remaining, then the issuer must bring the contract into compliance with § 7702A. The
issuer may bring a contract into compliance with § 7702A either by either increasing the contract’s death benefit or returning
the contract’s excess premiums and earnings thereon to the contract holder. The
issuer shall take the corrective action required under this section 5.05(1) of this
revenue procedure within 90 days of the
date of execution of the closing agreement
by the Service.
(2) No corrective action required if Service executes closing agreement on a date
within ninety (90) days of the expiration
of testing period. If the testing period for
a contract expires on or before the date
within 90 days of the execution of the closing agreement by the Service, then the issuer is not required to take any corrective
action under section 5.05(1) of this revenue procedure.
.06 Representations. The submission
must include representations to the effect
that the issuer is within the scope of section 4 of this revenue procedure and that
amount due to the Service under the closing agreement is computed correctly under
section 5.03(1) or (2) of this revenue procedure, as applicable. The representations
must be executed under penalties of perjury by an appropriate party (as set forth
in section 7.01 of Rev. Proc. 2008–1 (or
its successor). The issuer must retain documentation available for audit to support
the representations.
.07 Electronic submissions. The information required under section 5.01(1)
of this revenue procedure may be submitted to the Service electronically, in
read-only format, on a CD-ROM. Adobe
Portable Document format is a suitable
format. Other formats may be arranged
on a case-by-case basis. The issuer must
provide a total of three CD-ROMs, one
for each of the three copies of the closing
agreement.
July 21, 2008
SECTION 6. MODEL CLOSING
AGREEMENT
Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER SECTION 7702A
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to § 7121 of the Internal Revenue Code (the “Code”) by and
between [Insert Taxpayer name, address, and EIN] (“Taxpayer”) and the Commissioner of Internal Revenue (the “Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more life insurance contracts under § 7702.
B. Pursuant to Rev. Proc. 2008–39, 2008–29 I.R.B. 143, an issuer under certain circumstances may remedy an inadvertent
non-egregious failure to comply with the modified endowment contract rules under § 7702A.
C. By letter dated [Insert date], Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B. 1 [or successor
Rev. Proc., if applicable], a request for this Agreement covering [Insert number] modified endowment contracts identified on
Exhibit A attached to this Agreement (the “Contracts”).
D. Taxpayer intended that each of the Contracts not be a modified endowment contract under § 7702A. Taxpayer represents that
the Contract[s] is [are] not described in Sec. 4.02 of Rev. Proc. 2008–39 and that the Contracts identified on Exhibit A are eligible
for relief under Rev. Proc. 2008–39.
E. Taxpayer represents that the amount determined under Sec. 5.03 of Rev. Proc. 2008–39 is $ [Insert amount]. Taxpayer
represents that this amount has been computed correctly under the provisions of Rev. Proc. 2008–39.
F. To ensure that the Contract[s] is [are] not treated as [a] modified endowment contract[s], Taxpayer and the Service have entered
into this Agreement.
NOW THEREFORE IT IS HEREBY FURTHER DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SERVICE AS FOLLOWS:
1. In consideration for the agreement of the Service as set forth in Section 2 below, Taxpayer agrees as follows:
(A)
Taxpayer will pay to the Service the amount of $ [Insert amount] at the time and in the manner described in
Section 3 below.
(B)
The amount paid pursuant to Section 1(A) above is not deductible by Taxpayer, nor is such amount refundable,
subject to credit or offset, or otherwise recoverable by Taxpayer from the Service.
(C)
For purposes of Taxpayer’s complying with its reporting and withholding obligations under the Code,
(D)
(i)
neither the investment in the contract for purposes of § 72, nor the premiums paid for purposes of § 7702,
on any Contract can be increased by any portion of the amount set forth in Section 1(A) above. If any such
increases are made, they are entitled to no effect.
(ii)
neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702, on
any Contract can be increased by any portion of the amount which Taxpayer represents to be the income on the
contract for all of the Contracts in the aggregate. If any such increases are made, they are entitled to no effect.
To bring Contract[s] for which the testing period (as defined in Sec. 3.01 of Rev. Proc. 2008–39) will not have
expired on or before the date 90 days after the execution of this Agreement into compliance with § 7702A, either by
an increase in death benefit[s] or the return of the excess premiums and earnings thereon to the Contract holder[s].
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A)
To treat each Contract as having satisfied the requirements of § 7702A during the period from the date of issuance
of the Contract through and including the later of—
(i)
date of the execution of this Agreement, and
(ii)
the date of the corrective actions described in Section 1(D) above;
July 21, 2008
149
2008–29 I.R.B.
(B)
To treat the corrective action described in Section 1(D) above as having no effect on the date the Contract was issued,
entered into, or purchased for purposes of any provision of the Code or the regulations thereunder;
(C)
To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, and/or deposit requirements for
income subject to tax under § 72(e)(10) that was received or deemed received by a Contract holder under a Contract
in a calendar year ending prior to the date of execution of this Agreement; and
(D)
To treat no portion of the amount described in Section 1(A) above as income to the Contract holders.
3. The actions required of Taxpayer in Section 1(D) above shall be taken by Taxpayer no later than 90 days after the date of
execution of this Agreement by the Service. Payment of the amount described in Section 1(A) above shall be made within 60 days
of the date of execution of this Agreement by the Service by check payable to the “United States Treasury,” delivered together with
a copy of this executed Agreement to Internal Revenue Service, Receipt & Control Stop 31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. The Contract holders covered by this Agreement are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of an issuer to
the Contract holders.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that Taxpayer and the Service mutually agree that the matters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that they
have read and agreed to the terms of this document.
[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
This revenue procedure supersedes
Rev. Proc. 2001–42 and Rev. Proc.
2007–19.
2008–29 I.R.B.
SECTION 9. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have 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 1545–1752.
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
OMB control number.
150
Books and records relating to a 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
return information are confidential, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Katherine A. Hossofsky of
the Office of Associate Chief Counsel
(Financial Institutions & Products). For
further information regarding this revenue
July 21, 2008
procedure, contact Branch 4 of that office
at (202) 622–3970 (not a toll-free call).
26 CFR 301.7121–1: Closing agreements.
(Also Part I, Section 7702.)
Rev. Proc. 2008–40
SECTION 1. PURPOSE
This revenue procedure provides a procedure by which an issuer of a life insurance contract may remedy the failure of
one or more contracts to meet the definition of a life insurance contract under
§ 7702(a) or to satisfy the requirements
of § 101(f) of the Internal Revenue Code.
Rev. Rul. 91–17, 1991–1 C.B. 190, is
superseded in part; Notice 99–48, 1999–2
C.B. 429, is superseded.
SECTION 2. BACKGROUND
.01 Definition of a life insurance contract.
(1) Section 7702(a) provides that, for a
contract to qualify as a life insurance contract for Federal income tax purposes, the
contract must be a life insurance contract
under the applicable law and must either—
(a) satisfy the cash value accumulation
test of § 7702(b), or
(b) both meet the guideline premium
requirements of § 7702(c) and fall within
the cash value corridor of § 7702(d).
(2) A contract meets the cash value accumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender
value of the contract may not at any time
exceed the net single premium that would
have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline premium requirements of § 7702(c) if the sum
of the premiums paid under the contract
does not at any time exceed the guideline
premium limitation as of that time. The
guideline premium limitation as of any
date is the greater of the guideline single
premium, or the sum of the guideline level
premiums to that date. The guideline single premium is the premium that would be
required on the date the contract is issued
to fund the future benefits under the contract.
(4) A contract falls within the cash
value corridor of § 7702(d) if the death
July 21, 2008
benefit under the contract at any time is
not less than the applicable percentage
of the cash surrender value, based on the
table set forth in § 7702(d)(2).
(5) Section 7702 is effective for contracts issued after December 31, 1984, in
tax years ending after that date.
.02 Tax treatment of a contract that does
not meet the requirements of § 7702(a).
Section 7702(g)(1)(A) provides that if at
any time a contract that is a life insurance
contract under the applicable law does not
meet the definition of a life insurance contract under § 7702(a), the income on the
contract for any taxable year of the policyholder is treated as ordinary income received or accrued by the policyholder during such year. Further, § 7702(g)(1)(C)
provides that if, during any taxable year of
the policyholder, a contract that is a life insurance contract under the applicable law
ceases to meet the definition of a life insurance contract under § 7702(a), the income on the contract for all prior taxable
years is treated as received or accrued during the taxable year in which such cessation occurs.
.03 Definition and treatment of a flexible premium life insurance contract. A
flexible premium life insurance contract is
a life insurance contract that provides for
the payment of one or more premiums that
are not fixed by the insurer as to both timing and amount. Section 101(f) provides
that any amount paid by reason of the death
of the insured under a flexible premium
life insurance contract is excluded from
gross income only if the contract satisfies
either (1) the guideline premium limitation and the applicable percentage of cash
value test of § 101(f)(1)(A)(i) and (ii), or
(2) the cash value test of § 101(f)(1)(B).
The limitations of § 101(f) generally apply
to contracts issued before January 1, 1985.
.04 Recordkeeping, reporting, withholding, and deposit requirements for
failed contracts. The issuer of a contract
that fails to satisfy the requirements of
§ 7702(a) or § 101(f) may have recordkeeping, reporting, withholding, and deposit obligations.
An issuer that fails to meet these obligations also may be subject to penalties. See
Rev. Rul. 91–17 (concerning failures to
satisfy the requirements of § 7702(a)).
.05 Authority to enter into closing
agreements. Under § 7121, the Secretary
is authorized to enter into an agreement
151
in writing with any person relating to the
liability of such person (or of the person or
estate for whom he acts) in respect of any
internal revenue tax for any period. Such
an agreement is generally final and conclusive, except upon a showing of fraud
or malfeasance, or misrepresentation of a
material fact.
.06 Correction procedure for failures to
satisfy the requirements of § 7702(a).
Rev. Rul. 91–17, concludes that if
a contract fails to meet the definition of
a life insurance contract under § 7702(a),
then the holder of the contract is deemed
to have received a nonperiodic distribution as ordinary income under § 7702(g) or
(h), and the issuer is subject to the recordkeeping, reporting, withholding, and deposit requirements applicable to nonperiodic distributions. In addition, Rev. Rul.
91–17 states that the Internal Revenue Service (Service) will waive civil penalties for
an issuer’s failure to satisfy those requirements if, prior to June 3, 1991, the issuer
requested and, in a timely fashion, executed a closing agreement under which the
issuer agreed to pay a specified amount.
Notice 99–48, indicated that since June 3,
1991, the Service has continued to exercise its authority under § 7121 to enter into
closing agreements as set out in Rev. Rul.
91–17. Notice 99–48 also set forth the
rates to be used for the purpose of computing the amount due pursuant to such a
closing agreement. As a matter of practice, the Service has entered into closing
agreements to address contracts that failed
to satisfy the requirements of § 101(f), as
well.
.07 Changes to correction procedures.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how various correction procedures — including
those for correcting the failure of a contract
to satisfy the requirements of § 7702(a)
— may be improved. This revenue procedure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Most significantly, this revenue
procedure (1) sets forth a model closing
agreement for issuers that seek relief, and
(2) provides alternative calculations of the
amount due under the closing agreement.
SECTION 3. SCOPE
This revenue procedure applies to any
issuer of one or more contracts that qual-
2008–29 I.R.B.
ified as life insurance contracts under
the applicable law, but otherwise failed
to meet the definition of a life insurance
contract under § 7702(a) or to meet the
requirements of § 101(f). For purposes of
this revenue procedure, the term “issuer”
is any company that issues a contract that
is intended to satisfy the definition of a
life insurance contract under § 7702 or
§ 101(f). The term also includes a company that insures a contract holder under
a contract originally issued by another
company.
SECTION 4. PROCEDURE
.01 Request for ruling. An issuer that
seeks relief under this revenue procedure
must submit a request for a ruling that
meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any successor). Additionally, the submission must
contain the following information:
(1) the policy number for each contract;
(2) a description of the defects that
caused the contracts to fail to comply with
§ 7702 or § 101(f); and
(3) a description of the administrative
procedures the issuer has implemented to
prevent additional failures to meet the requirements of § 7702 or § 101(f) in the future.
.02 Closing agreement. In the case of a
failure to meet the guideline premium requirements of § 7702(c), the issuer must
submit a proposed closing agreement, in
triplicate, executed by the issuer, in the
same form as the model closing agreement
in section 5 of this revenue procedure. The
amount shown in Section 1(A) of the proposed closing agreement is the amount required to be paid (as determined under section 4.03 of this revenue procedure) for all
of the contracts covered by the agreement.
In the case of any other failure, the issuer may propose amendments to the proposed closing agreement set forth in section 5 of this revenue procedure, including
the amount required to be paid, as appropriate on a case-by-case basis.
.03 Determination of amount required
to be paid with regard to a contract.
(1) In general. The amount required
to be paid with regard to a contract under
this section 4.03 of this revenue procedure depends on the amount of excess
earnings with respect to the contract. For
a contract with excess earnings greater
2008–29 I.R.B.
than $5,000, the amount required to be
paid is the amount determined based on
income on the contract under section
4.03(2) of this revenue procedure; for a
contract with excess earnings less than or
equal to $5,000, the amount required to
be paid is the amount determined based
on excess earnings under section 4.03(3)
of this revenue procedure. In lieu of the
amount determined under section 4.03(2)
or section 4.03(3) of this revenue procedure, however, the issuer may elect to pay
the amount determined based on excess
premiums under section 4.03(4) of this
revenue procedure.
(2) Amount determined based on income on the contract. The amount required to be paid with regard to a contract
with excess earnings greater than $5,000
is the amount determined based on income
on the contract. This amount is equal to
(i) the amount of tax that would have been
owed by the contract holder if the contract holder were treated as receiving the
income on the contract, plus (ii) any interest with regard to such tax. For this purpose, the income on the contract is determined in the manner set forth in section
4.03(5)(a) of this revenue procedure; the
tax rate is assumed to equal the applicable
percentage for the contract determined under section 3.11 of Rev. Proc. 2008–39,
page 143, this Bulletin; and the amount
of interest is the amount computed under
§ 6621(a)(2) as if the amounts treated as
received by the contract holder as income
on the contract caused underpayments of
tax in the appropriate years.
(3) Amount determined based on excess
earnings. The amount required to be paid
with regard to a contract with excess earnings less than or equal to $5,000 is the
amount determined based on excess earnings. This amount is equal to the amount
of tax that would have been owed by the
contract holder if the contract holder were
treated as receiving the excess earnings on
the contract. For this purpose, the excess
earnings on the contract is the amount determined under section 4.03(5)(b) of this
revenue procedure; the tax rate is assumed
to equal the applicable percentage for the
contract determined under section 3.11 of
Rev. Proc. 2008–39, and the amount
of interest is the amount computed under
§ 6621(a)(2) as if the amounts treated as
received by the contract holder as excess
152
earnings caused underpayments of tax in
the appropriate years.
(4) Amount determined based on excess
premiums. In lieu of the amount determined based on income on the contract
set forth in section 4.03(2) of this revenue procedure or the amount determined
based on excess earnings set forth in section 4.03(3) of this revenue procedure, as
applicable, an issuer may elect to pay an
amount with regard to a contract equal to
100% of the excess premiums as defined
in section 4.03(5)(c) of this revenue procedure.
(5) Definitions.
(a) Income on the contract. The income on the contract is the amount determined with regard to the contract under
§ 7702(g)(1)(B).
(b) Excess earnings. The excess earnings for a contract is equal to the amount
obtained by multiplying—
(i) the sum of a contract’s excess premiums for a contract year and its cumulative
excess earnings for all prior contract years,
by
(ii) the applicable earnings rate as
set forth in section 3.07 of Rev. Proc.
2008–39. (For contract years before 1988,
the applicable earnings rate is the rate determined in a manner consistent with the
formulas set forth in section 3.07 of Rev.
Proc. 2008–39 for contract years after
2007.)
(c) Excess premiums. The excess premiums with regard to a contract is equal
to the highest amount by which the total
premiums paid under the contract exceed
the guideline premium limitations under
§ 7702(c) at any time the contract is in
force.
.04 Payment of amount. The issuer
is required to pay the amount determined
under section 4.03 of this revenue procedure within 60 days of the date of execution of the closing agreement by the Service. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05 Correction of contracts. With respect to each contract that is in force on the
effective date of the closing agreement, to
the extent necessary to bring the contract
into compliance with § 7702, the issuer is
July 21, 2008
required, no later than 90 days after the
date of execution of the closing agreement
with the Service, either (1) to increase the
death benefit to not less than an amount
that will ensure compliance with § 7702 or
§ 101(f), as applicable, or (2) to refund to
the contract holder the excess of the sum of
the premiums paid as of the effective date
of the closing agreement over the guideline premium limitation as of that date. If
the sum of the premiums paid does not exceed the guideline premium limitation, no
corrective action is necessary.
.06 Required representations. The submission must include representations to
the effect that (1) the issuer is within the
scope of section 3 of this revenue procedure; (2) the issuer properly computed the
amount required to be paid with regard to
the contracts in accordance with section
4.03 of this revenue procedure; and (3) the
issuer has brought the contracts into compliance with the requirements of § 7702 or
§ 101(f), as applicable, or will do so within
the time period specified in the model
closing agreement set forth in section 5
of this revenue procedure. The representations must be executed under penalties
of perjury by an appropriate party (as set
forth in section 7.01 of Rev. Proc. 2008–1
(or its successor). The issuer must retain
documentation available for audit to support the representations.
.07 Electronic submissions. The information required under section 4.01 of this
revenue procedure may be submitted to the
Service electronically, in read-only format,
on a CD-ROM. Adobe Portable Document
format is a suitable format. Other formats
may be arranged on a case-by-case basis.
The issuer must provide a total of three
CD-ROMs, one for each of the three copies
of the closing agreement.
SECTION 5. MODEL CLOSING
AGREEMENT
Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER § 7702 [Insert “or § 101(f)” if applicable]
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to § 7121 of the Internal Revenue Code (the “Code”) by
and between [Insert Taxpayer name, address and EIN number] (“Taxpayer”) and the Commissioner of Internal Revenue (the
“Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more contracts that were intended to qualify as life insurance contracts under § 7702 [Insert
“or § 101(f)” if applicable]. For each contract, however, Taxpayer accepted and retained premiums that exceeded the contract’s
guideline premium limitations. As a result, the contract[s] failed to satisfy the requirements of § 7702 [Insert “or § 101(f)” if
applicable].
B. Pursuant to Rev. Proc. 2008–40, 2008–29 I.R.B. 151, the Service under certain circumstances will waive civil penalties for
failure of a taxpayer to satisfy the recordkeeping, reporting, withholding, or deposit requirements for income received or deemed
received under § 7702(g).
C. By letter dated [Insert date] Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B. 1 [or successor
if applicable], a request for this Agreement covering [Insert number] of Taxpayer’s life insurance contracts identified on Exhibit
A attached to this Agreement (the “Contracts”).
D. Taxpayer represents that the failure[s] described in A above are eligible for relief under Rev. Proc. 2008–40.
E. Taxpayer represents that the amount determined under section 4.03 of Rev. Proc. 2008–40 is $ [Insert amount]. Taxpayer
represents that this amount has been computed correctly under the provisions of Rev. Proc. 2008–40.
F. To ensure that the Contracts satisfy the requirements of § 7702(a) [Insert “or § 101(f)” if applicable], Taxpayer and the
Service have entered into this Agreement.
NOW THEREFORE IT IS HEREBY FURTHER DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SERVICE AS FOLLOWS:
1. In consideration for the agreement of the Service as set forth in Section 2 below, Taxpayer agrees as follows:
(A)
To pay the Service the amount of $ [Insert amount] at the time and in the manner described in Section 3 below.
(B)
The amount paid pursuant to Section 1(A) above is not deductible, nor is such amount refundable, subject to credit
or offset, or otherwise recoverable from the Service.
(C)
For purposes of complying with Taxpayer’s reporting and withholding obligations under the Code,
July 21, 2008
153
2008–29 I.R.B.
(D)
(i)
neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702
[Insert “or § 101(f)” if applicable], on any Contract can be increased by any portion of the amount set forth
in Section 1(A) above. If any such increases are made, they are entitled to no effect.
(ii)
neither the investment in the contract, for purposes of § 72, nor the premiums paid, for purposes of § 7702
[Insert “or § 101(f)” if applicable], on any Contract can be increased by any portion of the amount which
Taxpayer represents to be the income on the contract for all of the Contracts in the aggregate. If any such
increases are made, they are entitled to no effect.
With respect to each Contract that is in force on the effective date of this Agreement, to the extent necessary in order
to bring such Contract into compliance with § 7702 [Insert “or §101(f)” if applicable], no later than 90 days after
the date of execution of this Agreement by the Service:
(i)
If the sum of the premiums paid as of the effective date of this Agreement exceeds the guideline premium
limitation as of such date, Taxpayer will take the following corrective action:
(a) Increase the death benefit to not less than an amount that will ensure compliance with § 7702 [Insert
“or § 101(f)” if applicable], or
(b) Refund to the Contract holder the amount of such excess, with interest at the Contract’s interest crediting
rate; or
(ii)
(E)
If the sum of the premiums paid as of the effective date of this Agreement does not exceed the guideline
premium limitation of § 7702 [insert “or § 101(f)” if applicable] as of such date, to take no corrective action.
With respect to any Contract which terminated by reason of the death of the insured (i) prior to the date this
Agreement is executed by the Service and Taxpayer and (ii) at a time when the premiums paid exceeded the amounts
necessary to keep the Contracts in compliance with the requirements of § 7702 [Insert “or § 101(f)” if applicable]
guideline premium limitation for the Contract, Taxpayer will pay the Contract holder, or the Contract holder’s estate,
the amount of such excess with interest.
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A)
To treat each Contract that is still in force as of the effective date of this Agreement as having satisfied the
requirements of § 7702 [Insert “or § 101(f)” if applicable] during the period from the date of issuance of the
Contract through and including the later of (i) the date of the execution of this Agreement by the Service or (ii) the
date of corrective action described in Section 1(D) with respect to that Contract;
(B)
To treat each Contract that terminated prior to the effective date of this Agreement as having satisfied the
requirements of § 7702 [Insert “or § 101(f)” if applicable] during the period from date of issuance of the Contract
through and including the date of the Contract’s termination;
(C)
To treat the failure(s) described above, and any corrective action described in Section 1(D) or 1(E) above, as having
no effect on the date the Contract was issued, entered into, or purchased for purposes of any provision of the
Code or regulations thereunder;
(D)
To treat any amount paid prior to the effective date of this Agreement to any beneficiary under a Contract by
reason of the death of the insured as paid under a life insurance contract for purposes of the exclusion from gross
income under § 101(a)(1);
(E)
To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, or deposit requirements for
income deemed received by Contract holders due to the Contract’s failure to satisfy the requirements of § 7702
[Insert “or 101(f)” if applicable]; and
(F)
To treat no portion of the amount described in Section 1(A) above as income to the Contract holders.
3. Any action required of Taxpayer in Section 1(D) or 1(E) above shall be taken by Taxpayer no later than 90 days after the
date of execution of this Agreement by the Service. Payment of the amount described in Section 1(A) above shall be made within
60 days after the date of execution of this Agreement by the Service by check payable to the “United States Treasury,” delivered
together with a copy of this executed Agreement, to Internal Revenue Service, Receipt & Control Stop 31, 201 W. Rivercenter
Blvd., Covington, KY 41011.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. Contract holders of the Contracts covered
by this Agreement are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of
Taxpayer to the Contract holders.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
2008–29 I.R.B.
154
July 21, 2008
6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that the Service and Taxpayer mutually agree that the matters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that they
have read and agreed to the terms of this document.
[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 91–17, 1991–1 C.B. 190, is
superseded in part to set forth new terms
and conditions under which the Service
will enter into a closing agreement to remedy the failure of a contract to qualify as
a life insurance contract; Notice 99–48 is
superseded.
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have 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 1545–1752.
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
OMB control number.
Books and records relating to a collection of information must be retained as
July 21, 2008
long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and
return information are confidential, as required by 26 U.S.C. 6103.
92–25, 1992–1 C.B. 741, is superseded;
Notice 2000–9, 2000–1 C.B. 449, is obsolete.
DRAFTING INFORMATION
.01 Definition and tax treatment of a
variable contract.
(1) Section 817(d) defines the term
“variable contract” to mean a contract that
(a) provides for the allocation of all or part
of the amounts received under the contract
to an account that, pursuant to state law or
regulations, is segregated from the general
asset accounts of the company, and (b)
provides for the payment of annuities, or
is a life insurance contract, or provides for
funding of insurance on retired lives. In
the case of an annuity contract or a contract that provides funding of insurance on
retired lives, the amounts paid in or the
amounts paid out are required to reflect the
investment return and the market value of
the segregated asset account. In the case
of a life insurance contract, the amount of
the death benefit (or the period of coverage) must be adjusted on the basis of the
investment return and the market value of
the segregated asset account.
(2) Section 817(h) of the Code provides
that a variable contract (other than a pension plan contract) based on a segregated
The principal author of this revenue
procedure is Melissa S. Luxner of the Office of Associate Chief Counsel (Financial
Institutions & Products). For further information regarding this revenue procedure,
contact Branch 4 of that office at (202)
622–3970 (not a toll-free call).
26 CFR 301.7121–1: Closing agreements.
(Also Part I, Section 817; 1.817–5.)
Rev. Proc. 2008–41
SECTION 1. PURPOSE
This revenue procedure provides a procedure by which an issuer of a variable
contract may remedy an inadvertent failure
of a variable contract to satisfy the diversification requirements of § 817(h) of the
Internal Revenue Code. Rev. Rul. 91–17,
1991–1 C.B. 190, is amplified; Rev. Proc.
155
SECTION 2. BACKGROUND
2008–29 I.R.B.
asset account shall not be treated as an annuity, endowment, or life insurance contract if the investments made by the account are not adequately diversified in accordance with regulations prescribed by
the Secretary.
(3) Section 1.817–5(a)(1) provides that
a variable contract is treated as based on
a segregated asset account for a calendar
quarter period if amounts received under
the contract (or earnings thereon) are allocated to the account at any time during the period. Section 1.817–5(e) of the
Income Tax Regulations provides that a
“segregated asset account” consists of all
assets the investment return and market
value of each of which must be allocated
in an identical manner to any variable contract invested in any of such assets. Section 1.817–5(g) illustrates the application
of this provision.
(4) Section 1.817–5(a) provides that, if
a variable contract that is a life insurance
contract under applicable law is not treated
as a life insurance or endowment contract
under § 7702(a), the income on the contract for any taxable year of the policyholder is treated as ordinary income received or accrued by the policyholder during such year in accordance with § 7702(g)
and (h). Likewise, if a variable contract
is not treated as an annuity contract under
§ 72, the regulation provides that the income on the contract for any taxable year
of the policyholder shall be treated as ordinary income received or accrued by the
policyholder during such year in the same
manner as a life insurance or endowment
contract under § 7702(g) and (h).
.02 Diversification requirements.
(1) Section 1.817–5(b)(1) provides that
the investments of a segregated asset account are adequately diversified for purposes of § 817(h) only if—
(a) No more than 55% of the value of
the total assets of the account is represented by any one investment;
(b) No more than 70% of the value of
the total assets of the account is represented by any two investments;
(c) No more than 80% of the value of
the total assets of the account is represented by any three investments, and
(d) No more than 90% of the value of
the total assets of the account is represented by any four investments.
For purposes of § 1.817–5, all securities of
the same issuer, all interests in the same
2008–29 I.R.B.
real property project, and all interests in the
same commodity are each treated as a single investment. In the case of government
securities, each government agency or instrumentality is treated as a separate issuer.
(2) Section 817(h)(2) provides a safe
harbor under which the investments of a
segregated asset account are adequately
diversified for purposes of § 817(h) if
(a) the account meets the requirements of
§ 851(b)(3), and (b) no more than 55% of
the value of the total assets of the account
are assets described in § 851(b)(3)(A)(i)
(i.e., cash, cash items (including receivables), Government securities, and securities of other regulated investment
companies).
(3) Under § 1.817–5(c)(1), a segregated
asset account that satisfies the requirements of § 1.817–5(b) as of the last day
of any calendar quarter period (or within
30 days after that last day) is considered
adequately diversified for that period.
.03 Recordkeeping, reporting, withholding, and deposit requirements for
nondiversified contracts.
An issuer of a variable contract that fails
to satisfy the requirements of § 817(h) may
have recordkeeping, reporting, withholding, and deposit obligations. An issuer that
fails to meet these obligations also may be
subject to penalties. See Rev. Rul. 91–17.
.04 Authority to enter into closing
agreements. Under § 7121, the Secretary
is authorized to enter into an agreement
in writing with any person relating to the
liability of such person (or of the person
or estate for whom he acts) in respect of
any internal revenue tax for any period.
Such agreement is generally final and conclusive, except upon a showing of fraud
or malfeasance, or misrepresentation of a
material fact.
.05 Correction procedure for failure to
satisfy the diversification requirements of
§ 817(h).
(1) Section 1.817–5(a)(2) provides that,
in the event of an inadvertent failure to
diversify, the investments of a segregated
asset account are nevertheless treated as
satisfying the diversification requirements
of § 1.817–5(b) for one or more periods
if —
(a) the issuer or holder of the variable
contract shows that the failure to satisfy the
diversification requirements was inadvertent;
156
(b) the investments of the account
satisfy the diversification requirements
within a reasonable item after discovery
of the failure; and
(c) the issuer or holder agrees to make
such adjustments or pay such amounts as
the Commissioner may require.
For this purpose (and for purposes of this
revenue procedure), income on the contract is computed under § 7702(g)(1)(B),
without regard to § 7702(g)(1)(C), and is
computed using the period or periods of
nondiversification instead of the “taxable
year” referred to in § 7702(g)(1)(B). Thus,
for example, income attributable to each
segregated asset account on which a contract is based (including accounts that at
all times were adequately diversified) is included in the computation of income on the
contract.
(2) Rev. Proc. 92–25, 1992–1 C.B.
741, set forth the procedure by which an
issuer of a variable contract could request
the relief described in § 1.817–5(a)(2)
with regard to an inadvertent failure to
satisfy the diversification requirements
of § 817(h). Among the requirements
set forth in Rev. Proc. 92–25 was a requirement that the issuer pay an amount
under the closing agreement based on all
the income on the annuity contracts that
invested in the nondiversified accounts,
including income with regard to accounts
that were adequately diversified.
(3) Notice 2000–9, 2000–1 C.B. 449,
reminded issuers of variable annuity contracts that the special rules of § 817(h)(3)
and § 1.817–5(b)(3), concerning diversification of accounts with respect to variable
life insurance contracts, do not apply with
respect to variable annuity contracts. Notice 2000–9 provided a one-time procedure
to cure diversification failures that resulted
from a misapplication of that rule. That
procedure applied to requests for closing
agreement relief that were received on or
before August 1, 2000.
.06 Changes to correction procedure.
In Notice 2007–15, 2007–7 I.R.B. 503,
the Service requested comments as to how
various correction procedures — including
those for inadvertent failures to satisfy the
diversification requirements of § 817(h) —
may be improved. This revenue procedure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Most significantly, this revenue
procedure (1) updates the model closing
July 21, 2008
agreement set forth in Rev. Proc. 92–25,
and (2) provides both an alternative computation of the amount due under the closing agreement and an overall limit on the
amount that must be paid.
SECTION 3. SCOPE
This revenue procedure applies to any
issuer of a variable contract that inadvertently failed to satisfy the diversification requirements of § 817(h), provided the issuer is entitled to relief under
§ 1.817–5(a)(2). For purposes of this
revenue procedure, the term “issuer” is
any company that issues a contract that
is a variable contract under § 817(d) and
is intended to satisfy the diversification
requirements of § 817(h). The term also
includes a company that insures a contract
holder under a contract originally issued
by another company.
SECTION 4. PROCEDURE
.01 Request for ruling. An issuer that
seeks relief under this revenue procedure
must submit a request for a ruling that
meets the requirements of Rev. Proc.
2008–1, 2008–1 I.R.B. 1 (or any successor). Additionally, the submission must —
(1) identify the period or periods during
which the investments of the segregated
asset account did not satisfy the diversification requirements;
(2) show that the failure to diversify was
inadvertent;
(3) demonstrate that the investments
of the account were brought into compliance with the diversification requirements
within a reasonable time after discovery
of the failure; and
(4) if the amount required to be paid is
determined under section 4.03(2) of this
revenue procedure, describe the method
used to compute the amount of income that
all holders of contracts based on the account would be treated as receiving during the period or periods of nondiversification if the account were not treated as adequately diversified under §1.817–5(a)(2).
(This computation is to be made without
regard to contracts that were completely
surrendered during the nondiversification
period.) Otherwise, indicate whether the
amount required to be paid was determined
under section 4.03(3) or section 4.04(4) of
this revenue procedure.
July 21, 2008
.02 Closing agreement. The issuer must
also submit a proposed closing agreement,
in triplicate, executed by the issuer, using the model closing agreement in section 6 of this revenue procedure. The
amount shown in Section 1(A) of the proposed closing agreement is the amount determined under section 4.03 of this revenue
procedure for all of the contracts covered
by the agreement.
.03 Determination of amount required
to be paid.
(1) In general. Except as provided in
section 4.03(4) of this revenue procedure,
the issuer must remit to the Service the
lesser of the amount determined based
on income on the contracts under section
4.03(2) of this revenue procedure, or the
amount determined based on the amount
by which the segregated asset account was
nondiversified under section 4.03(3) of
this revenue procedure.
(2) Amount determined based on income on the contracts. The amount required to be paid based on income on
the contracts is the sum of the following
amounts for variable annuity contracts and
for variable life insurance or endowment
contracts, as applicable:
(a) With regard to variable annuity contracts, an amount equal to the sum of —
(i) 20% of income on annuity contracts
from which payments have not been made
as of the end of the period; plus
(ii) 15% of income on annuity contracts
from which payments have been made as
of the end of the period; plus
(iii) any interest computed under
§ 6621(a)(2) as if the amounts determined
under sections 4.03(2)(a)(i) and (ii) of this
revenue procedure were underpayments
by the contract holders for their tax year(s)
containing the period(s) of nondiversification; and
(b) With regard to variable life insurance or endowment contracts, an amount
equal to the sum of —
(i) 28% of the income on the contracts;
plus
(ii) any interest computed under
§ 6621(a)(2) as if the amount determined
under section 4.03(2)(b)(i) of this revenue
procedure were an underpayment by the
contract holders for their tax year(s) containing the period(s) of nondiversification.
(3) Amount determined based on the
amount by which the segregated asset account was nondiversified. The amount
157
determined based on the amount by which
the segregated asset account was nondiversified is an amount equal to 100%
of the amount by which the account’s
interest in a single investment exceeded
the applicable limitation of § 1.817–5(b).
Thus, for example, if a segregated asset
account’s investment in a single security exceeded both the 55% limitation of
§ 1.817–5(b)(1)(i)(A) and the 70% limitation of § 1.817–5(b)(1)(i)(B), the amount
determined under this section 4.03(3) is
the total amount by which the investment
would need to be reduced in order to satisfy both requirements and comply with
the rules of § 817(h) and § 1.817–5(b).
This amount is determined as of the 30th
day after the last day of each calendar
quarter for which the segregated asset
account was not diversified. If nondiversification spans multiple calendar quarters,
the amount payable under this section is
based on the calendar quarter that produces the highest amount.
(4) Limitation on amount required to
be paid. Notwithstanding section 4.03(2)
or section 4.03(3) of this revenue procedure, as applicable, the amount required
to be paid shall not exceed the lesser of
$5,000,000 or 5% of the total asset value
of the segregated asset account on the 30th
day after the last day of each calendar
quarter for which the segregated asset account was not diversified. If nondiversification spans multiple calendar quarters,
the amount payable under this section is
based on the calendar quarter that produces
the highest amount. The limitation applies
on a per segregated asset account basis,
and is not increased by any interest computed under § 6621(a)(2).
.04 Payment of amount. The issuer
is required to pay the amount determined
under section 4.03 of this revenue procedure within 60 days of the date of execution of the closing agreement by the Service. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
.05 Correction of contracts. The issuer
is required to have satisfied the requirements of § 817(h) and § 1.817–5(b) of the
regulations within a reasonable time after
2008–29 I.R.B.
the discovery of the failure to satisfy those
requirements.
.06 Required representations. The submission must include representations to
the effect that (1) the issuer is within the
scope of section 3 of this revenue procedure; (2) the issuer properly computed the
amount required to be paid with regard to
the contracts in accordance with section
4.03 of this revenue procedure; and (3) the
issuer has brought the contracts into com-
pliance with the requirements of § 817(h)
and § 1.817–5(b) of the regulations. The
representations must be executed under
penalties of perjury by an appropriate
party (as set forth in section 7.01 of Rev.
Proc. 2008–1 (or its successor)). The issuer must retain documentation available
for audit to support the representations.
.07 Electronic submission. The information required under this revenue procedure may be submitted to the Service
electronically, in read-only format, on a
CD-ROM. Adobe Portable Document is a
suitable format. Other formats may be arranged on a case-by-case basis. The issuer
must provide a total of three CD-ROMs,
one for each of the three copies of the closing agreement.
SECTION 6. MODEL CLOSING
AGREEMENT
Effective as of date executed by Internal
Revenue Service
CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER SECTION 817(h)
THIS CLOSING AGREEMENT (“Agreement”) is made pursuant to section 7121 of the Internal Revenue Code (the “Code”), by
and between [Insert Taxpayer name, address and EIN] (“Taxpayer”) and the Commissioner of Internal Revenue (the “Service”).
WHEREAS,
A. Taxpayer is the issuer of one or more variable contracts, as defined in § 817(d) (without regard to § 817(h)) (the “Contracts”),
which are based, in whole or in part, on a segregated asset account (the “Account”) and that provides for the allocation of amounts
received under the variable contracts to the Account.
B. Pursuant to Rev. Proc. 2008–41, 2008–29 I.R.B. 155, the Service may treat the investments of a segregated asset account on
which a variable contract is based as satisfying the diversification requirements of § 817(h) and § 1.817–5(b) of the Income Tax
Regulations for periods during which there was an inadvertent failure to diversify.
C. By letter dated [Insert date] Taxpayer submitted to the Service, pursuant to Rev. Proc. 2008–1, 2008–1 I.R.B. 1 [or successor,
if applicable] and Rev. Proc. 2008–41 a request for this Closing Agreement that [Insert account name] (the Account) be treated
as adequately diversified under § 817(h) for the period [Insert period of nondiversification] (“the period of nondiversification”).
D. Taxpayer represents that the failure of the Account to satisfy the requirements of § 817(h) is eligible for relief under Rev.
Proc. 2008–41.
E. Taxpayer represents that the failure of the investments in the Account to satisfy the requirements of § 1.817–5(b) was discovered on [Insert date], and the investments came into compliance with those requirements on [Insert date].
F. Taxpayer represents that the amount determined under section [Insert 4.03(2), (3) or (4), as appropriate] of Rev. Proc.
2008–41 is $ [Insert amount]. Taxpayer represents that this amount has been computed correctly under the provisions of Rev.
Proc. 2008–41.
G. To ensure that variable contracts that provide for the allocation of amounts received thereunder to Account are treated as
annuity, endowment, or life insurance contracts, as applicable, Taxpayer and the Service have entered into this Agreement.
NOW THEREFORE IT IS HEREBY DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SERVICE AS FOLLOWS:
1. In consideration for the agreement of the Service as set forth in section 2 below, Taxpayer agrees as follows:
(A)
Taxpayer will pay the Service $ [Insert amount] at the time and manner described in section 3 below.
(B)
The amount paid pursuant to section 1(A) above is not deductible by Taxpayer, nor is such amount refundable,
subject to credit or offset, or otherwise recoverable from the Service;
(C)
For purposes of Taxpayer’s complying with its reporting and withholding obligations under the Code,
(i)
neither the investment in the contract for purposes of § 72, not the premiums paid for purposes of section
§ 7702 on any Contract can be increased by any portion of the amount set for the in section 1(A) above. If any
such increases are made, they are entitled to no effect.
2008–29 I.R.B.
158
July 21, 2008
(ii)
neither the investment in the contract for purposes of § 72, nor the premiums paid, for purposes of § 7702 on
any Contract can be increased by any portion of the amount which Taxpayer represents to be the income on the
contract for all of the Contracts in the aggregate. If any such increases are made, they are entitled to no effect.
2. In consideration of the agreement of Taxpayer set forth in Section 1 above, the Service agrees as follows:
(A)
To treat the investments of the Account as adequately diversified for purposes of § 817(h) during the period of
nondiversification;
(B)
To treat no portion of the amount described in Section 1(A) above as income to the Contract holders;
(C)
To treat the failure(s) described above, and any corrective action described in Section 1(A) above, as having no
effect on the date the Contracts were issued, entered into or purchased for purposes of any provision of the Code
or regulations thereunder; and
(D)
To waive civil penalties for failure of Taxpayer to satisfy the reporting, withholding, or deposit requirements for
income deemed received by Contract holders due to the Contracts’ failure to satisfy the requirements of § 817.
3. Payment of the amount described in Section 1(A) above shall be made within 60 days of the date of execution of this Agreement by the Service. This payment must be made by check payable to the “United States Treasury,” delivered, together with a copy
of this executed Agreement, to Internal Revenue Service Center, Receipt & Control Stop 31, 201 W. Rivercenter Blvd., Covington,
KY 41011.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. Holders of contracts based on the Account
are intended beneficiaries of this Agreement. This Agreement shall not be construed as creating any liability of Taxpayer to the
holders of the contracts based on the Account.
5. Neither the Service nor Taxpayer shall endeavor by litigation or other means to attack the validity of this Agreement.
6. This Agreement may not be cited or relied upon as precedent in the disposition of any other matter.
NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that the Service and Taxpayer mutually agree that the matters so determined shall be final and conclusive, except as follows:
1. The matter to which this Agreement relates may be reopened in the event of fraud, malfeasance, or misrepresentation of
material facts set forth herein.
2. This Agreement is subject to sections of the Code that expressly provide that effect be given to their provisions (including
any stated exception for Code § 7122) notwithstanding any other law or rule of law.
3. To the extent this Agreement relates to any tax period after the date on which it is executed, it is subject to any law, enacted
after such date, that applies to that tax period.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate. By signing, the above parties certify that
they have read and agreed to the terms of this document.
[Insert Taxpayer name]
Date Signed:
By:
Title:
COMMISSIONER OF INTERNAL REVENUE
Date Signed:
By:
Title:
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
July 21, 2008
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 91–17, 1991–1 C.B. 190, is
amplified to provide terms and conditions
and a model closing agreement for use by
taxpayers seeking the relief described in
§ 1.817–5(a)(2) of the regulations; Rev.
159
Proc. 92–25, 1992–1 C.B. 741, is superseded; Notice 2000–9, 2000–1 C.B. 449,
is obsolete.
SECTION 9. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have been reviewed
2008–29 I.R.B.
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1752.
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
OMB control number.
Books and records relating to a 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
return information are confidential, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Melissa S. Luxner of the Office of Associate Chief Counsel (Financial
Institutions & Products). For further information regarding this revenue procedure,
contact Branch 4 of that office at (202)
622–3970 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of correct tax liability.
(Also Part 1, §§ 101, 7702.)
Rev. Proc. 2008–42
SECTION 1. PURPOSE
This revenue procedure provides a
procedure by which an issuer of a life
insurance contract may automatically
obtain a waiver, under § 7702(f)(8) or
§ 101(f)(3)(H) of the Internal Revenue
Code, for certain reasonable errors that
caused the contract to fail to satisfy the
requirements of § 7702 or § 101(f), as
applicable. Rev. Rul. 91–17, 1991–1 C.B.
190, is amplified.
SECTION 2. BACKGROUND
.01 Definition of a life insurance contract.
(1) Section 7702(a) provides that, for a
contract to qualify as a life insurance contract for Federal income tax purposes, the
contract must be a life insurance contract
under the applicable law and must either—
2008–29 I.R.B.
(a) satisfy the cash value accumulation
test of § 7702(b), or
(b) both meet the guideline premium
requirements of § 7702(c) and fall within
the cash value corridor of § 7702(d).
(2) A contract meets the cash value accumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender
value of the contract may not at any time
exceed the net single premium that would
have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline premium requirements of § 7702(c) if the sum
of the premiums paid under the contract
does not at any time exceed the guideline
premium limitation as of that time. The
guideline premium limitation as of any
date is the greater of the guideline single
premium, or the sum of the guideline level
premiums to that date. The guideline single premium is the premium that would be
required on the date the contract is issued
to fund the future benefits under the contract.
(4) A contract falls within the cash
value corridor of § 7702(d) if the death
benefit under the contract at any time is
not less than the applicable percentage
of the cash surrender value, based on the
table set forth in § 7702(d)(2).
(5) Section 7702 is effective for contracts issued after December 31, 1984, in
tax years ending after that date.
.02 Definition and tax treatment of a
flexible premium life insurance contract.
A flexible premium life insurance contract
is a life insurance contract that provides for
the payment of one or more premiums that
are not fixed by the insurer as to both timing and amount. Section 101(f) provides
that any amount paid by reason of the death
of the insured under a flexible premium
life insurance contract is excluded from
gross income only if the contract satisfies
either (1) the guideline premium limitation and the applicable percentage of cash
value test of § 101(f)(1)(A)(i) and (ii), or
(2) the cash value test of § 101(f)(1)(B).
The limitations of § 101(f) generally apply
to contracts issued before January 1, 1985.
.03 Correction procedure for reasonable errors. Section 7702(f)(8) provides
that if a taxpayer establishes to the satisfaction of the Secretary that the requirements
of § 7702(a) for any contract year were not
satisfied due to reasonable error, and rea-
160
sonable steps are being taken to remedy the
error, the Secretary may waive the failure
to satisfy those requirements. The Internal Revenue Service (Service) may waive
civil penalties for failure to satisfy the reporting, withholding, and deposit requirements for income deemed received under
§ 7702(g) and (h), as well. See Rev. Rul.
91–17. Section 101(f)(3)(H) provides similar authority for the Secretary to waive
the failure to satisfy the requirements of
§ 101(f). In order to request a waiver under
§ 7702(f)(8) or § 101(f)(3)(H), a taxpayer
generally must request a letter ruling from
the Service under the procedures set forth
in Rev. Proc. 2008–1, 2008–1 I.R.B. 1 (or
any successor).
.04 Changes to correction procedure.
In Notice 2007–15, 2007–1 C.B. 503, the
Service requested comments as to how various correction procedures — including
those for obtaining a waiver with respect to
errors that are reasonable within the meaning of § 7702(f)(8) or § 101(f)(3)(H) —
may be improved. This revenue procedure incorporates a number of changes that
taxpayers suggested in response to Notice
2007–15. Specifically, this revenue procedure provides a simplified procedure under
which a taxpayer may obtain a waiver for
a limited class of errors under these provisions without incurring the cost of requesting a letter ruling.
SECTION 3. SCOPE
.01 In general. This revenue procedure
applies to any issuer of a life insurance
contract that failed to satisfy the requirements of § 7702 or § 101(f), as applicable,
due to an eligible reasonable error, provided reasonable steps are taken to remedy
the error.
.02 Issuer. For purposes of this revenue
procedure, the term “issuer” is any company that issues a contract that is intended
to satisfy the requirements of § 7702 or
§ 101(f). The term also includes a company that insures a contract holder under a
contract originally issued by another company.
.03 Eligible reasonable error. An eligible reasonable error for purposes of this
revenue procedure exists if: (1) the issuer
has compliance procedures with specific,
clearly articulated provisions that if followed would have prevented the contract
from failing to satisfy the requirements of
July 21, 2008
§ 7702 or § 101(f); (2) an employee or independent contractor of the issuer acted, or
failed to act, in accordance with the compliance procedures; and (3) such act or failure to act was inadvertent, and was the sole
reason that the contract failed to satisfy the
requirements of either § 7702 or § 101(f).
Thus, for example, the term eligible reasonable error includes an employee’s incorrect recording of the age or gender of
the insured, or of the incorrect amount or
time of payment of the insured’s premium
payment.
.04 Reasonable steps to remedy. The
requirement that reasonable steps be taken
to remedy the eligible reasonable error is
satisfied for purposes of this revenue procedure if the issuer refunds excess premium with interest and/or increases the
death benefit on the contract no later than
the date on which the issuer files the federal income tax return to which the tax return attachment described in section 4.03
of this revenue procedure is affixed. The
remedy required under this section 3.04 of
this revenue procedure does not include
changes to the issuer’s compliance procedures, since the definition of an eligible
reasonable error under section 3.03 of this
revenue procedure requires that the system already have specific, clearly articulated procedures that if followed would
have prevented the error.
.05 Non-eligible errors. Although the
automatic waiver provided under this revenue procedure is not available with respect to an error that is not described in
section 3.03 of this revenue procedure, relief may be available under other correction procedures. For example, neither a
defective legal interpretation nor a computer programming error would satisfy the
requirement of section 3.03(1) of this revenue procedure that the issuer’s compliance procedures, if followed, would have
prevented the error. If such an error is reasonable, however, the issuer may request
a waiver by letter ruling under the procedures set forth in Rev. Proc. 2008–1 (or
any successor). In addition, errors that are
not reasonable may be eligible for correction by closing agreement under the procedure set forth in Rev. Proc. 2008–40, page
151, this Bulletin.
July 21, 2008
SECTION 4. PROCEDURE
.01 Automatic waiver. The failure of
one or more life insurance contracts to satisfy the requirements of § 7702 or § 101(f),
as applicable, due to reasonable error will
be treated as waived pursuant to the authority of § 7702(f)(8) or § 101(f)(3)(H), as applicable, provided the issuer (1) is within
the scope of section 3.01 of this revenue
procedure, and (2) files both the waiver
statement described in section 4.02 and the
tax return attachment described in section
4.03 of this revenue procedure.
.02 Waiver statement. An automatic
waiver for a reasonable error described
in section 3 of this revenue procedure is
available to an issuer only if it files with
the Service, in duplicate, a statement entitled “Automatic Waiver Request under
Rev. Proc. 2008–42” in which the issuer
(1) provides a brief description of the error
and the steps taken to remedy the error; (2)
lists the policy numbers of the life insurance contracts for which it seeks an automatic waiver; and (3) provides the representations described in section 4.04 of this
revenue procedure. This statement should
be signed and dated, and submitted to the
Commissioner of Internal Revenue, Attn:
CC:FIP:4, Room 3550, 1111 Constitution
Avenue, NW, Washington, DC 20224, no
later than the date on which the issuer files
the federal income tax return to which the
tax return attachment described in section
4.03 of this revenue procedure is affixed.
.03 Tax return attachment. In addition,
the issuer must attach to its timely-filed
(including extensions) Federal income
tax return, for the taxable year during
which the issuer relies upon this revenue procedure to obtain a § 101(f)(3)(H)
or § 7702(f)(8) waiver, a statement that
reads: “Issuer has submitted an Automatic Waiver Request under section 4.02
of Rev. Proc. 2008–42 for certain errors
that caused one or more life insurance
contracts it issued to fail to comply with
§ 7702(f)(8) or § 101(f) of the Internal
Revenue Code. An issuer filing its return
electronically should attach this statement
as an Adobe Portable Document format
(PDF) file named “Rev. Proc. 2008–42.”
.04 Representations. The waiver statement required under section 4.02 of this
revenue procedure must include representations to the effect that the issuer is within
161
the scope of section 3 of this revenue procedure and that the issuer is otherwise entitled to the requested waiver. The representations must be executed under penalties of
perjury by an appropriate party (as set forth
in section 7.01 of Rev. Proc. 2008–1 (or its
successor)). The issuer must retain documentation available for audit to support the
representations.
.05 Electronic submissions. The waiver
statement required under section 4.02
of this revenue procedure may be submitted to the Service electronically, in
read-only format, on a CD-ROM. Adobe
Portable Document format is a suitable
format. Other formats may be arranged
on a case-by-case basis. The issuer must
provide a total of two CD-ROMs.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective July
21, 2008, the date of its publication in the
Internal Revenue Bulletin.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Rul. 91–17, 1991–1 C.B. 190,
is amplified to provide an automatic procedure by which an issuer of a life insurance contract may automatically obtain a
waiver for certain reasonable errors that
caused the contract to fail to satisfy the requirements of § 7702 or § 101, as applicable.
SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information in this
revenue procedure have 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 1545–1752.
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
OMB control number.
Books and records relating to a 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
return information are confidential, as required by 26 U.S.C. 6103.
2008–29 I.R.B.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Josephine H. Firehock of the
2008–29 I.R.B.
Office of Associate Chief Counsel (Financial Institutions & Products). For further
information regarding this revenue pro-
162
cedure, contact Branch 4 of that office at
(202) 622–3970 (not a toll-free call).
July 21, 2008
| File Type | application/pdf |
| File Title | IRB 2008-29 (Rev. July 21, 2008) |
| Subject | Internal Revenue Bulletin |
| Author | SE:W:CAR:MP:T |
| File Modified | 2011-02-07 |
| File Created | 2011-02-07 |