[Federal Register Volume 67, Number 131 (Tuesday, July 9, 2002)]
[Proposed Rules]
[Pages 45414-45437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-17042]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[REG-164754-01]
RIN 1545-BA44


Split-Dollar Life Insurance Arrangements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
income, employment, and gift taxation of split-dollar life insurance 
arrangements. The proposed regulations will provide needed guidance to 
persons who enter into split-dollar life insurance arrangements. This 
document also provides notice of a public hearing on the proposed 
regulations.

DATES: Written or electronic comments must be received by October 7, 
2002. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for October 23, 2002, must be received by 
October 9, 2002.

ADDRESSES: Send submissions to CC:ITA:RU (REG-164754-01), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-164754-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC or sent electronically, via the IRS Internet site 
at www.irs.gov/regs. The public hearing will be held in room 4718, 
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the section 61 regulations, 
please contact Elizabeth Kaye at (202) 622-4920; concerning the section 
83 regulations, please contact Erinn Madden at (202) 622-6030; 
concerning the section 301 regulations, please contact Krishna 
Vallabhaneni at (202) 622-7550; concerning the section 7872 
regulations, please contact Rebecca Asta at (202) 622-3940; and 
concerning the application of these regulations to the Federal gift 
tax, please contact Lane Damazo at (202) 622-3090. To be placed on the 
attendance list for the hearing, please contact LaNita M. Vandyke at 
(202) 622-7180.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S Washington, 
DC 20224. Comments on the collection of information should be received 
by September 9, 2002. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collections of information in this proposed regulation are in 
Sec. 1.7872-15(d)(2)(ii) and (j)(3)(ii). These collections of 
information are required by the IRS to verify consistent treatment by 
the borrower and lender of split-dollar loans with nonrecourse or 
contingent payments. In addition, in the case of a split-dollar loan 
that provides for nonrecourse payments, the collections of information 
are required to obtain a benefit. The likely respondents are parties 
entering into split-dollar loans with nonrecourse or contingent 
payments.
    Estimated total annual reporting and/or recordkeeping burden: 
32,500 hours.
    Estimated average annual burden hours per respondent and/or 
recordkeeper: 17 minutes.
    Estimated number of respondents and/or recordkeepers: 115,000.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to

[[Page 45415]]

respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or 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 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

1. Current Law

    Section 61 provides that gross income includes all income from 
whatever source derived. Section 1.61-2(d) describes the taxation of 
premiums paid by an employer or service recipient for life insurance on 
the life of an employee or independent contractor if the proceeds of 
the life insurance are payable to the beneficiary of the employee.
    Section 83 provides rules for taxing a transfer of property in 
connection with the performance of services. Generally, if property is 
transferred to any person other than the service recipient in 
connection with the performance of services, the excess of the fair 
market value of such property (determined without regard to lapse 
restrictions) over the amount paid for such property is included in the 
gross income of the service provider in the first taxable year in which 
the service provider's rights in such property are either transferable 
or not subject to a substantial risk of forfeiture, whichever is 
applicable. Under Sec. 1.83-1(a)(2), the cost of life insurance 
protection under a life insurance contract, retirement income contract, 
endowment contract, or other contract providing life insurance 
protection generally is taxable under section 61 and the regulations 
thereunder during the period such contract is substantially nonvested 
(that is, prior to the time when rights to the contract are either 
transferable or not subject to a substantial risk of forfeiture). The 
cost of such life insurance protection is the reasonable net premium 
cost, as determined by the Commissioner, of the current life insurance 
protection (as defined in Sec. 1.72-16(b)(3)) provided by such 
contract. Under Sec. 1.83-3(e), in the case of a transfer of a life 
insurance contract, retirement income contract, endowment contract, or 
other contract providing life insurance protection, only the cash 
surrender value of the contract is considered property.
    Section 163(h) disallows a deduction for personal interest paid or 
accrued during the taxable year for taxpayers other than corporations. 
For purposes of section 163(h), personal interest is any interest other 
than the following: interest paid or accrued on indebtedness properly 
allocable to a trade or business; any investment interest within the 
meaning of section 163(d); any interest which is taken into account 
under section 469 in computing passive income or loss; any qualified 
residence interest; any interest payable under section 6601 on any 
unpaid portion of the tax imposed by section 2001 for the period during 
which an extension of time for payment is in effect; and any interest 
allowable for deduction under section 221 (relating to interest on 
education loans).
    Section 264(a)(1) provides that no deduction is allowed for 
premiums on any life insurance policy if the taxpayer is directly or 
indirectly a beneficiary under the policy. Section 264(a)(2) provides 
that no deduction is allowed, except as provided in section 264(e), for 
any interest paid or accrued on indebtedness with respect to a life 
insurance policy owned by the taxpayer and covering the life of any 
individual.
    Section 301 provides that distributions of property made by a 
corporation to a shareholder with respect to its stock may constitute a 
dividend includible in the gross income of the shareholder.
    Sections 163(e) and 1271 through 1275 provide rules for the 
treatment of original issue discount (OID) on debt instruments. In 
general, the holder and the issuer of a debt instrument take the OID 
into account as it accrues on the basis of the debt instrument's yield 
to maturity.
    Section 7872 provides rules for certain direct and indirect below-
market loans enumerated in section 7872(c)(1). The legislative history 
of section 7872 states that the term loan is to be interpreted broadly 
for purposes of section 7872, potentially encompassing ``any transfer 
of money that provides the transferor with a right to repayment.'' H.R. 
Rep. 98-861, 98th Cong., 2d Sess. 1018 (1984). In general, section 7872 
recharacterizes a below-market loan (a loan in which the interest rate 
charged is less than the applicable Federal rate (AFR)) as an arm's-
length transaction in which the lender makes a loan to the borrower at 
the AFR, coupled with a payment or payments to the borrower sufficient 
to fund all or part of the interest that the borrower is treated as 
paying on that loan. The amount, timing, and characterization of the 
imputed payments to the borrower under a below-market loan depend on 
the relationship between the borrower and the lender and whether the 
loan is characterized as a demand loan or a term loan. For example, in 
the case of a compensation-related below-market loan within the meaning 
of section 7872(c)(1)(B), the imputed payments are treated as payments 
of compensation.
    Section 7872 generally provides that, in the case of any below-
market loan that is a gift or demand loan subject to section 7872, 
forgone interest is treated as transferred from the lender to the 
borrower and retransferred from the borrower to the lender as interest 
on the last day of the calendar year for each year the loan is 
outstanding.
    Section 7872 generally provides that, in the case of any below-
market loan that is a term loan subject to section 7872, the lender is 
treated as having transferred, on the day the loan is made, an amount 
equal to the excess of the amount loaned over the present value of all 
payments which are required to be made under the terms of the loan. 
This amount is treated as retransferred by the borrower to the lender 
as OID over the term of the loan.
    Rev. Rul. 64-328 (1964-2 C.B. 11) and Rev. Rul. 66-110 (1966-1 C.B. 
12) address the Federal income tax treatment of a split-dollar life 
insurance arrangement under which an employer and an employee join in 
the purchase of a life insurance contract on the life of the employee 
and provide for the allocation of policy benefits. The rulings conclude 
that all economic benefits provided by the employer to the employee 
under such an arrangement are taxed to the employee. Thus, under the 
rulings, the employee generally must include in compensation income for 
each taxable year during which the arrangement remains in effect (i) 
the annual cost of the life insurance protection provided to the 
employee, reduced by any payments made by the employee for such life 
insurance protection, (ii) any policy owner dividends or similar 
distributions provided to the employee under the life insurance 
contract (including any dividends, as described in Rev. Rul. 66-110, 
used to provide additional policy benefits), and (iii) any other 
economic benefits provided to the employee under the arrangement. 
Neither ruling distinguishes, for tax purposes, between an arrangement 
in which the employer owns the life insurance contract (as in a so-
called endorsement arrangement) and an arrangement in which the 
employee owns the contract (as in a so-called collateral assignment 
arrangement).

[[Page 45416]]

    Rev. Rul. 79-50 (1979-1 C.B. 138) provides that, in a split-dollar 
life insurance arrangement similar to the one described in Rev. Rul. 
64-328 between a corporation and a shareholder, the shareholder must 
include in income the value of the insurance protection in excess of 
the premiums paid by the shareholder, and must treat such amounts as 
provided in section 301(c).
    Notice 2001-10 (2001-1 C.B. 459) set forth rules for the taxation 
of split-dollar life insurance arrangements in which the employee has 
an interest in the cash surrender value of the life insurance contract 
(so-called equity split-dollar life insurance arrangements). Notice 
2001-10 generally provided, under specified conditions, for the 
taxation of equity split-dollar life insurance arrangements under 
either the rules of sections 61 and 83 or the rules of section 7872.
    Notice 2002-8 (2002-4 I.R.B. 398), which revoked Notice 2001-10, 
provides guidance with respect to split-dollar life insurance 
arrangements entered into before the date final regulations concerning 
such arrangements are published in the Federal Register. The notice 
indicates that taxpayers may treat current life insurance protection 
provided under such an arrangement as an economic benefit and that the 
IRS will not treat the arrangement as having been terminated if the 
parties continue to treat and report the value of the current life 
insurance protection in that manner. Notice 2002-8 provides that, 
alternatively, the parties may treat the premiums or other payments as 
loans from the sponsor of the arrangement (typically, the employer) to 
the other party. In these cases, the IRS will not challenge a 
taxpayer's reasonable efforts to comply with the requirements of 
sections 1271 through 1275 and section 7872. In addition, all payments 
by the sponsor from the inception of the arrangement (reduced by any 
repayments to the sponsor) before the first taxable year in which the 
payments are treated as loans must be treated as loans entered into at 
the beginning of such first taxable year.\1\
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    \1\ Notice 2002-8 also provides that an employer and employee 
may continue to use the P.S. 58 rates set forth in Rev. Rul. 55-747 
(1955-2 C.B. 228), which was revoked by Notice 2001-10, only with 
respect to split-dollar life insurance arrangements entered into 
before January 28, 2002, in which a contractual arrangement between 
the employer and employee provides that the P.S. 58 rates will be 
used to determine the value of the current life insurance protection 
provided to the employee (or to the employee and one or more 
additional persons). Taxpayers may not use the P.S. 58 rates for 
``reverse'' split-dollar life insurance arrangements or for split-
dollar life insurance arrangements outside of the compensatory 
context.
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    Notice 2002-8 also describes the anticipated proposed regulations 
on split-dollar life insurance arrangements. The notice states that the 
rules would require taxation of a split-dollar life insurance 
arrangement under one of two mutually exclusive regimes: an economic 
benefit regime and a loan regime.

2. Overview of the Proposed Regulations

    These proposed regulations provide guidance on the taxation of 
split-dollar life insurance arrangements, including equity split-dollar 
life insurance arrangements. The proposed regulations apply for 
purposes of Federal income, employment, and gift taxes. For example, 
the proposed regulations apply to a split-dollar life insurance 
arrangement between an employer and an employee, between a corporation 
and a shareholder, and between a donor and a donee.
Definition of Split-Dollar Life Insurance Arrangement
    The proposed regulations generally define a split-dollar life 
insurance arrangement as any arrangement (that is not part of a group 
term life insurance plan described in section 79) between an owner of a 
life insurance contract and a non-owner of the contract under which 
either party to the arrangement pays all or part of the premiums, and 
one of the parties paying the premiums is entitled to recover (either 
conditionally or unconditionally) all or any portion of those premiums 
and such recovery is to be made from, or is secured by, the proceeds of 
the contract. This definition is intended to apply broadly and will 
cover an arrangement, for example, under which the non-owner of a 
contract provides funds directly to the owner of the contract with 
which the owner pays premiums, as long as the non-owner is entitled to 
recover (either conditionally or unconditionally) all or a portion of 
the funds from the contract proceeds (for example, death benefits) or 
has an interest in the contract to secure the right of recovery. In 
addition, the amount to be recovered by the party paying the premiums 
need not be determined by reference to the amount of those premiums. 
The definition is not intended to cover the purchase of an insurance 
contract in which the only parties to the arrangement are the policy 
owner and the life insurance company acting only in its capacity as 
issuer of the contract.
    A special rule applies in the case of an arrangement entered into 
in connection with the performance of services. Under this special 
rule, a split-dollar life insurance arrangement is any arrangement 
(whether or not described in the general rule) between an owner and a 
non-owner of a life insurance contract under which the employer or 
service recipient pays, directly or indirectly, all or any portion of 
the premiums and the beneficiary of all or any portion of the death 
benefit is designated by the employee or service provider or is any 
person whom the employee or service provider would reasonably be 
expected to name as beneficiary. (Like the general rule, this special 
rule does not apply to any arrangement covered by section 79.) This 
special rule also applies to arrangements between a corporation and 
another person in that person's capacity as a shareholder in the 
corporation under which the corporation pays, directly or indirectly, 
all or any portion of the premiums and the beneficiary of all or a 
portion of the death benefit is a person designated by, or would be 
reasonably expected to be designated by, the shareholder. As in the 
case of the general definition, the special rule is not intended to 
cover the purchase of an insurance contract in which the only parties 
to the arrangement are the policy owner and the life insurance company 
acting only in its capacity as issuer of the contract.
Mutually Exclusive Regimes
    As indicated in Notice 2002-8, the proposed regulations provide two 
mutually exclusive regimes for taxing split-dollar life insurance 
arrangements. A split-dollar life insurance arrangement (as defined in 
the proposed regulations) is taxed under either the economic benefit 
regime or the loan regime. The proposed regulations provide rules that 
determine which tax regime applies to a split-dollar life insurance 
arrangement.
    Under the economic benefit regime (generally set forth in 
Sec. 1.61-22 of the proposed regulations), the owner of the life 
insurance contract is treated as providing economic benefits to the 
non-owner of the contract. The economic benefit regime generally will 
govern the taxation of endorsement arrangements. In addition, a special 
rule requires the economic benefit regime to apply (and the loan regime 
not to apply) to any split-dollar life insurance arrangement if (i) the 
arrangement is entered into in connection with the performance of 
services, and the employee or service provider is not the owner of the 
life insurance contract, or (ii) the

[[Page 45417]]

arrangement is entered into between a donor and a donee (for example, a 
life insurance trust) and the donee is not the owner of the life 
insurance contract.
    Under the loan regime (generally set forth in Sec. 1.7872-15 of the 
proposed regulations), the non-owner of the life insurance contract is 
treated as loaning premium payments to the owner of the contract. 
Except for specified arrangements, the loan regime applies to any 
split-dollar loan (as defined in the proposed regulations). The loan 
regime generally will govern the taxation of collateral assignment 
arrangements.
    Thus, in contrast to Rev. Rul. 64-328 and Rev. Rul. 66-110, the 
proposed regulations generally provide substantially different tax 
consequences to the parties depending on which party owns the life 
insurance contract.
    The proposed regulations also require both the owner and the non-
owner of a life insurance contract that is part of a split-dollar life 
insurance arrangement (as defined either in the general rule or the 
special rule) to fully and consistently account for all amounts under 
the arrangement under the rules of either Sec. 1.61-22 or Sec. 1.7872-
15.
    For purposes of both the general rule and the special rule, unless 
the non-owner's payments are certain payments made in consideration for 
economic benefits, general Federal income, employment, and gift tax 
principles apply to the arrangement. For example, if an employer pays 
premiums on a contract owned by an employee and the payments are not 
split-dollar loans under Sec. 1.7872-15, the employee must include the 
full amount of the payments in gross income at the time they are paid 
by the employer to the extent that the employee's rights to the life 
insurance contract are substantially vested. Also, to the extent an 
owner's repayment obligation is waived, cancelled, or forgiven at any 
time under an arrangement that prior to the cancellation of 
indebtedness was treated as a split-dollar loan, the owner and non-
owner must account for the amount waived, cancelled, or forgiven in 
accordance with the relationship between the parties. Thus, if the 
arrangement were in a compensatory context, the owner of the contract 
(the employee) and the non-owner (the employer) would account for the 
amount as compensation. See OKC Corp. and Subsidiaries v. Commissioner, 
82 T.C. 638 (1984) (whether the cancellation of a debt is ordinary 
income to the debtor depends upon the nature of the payment); Newmark 
v. Commissioner, 311 F.2d 913 (2d Cir. 1962) (discharge of indebtedness 
constituted a payment for services in an employment situation).

Owners and Non-Owners

    The proposed regulations provide rules for determining the owner 
and the non-owner of the life insurance contract. The owner is the 
person named as the policy owner. If two or more persons are designated 
as the policy owners, the first-named person generally is treated as 
the owner of the entire contract. However, if two or more persons are 
named as the policy owners and each such person has an undivided 
interest in every right and benefit of the contract, those persons are 
treated as owners of separate contracts. For example, if an employer 
and an employee jointly own a life insurance contract and share equally 
in all rights and benefits under the contract, they are treated as 
owning two separate contracts (and, ordinarily, neither contract would 
be treated as part of a split-dollar life insurance arrangement).
    The general rule that the person named as the policy owner is 
treated as the owner of the life insurance contract is subject to two 
exceptions involving situations in which the only benefits available 
under the split-dollar life insurance arrangement would be the value of 
current life insurance protection (that is, so-called non-equity 
arrangements). Under the first exception, an employer or service 
recipient is treated as the owner of the contract under a split-dollar 
life insurance arrangement that is entered into in connection with the 
performance of services if, at all times, the only economic benefits 
available to the employee or service provider under the arrangement 
would be the value of current life insurance protection. Similarly, a 
donor is treated as the owner of a life insurance contract under a 
split-dollar life insurance arrangement that is entered into between a 
donor and a donee (for example, a life insurance trust) if, at all 
times, the only economic benefits available to the donee under the 
arrangement would be the value of current life insurance protection. 
The proposed regulations reserve on the issue of the consequences of a 
modification to these arrangements (for example, such as subsequently 
providing the employee or donee with an interest in the cash value of 
the life insurance contract). The IRS and the Treasury Department 
request comments on the rule the final regulations should adopt 
regarding the consequences of modifying these arrangements.
    The non-owner is any person other than the owner of the life 
insurance contract having any direct or indirect interest in such 
contract (other than a life insurance company acting solely in its 
capacity as issuer of a life insurance contract). For example, an 
employee whose spouse is designated by the employer as the beneficiary 
of a life insurance contract that is owned by the employer would have 
an indirect interest in the contract and, therefore, would be treated 
as a non-owner.

3. Taxation Under the Economic Benefit Regime

a. In General
    Section 1.61-22(d) provides that, as a general rule for split-
dollar life insurance arrangements that are taxed under the economic 
benefit regime, the owner of the life insurance contract is treated as 
providing economic benefits to the non-owner of the contract, and those 
economic benefits must be accounted for fully and consistently by both 
the owner and the non-owner. The value of the economic benefits, 
reduced by any consideration paid by the non-owner to the owner, is 
treated as transferred from the owner to the non-owner. The tax 
consequences of that transfer will depend on the relationship between 
the owner and the non-owner. Thus, the transfer may constitute a 
payment of compensation, a distribution under section 301, a gift, or a 
transfer having a different tax character.
Non-Equity Split-Dollar Life Insurance Arrangements
    Under a non-equity split-dollar life insurance arrangement, the 
owner is treated as providing current life insurance protection 
(including paid-up additions) to the non-owner. The amount of the 
current life insurance protection provided to the non-owner for a 
taxable year equals the excess of the average death benefit of the life 
insurance contract over the total amount payable to the owner under the 
split-dollar life insurance arrangement. The total amount payable to 
the owner is increased by the amount of any outstanding policy loan. 
The cost of the current life insurance protection provided to the non-
owner in any year equals the amount of the current life insurance 
protection provided to the non-owner multiplied by the life insurance 
premium factor designated or permitted in guidance published in the 
Internal Revenue Bulletin. For example, assume that employer R is the 
owner of a $1,000,000 life insurance contract that is part of a split-
dollar life insurance arrangement between R and employee E. Under the 
arrangement, R pays all of the $10,000 annual premiums and is entitled 
to receive the greater of its

[[Page 45418]]

premiums or the cash surrender value of the contract when the 
arrangement terminates or E dies. Assume that through year 10 of the 
arrangement R has paid $100,000 of premiums and that in year 10 the 
cost of term insurance for E is $1.00 for $1,000 of insurance and the 
cash surrender value of the contract is $200,000. Under Sec. 1.61-22, 
in year 10, E must include in compensation income $800 ($1,000,000--
$200,000, or $800,000 payable to R, multiplied by .001 (E's premium 
rate factor)). If, however, E paid $300 of the premium, E would include 
$500 in compensation income.
    The Treasury Department and the IRS request comments on whether 
there is a need for more specific guidance in computing the cost of a 
death benefit that varies during the course of a taxable year. Comments 
are requested concerning, for example, whether a convention requiring 
the amount of the death benefit to be recomputed on a quarterly or 
semi-annual basis would properly balance the accurate computation of 
the death benefit against compliance and administrative burdens.
Equity Split-Dollar Life Insurance Arrangements
    Under Sec. 1.61-22(d)(3), the owner and the non-owner also must 
account fully and consistently for any right in, or benefit of, a life 
insurance contract provided to the non-owner under an equity split-
dollar life insurance arrangement. For example, in a compensatory 
context in which the contract is owned by the employer, the employee 
must include in gross income the value of any interest in the cash 
surrender value of the contract provided to the employee during a 
taxable year.
    This result is consistent with the conclusion in Rev. Rul. 66-110 
that an employee must include in gross income the value of all economic 
benefits provided under a split-dollar life insurance arrangement. More 
broadly, this result is consistent with the fact that a non-owner who 
has an interest in the cash surrender value of a life insurance 
contract under an equity split-dollar life insurance arrangement is in 
a better economic position than a non-owner who has no such interest 
under a non-equity arrangement.
    In general, a mere unfunded, unsecured promise to pay money in the 
future--as in a standard nonqualified deferred compensation plan 
covering an employee--does not result in current income. However, a 
non-owner's interest in a life insurance contract under an equity 
split-dollar life insurance arrangement is less like that of an 
employee covered under a standard nonqualified deferred compensation 
arrangement and more like that of an employee who obtains an interest 
in a specific asset of the employer (such as where the employer makes 
an outright purchase of a life insurance contract for the benefit of 
the employee). The employer's right to a return of its premiums, which 
characterizes most equity split-dollar life insurance arrangements, 
affects only the valuation of the employee's interest under the 
arrangement and, therefore, the amount of the employee's current 
income.
    Specific guidance regarding valuation of economic benefits under an 
equity split-dollar life insurance arrangement is reserved in 
Sec. 1.61-22, pending comments from interested parties concerning an 
appropriate valuation methodology and views on whether such a 
methodology should be adopted as a substantive rule or as a safe 
harbor. Any proposal for a specific methodology should be objective and 
administrable. One potential approach for valuation might involve 
subtracting from current premium payments made by the contract owner 
the net present value of the amount to be repaid to the owner in the 
future.
Other Tax Consequences
    Because Sec. 1.61-22(c) treats one party to the split-dollar life 
insurance arrangement as the owner of the entire contract, the non-
owner has no investment in the contract under section 72(e). Thus, no 
amount paid by the non-owner under a split-dollar life insurance 
arrangement, whether or not designated as a premium, and no amount 
included in the non-owner's gross income as an economic benefit, is 
treated as investment in the contract under section 72(e)(6) for the 
non-owner. However, as described below, special rules apply in the case 
of a transfer of the contract from the owner to the non-owner.
    Any premium paid by the owner is included in the owner's investment 
in the contract under section 72(e)(6). However, no premium payment and 
no economic benefit includible in the non-owner's gross income is 
deductible by the owner (except as otherwise provided under section 83 
when the contract is transferred to the non-owner and the transfer is 
taxable in accordance with the rules of that section). Any amount paid 
by the non-owner to the owner for any economic benefit is included in 
the owner's gross income. Such amount is also included in the owner's 
investment in the contract (but only to the extent not otherwise so 
included by reason of having been paid by the owner as a premium or 
other consideration for the contract).
b. Taxation of Amounts Received Under the Life Insurance Contract
    Any amount received under the life insurance contract (other than 
an amount received by reason of death) and provided, directly or 
indirectly, to the non-owner is treated as though paid by the insurance 
company to the owner and then by the owner to the non-owner. This rule 
applies to a policy owner dividend, the proceeds of a specified policy 
loan (as defined in Sec. 1.61-22(e)), a withdrawal, or the proceeds of 
a partial surrender. The owner is taxed on the amount in accordance 
with the rules of section 72. The non-owner (and the owner for gift tax 
and employment tax purposes) must take the amount into account as a 
payment of compensation, a distribution under section 301, a gift, or 
other transfer depending on the non-owner's relationship to the owner. 
However, the amount that must be taken into account is reduced by the 
sum of (i) the value of all economic benefits actually taken into 
account by the non-owner (and the owner for gift tax and employment tax 
purposes) reduced (but not below zero) by the amounts that would have 
been taken into account were the arrangement a non-equity split-dollar 
life insurance arrangement and (ii) any consideration paid by the non-
owner for all economic benefits reduced (but not below zero) by any 
consideration paid by the non-owner that would have been allocable to 
economic benefits provided to the non-owner were the arrangement a non-
equity split-dollar life insurance arrangement. However, the preceding 
sentence applies only to the extent such economic benefits were not 
previously used to reduce an earlier amount received under the 
contract.
    The same result applies in the case of a specified policy loan. A 
policy loan is a specified policy loan to the extent (i) the proceeds 
of the loan are distributed directly from the insurance company to the 
non-owner; (ii) a reasonable person would not expect that the loan will 
be repaid by the non-owner; or (iii) the non-owner's obligation to 
repay the loan to the owner is satisfied, or is capable of being 
satisfied, upon repayment by either party to the insurance company. 
Because the employee is not the owner of the contract, the specified 
policy loan will not be treated as a loan to the employee but as a loan 
to the employer (the owner of the contract), followed by a payment of 
cash compensation from the employer to the employee.
    Amounts received by reason of death are treated differently. Under 
Sec. 1.61-

[[Page 45419]]

22(f), any amount paid to a beneficiary (other than the owner) by 
reason of the death of the insured is excludable from the beneficiary's 
gross income under section 101(a) as an amount received under a life 
insurance contract. This result applies only to the extent that such 
amount is allocable to current life insurance protection provided to 
the non-owner pursuant to the split-dollar life insurance arrangement, 
the cost of which was paid by the non-owner, or the value of which the 
non-owner actually took into account under the rules set forth in 
Sec. 1.61-22. Amounts received by a non-owner in its capacity as a 
lender are generally not amounts received by reason of the death of the 
insured under section 101(a). Cf. Rev. Rul. 70-254 (1970-1 C.B. 31).
c. Transfer of Life Insurance Contract to the Non-Owner
    Section 1.61-22(g) provides rules for the transfer of a life 
insurance contract (or an undivided interest therein) from the owner to 
the non-owner. Consistent with the general rule for determining 
ownership, Sec. 1.61-22(g) provides that a transfer of a life insurance 
contract (or an undivided interest therein) underlying a split-dollar 
life insurance arrangement occurs on the date that the non-owner 
becomes the owner of the entire contract (or the undivided interest 
therein). Thus, a transfer of the contract does not occur merely 
because the cash surrender value of the contract exceeds the premiums 
paid by the owner or the amount ultimately repayable to the owner on 
termination of the arrangement or the death of the insured. In 
addition, there is no transfer of the contract if the owner merely 
endorses a percentage of the cash surrender value of the contract (or 
similar rights in the contract) to the non-owner. Unless and until 
ownership of the contract is formally changed, the owner will continue 
to be treated as the owner for all Federal income, employment, and gift 
tax purposes.
    At the time of a transfer, there generally must be taken into 
account for Federal income, employment, and gift tax purposes the 
excess of the fair market value of the life insurance contract (or the 
undivided interest therein) transferred to the non-owner (transferee) 
over the sum of (i) the amount the transferee pays to the owner 
(transferor) to obtain the contract (or the undivided interest 
therein), (ii) the value of all economic benefits actually taken into 
account by the non-owner (and the owner for gift tax and employment tax 
purposes) reduced (but not below zero) by the amounts that would have 
been taken into account were the arrangement a non-equity split-dollar 
life insurance arrangement, and (iii) any consideration paid by the 
non-owner for all economic benefits reduced (but not below zero) by any 
consideration paid by the non-owner that would have been allocable to 
economic benefits provided to the non-owner were the arrangement a non-
equity split-dollar life insurance arrangement. However, clauses (ii) 
and (iii) of the preceding sentence apply only to the extent those 
economic benefits were not previously used to reduce an earlier amount 
received under the contract. For this purpose, the fair market value of 
the life insurance contract is the cash surrender value and the value 
of all other rights under the contract (including any supplemental 
agreements, whether or not guaranteed), other than the value of the 
current life insurance protection. For example, the fair market value 
of the contract includes the value of a guaranteed right to an above-
market rate of return (to the extent not already reflected in the cash 
surrender value).
    In a transfer subject to section 83, fair market value is 
determined disregarding any lapse restrictions. In addition, the timing 
of the transferee's inclusion is determined under the rules of section 
83. Therefore, a transfer will not give rise to gross income until the 
transferee's rights to the contract (or undivided interest in the 
contract) are substantially vested (unless the transferee makes a 
section 83(b) election). Section 1.83-6(a)(5) of the proposed 
regulations allows the service recipient's deduction at that time.
    Under the general rule, the amount treated as consideration paid to 
acquire the contract under section 72(g)(1) equals the greater of the 
fair market value of the contract or the sum of the amount the 
transferee pays to obtain the contract plus the amount of unrecovered 
economic benefits previously taken into account or paid for by the 
transferee. Thus, these amounts become the transferee's investment in 
the contract under section 72(e) immediately after the transfer.
    In the case of a transfer between a donor and a donee, the amount 
treated as consideration paid by the transferee to acquire the contract 
under section 72(g)(1) to determine the transferee's investment in the 
contract under section 72(e) immediately after the transfer is the sum 
of (i) the amount the transferee pays to obtain the contract, (ii) the 
aggregate of premiums or other consideration paid or deemed to have 
been paid by the transferor, and (iii) the amount of unrecovered 
economic benefits previously either taken into account by the 
transferee (excluding the amount of those benefits that was excludable 
from the transferee's gross income at the time of receipt) or paid for 
by the transferee.
    After a transfer of an entire life insurance contract, the 
transferee becomes the owner for Federal income, employment, and gift 
tax purposes, including for purposes of the split-dollar life insurance 
rules. Thus, if the transferor pays premiums after the transfer, the 
payment of those premiums may be includible in the transferee's gross 
income if the payments are not split-dollar loans under Sec. 1.7872-15. 
After the transfer of an undivided interest in a life insurance 
contract, the transferee is treated as the new owner of a separate 
contract for all purposes. However, if a transfer of a life insurance 
contract or an undivided interest in the contract is made in connection 
with the performance of services and the transfer is not yet taxable 
under section 83 (because rights to the contract or the undivided 
interest are substantially nonvested and no section 83(b) election is 
made), the transferor continues to be treated as the owner of the 
contract.

4. Taxation Under the Loan Regime

a. In General
    Under Sec. 1.7872-15, a payment made pursuant to a split-dollar 
life insurance arrangement is a split-dollar loan and the owner and 
non-owner are treated, respectively, as borrower and lender if (i) the 
payment is made either directly or indirectly by the non-owner to the 
owner; (ii) the payment is a loan under general principles of Federal 
tax law or, if not a loan under general principles of Federal tax law, 
a reasonable person would expect the payment to be repaid in full to 
the non-owner (whether with or without interest); and (iii) the 
repayment is to be made from, or is secured by, either the policy's 
death benefit proceeds or its cash surrender value. The Treasury 
Department and the IRS recognize that, in the earlier years during 
which a split-dollar life insurance arrangement is in effect, policy 
surrender and load charges may significantly reduce the policy's cash 
surrender value, resulting in under-collateralization of a non-owner's 
right to be repaid its premium payments. Nevertheless, so long as a 
reasonable person would expect the payment to be repaid in full, the 
payment is a split-dollar loan under Sec. 1.7872-15. The Treasury 
Department and the IRS believe that Congress generally intended that 
section 7872 would govern the treatment of an arrangement the substance 
of which is a loan from one

[[Page 45420]]

party to another and that there was no congressional intent to make 
section 7872 inapplicable to split-dollar life insurance arrangements 
if the arrangements are, in substance, loans.
    If a payment on a split-dollar loan is nonrecourse to the borrower 
and the loan does not otherwise provide for contingent payments, 
Sec. 1.7872-15 treats the loan as a split-dollar loan that provides for 
contingent payments unless the parties to the split-dollar life 
insurance arrangement provide a written representation with respect to 
the loan to which the payment relates. In general, unless the parties 
represent that a reasonable person would expect that all payments under 
the loan will be made, the loan will be treated as a loan that provides 
for contingent payments. This written representation requirement is 
intended to help ensure that the parties to the arrangement treat the 
payments consistently.
    If a split-dollar loan does not provide for sufficient interest, 
the loan is a below-market split-dollar loan subject to section 7872 
and Sec. 1.7872-15. If the split-dollar loan provides for sufficient 
interest, then, except as provided in Sec. 1.7872-15, the loan is 
subject to the general rules for debt instruments (including the rules 
for OID). In general, interest on a split-dollar loan is not deductible 
by the borrower under sections 264 and 163(h). Section 1.7872-15 
provides special rules for split-dollar loans that provide for certain 
variable rates of interest, contingent interest payments, and lender or 
borrower options. Section 1.7872-15 also provides rules for split-
dollar loans on which stated interest is subsequently waived, 
cancelled, or forgiven by the lender, and for below-market split-dollar 
loans with indirect participants.
b. Treatment of Below-Market Split-Dollar Loans
    If a split-dollar loan is a below-market loan, then, in general, 
the loan is recharacterized as a loan with interest at the AFR, coupled 
with an imputed transfer by the lender to the borrower. The timing, 
amount, and characterization of the imputed transfers between the 
lender and borrower of the loan will depend upon the relationship 
between the lender and the borrower (for example, the imputed transfer 
is generally characterized as a compensation payment if the lender is 
the borrower's employer), and whether the loan is a demand loan or a 
term loan.
    For purposes of Sec. 1.7872-15, a below-market split-dollar loan 
made from a lender to a borrower with a relationship not enumerated in 
section 7872(c)(1)(A), (B), or (C) is treated as a significant-effect 
loan under section 7872(c)(1)(E). However, if the effect of a split-
dollar loan is attributable to the relationship between the lender or 
borrower and an indirect participant (for example, when a split-dollar 
loan is made from an employer to the child of an employee), the below-
market split-dollar loan is restructured as two or more successive 
below-market loans. Any deduction allowable to the indirect participant 
under section 163(d) for investment interest deemed paid is limited to 
the amount of investment interest deemed received by the indirect 
participant.
Split-Dollar Demand Loans
    A split-dollar demand loan is any split-dollar loan that is payable 
in full at any time on the demand of the lender (or within a reasonable 
time after the lender's demand). Each calendar year that a split-dollar 
demand loan is outstanding, the loan is tested to determine if the loan 
provides for sufficient interest. A split-dollar demand loan provides 
for sufficient interest for the calendar year if the rate (based on 
annual compounding) at which interest accrues on the loan's adjusted 
issue price during the year is no lower than the blended annual rate 
for the year. The use of an annual rate, rather than a semiannual rate, 
provides a simplified method to determine whether a split-dollar loan 
provides for sufficient interest and, if the split-dollar loan is 
below-market, to compute the loan's forgone interest.
    In the case of a below-market split-dollar demand loan, the amount 
of forgone interest for a calendar year is the excess of (i) the amount 
of interest that would have been payable on the loan for the calendar 
year if interest accrued on the loan's adjusted issue price at the 
appropriate AFR and were payable annually over (ii) any interest that 
accrues on the loan during the year. In general, this excess amount is 
treated as transferred by the lender to the borrower and retransferred 
as interest by the borrower to the lender at the end of each calendar 
year that the loan remains outstanding.
Split-Dollar Term Loans
    A split-dollar term loan is any loan that is not a split-dollar 
demand loan. A split-dollar term loan does not provide for sufficient 
interest if the amount loaned exceeds the imputed loan amount, which is 
the present value of all payments due under the loan, determined as of 
the date the loan is made, using a discount rate equal to the AFR in 
effect on that date. The AFR used for purposes of the preceding 
sentence must be appropriate for the loan's term (short-term, mid-term, 
or long-term) and the compounding period used in computing the present 
value.
    With respect to a below-market split-dollar term loan, the amount 
of the imputed transfer by the lender to the borrower is the excess of 
the amount loaned over the imputed loan amount. In general, a split-
dollar term loan is treated as having OID equal to the amount of the 
imputed transfer, in addition to any other OID on the loan (determined 
without regard to Sec. 1.7872-15).
    The term of a split-dollar term loan generally is the term stated 
in the split-dollar life insurance arrangement. However, special rules 
apply if the loan is subject to certain borrower or lender options. For 
purposes of determining a loan's term, the borrower or the lender is 
projected to exercise or not exercise an option or combination of 
options in a manner that minimizes the loan's overall yield.
    Special rules also are provided for split-dollar term loans payable 
upon the death of an individual, certain split-dollar term loans that 
are conditioned on the future performance of substantial services by an 
individual, and gift split-dollar term loans. Under Sec. 1.7872-15, 
these split-dollar loans are split-dollar term loans for purposes of 
determining whether the loan provides for sufficient interest. However, 
if the loan does not provide for sufficient interest when the loan is 
made, forgone interest is determined on the loan annually similar to a 
split-dollar demand loan. The rate used to determine the amount of 
forgone interest each year is the AFR based on the term of the loan 
rather than the blended annual rate. A below-market gift split-dollar 
term loan is treated as a term loan for gift tax purposes.
c. Loans That Provide for Contingent Payments
    A split-dollar loan that provides for one or more contingent 
payments is accounted for by the parties under the contingent split-
dollar method, a method similar to the noncontingent bond method 
described in Sec. 1.1275-4(b). Under this method, the lender prepares a 
projected payment schedule that includes all of the noncontingent 
payments and a projected payment for each contingent payment. Any 
contingent payment provided for under the terms of a split-dollar loan 
is projected to resolve to its lowest possible value. However, the 
projected payment schedule must produce a yield that is not less than 
zero. The projected payment schedule is used to determine

[[Page 45421]]

the yield of the split-dollar loan. This yield is then used to 
determine the accruals of interest (OID) on the loan and to determine 
whether the loan is a below-market loan for purposes of section 7872 
and Sec. 1.7872-15. For example, a split-dollar loan providing for 
contingent payments is treated as a below-market split-dollar loan if 
the yield based on the projected payment schedule is less than the 
appropriate AFR.
    If, when a contingency resolves, the actual amount of a contingent 
payment is different than the projected payment, appropriate 
adjustments are made by the parties to reflect the difference when the 
contingency resolves. For example, if a contingent split-dollar loan 
was treated as a below-market split-dollar loan based on the projected 
payment schedule and the actual yield on the loan turns out to be 
greater than the appropriate AFR when the contingency resolves, the 
parties will take appropriate adjustments into account for any prior 
imputed transfers under section 7872 and Sec. 1.7872-15 at that time.
d. Split-Dollar Loans With Stated Interest That Is Subsequently Waived, 
Cancelled or Forgiven
    If a split-dollar loan provides for stated interest that is 
subsequently waived, cancelled or forgiven, appropriate adjustments are 
made by the parties to reflect the difference between the interest 
payable at the stated rate and the interest actually paid by the 
borrower at that time. An adjustment (for example, an imputed transfer 
of compensation) may have consequences for the Federal Insurance 
Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) if 
the adjustment represents wages to the borrower.
e. Payment Ordering Rules
    Payments made by a borrower to a lender pursuant to a split-dollar 
life insurance arrangement are applied in the following order: to 
accrued but unpaid interest (including any OID) on all outstanding 
split-dollar loans in the order the interest accrued; to principal on 
the outstanding split-dollar loans in the order in which the loans were 
made; to payments of amounts previously paid by the lender pursuant to 
the split-dollar life insurance arrangement that were not reasonably 
expected to be repaid; and to any other payment with respect to a 
split-dollar life insurance arrangement. Comments are requested on this 
rule and other alternative rules, which include applying payments to 
both the accrued but unpaid interest and principal on each split-dollar 
loan in the order in which the loans were made, and applying payments 
pro-rata on all existing split-dollar loan balances.

5. Transfer Tax Treatment of Split-Dollar Life Insurance Arrangements

    The proposed regulations will apply for gift tax purposes in 
situations involving private split-dollar life insurance arrangements. 
Thus, if, under the proposed regulations, an irrevocable insurance 
trust is the owner of the life insurance contract underlying the split-
dollar life insurance arrangement, and a reasonable person would expect 
that the donor, or the donor's estate, will recover an amount equal to 
the donor's premium payments, those premium payments are treated as 
loans made by the donor to the trust and are subject to Sec. 1.7872-15. 
In such a case, payment of a premium by the donor is treated as a 
split-dollar loan to the trust in the amount of the premium payment. If 
the loan is repayable upon the death of the donor, the term of the loan 
is the donor's life expectancy determined under the appropriate table 
under Sec. 1.72-9 as of the date of the payment and the value of the 
gift is the amount of the premium payment less the present value 
(determined under section 7872 and Sec. 1.7872-15) of the donor's right 
to receive repayment. If, however, the donor makes premium payments 
that are not split-dollar loans, then the premium payments are governed 
by general gift tax principles. In such a case, with each premium 
payment, the donor is treated as making a gift to the trust equal to 
the amount of that payment.
    Different rules apply, however, if the donor is treated under 
Sec. 1.61-22(c) as the owner of the life insurance contract underlying 
the split-dollar life insurance arrangement and the donor is entitled 
to recover (either conditionally or unconditionally) all or any portion 
of the premium payments and such recovery is to be made from, or is 
secured by, the proceeds of the life insurance contract. Under these 
circumstances, the donor is treated as making a gift of economic 
benefits to the irrevocable insurance trust when the donor makes any 
premium payment on the life insurance contract. For example, assume 
that under the terms of the split-dollar life insurance arrangement, on 
termination of the arrangement or the donor's death, the donor or 
donor's estate is entitled to receive an amount equal to the greater of 
the aggregate premiums paid by the donor or the cash surrender value of 
the contract. In this case, each time the donor pays a premium, the 
donor makes a gift to the trust equal to the cost of the current life 
insurance protection provided to the trust less any premium amount paid 
by the trustee. On the other hand, if the donor or the donor's estate 
is entitled to receive an amount equal to the lesser of the aggregate 
premiums paid by the donor, or the cash surrender value of the 
contract, the amount of the donor's gift to the trust upon the payment 
of a premium equals the value of the economic benefits attributable to 
the trust's entire interest in the contract (reduced by any 
consideration the trustee paid for the interest).
    As discussed earlier, Sec. 1.61-22(c) treats the donor as the owner 
of a life insurance contract even if the donee is named as the policy 
owner if, under the split-dollar life insurance arrangement, the only 
amount that would be treated as a transfer by gift by the donor under 
the arrangement would be the value of current life insurance 
protection. However, any amount paid by a donee, directly or 
indirectly, to the donor for such current life insurance protection 
would generally be included in the donor's gross income.
    Similarly, if the donor is the owner of the life insurance contract 
that is part of the split-dollar life insurance arrangement, amounts 
received by the irrevocable insurance trust (either directly or 
indirectly) under the contract (for example, as a policy owner dividend 
or proceeds of a specified policy loan) are treated as gifts by the 
donor to the irrevocable insurance trust as provided in Sec. 1.61-
22(e). The donor must also treat as a gift to the trust the amount set 
forth in Sec. 1.61-22(g) upon the transfer of the life insurance 
contract (or undivided interest therein) from the donor to the trust.
    The gift tax consequences of the transfer of an interest in a life 
insurance contract to a third party will continue to be determined 
under established gift tax principles notwithstanding who is treated as 
the owner of the life insurance contract under the proposed 
regulations. See, for example, Rev. Rul. 81-198 (1981-2 C.B. 188). 
Similarly, for estate tax purposes, regardless of who is treated as the 
owner of a life insurance contract under these proposed regulations, 
the inclusion of the policy proceeds in a decedent's gross estate will 
continue to be determined under section 2042. Thus, the policy proceeds 
will be included in the decedent's gross estate under section 2042(1) 
if receivable by the decedent's executor, or under section 2042(2) if 
the policy proceeds are receivable by a beneficiary other than the 
decedent's estate and the decedent possessed any incidents of ownership 
with respect to the policy.

[[Page 45422]]

6. Other Applications of These Regulations

    The proposed regulations provide for conforming changes to the 
definition of wages under sections 3121(a), 3231(e), 3306(b), and 
3401(a) and self-employment income under section 1402(a). The rules 
also apply for purposes of characterizing distributions from a 
corporation to a shareholder under section 301.

7. Revenue Rulings To Become Obsolete

    Concurrent with the publication of final regulations relating to 
split-dollar life insurance arrangements in the Federal Register, the 
IRS will obsolete the following revenue rulings with respect to split-
dollar life insurance arrangements entered into after the date the 
final regulations are published in the Federal Register: Rev. Rul. 64-
328 (1964-2 C.B. 11); Rev. Rul. 66-110 (1966-1 C.B. 12); Rev. Rul. 78-
420 (1978-2 C.B. 68) (with respect to income tax consequences); Rev. 
Rul. 79-50 (1979-1 C.B. 138); and Rev. Rul. 81-198 (1981-2 C.B. 188) 
(with respect to income tax consequences). Taxpayers entering into 
split-dollar life insurance arrangements on or before the date of 
publication of the final regulations may continue to rely on these 
revenue rulings to the extent described in Notice 2002-8.
    The Treasury Department and the IRS request comments concerning 
whether any other revenue rulings or guidance published in the Internal 
Revenue Bulletin should be reconsidered in connection with the 
publication of final regulations relating to split-dollar life 
insurance arrangements in the Federal Register.

Proposed Effective Date

    These proposed regulations are proposed to apply to any split-
dollar life insurance arrangement entered into after the date these 
regulations are published as final regulations in the Federal Register. 
In addition, under the proposed regulations, an arrangement entered 
into on or before the date final regulations are published in the 
Federal Register and that is materially modified after that date is 
treated as a new arrangement entered into on the date of the 
modification. Comments are requested regarding whether certain material 
modifications should be disregarded in determining whether an 
arrangement is treated as a new arrangement for purposes of the 
effective date rule. For example, comments are requested whether an 
arrangement entered into on or before the effective date should be 
subject to these rules if the only material modification to the 
arrangement after that date is an exchange of an insurance policy 
qualifying for nonrecognition treatment under section 1035.
    Taxpayers are reminded that Notice 2002-8 provides guidance with 
respect to arrangements entered into before the effective date of these 
regulations.
    In addition, taxpayers may rely on these proposed regulations for 
the treatment of any split-dollar life insurance arrangement entered 
into on or before the date final regulations are published in the 
Federal Register provided that all parties to the split-dollar life 
insurance arrangement treat the arrangement consistently. Thus, for 
example, an owner and a non-owner of a life insurance contract that is 
part of a split-dollar life insurance arrangement may not rely on these 
proposed regulations if one party treats the arrangement as subject to 
the economic benefit rules of Sec. 1.61-22 and the other party treats 
the arrangement as subject to the loan rules of Sec. 1.7872-15. 
Moreover, parties to an equity split-dollar life insurance arrangement 
subject to the economic benefit regime may rely on these proposed 
regulations only if the value of all economic benefits taken into 
account by the parties exceeds the value of the economic benefits the 
parties would have taken into account if the arrangement were a non-
equity split-dollar life insurance arrangement (determined using the 
Table 2001 rates in Notice 2002-8), thereby reflecting the fact that 
such an arrangement provides the non-owner with economic benefits that 
are more valuable than current life insurance protection.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory flexibility assessment is not required. 
It is hereby certified that the collection of information requirements 
in these regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the regulations merely require a taxpayer to prepare a 
written representation that contains minimal information (if the loan 
provides for nonrecourse payments) or a projected payment schedule (if 
the loan provides for contingent payments). In addition, the 
preparation of these documents should take no more than .28 hours per 
taxpayer. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, this notice 
of proposed rulemaking will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments (a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The Treasury Department and IRS specifically request comments on 
the clarity of the proposed rules and how they may be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for October 23, 2002, beginning 
at 10 a.m. in room 4718 of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. 
All visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (signed original and eight (8) copies) by 
October 9, 2002. A period of 10 minutes will be allotted to each person 
for making comments. An agenda showing the schedule of speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are Rebecca 
Asta of the Office of Associate Chief Counsel (Financial Institutions 
and Products), Lane Damazo of the Office of Associate Chief Counsel 
(Passthroughs and Special Industries), Elizabeth Kaye of the Office of 
Associate Chief Counsel (Income Tax and Accounting), Erinn Madden of 
the Office of Associate Chief Counsel (Tax-Exempt and Governmental 
Entities), and Krishna Vallabhaneni of the Office of Associate Chief 
Counsel

[[Page 45423]]

(Corporate). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 31 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.7872-15 also issued under 26 U.S.C. 1275 and 7872. * * 
*

    Par. 2. Section 1.61-2 is amended by:
    1. Redesignating paragraphs (d)(2)(ii)(a) and (b) as paragraphs 
(d)(2)(ii)(A) and (B), respectively.
    2. Adding two sentences immediately following the second sentence 
in newly designated paragraph (d)(2)(ii)(A).
    The additions read as follows:


Sec. 1.61-2  Compensation for services, including fees, commissions, 
and similar items.

* * * * *
    (d) * * *
    (2) * * *
    (ii)(A) Cost of life insurance on the life of the employee. * * * 
For example, if an employee or independent contractor is the owner (as 
defined in Sec. 1.61-22(c)(1)) of a life insurance contract and the 
payments under such contract are not split-dollar loans under 
Sec. 1.7872-15(b)(1), the employee or independent contractor must 
include in income the amount of any such payments by the employer or 
service recipient with respect to such contract during any year to the 
extent that the employee's or independent contractor's rights to the 
life insurance contract are substantially vested (within the meaning of 
Sec. 1.83-3(b)). This result is the same regardless of whether the 
employee or independent contractor had at all times been the owner of 
the life insurance contract or the contract previously had been owned 
by the employer or service recipient as part of a split-dollar life 
insurance arrangement (as defined in Sec. 1.61-22(b)(1) or (2)) and had 
been transferred by the employer or service recipient to the employee 
or independent contractor under Sec. 1.61-22(g). * * *
* * * * *
    Par. 3. Section 1.61-22 is added to read as follows:


Sec. 1.61-22  Taxation of split-dollar life insurance arrangements.

    (a) Scope--(1) In general. This section provides rules for the 
taxation of a split-dollar life insurance arrangement for purposes of 
the income tax, the gift tax, the Federal Insurance Contributions Act 
(FICA), the Federal Unemployment Tax Act (FUTA), the Railroad 
Retirement Tax Act (RRTA), and the Self-Employment Contributions Act of 
1954 (SECA). For the Collection of Income Tax at Source on Wages, this 
section also provides rules for the taxation of a split-dollar life 
insurance arrangement, other than a payment under a split-dollar life 
insurance arrangement that is a split-dollar loan under Sec. 1.7872-
15(b)(1). In general, a split-dollar life insurance arrangement (as 
defined in paragraph (b) of this section) is subject to the rules of 
either paragraphs (d) through (g) of this section or Sec. 1.7872-15. 
For rules to determine which rules apply to a split-dollar life 
insurance arrangement, see paragraph (b)(3) of this section.
    (2) Overview. Paragraph (b) of this section defines a split-dollar 
life insurance arrangement and provides rules to determine whether an 
arrangement is subject to the rules of paragraphs (d) through (g) of 
this section, Sec. 1.7872-15, or general tax rules. Paragraph (c) of 
this section defines certain other terms. Paragraph (d) of this section 
sets forth rules for the taxation of economic benefits provided under a 
split-dollar life insurance arrangement. Paragraph (e) of this section 
sets forth rules for the taxation of amounts received under a life 
insurance contract that is part of a split-dollar life insurance 
arrangement. Paragraph (f) of this section provides rules for 
additional tax consequences of a split-dollar life insurance 
arrangement, including the treatment of death benefits. Paragraph (g) 
of this section provides rules for the transfer of a life insurance 
contract (or an undivided interest in the contract) that is part of a 
split-dollar life insurance arrangement. Paragraph (h) of this section 
provides examples illustrating the application of this section. 
Paragraph (j) of this section provides the effective date of this 
section.
    (b) Split-dollar life insurance arrangement-- (1) In general. A 
split-dollar life insurance arrangement is any arrangement between an 
owner and a non-owner of a life insurance contract that satisfies the 
following criteria--
    (i) Either party to the arrangement pays, directly or indirectly, 
all or any portion of the premiums on the life insurance contract, 
including a payment by means of a loan to the other party that is 
secured by the life insurance contract;
    (ii) At least one of the parties to the arrangement paying premiums 
under paragraph (b)(1)(i) of this section is entitled to recover 
(either conditionally or unconditionally) all or any portion of those 
premiums and such recovery is to be made from, or is secured by, the 
proceeds of the life insurance contract; and
    (iii) The arrangement is not part of a group-term life insurance 
plan described in section 79.
    (2) Special rule--(i) In general. Any arrangement between an owner 
and a non-owner of a life insurance contract is treated as a split-
dollar life insurance arrangement (regardless of whether the criteria 
of paragraph (b)(1) of this section are satisfied) if the arrangement 
is described in paragraph (b)(2)(ii) or (iii) of this section.
    (ii) Compensatory arrangements. An arrangement is described in this 
paragraph (b)(2)(ii) if the following criteria are satisfied--
    (A) The arrangement is entered into in connection with the 
performance of services and is not part of a group-term life insurance 
plan described in section 79;
    (B) The employer or service recipient pays, directly or indirectly, 
all or any portion of the premiums; and
    (C) The beneficiary of all or any portion of the death benefit is 
designated by the employee or service provider or is any person whom 
the employee or service provider would reasonably be expected to 
designate as the beneficiary.
    (iii) Shareholder arrangements. An arrangement is described in this 
paragraph (b)(2)(iii) if the following criteria are satisfied--
    (A) The arrangement is entered into between a corporation and 
another person in that person's capacity as a shareholder in the 
corporation;
    (B) The corporation pays, directly or indirectly, all or any 
portion of the premiums; and
    (C) The beneficiary of all or any portion of the death benefit is 
designated by the shareholder or is any person whom the shareholder 
would reasonably be expected to designate as the beneficiary.
    (3) Determination of whether this section or Sec. 1.7872-15 applies 
to a split-

[[Page 45424]]

dollar life insurance arrangement--(i) Split-dollar life insurance 
arrangements involving split-dollar loans under Sec. 1.7872-15. Except 
as provided in paragraph (b)(3)(ii) of this section, paragraphs (d) 
through (g) of this section do not apply to any split-dollar loan as 
defined in Sec. 1.7872-15(b)(1). Section 1.7872-15 applies to any such 
loan. See paragraph (b)(5) of this section for the treatment of 
payments made by a non-owner under a split-dollar life insurance 
arrangement that are not split-dollar loans.
    (ii) Exceptions. Paragraphs (d) through (g) of this section apply 
(and Sec. 1.7872-15 does not apply) to any split-dollar life insurance 
arrangement if--
    (A) The arrangement is entered into in connection with the 
performance of services, and the employee or service provider is not 
the owner of the life insurance contract (or is not treated as the 
owner of the contract under paragraph (c)(1)(ii)(A)(1) of this 
section); or
    (B) The arrangement is entered into between a donor and a donee 
(for example, a life insurance trust) and the donee is not the owner of 
the life insurance contract (or is not treated as the owner of the 
contract under paragraph (c)(1)(ii)(A)(2) of this section).
    (4) Consistency requirement. Both the owner and the non-owner of a 
life insurance contract that is part of a split-dollar life insurance 
arrangement described in paragraph (b)(1) or (2) of this section must 
fully and consistently account for all amounts under the arrangement 
under paragraph (b)(5) of this section, paragraphs (d) through (g) of 
this section, or under Sec. 1.7872-15.
    (5) Non-owner payments that are not split-dollar loans. If a non-
owner of a life insurance contract makes premium payments (directly or 
indirectly) under a split-dollar life insurance arrangement, and the 
payments are neither split-dollar loans nor consideration for economic 
benefits described in paragraph (d) of this section, then neither the 
rules of paragraphs (d) through (g) of this section nor the rules in 
Sec. 1.7872-15 apply to such payments. Instead, general income tax, 
employment tax, and gift tax principles apply to the premium payments. 
See, for example, Sec. 1.61-2(d)(2)(ii)(A).
    (6) Waiver, cancellation, or forgiveness. If a repayment obligation 
described in Sec. 1.7872-15(a)(2) is waived, cancelled, or forgiven at 
any time, then the parties must take the amount waived, cancelled, or 
forgiven into account in accordance with the relationships between the 
parties (for example, as compensation in the case of an employee-
employer relationship).
    (c) Definitions. The following definitions apply for purposes of 
this section:
    (1) Owner--(i) In general. With respect to a life insurance 
contract, the person named as the policy owner of such contract 
generally is the owner of such contract. If two or more persons are 
named as policy owners of a life insurance contract and each person has 
all the incidents of ownership with respect to an undivided interest in 
the contract, each person is treated as the owner of a separate 
contract to the extent of such person's undivided interest. If two or 
more persons are named as policy owners of a life insurance contract 
but each person does not have all the incidents of ownership with 
respect to an undivided interest in the contract, the person who is the 
first-named policy owner is treated as the owner of the entire 
contract.
    (ii) Special rule for certain arrangements--(A) In general. 
Notwithstanding paragraph (c)(1)(i) of this section--
    (1) An employer or service recipient is treated as the owner of a 
life insurance contract under a split-dollar life insurance arrangement 
that is entered into in connection with the performance of services if, 
at all times, the arrangement is described in paragraph (d)(2) of this 
section; and
    (2) A donor is treated as the owner of a life insurance contract 
under a split-dollar life insurance arrangement that is entered into 
between a donor and a donee (for example, a life insurance trust) if, 
at all times, the arrangement is described in paragraph (d)(2) of this 
section.
    (B) Modifications. [Reserved]
    (iii) Attribution rules. [Reserved]
    (2) Non-owner. With respect to a life insurance contract, a non-
owner is any person (other than the owner of such contract) that has 
any direct or indirect interest in such contract (but not including a 
life insurance company acting only in its capacity as the issuer of a 
life insurance contract).
    (3) Transfer of entire contract or undivided interest therein. A 
transfer of the ownership of a life insurance contract (or an undivided 
interest in such contract) that is part of a split-dollar life 
insurance arrangement occurs on the date that a non-owner becomes the 
owner (within the meaning of paragraph (c)(1) of this section) of the 
entire contract or of an undivided interest in the contract.
    (4) Undivided interest. An undivided interest in a life insurance 
contract consists of an identical fractional or percentage interest in 
each right and benefit under the contract.
    (5) Employment tax. The term employment tax means the Federal 
Insurance Contributions Act (FICA), the Federal Unemployment Tax Act 
(FUTA), the Railroad Retirement Tax Act (RRTA), the Self-Employment 
Contributions Act of 1954 (SECA), and the Collection of Income Tax at 
Source on Wages.
    (d) Economic benefits provided under a split-dollar life insurance 
arrangement--(1) In general. Under a split-dollar life insurance 
arrangement subject to the rules of paragraphs (d) through (g) of this 
section, the owner of the life insurance contract is treated as 
providing economic benefits to the non-owner of the life insurance 
contract. Those economic benefits must be accounted for fully and 
consistently by both the owner and the non-owner pursuant to the rules 
of this paragraph (d). The value of the economic benefits, reduced by 
any consideration paid by the non-owner to the owner, is treated as 
transferred from the owner to the non-owner. Depending on the 
relationship between the owner and the non-owner, the economic benefits 
may constitute a payment of compensation, a distribution under section 
301, a gift, or a transfer having a different tax character. Further, 
depending on the relationship between or among a non-owner and one or 
more other persons, the economic benefits may be treated as provided 
from the owner to the non-owner and as separately provided from the 
non-owner to such other person or persons (for example, as a payment of 
compensation from an employer to an employee and as a gift from the 
employee to the employee's children).
    (2) Non-equity split-dollar life insurance arrangements. In the 
case of a split-dollar life insurance arrangement subject to the rules 
of paragraphs (d) through (g) of this section under which the only 
economic benefit provided to the non-owner is current life insurance 
protection (including paid-up additions thereto), the amount of the 
current life insurance protection provided to the non-owner for a 
taxable year equals the excess of the average death benefit of the life 
insurance contract over the total amount payable to the owner under the 
split-dollar life insurance arrangement. The total amount payable to 
the owner is increased by the amount of any outstanding policy loan. 
The cost of the current life insurance protection provided to the non-
owner in any year equals the amount of the current life insurance 
protection provided to the non-owner multiplied by the life insurance 
premium factor designated or

[[Page 45425]]

permitted in guidance published in the Internal Revenue Bulletin (see 
Sec. 601.601(d)(2)(ii) of this chapter).
    (3) Equity split-dollar life insurance arrangements--(i) In 
general. In the case of a split-dollar life insurance arrangement 
subject to the rules of paragraphs (d) through (g) of this section 
other than an arrangement described in paragraph (d)(2) of this 
section, any right in, or benefit of, a life insurance contract 
(including, but not limited to, an interest in the cash surrender 
value) provided during a taxable year to a non-owner under a split-
dollar life insurance arrangement is an economic benefit for purposes 
of this paragraph (d).
    (ii) Valuation of economic benefits. [Reserved]
    (e) Amounts received under the contract--(1) In general. Except as 
otherwise provided in paragraph (f)(2)(ii) of this section, any amount 
received under a life insurance contract that is part of a split-dollar 
life insurance arrangement subject to the rules of paragraphs (d) 
through (g) of this section (including, but not limited to, a policy 
owner dividend, proceeds of a specified policy loan described in 
paragraph (e)(2) of this section, or the proceeds of a withdrawal from 
or partial surrender of the life insurance contract) is treated, to the 
extent provided directly or indirectly to a non-owner of the life 
insurance contract, as though such amount had been paid to the owner of 
the life insurance contract and then paid by the owner to the non-owner 
who is a party to the split-dollar life insurance arrangement. The 
amount received is taxable to the owner in accordance with the rules of 
section 72. The non-owner (and the owner for gift tax and employment 
tax purposes) must take the amount described in paragraph (e)(3) of 
this section into account as a payment of compensation, a distribution 
under section 301, a gift, or other transfer depending on the 
relationship between the owner and the non-owner.
    (2) Specified policy loan. A policy loan is a specified policy loan 
to the extent--
    (i) The proceeds of the loan are distributed directly from the 
insurance company to the non-owner;
    (ii) A reasonable person would not expect that the loan will be 
repaid by the non-owner; or
    (iii) The non-owner's obligation to repay the loan to the owner is 
satisfied or is capable of being satisfied upon repayment by either 
party to the insurance company.
    (3) Amount required to be taken into account. With respect to a 
non-owner (and the owner for gift tax and employment tax purposes), the 
amount described in this paragraph (e)(3) is equal to the excess of--
    (i) The amount treated as received by the owner under paragraph 
(e)(1) of this section; over
    (ii) The amount of all economic benefits described in paragraph 
(d)(3) of this section actually taken into account under paragraph 
(d)(1) of this section by the transferee (and the transferor for gift 
tax and employment tax purposes) reduced (but not below zero) by any 
amounts that would have been taken into account under paragraph (d)(1) 
of this section if paragraph (d)(2) of this section were applicable to 
the arrangement plus any consideration paid by the non-owner for all 
economic benefits described in paragraph (d)(3) of this section reduced 
(but not below zero) by any consideration paid by the non-owner that 
would have been allocable to amounts described in paragraph (d)(2) of 
this section if paragraph (d)(2) of this section were applicable to the 
arrangement. The amount determined under the preceding sentence applies 
only to the extent that neither this paragraph (e)(3)(ii) nor paragraph 
(g)(1)(ii) of this section previously has applied to such economic 
benefits.
    (f) Other tax consequences--(1) Introduction. In the case of a 
split-dollar life insurance arrangement subject to the rules of 
paragraphs (d) through (g) of this section, this paragraph (f) sets 
forth other tax consequences to the owner and non-owner of a life 
insurance contract that is part of the arrangement for the period prior 
to the transfer (as defined in paragraph (c)(3) of this section) of the 
contract (or an undivided interest therein) from the owner to the non-
owner. See paragraph (g) of this section and Sec. 1.83-6(a)(5) for tax 
consequences upon the transfer of the contract (or an undivided 
interest therein).
    (2) To non-owner--(i) In general. A non-owner does not receive any 
investment in the contract under section 72(e)(6) with respect to a 
life insurance contract that is part of a split-dollar life insurance 
arrangement subject to the rules of paragraphs (d) through (g) of this 
section.
    (ii) Death proceeds to beneficiary (other than the owner). Any 
amount paid to a beneficiary (other than the owner) by reason of the 
death of the insured is excluded from gross income by such beneficiary 
under section 101(a) as an amount received under a life insurance 
contract to the extent such amount is allocable to current life 
insurance protection provided to the non-owner pursuant to the split-
dollar life insurance arrangement, the cost of which was paid by the 
non-owner, or the value of which the non-owner actually took into 
account pursuant to paragraph (d) of this section.
    (3) To owner. Any premium paid by an owner under a split-dollar 
life insurance arrangement subject to the rules of paragraphs (d) 
through (g) of this section is included in the owner's investment in 
the contract under section 72(e)(6). No premium or amount described in 
paragraph (d) of this section is deductible by the owner (except as 
otherwise provided in Sec. 1.83-6(a)(5)). Any amount paid by a non-
owner, directly or indirectly, to the owner of the life insurance 
contract for current life insurance protection or for any other 
economic benefit under the life insurance contract is included in the 
owner's gross income and is included in the owner's investment in the 
life insurance contract for purposes of section 72(e)(6) (but only to 
the extent not otherwise so included by reason of having been paid by 
the owner as a premium or other consideration for the contract).
    (g) Transfer of entire contract or undivided interest therein--(1) 
In general. Upon a transfer within the meaning of paragraph (c)(3) of 
this section of a life insurance contract (or an undivided interest 
therein) to a non-owner (transferee), the transferee (and the owner 
(transferor) for gift tax and employment tax purposes) takes into 
account the excess of the fair market value of the life insurance 
contract (or the undivided interest therein) transferred to the 
transferee at that time over the sum of--
    (i) The amount the transferee pays to the transferor to obtain the 
contract (or the undivided interest therein); and
    (ii) The amount of all economic benefits described in paragraph 
(d)(3) of this section actually taken into account under paragraph 
(d)(1) of this section by the transferee (and the transferor for gift 
tax and employment tax purposes) reduced (but not below zero) by any 
amounts that would have been taken into account under paragraph (d)(1) 
of this section if paragraph (d)(2) of this section were applicable to 
the arrangement plus any consideration paid by the non-owner for all 
economic benefits described in paragraph (d)(3) of this section reduced 
(but not below zero) by any consideration paid by the non-owner that 
would have been allocable to amounts described in paragraph (d)(2) of 
this section if paragraph (d)(2) of this section were applicable to the 
arrangement. The amount determined under the preceding sentence applies 
only to the extent that neither paragraph (e)(3)(ii) of this

[[Page 45426]]

section nor this paragraph (g)(1)(ii) previously has applied to such 
economic benefits.
    (2) Determination of fair market value. For purposes of paragraph 
(g)(1) of this section, the fair market value of a life insurance 
contract is the cash surrender value and the value of all other rights 
under such contract (including any supplemental agreements thereto and 
whether or not guaranteed), other than the value of current life 
insurance protection.
    (3) Exception for certain transfers in connection with the 
performance of services. To the extent the ownership of a life 
insurance contract (or undivided interest in such contract) is 
transferred in connection with the performance of services, paragraph 
(g)(1) of this section does not apply until such contract (or undivided 
interest in such contract) is taxable under section 83. For purposes of 
paragraph (g)(1) of this section, fair market value is determined 
disregarding any lapse restrictions and at the time the transfer of 
such contract (or undivided interest in such contract) is taxable under 
section 83.
    (4) Treatment of non-owner after transfer--(i) In general. After a 
transfer of an entire life insurance contract (except when such 
transfer is in connection with the performance of services and the 
transfer is not yet taxable under section 83), the person who 
previously had been the non-owner is treated as the owner of such 
contract for all purposes, including for purposes of paragraph (b) of 
this section and for purposes of Sec. 1.61-2(d)(2)(ii)(A). After the 
transfer of an undivided interest in a life insurance contract (or, if 
later, at the time such transfer is taxable under section 83), the 
person who previously had been the non-owner is treated as the owner of 
a separate contract consisting of that interest for all purposes, 
including for purposes of paragraph (b) of this section and for 
purposes of Sec. 1.61-2(d)(2)(ii)(A). However, such person will 
continue to be treated as a non-owner with respect to any undivided 
interest in the contract not so transferred (or not yet taxable under 
section 83).
    (ii) Investment in the contract after transfer--(A) In general. The 
amount treated as consideration paid to acquire the contract under 
section 72(g)(1) to determine the aggregate premiums paid by the 
transferee for purposes of determining the transferee's investment in 
the contract under section 72(e) after the transfer (or, if later, at 
the time such transfer is taxable under section 83) equals the greater 
of the fair market value of the contract or the sum of the amounts 
determined under paragraphs (g)(1)(i) and (ii) of this section.
    (B) Transfers between a donor and a donee. In the case of a 
transfer of a contract between a donor and a donee, the amount treated 
as consideration paid by the transferee to acquire the contract under 
section 72(g)(1) to determine the aggregate premiums paid by the 
transferee for purposes of determining the transferee's investment in 
the contract under section 72(e) after the transfer equals the sum of 
the amounts determined under paragraphs (g)(1)(i) and (ii) of this 
section except that--
    (1) The amount determined under paragraph (g)(1)(i) of this section 
includes the aggregate of premiums or other consideration paid or 
deemed to have been paid by the transferor; and
    (2) The amount of all economic benefits determined under paragraph 
(g)(1)(ii) of this section actually taken into account by the 
transferee does not include such benefits to the extent such benefits 
were excludable from the transferee's gross income at the time of 
receipt.
    (C) Transfers of an undivided interest in a contract. If a portion 
of a contract is transferred to the transferee, then the amount to be 
included as consideration paid to acquire the contract is determined by 
multiplying the amount determined under paragraph (g)(4)(ii)(A) of this 
section (as modified by paragraph (g)(4)(ii)(B) of this section, if the 
transfer is between a donor and a donee) by a fraction, the numerator 
of which is the fair market value of the portion transferred and the 
denominator of which is the fair market value of the entire contract.
    (D) Example. The following example illustrates the rules of this 
paragraph (g)(4)(ii):

    Example. (i) In year 1, donor D and donee E enter into a split-
dollar life insurance arrangement as defined in paragraph (b)(1) of 
this section. D is the owner of the life insurance contract under 
paragraph (c)(1) of this section. The life insurance contract is not 
a modified endowment contract as defined in section 7702A. In year 
5, D gratuitously transfers the contract, within the meaning of 
paragraph (c)(3) of this section, to E. At the time of the transfer, 
the fair market value of the contract is $200,000 and D had paid 
$50,000 in premiums under the arrangement. In addition, at the time 
of the transfer, E had previously received $80,000 of benefits 
described in paragraph (d)(3) of this section, which were excludable 
from E's gross income under section 102.
    (ii) E's investment in the contract is $50,000, consisting of 
the $50,000 of premiums paid by D. The $80,000 of benefits described 
in paragraph (d)(3) of this section that E received is not included 
in E's investment in the contract because such amounts were 
excludable from E's gross income at the time of receipt.

    (iii) No investment in the contract for current life insurance 
protection. No amount allocable to current life insurance protection 
provided to the transferee (the cost of which was paid by the 
transferee or the value of which was provided to the transferee) is 
treated as consideration paid to acquire the contract under section 
72(g)(1) to determine the aggregate premiums paid by the transferee for 
purposes of determining the transferee's investment in the contract 
under section 72(e) after the transfer.
    (h) Examples. The following examples illustrate the rules of this 
section. Except as otherwise provided, each of the examples assumes 
that the employer (R) is the owner (as defined in paragraph (c)(1) of 
this section) of a life insurance contract that is part of a split-
dollar life insurance arrangement subject to the rules of paragraphs 
(d) through (g) of this section, that the life insurance contract is 
not a modified endowment contract under section 7702A, that the 
compensation paid to the employee (E) is reasonable, and that E makes 
no premium payments. The examples are as follows:

    Example 1. (i) In year 1, R purchases a life insurance contract 
on the life of E. R is named as the policy owner of the contract. R 
and E enter into an arrangement under which R will pay all the 
premiums on the life insurance contract until the termination of the 
arrangement or E's death. Upon termination of the arrangement or E's 
death, R is entitled to receive the greater of the aggregate 
premiums or the cash surrender value of the contract. The balance of 
the death benefit will be paid to a beneficiary designated by E.
    (ii) Because R is designated as the policy owner, R is the owner 
of the contract under paragraph (c)(1) of this section. E is a non-
owner of the contract. Under the arrangement between R and E, a 
portion of the death benefit is payable to a beneficiary designated 
by E. The arrangement is a split-dollar life insurance arrangement 
under paragraph (b)(1) or (2) of this section. For each year that 
the split-dollar life insurance arrangement is in effect, the 
arrangement is described in paragraph (d)(2) of this section and E 
must include in income the value of current life insurance 
protection, as required by paragraph (d)(2) of this section.
    Example 2. (i) The facts are the same as in Example 1 except 
that, upon termination of the arrangement or E's death, R is 
entitled to receive the lesser of the aggregate premiums or the cash 
surrender value of the contract.
    (ii) For each year that the split-dollar life insurance 
arrangement is in effect, the arrangement is described in paragraph 
(d)(3) of this section and E must include in gross income the value 
of the economic benefit attributable to E's interest in the life

[[Page 45427]]

insurance contract, as required by paragraph (d)(3) of this section.
    Example 3. (i) The facts are the same as in Example 1 except 
that in year 5, R and E modify the split-dollar life insurance 
arrangement to provide that, upon termination of the arrangement or 
E's death, R is entitled to receive the greater of the aggregate 
premiums or one-half the cash surrender value of the contract.
    (ii) In year 5 (and subsequent years), the arrangement is 
described in paragraph (d)(3) of this section and E must include in 
gross income the value of the economic benefit attributable to E's 
interest in the life insurance contract, as required by paragraph 
(d)(3) of this section. Because the modification made by R and E in 
year 5 does not involve the transfer (within the meaning of 
paragraph (c)(3) of this section) of an undivided interest in the 
life insurance contract from R to E, the modification is not a 
transfer for purposes of paragraph (g) of this section.
    Example 4. (i) The facts are the same as in Example 2 except 
that in year 7, R and E modify the split-dollar life insurance 
arrangement to provide that, upon termination of the arrangement or 
E's death, R will be paid the lesser of 80 percent of the aggregate 
premiums or the cash surrender value of the contract.
    (ii) The arrangement is described in paragraph (d)(3) of this 
section. In year 7 (and in subsequent years), E must include in 
gross income the value of the increased economic benefits described 
in paragraph (d)(3) of this section resulting from the contract 
modification under which E obtains rights to a larger amount of the 
cash value of the contract (attributable to the fact that R will 
forgo the right to recover 20 percent of the premiums R pays).
    Example 5. (i) The facts are the same as in Example 3 except 
that in year 7, E is designated as the policy owner. At that time, 
E's rights to the contract are substantially vested as defined in 
Sec. 1.83-3(b).
    (ii) In year 7, R is treated as having made a transfer (within 
the meaning of paragraph (c)(3) of this section) of the life 
insurance contract to E. E must include in gross income the amount 
determined under paragraph (g)(1) of this section.
    (iii) After the transfer of the contract to E, E is the owner of 
the contract and any premium payments by R will be included in E's 
income under paragraph (b)(5) of this section and Sec. 1.61-
2(d)(2)(ii)(A) (unless R's payments are split-dollar loans as 
defined in Sec. 1.7872-15(b)(1)).
    Example 6. (i) In year 1, E and R enter into a split-dollar life 
insurance arrangement as defined in paragraph (b)(2) of this 
section. Under the arrangement, R is required to make annual premium 
payments of $10,000 and E is required to make annual premium 
payments of $500. In year 5, a $500 policy owner dividend payable to 
E is declared by the insurance company. E directs the insurance 
company to use the $500 as E's premium payment for year 5.
    (ii) For each year the arrangement is in effect, the arrangement 
is described in paragraph (d)(3) of this section and E must include 
in gross income the value of the economic benefits granted during 
the year, as required by paragraph (d)(3) of this section over the 
$500 premium payments paid by E. In year 5, E must also include in 
gross income as compensation the excess, if any, of the $500 
distributed to E from the proceeds of the policy owner dividend over 
the amount determined under paragraph (e)(3)(ii) of this section.
    (iii) R must include in income the premiums paid by E during the 
years the split-dollar life insurance arrangement is in effect, 
including the $500 of the premium E paid in year 5 with proceeds of 
the policy owner dividend. R's investment in the contract is 
increased in an amount equal to the premiums paid by E, including 
the $500 of the premium paid by E in year 5 from the proceeds of the 
policy owner dividend. In year 5, R is treated as receiving a $500 
distribution under the contract, which is taxed pursuant to section 
72.
    Example 7. (i) The facts are the same as in Example 2 except 
that in year 10, E withdraws $100,000 from the cash value of the 
contract.
    (ii) In year 10, R is treated as receiving a $100,000 
distribution from the insurance company. This amount is treated as 
an amount received by R under the contract and taxed pursuant to 
section 72. This amount reduces R's investment in the contract under 
section 72(e). R is treated as paying the $100,000 to E as cash 
compensation, and E must include that amount in gross income less 
any amounts determined under paragraph (e)(3)(ii) of this section.
    Example 8. (i) The facts are the same as in Example 7 except E 
receives the proceeds of a $100,000 specified policy loan directly 
from the insurance company.
    (ii) The transfer of the proceeds of the specified policy loan 
to E is treated as a loan by the insurance company to R. Under the 
rules of section 72(e), the $100,000 loan is not included in R's 
income and does not reduce R's investment in the contract. R is 
treated as paying the $100,000 of loan proceeds to E as cash 
compensation. E must include that amount in gross income less any 
amounts determined under paragraph (e)(3)(ii) of this section.

    (i) [Reserved]
    (j) Effective date--(1) General rule. This section applies to any 
split-dollar life insurance arrangement (as defined in paragraph (b)(1) 
or (2) of this section) entered into after the date the final 
regulations are published in the Federal Register.
    (2) Early reliance--(i) General rule. Taxpayers may rely on this 
section for the treatment of any split-dollar life insurance 
arrangement (as defined in paragraph (b)(1) or (2) of this section) 
entered into on or before the date described in paragraph (j)(1) of 
this section, provided that all taxpayers who are parties to the 
arrangement treat the arrangement consistently under this section and, 
in the case of an arrangement described in paragraph (d)(3) of this 
section, also satisfy the requirements in paragraph (j)(2)(ii) of this 
section.
    (ii) Equity split-dollar life insurance arrangements. Parties to an 
arrangement described in paragraph (d)(3) of this section may rely on 
this section only if the value of all economic benefits taken into 
account by the parties exceeds the value of the economic benefits the 
parties would have taken into account if paragraph (d)(2) of this 
section were applicable to the arrangement (determined using the life 
insurance premium factor designated in guidance published in the 
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii) of this 
chapter)), thereby reflecting the fact that such an arrangement 
provides the non-owner with economic benefits that are more valuable 
than current life insurance protection.
    (3) Modified arrangements treated as new arrangements. An 
arrangement entered into on or before the date set forth in paragraph 
(j)(1) of this section that is materially modified after the date set 
forth in paragraph (j)(1) of this section is treated as a new 
arrangement entered into on the date of the modification.
    Par. 4. Section 1.83-1 is amended by:
    1. Removing the second sentence of paragraph (a)(2).
    2. Adding a sentence at the end of paragraph (a)(2).
    The addition reads as follows:


Sec. 1.83-1  Property transferred in connection with the performance of 
services.

    (a) * * *
    (2) Life insurance. * * * For the taxation of life insurance 
protection under a split-dollar life insurance arrangement (as defined 
in Sec. 1.61-22(b)(1) or (2)), see Sec. 1.61-22.
* * * * *
    Par. 5. Section 1.83-3 is amended by:
    1. Adding a sentence at the end of paragraph (a)(1).
    2. Revising the penultimate sentence in paragraph (e).
    The addition and revision read as follows:


Sec. 1.83-3  Meaning and use of certain terms.

    (a) * * * (1) * * * For special rules applying to the transfer of a 
life insurance contract (or an undivided interest therein) that is part 
of a split-dollar life insurance arrangement (as defined in Sec. 1.61-
22(b)(1) or (2)), see Sec. 1.61-22(g).
* * * * *
    (e) * * * In the case of a transfer of a contract, or any undivided 
interest therein, providing death benefit protection (including a life 
insurance contract, retirement contract, or

[[Page 45428]]

endowment contract) after the date the final regulations are published 
in the Federal Register, the cash surrender value and all other rights 
under such contract (including any supplemental agreements thereto and 
whether or not guaranteed), other than current life insurance 
protection, are treated as property for purposes of this section. * * *
* * * * *
    Par. 6. Section 1.83-6 is amended as follows:
    1. Redesignating paragraph (a)(5) as paragraph (a)(6).
    2. Adding a new paragraph (a)(5).
    The addition reads as follows:


Sec. 1.83-6  Deduction by employer.

    (a) * * *
    (5) Transfer of life insurance contract (or an undivided interest 
therein)--(i) General rule. In the case of a transfer of a life 
insurance contract (or an undivided interest therein) described in 
Sec. 1.61-22(c)(3) in connection with the performance of services, a 
deduction is allowable under paragraph (a)(1) of this section to the 
person for whom the services were performed. The amount of the 
deduction, if allowable, is equal to the sum of the amount included as 
compensation in the gross income of the service provider under 
Sec. 1.61-22(g)(1) and the amount determined under Sec. 1.61-
22(g)(1)(ii).
    (ii) Effective date--(A) General rule. Paragraph (a)(5)(i) of this 
section applies to any split-dollar life insurance arrangement (as 
defined in Sec. 1.61-22(b)(1) or (2)) entered into after the date the 
final regulations are published in the Federal Register.
    (B) Early reliance--(1) General rule. Taxpayers may rely on this 
paragraph (a)(5) for the treatment of any split-dollar life insurance 
arrangement (as defined in Sec. 1.61-22(b)(1) or (2)) entered into on 
or before the date described in paragraph (a)(5)(ii)(A) of this 
section, provided that all taxpayers who are parties to the arrangement 
treat the arrangement consistently under Sec. 1.61-22(d) through (g) 
and, in the case of an arrangement described in Sec. 1.61-22(d)(3), 
also satisfy the requirements in paragraph (a)(5)(ii)(B)(2) of this 
section.
    (2) Equity split-dollar life insurance arrangements. Parties to an 
arrangement described in Sec. 1.61-22(d)(3) may rely on this paragraph 
(a)(5) only if the value of all economic benefits taken into account by 
the parties exceeds the value of the economic benefits the parties 
would have taken into account if Sec. 1.61-22(d)(2) were applicable to 
the arrangement (determined using the life insurance premium factor 
designated in guidance published in the Internal Revenue Bulletin (see 
Sec. 601.601(d)(2)(ii) of this chapter)), thereby reflecting the fact 
that such an arrangement provides the non-owner with economic benefits 
that are more valuable than current life insurance protection.
    (C) Modified arrangements treated as new arrangements. An 
arrangement entered into on or before the date set forth in paragraph 
(a)(5)(ii)(A) of this section that is materially modified after the 
date set forth in paragraph (a)(5)(ii)(A) of this section is treated as 
a new arrangement entered into on the date of the modification.
* * * * *
    Par. 7. In Sec. 1.301-1, paragraph (q) is added to read as follows:


Sec. 1.301-1  Rules applicable with respect to distributions of money 
and other property.

* * * * *
    (q) Split-dollar and other life insurance arrangements--(1) Split-
dollar life insurance arrangements--(i) Distribution of economic 
benefits. The provision by a corporation to its shareholder pursuant to 
a split-dollar life insurance arrangement, as defined in Sec. 1.61-
22(b)(1) or (2), of economic benefits described in Sec. 1.61-22(d) or 
of amounts described in Sec. 1.61-22(e) is treated as a distribution of 
property, the amount of which is determined under Sec. 1.61-22(d) and 
(e), respectively.
    (ii) Distribution of entire contract or undivided interest therein. 
A transfer (within the meaning of Sec. 1.61-22(c)(3)) of the ownership 
of a life insurance contract (or an undivided interest therein) that is 
part of a split-dollar life insurance arrangement is a distribution of 
property, the amount of which is determined pursuant to Sec. 1.61-
22(g)(1) and (2).
    (2) Other life insurance arrangements. A payment by a corporation 
on behalf of a shareholder of premiums on a life insurance contract or 
an undivided interest therein that is owned by the shareholder 
constitutes a distribution of property, even if such payment is not 
part of a split-dollar life insurance arrangement under Sec. 1.61-
22(b).
    (3) When distribution is made--(i) In general. Except as provided 
in paragraph (q)(3)(ii) of this section, paragraph (b) of this section 
shall apply to determine when a distribution described in paragraph 
(q)(1) or (2) of this section is taken into account by a shareholder.
    (ii) Exception. Notwithstanding paragraph (b) of this section, a 
distribution described in paragraph (q)(1)(ii) of this section shall be 
treated as made by a corporation to its shareholder at the time that 
the life insurance contract, or an undivided interest therein, is 
transferred (within the meaning of Sec. 1.61-22(c)(3)) to the 
shareholder.
    (4) Effective date--(i) General rule. This paragraph (q) applies to 
split-dollar and other life insurance arrangements entered into after 
the date the final regulations are published in the Federal Register.
    (ii) Early reliance--(A) General rule. Taxpayers may rely on this 
paragraph (q) for the treatment of any split-dollar life insurance 
arrangement (as defined in Sec. 1.61-22(b)(1) or (2)) entered into on 
or before the date described in paragraph (q)(4)(i) of this section, 
provided that all taxpayers who are parties to the arrangement treat 
the arrangement consistently under Sec. 1.61-22(d) through (g) and, in 
the case of an arrangement described in Sec. 1.61-22(d)(3), also 
satisfy the requirements in paragraph (q)(4)(ii)(B) of this section.
    (B) Equity split-dollar life insurance arrangements. Parties to an 
arrangement described in Sec. 1.61-22(d)(3) may rely on this paragraph 
(q) only if the value of all economic benefits taken into account by 
the parties exceeds the value of the economic benefits the parties 
would have taken into account if Sec. 1.61-22(d)(2) were applicable to 
the arrangement (determined using the life insurance premium factor 
designated in guidance published in the Internal Revenue Bulletin (see 
Sec. 601.601(d)(2)(ii) of this chapter)), thereby reflecting the fact 
that such an arrangement provides the non-owner with economic benefits 
that are more valuable than current life insurance protection.
    (iii) Modified arrangements treated as new arrangements. An 
arrangement entered into on or before the date set forth in paragraph 
(q)(4)(i) of this section that is materially modified after the date 
set forth in paragraph (q)(4)(i) of this section is treated as a new 
arrangement entered into on the date of the modification.
    Par. 8. Section 1.1402(a)-18 is added to read as follows:


Sec. 1.1402(a)-18  Split-dollar life insurance arrangements.

    See Sec. 1.61-22 for rules relating to the treatment of split-
dollar life insurance arrangements.
    Par. 9. Section 1.7872-15 is added to read as follows:


Sec. 1.7872-15  Split-dollar loans.

    (a) General rules--(1) Introduction. This section applies to split-
dollar loans as defined in paragraph (b)(1) of this section. If a 
split-dollar loan is not a below-market loan, then, except as provided 
in this section, the loan is governed by the general rules for debt

[[Page 45429]]

instruments (including the rules for original issue discount (OID) 
under sections 1271 through 1275 and the regulations thereunder). If a 
split-dollar loan is a below-market loan, then, except as provided in 
this section, the loan is governed by section 7872 and the regulations 
thereunder. The timing, amount, and characterization of the imputed 
transfers between the lender and borrower of a below-market split-
dollar loan depend upon the relationship between the parties and upon 
whether the loan is a demand loan or a term loan. For additional rules 
relating to the treatment of split-dollar life insurance arrangements, 
see Sec. 1.61-22.
    (2) Loan treatment--(i) General rule. A payment made pursuant to a 
split-dollar life insurance arrangement is treated as a loan for 
Federal tax purposes, and the owner and non-owner are treated, 
respectively, as the borrower and the lender, if--
    (A) The payment is made either directly or indirectly by the non-
owner to the owner (including a premium payment made by the non-owner 
directly to the insurance company with respect to the policy held by 
the owner);
    (B) The payment is a loan under general principles of Federal tax 
law or, if it is not a loan under general principles of Federal tax 
law, a reasonable person would expect the payment to be repaid in full 
to the non-owner (whether with or without interest); and
    (C) The repayment is to be made from, or is secured by, either the 
policy's death benefit proceeds or its cash surrender value.
    (ii) Payments that are only partially repayable. For purposes of 
Sec. 1.61-22 and this section, if a non-owner makes a payment pursuant 
to a split-dollar life insurance arrangement and the non-owner is 
entitled to repayment of some but not all of the payment, the payment 
is treated as two payments: one that is repayable and one that is not. 
Thus, paragraph (a)(2)(i) of this section refers to the repayable 
payment.
    (iii) Treatment of payments that are not split-dollar loans. See 
Sec. 1.61-22(b)(5) for the treatment of payments by a non-owner that 
are not split-dollar loans.
    (iv) Examples. The provisions of this paragraph (a)(2) are 
illustrated by the following examples:

    Example 1. Assume an employee owns a life insurance policy under 
a split-dollar life insurance arrangement, the employer makes 
premium payments on this policy, there is a reasonable expectation 
that the payments will be repaid, and the repayments are secured by 
the policy. Under paragraph (a)(2)(i) of this section, each premium 
payment is a loan for Federal tax purposes.
    Example 2. (i) Assume an employee owns a life insurance policy 
under a split-dollar life insurance arrangement and the employer 
makes premium payments on this policy. The employer is entitled to 
be repaid 80 percent of each premium payment, and the repayments are 
secured by the policy. Under paragraph (a)(2)(ii) of this section, 
the taxation of 20 percent of each premium payment is governed by 
Sec. 1.61-22(b)(5). If there is a reasonable expectation that the 
remaining 80 percent of a payment will be repaid in full, then, 
under paragraph (a)(2)(i) of this section, the 80 percent is a loan 
for Federal tax purposes.
    (ii) If less than 80 percent of a premium payment is reasonably 
expected to be repaid, then this paragraph (a)(2) does not cause any 
of the payment to be a loan for Federal tax purposes. If the payment 
is not a loan under general principles of Federal tax law, the 
entire premium payment is governed by Sec. 1.61-22(b)(5).

    (3) No de minimis exceptions. For purposes of this section, section 
7872 is applied to a split-dollar loan without regard to the de minimis 
exceptions in section 7872(c)(2) and (3).
    (b) Definitions. For purposes of this section, the terms split-
dollar life insurance arrangement, owner, and non-owner have the same 
meanings as provided in Sec. 1.61-22(b) and (c). In addition, the 
following definitions apply for purposes of this section:
    (1) A split-dollar loan is a loan described in paragraph (a)(2)(i) 
of this section.
    (2) A split-dollar demand loan is any split-dollar loan that is 
payable in full at any time on the demand of the lender (or within a 
reasonable time after the lender's demand).
    (3) A split-dollar term loan is any split-dollar loan other than a 
split-dollar demand loan. See paragraph (e)(5) of this section for 
special rules regarding certain split-dollar term loans payable on the 
death of an individual, certain split-dollar term loans conditioned on 
the future performance of substantial services by an individual, and 
gift split-dollar term loans.
    (c) Interest deductions for split-dollar loans. The borrower may 
not deduct any qualified stated interest, OID, or imputed interest on a 
split-dollar loan. See sections 163(h) and 264(a). In certain 
circumstances, an indirect participant may be allowed to deduct 
qualified stated interest, OID, or imputed interest on a deemed loan. 
See paragraph (e)(2)(iii) of this section (relating to indirect loans).
    (d) Treatment of split-dollar loans providing for nonrecourse 
payments--(1) In general. Except as provided in paragraph (d)(2) of 
this section, if a payment on a split-dollar loan is nonrecourse to the 
borrower, the payment is a contingent payment for purposes of this 
section. See paragraph (j) of this section for the treatment of a 
split-dollar loan that provides for one or more contingent payments.
    (2) Exception for certain loans with respect to which the parties 
to the split-dollar life insurance arrangement make a representation--
(i) Requirements. An otherwise noncontingent payment on a split-dollar 
loan that is nonrecourse to the borrower is not a contingent payment 
under this section if the following requirements are satisfied--
    (A) The split-dollar loan provides for interest payable at a stated 
rate that is either a fixed rate or a variable rate described in 
paragraph (g) of this section; and
    (B) The parties to the split-dollar life insurance arrangement 
represent in writing that a reasonable person would expect that all 
payments under the loan will be made.
    (ii) Time and manner for providing written representation. The 
Commissioner may prescribe the time and manner for providing the 
written representation required by paragraph (d)(2)(i)(B) of this 
section. Until the Commissioner prescribes otherwise, the written 
representation that is required by paragraph (d)(2)(i)(B) of this 
section must meet the requirements of this paragraph (d)(2)(ii). Both 
the borrower and the lender must sign the representation not later than 
the last day (including extensions) for filing the Federal income tax 
return of the borrower or lender, whichever is earlier, for the taxable 
year in which the lender makes the first split-dollar loan under the 
split-dollar life insurance arrangement. This representation must 
include the names, addresses, and taxpayer identification numbers of 
the borrower, lender, and any indirect participants. Unless otherwise 
stated therein, this representation applies to all subsequent split-
dollar loans made pursuant to the split-dollar life insurance 
arrangement. Each party should retain an original of the representation 
as part of its books and records and should attach a copy of this 
representation to its Federal income tax return for any taxable year in 
which the lender makes a loan to which the representation applies.
    (e) Below-market split-dollar loans--(1) Scope--(i) In general. 
This paragraph (e) applies to below-market split-dollar loans 
enumerated under section 7872(c)(1), which include gift loans, 
compensation-related loans, and corporation-shareholder loans. The 
characterization of a split-dollar loan under section 7872(c)(1) and of 
the

[[Page 45430]]

imputed transfers under section 7872(a)(1) and (b)(1) depends upon the 
relationship between the lender and the borrower or the lender, 
borrower, and any indirect participant. For example, if the lender is 
the borrower's employer, the split-dollar loan is generally a 
compensation-related loan, and any imputed transfer from the lender to 
the borrower is generally a payment of compensation. The loans covered 
by this paragraph (e) include indirect loans between the parties. See 
paragraph (e)(2) of this section for the treatment of certain indirect 
split-dollar loans. See paragraph (f) of this section for the treatment 
of any stated interest or OID on split-dollar loans. See paragraph (j) 
of this section for additional rules that apply to a split-dollar loan 
that provides for one or more contingent payments.
    (ii) Significant-effect split-dollar loans. If a direct or indirect 
below-market split-dollar loan is not enumerated in section 
7872(c)(1)(A), (B), or (C), the loan is a significant-effect loan under 
section 7872(c)(1)(E).
    (2) Indirect split-dollar loans--(i) In general. If, based on all 
the facts and circumstances, including the relationship between the 
borrower or lender and some third person (the indirect participant), 
the effect of a below-market split-dollar loan is to transfer value 
from the lender to the indirect participant and from the indirect 
participant to the borrower, then the below-market split-dollar loan is 
restructured as two or more successive below-market loans (the deemed 
loans) as provided in this paragraph (e)(2). The transfers of value 
described in the preceding sentence include (but are not limited to) a 
gift, compensation, a capital contribution, and a distribution under 
section 301 (or, in the case of an S corporation, under section 1368). 
The deemed loans are--
    (A) A deemed below-market split-dollar loan made by the lender to 
the indirect participant; and
    (B) A deemed below-market split-dollar loan made by the indirect 
participant to the borrower.
    (ii) Application. Each deemed loan is treated as having the same 
provisions as the original loan between the lender and borrower, and 
section 7872 is applied to each deemed loan. Thus, for example, if, 
under a split-dollar life insurance arrangement, an employer (lender) 
makes an interest-free split-dollar loan to an employee's child 
(borrower), the loan is generally restructured as a deemed 
compensation-related below-market split-dollar loan from the lender to 
the employee (the indirect participant) and a second deemed gift below-
market split-dollar loan from the employee to the employee's child. In 
appropriate circumstances, section 7872(d)(1) may limit the interest 
that accrues on a deemed loan for Federal income tax purposes. For loan 
arrangements between husband and wife, see section 7872(f)(7).
    (iii) Limitations on investment interest for purposes of section 
163(d). For purposes of section 163(d), the imputed interest from the 
indirect participant to the lender that is taken into account by the 
indirect participant under this paragraph (e)(2) is not investment 
interest to the extent of the excess, if any, of--
    (A) The imputed interest from the indirect participant to the 
lender that is taken into account by the indirect participant; over
    (B) The imputed interest to the indirect participant from the 
borrower that is recognized by the indirect participant.
    (iv) Example. The provisions of this paragraph (e)(2) are 
illustrated by the following example:

    Example. (i) On January 1, 2009, Employer X and Individual A 
enter into a split-dollar life insurance arrangement under which A 
is named as the policy owner. A is the child of B, an employee of X. 
On January 1, 2009, X makes a $30,000 premium payment, repayable 
upon demand without interest. Repayment of the premium payment is 
fully recourse to A. The payment is a below-market split-dollar 
demand loan. A's net investment income for 2009 is $1,100, and there 
are no other outstanding loans between A and B. Assume that the 
blended annual rate for 2009 is 5 percent, compounded annually.
    (ii) Based on the relationships among the parties, the effect of 
the below-market split-dollar loan from X to A is to transfer value 
from X to B and then to transfer value from B to A. Under paragraph 
(e)(2) of this section, the below-market split-dollar loan from X to 
A is restructured as two deemed below-market split-dollar demand 
loans: a compensation-related below-market split-dollar loan between 
X and B and a gift below-market split-dollar loan between B and A. 
Each of the deemed loans has the same terms and conditions as the 
original loan.
    (iii) Under paragraph (e)(3) of this section, the amount of 
forgone interest deemed paid to B by A in 2009 is $1,500 ([$30,000 x 
0.05]--0). Under section 7872(d)(1), however, the amount of forgone 
interest deemed paid to B by A is limited to $1,100 (A's net 
investment income for the year). Under paragraph (e)(2)(iii) of this 
section, B's deduction under section 163(d) in 2009 for interest 
deemed paid on B's deemed loan from X is limited to $1,100 (the 
interest deemed received from A).

    (3) Split-dollar demand loans--(i) In general. This paragraph 
(e)(3) provides rules for testing split-dollar demand loans for 
sufficient interest, and, if the loans do not provide for sufficient 
interest, rules for the calculation and treatment of forgone interest 
on these loans. See paragraph (g) of this section for additional rules 
that apply to a split-dollar loan providing for certain variable rates 
of interest.
    (ii) Testing for sufficient interest. Each calendar year that a 
split-dollar demand loan is outstanding, the loan is tested to 
determine if the loan provides for sufficient interest. A split-dollar 
demand loan provides for sufficient interest for the calendar year if 
the rate (based on annual compounding) at which interest accrues on the 
loan's adjusted issue price during the year is no lower than the 
blended annual rate for the year. (The Internal Revenue Service 
publishes the blended annual rate in the Internal Revenue Bulletin in 
July of each year (see Sec. 601.601(d)(2)(ii) of this chapter).) If the 
loan does not provide for sufficient interest, the loan is a below-
market split-dollar demand loan for that calendar year. See paragraph 
(e)(3)(iii) of this section to determine the amount and treatment of 
forgone interest for each calendar year the loan is below-market.
    (iii) Imputations--(A) Amount of forgone interest. For each 
calendar year, the amount of forgone interest on a split-dollar demand 
loan is treated as transferred by the lender to the borrower and as 
retransferred as interest by the borrower to the lender. This amount is 
the excess of--
    (1) The amount of interest that would have been payable on the loan 
for the calendar year if interest accrued on the loan's adjusted issue 
price at the AFR (determined in paragraph (e)(3)(ii) of this section) 
and were payable annually on the day referred to in paragraph 
(e)(3)(iii)(B) of this section; over
    (2) Any interest that accrues on the loan during the year.
    (B) Timing of transfers of forgone interest--(1) In general. Except 
as provided in paragraphs (e)(3)(iii)(B)(2) and (3) of this section, 
the forgone interest (as determined under paragraph (e)(3)(iii)(A) of 
this section) that is attributable to a calendar year is treated as 
transferred by the lender to the borrower (and retransferred as 
interest by the borrower to the lender) on the last day of the calendar 
year and is accounted for by each party to the split-dollar loan in a 
manner consistent with that party's method of accounting.
    (2) Exception for death, liquidation, or termination of the 
borrower. In the taxable year in which the borrower dies (in the case 
of borrower who is a natural person) or is liquidated or otherwise 
terminated (in the case of a borrower other than a natural person), any 
forgone interest is treated, for both the

[[Page 45431]]

lender and the borrower, as transferred and retransferred on the last 
day of the borrower's final taxable year.
    (3) Exception for repayment of below-market split-dollar loan. Any 
forgone interest is treated, for both the lender and the borrower, as 
transferred and retransferred on the day the split-dollar loan is 
repaid in full.
    (4) Split-dollar term loans--(i) In general. Except as provided in 
paragraph (e)(5) of this section, this paragraph (e)(4) provides rules 
for testing split-dollar term loans for sufficient interest and, if the 
loans do not provide for sufficient interest, rules for imputing 
payments on these loans. See paragraph (g) of this section for 
additional rules that apply to a split-dollar loan providing for 
certain variable rates of interest.
    (ii) Testing a split-dollar term loan for sufficient interest. A 
split-dollar term loan is tested on the day the loan is made to 
determine if the loan provides for sufficient interest. A split-dollar 
term loan provides for sufficient interest if the imputed loan amount 
equals or exceeds the amount loaned. The imputed loan amount is the 
present value of all payments due under the loan, determined as of the 
date the loan is made, using a discount rate equal to the AFR in effect 
on that date. The AFR used for purposes of the preceding sentence must 
be appropriate for the loan's term (short-term, mid-term, or long-term) 
and for the compounding period used in computing the present value. See 
section 1274(d)(1). If the split-dollar loan does not provide for 
sufficient interest, the loan is a below-market split-dollar term loan 
subject to paragraph (e)(4)(iv) of this section.
    (iii) Determining loan term. This paragraph (e)(4)(iii) provides 
rules to determine the term of a split-dollar term loan for purposes of 
paragraph (e)(4)(ii) of this section. The term of the loan determined 
under this paragraph (e)(4)(iii) (other than paragraph (e)(4)(iii)(C) 
of this section) applies to determine the split-dollar loan's term, 
payment schedule, and yield for all purposes of this section.
    (A) In general. Except as provided in paragraph (e)(4)(iii)(B), 
(C), (D) or (E) of this section, the term of a split-dollar term loan 
is based on the period from the date the loan is made until the loan's 
stated maturity date.
    (B) Special rules for certain options--(1) Payment schedule that 
minimizes yield. If a split-dollar term loan is subject to 
unconditional options that are exercisable at one or more times during 
the term of the loan and that, if exercised, would require full payment 
of the loan on a date other than the stated maturity date, then the 
rules of this paragraph (e)(4)(iii)(B)(1) determine the term of the 
loan. For purposes of determining a split-dollar loan's term, the 
borrower is projected to exercise or not exercise an option or 
combination of options in a manner that minimizes the loan's overall 
yield. Similarly, the lender is projected to exercise or not exercise 
an option or combination of options in a manner that minimizes the 
loan's overall yield. If different projected patterns of exercise or 
non-exercise produce the same minimum yield, the parties are projected 
to exercise or not exercise an option or combination of options in a 
manner that produces the longest term.
    (2) Change in circumstances. If the borrower (or lender) does or 
does not exercise the option as projected under paragraph 
(e)(4)(iii)(B)(1) of this section, the split-dollar loan is treated as 
retired and reissued on the date the option is or is not exercised. The 
amount for which the loan is deemed to be retired and reissued is the 
loan's adjusted issue price on that date. The reissued loan must be 
retested using the appropriate AFR in effect on the date of reissuance 
to determine whether it is a below-market loan.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (e)(4)(iii)(B):

    Example 1. Employee B issues a 10-year split-dollar term loan to 
Employer Y. B has the right to prepay the loan at the end of year 5. 
Interest is payable on the split-dollar loan at 1 percent for the 
first 5 years and at 10 percent for the remaining 5 years. Under 
paragraph (e)(4)(iii)(B)(1) of this section, this arrangement is 
treated as a 5-year split-dollar term loan from Y to B, with 
interest payable at 1 percent.
    Example 2. The facts are the same as the facts in Example 1, 
except that B does not in fact prepay the split-dollar loan at the 
end of year 5. Under paragraph (e)(4)(iii)(B)(2) of this section, 
the first loan is treated as retired at the end of year 5 and a new 
5-year split-dollar term loan is issued at that time, with interest 
payable at 10 percent.
    Example 3. Employee A issues a 10-year split-dollar term loan on 
which the lender, Employer X, has the right to demand payment at the 
end of year 2. Interest is payable on the split-dollar loan at 7 
percent each year that the loan is outstanding. Under paragraph 
(e)(4)(iii)(B)(1) of this section, this arrangement is treated as a 
10-year split-dollar term loan because the exercise of X's put 
option would not reduce the yield of the loan (the yield of the loan 
is 7 percent, compounded annually, whether or not X demands 
payment).

    (C) Split-dollar term loans providing for certain variable rates of 
interest. If a split-dollar term loan is subject to paragraph (g) of 
this section (a split-dollar loan that provides for certain variable 
rates of interest), the term of the loan for purposes of paragraph 
(e)(4)(ii) of this section is determined under paragraph (g)(3)(ii) of 
this section.
    (D) Split-dollar loans payable upon the death of an individual. If 
a split-dollar term loan is described in paragraph (e)(5)(ii)(A) or 
(v)(A) of this section, the term of the loan for purposes of paragraph 
(e)(4)(ii) of this section is determined under paragraph (e)(5)(ii)(C) 
or (v)(B)(2) of this section, whichever is applicable.
    (E) Split-dollar loans conditioned on the future performance of 
substantial services by an individual. If a split-dollar term loan is 
described in paragraph (e)(5)(iii)(A)(1) or (v)(A) of this section, the 
term of the loan for purposes of paragraph (e)(4)(ii) of this section 
is determined under paragraph (e)(5)(iii)(C) or (v)(B)(2) of this 
section, whichever is applicable.
    (iv) Timing and amount of imputed transfer in connection with 
below-market split-dollar term loans. If a split-dollar term loan is a 
below-market loan, then the rules applicable to below-market term loans 
under section 7872 apply. In general, the loan is recharacterized as 
consisting of two portions: an imputed loan amount (as defined in 
paragraph (e)(4)(ii) of this section) and an imputed transfer from the 
lender to the borrower. The imputed transfer occurs at the time the 
loan is made (for example, when the lender makes a premium payment on a 
life insurance policy) and is equal to the excess described in 
paragraph (e)(4)(ii) of this section.
    (v) Amount treated as OID. In the case of any below-market split-
dollar term loan described in this paragraph (e)(4), for purposes of 
applying sections 1271 through 1275 and the regulations thereunder, the 
issue price of the loan is the amount determined under Sec. 1.1273-2, 
reduced by the amount of the imputed transfer described in paragraph 
(e)(4)(iv) of this section. Thus, the loan is generally treated as 
having OID in an amount equal to the amount of the imputed transfer 
described in paragraph (e)(4)(iv) of this section, in addition to any 
other OID on the loan (determined without regard to section 
7872(b)(2)(A) or this paragraph (e)(4)).
    (vi) Example. The provisions of this paragraph (e)(4) are 
illustrated by the following example:

    Example. (i) On July 1, 2009, Corporation Z and Shareholder A 
enter into a split-dollar life insurance arrangement under which A 
is named as the policy owner. On July 1, 2009, Z makes a $100,000 
premium payment, repayable without interest in 15 years. Repayment 
of the premium payment is fully

[[Page 45432]]

recourse to A. The premium payment is a split-dollar term loan. 
Assume the long-term AFR (based on annual compounding) at the time 
the loan is made is 7 percent.
    (ii) Based on a 15-year term and a discount rate of 7 percent, 
compounded annually (the long-term AFR), the present value of the 
payments under the loan is $36,244.60, determined as follows: 
$100,000/[1+(0.07/1)]\15\. This loan is a below-market split-dollar 
term loan because the imputed loan amount of $36,244.60 (the present 
value of the amount required to be repaid to Z) is less than the 
amount loaned ($100,000).
    (iii) In accordance with section 7872(b)(1) and paragraph 
(e)(4)(iv) of this section, on the date that the loan is made, Z is 
treated as transferring to A $63,755.40 (the excess of $100,000 
(amount loaned) over $36,244.60 (imputed loan amount)). Under 
section 7872 and paragraph (e)(1)(i) of this section, Z is treated 
as making a section 301 distribution to A on July 1, 2009, of 
$63,755.40. Z must take into account as OID an amount equal to the 
imputed transfer. See Sec. 1.1272-1 for the treatment of OID.

    (5) Special rules for certain split-dollar term loans--(i) In 
general. This paragraph (e)(5) provides rules for split-dollar loans 
payable on the death of an individual, split-dollar loans conditioned 
on the future performance of substantial services by an individual, and 
gift term loans. These split-dollar loans are split-dollar term loans 
for purposes of determining whether the loan provides for sufficient 
interest. If, however, the loan is a below-market split-dollar loan, 
then, except as provided in paragraph (e)(5)(v) of this section, 
forgone interest is determined annually, similar to a demand loan, but 
using an AFR that is appropriate for the loan's term and that is 
determined when the loan is issued.
    (ii) Split-dollar loans payable not later than the death of an 
individual--(A) Applicability. This paragraph (e)(5)(ii) applies to a 
split-dollar term loan payable not later than the death of an 
individual.
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(ii)(A) of this section is tested under paragraph (e)(4)(ii) of 
this section to determine if the loan provides for sufficient interest. 
If the loan provides for sufficient interest, then section 7872 does 
not apply to the loan, and the interest on the loan is taken into 
account under paragraph (f) of this section. If the loan does not 
provide for sufficient interest, then section 7872 applies to the loan, 
and the loan is treated as a below-market demand loan subject to 
paragraph (e)(3)(iii) of this section. For each year that the loan is 
outstanding, however, the AFR used in the determination of forgone 
interest under paragraph (e)(3)(iii) of this section is not the blended 
annual rate but rather is the AFR (based on annual compounding) 
appropriate for the loan's term for the month in which the loan is 
made. See paragraph (e)(5)(ii)(C) of this section to determine the 
loan's term.
    (C) Term of loan. For purposes of paragraph (e)(5)(ii)(B) of this 
section, the term of a split-dollar loan payable on the death of an 
individual (including the death of the last survivor of a group of 
individuals) is the life expectancy as determined under the appropriate 
table in Sec. 1.72-9 on the day the loan is made. If a split-dollar 
loan is payable on the earlier of the individual's death or another 
term determined under paragraph (e)(4)(iii) of this section, the term 
of the loan is whichever term is shorter.
    (D) Retirement and reissuance of loan. If a split-dollar loan 
described in paragraph (e)(5)(ii)(A) of this section remains 
outstanding longer than the term determined under paragraph 
(e)(5)(ii)(C) of this section because the individual outlived his or 
her life expectancy, the split-dollar loan is treated as retired and 
reissued as a split-dollar demand loan at that time for the loan's 
adjusted issue price on that date. However, the loan is not retested at 
that time to determine whether the loan provides for sufficient 
interest. For purposes of determining forgone interest under paragraph 
(e)(5)(ii)(B) of this section, the appropriate AFR for the reissued 
loan is the AFR determined under (e)(5)(ii)(B) of this section on the 
day the loan was originally made.
    (iii) Split-dollar loans conditioned on the future performance of 
substantial services by an individual--(A) Applicability--(1) In 
general. This paragraph (e)(5)(iii) applies to a split-dollar term loan 
if the benefits of the interest arrangements of the loan are not 
transferable and are conditioned on the future performance of 
substantial services (within the meaning of section 83) by an 
individual.
    (2) Exception. Notwithstanding paragraph (e)(5)(iii)(A)(1) of this 
section, this paragraph (e)(5)(iii) does not apply to a split-dollar 
loan described in paragraph (e)(5)(v)(A) of this section (regarding a 
split-dollar loan that is payable on the later of a term certain and 
the date on which the condition to perform substantial future services 
by an individual ends).
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(iii)(A)(1) of this section is tested under paragraph (e)(4)(ii) 
of this section to determine if the loan provides for sufficient 
interest. Except as provided in paragraph (e)(5)(iii)(D) of this 
section, if the loan provides for sufficient interest, then section 
7872 does not apply to the loan and the interest on the loan is taken 
into account under paragraph (f) of this section. If the loan does not 
provide for sufficient interest, then section 7872 applies to the loan 
and the loan is treated as a below-market demand loan subject to 
paragraph (e)(3)(iii) of this section. For each year that the loan is 
outstanding, however, the AFR used in the determination of forgone 
interest under paragraph (e)(3)(iii) of this section is not the blended 
annual rate but rather is the AFR (based on annual compounding) 
appropriate for the loan's term for the month in which the loan is 
made. See paragraph (e)(5)(iii)(C) of this section to determine the 
loan's term.
    (C) Term of loan. The term of a split-dollar loan described in 
paragraph (e)(5)(iii)(A)(1) of this section is based on the period from 
the date the loan is made until the loan's stated maturity date. 
However, if a split-dollar loan described in paragraph 
(e)(5)(iii)(A)(1) of this section does not have a stated maturity date, 
the term of the loan is presumed to be seven years.
    (D) Retirement and reissuance of loan. If a split-dollar loan 
described in paragraph (e)(5)(iii)(A)(1) of this section remains 
outstanding longer than the term determined under paragraph 
(e)(5)(iii)(C) of this section because of the continued performance of 
substantial services, the split-dollar loan is treated as retired and 
reissued as a split-dollar demand loan at that time for the loan's 
adjusted issue price on that date. The loan is retested at that time to 
determine whether the loan provides for sufficient interest.
    (iv) Gift split-dollar term loans--(A) Applicability. This 
paragraph (e)(5)(iv) applies to gift split-dollar term loans.
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(iv)(A) of this section is tested under paragraph (e)(4)(ii) of 
this section to determine if the loan provides for sufficient interest. 
If the loan provides for sufficient interest, then section 7872 does 
not apply to the loan and the interest on the loan is taken into 
account under paragraph (f) of this section. If the loan does not 
provide for sufficient interest, then section 7872 applies to the loan 
and the loan is treated as a below-market demand loan subject to 
paragraph (e)(3)(iii) of this section. For each year that the loan is 
outstanding, however, the AFR used in the determination of forgone 
interest under paragraph (e)(3)(iii) of this section is not the blended 
annual rate but rather is the AFR (based on annual compounding) 
appropriate for the loan's term for the month in which the loan is 
made. See

[[Page 45433]]

paragraph (e)(5)(iv)(C) of this section to determine the loan's term.
    (C) Term of loan. For purposes of paragraph (e)(5)(iv)(B) of this 
section, the term of a gift split-dollar term loan is the term 
determined under paragraph (e)(4)(iii) of this section.
    (D) Limited application for gift split-dollar term loans. The rules 
of paragraph (e)(5)(iv)(B) of this section apply to a gift split-dollar 
term loan only for Federal income tax purposes. For purposes of chapter 
12 of the Internal Revenue Code (relating to the gift tax), gift below-
market split-dollar term loans are treated as term loans under section 
7872(b) and paragraph (e)(4) of this section. See section 7872(d)(2).
    (v) Split-dollar loans payable on the later of a term certain and 
another specified date--(A) Applicability. This paragraph (e)(5)(v) 
applies to any split-dollar term loan payable upon the later of a term 
certain or--
    (1) The death of an individual; or
    (2) For a loan described in paragraph (e)(5)(iii)(A)(1) of this 
section, the date on which the condition to perform substantial future 
services by an individual ends.
    (B) Treatment of loan--(1) In general. A split-dollar loan 
described in paragraph (e)(5)(v)(A) of this section is a split-dollar 
term loan, subject to paragraph (e)(4) of this section.
    (2) Term of the loan. The term of a split-dollar loan described in 
paragraph (e)(5)(v)(A) of this section is the term certain.
    (3) Appropriate AFR. The appropriate AFR for a split-dollar loan 
described in paragraph (e)(5)(v)(A) of this section is based on a term 
of the longer of the term certain or the loan's expected term as 
determined under either paragraph (e)(5)(ii) or (iii) of this section, 
whichever is applicable.
    (C) Retirement and reissuance. If a split-dollar loan described in 
paragraph (e)(5)(v)(A) of this section remains outstanding longer than 
the term certain, the split-dollar loan is treated as retired and 
reissued at the end of the term certain for the loan's adjusted issue 
price on that date. The reissued loan is subject to paragraph 
(e)(5)(ii) or (iii) of this section, whichever is applicable. However, 
the loan is not retested at that time to determine whether the loan 
provides for sufficient interest. For purposes of paragraph (e)(3)(iii) 
of this section, the appropriate AFR for the reissued loan is the AFR 
determined under paragraph (e)(5)(v)(B)(3) of this section on the day 
the loan was originally made.
    (vi) Example. The provisions of this paragraph (e)(5) are 
illustrated by the following example:

    Example. (i) On January 1, 2009, Corporation Y and Shareholder 
B, a 65 year-old male, enter into a split-dollar life insurance 
arrangement under which B is named as the policy owner. On January 
1, 2009, Y makes a $100,000 premium payment, repayable, without 
interest, from the death benefits of the underlying contract upon 
B's death. The premium payment is a split-dollar term loan. 
Repayment of the premium payment is fully recourse to B. Assume the 
long-term AFR (based on annual compounding) at the time of the loan 
is 7 percent. Both Y and B use the calendar year as their taxable 
years.
    (ii) Based on Table 1 in Sec. 1.72-9, the expected term of the 
loan is 15 years. Under paragraph (e)(5)(ii)(C) of this section, the 
long-term AFR (based on annual compounding) is the appropriate test 
rate. Based on a 15-year term and a discount rate of 7 percent, 
compounded annually (the long-term AFR), the present value of the 
payments under the loan is $36,244.60, determined as follows: 
$100,000/[1+(0.07/1)] 15. Under paragraph (e)(5)(ii)(B) 
of this section, this loan is a below-market split-dollar term loan 
because the imputed loan amount of $36,244.60 (the present value of 
the amount required to be repaid to Y) is less than the amount 
loaned ($100,000).
    (iii) Under paragraph (e)(5)(ii)(B) of this section, the amount 
of forgone interest for 2009 (and each subsequent full calendar year 
that the loan remains outstanding) is $7,000, which is the amount of 
interest that would have been payable on the loan for the calendar 
year if interest accrued on the loan's adjusted issue price 
($100,000) at the long-term AFR (7 percent, compounded annually). 
Under section 7872 and paragraph (e)(1)(i) of this section, on 
December 31, 2009, Y is treated as making a section 301 distribution 
to B of $7,000. In addition, Y has $7,000 of imputed interest income 
for 2009.

    (f) Treatment of stated interest and OID for split-dollar loans--
(1) In general. If a split-dollar loan provides for stated interest or 
OID, the loan is subject to this paragraph (f), regardless of whether 
the split-dollar loan has sufficient interest. Except as provided in 
paragraphs (f)(2), (g), and (j) of this section, split-dollar loans are 
subject to the same Internal Revenue Code and regulatory provisions for 
stated interest and OID as other loans. For example, the lender of a 
split-dollar loan that provides for stated interest must account for 
any qualified stated interest (as defined in Sec. 1.1273-1(c)) under 
its regular method of accounting (for example, an accrual method or the 
cash receipts and disbursements method). See Sec. 1.446-2 to determine 
the amount of qualified stated interest that accrues during an accrual 
period. In addition, the lender must account under Sec. 1.1272-1 for 
any OID on a split-dollar loan. See paragraph (h) of this section for a 
subsequent waiver, cancellation, or forgiveness of stated interest on a 
split-dollar loan.
    (2) Term, payment schedule, and yield. The term of a split-dollar 
term loan determined under paragraph (e)(4)(iii) of this section (other 
than paragraph (e)(4)(iii)(C) of this section) applies to determine the 
split-dollar loan's term, payment schedule, and yield for all purposes 
of this section.
    (g) Certain variable rates of interest--(1) In general. This 
paragraph (g) provides rules for a split-dollar loan that provides for 
certain variable rates of interest. If this paragraph (g) does not 
apply to a variable rate split-dollar loan, the loan is subject to the 
rules for split-dollar loans providing for one or more contingent 
payments in paragraph (j) of this section.
    (2) Applicability--(i) In general. Except as provided in paragraph 
(g)(2)(ii) of this section, this paragraph (g) applies to a split-
dollar loan that is a variable rate debt instrument (within the meaning 
of Sec. 1.1275-5) and that provides for stated interest at a qualified 
floating rate (or rates).
    (ii) Interest rate restrictions. This paragraph (g) does not apply 
to a split-dollar loan if, as a result of interest rate restrictions 
(such as an interest rate cap), the expected yield of the loan taking 
the restrictions into account is significantly less than the expected 
yield of the loan without regard to the restrictions. Conversely, if 
reasonably symmetric interest rate caps and floors or reasonably 
symmetric governors are fixed throughout the term of the loan, these 
restrictions generally do not prevent this paragraph (g) from applying 
to the loan.
    (3) Testing for sufficient interest--(i) Demand loan. For purposes 
of paragraph (e)(3)(ii) of this section (regarding testing a split-
dollar demand loan for sufficient interest), a split-dollar demand loan 
is treated as if it provided for a fixed rate of interest for each 
accrual period to which a qualified floating rate applies. The 
projected fixed rate for each accrual period is the value of the 
qualified floating rate as of the beginning of the calendar year that 
contains the last day of the accrual period.
    (ii) Term loan. For purposes of paragraph (e)(4)(ii) of this 
section (regarding testing a split-dollar term loan for sufficient 
interest), a split-dollar term loan subject to this paragraph (g) is 
treated as if it provided for a fixed rate of interest for each accrual 
period to which a qualified floating rate applies. The projected fixed 
rate for each accrual period is the value of the qualified

[[Page 45434]]

floating rate on the date the split-dollar term loan is made. The term 
of a split-dollar loan that is subject to this paragraph (g)(3)(ii) is 
determined using the rules in Sec. 1.1274-4(c)(2). For example, if the 
loan provides for interest at a qualified floating rate that adjusts at 
varying intervals, the term of the loan is determined by reference to 
the longest interval between interest adjustment dates. See paragraph 
(e)(5) of this section for special rules relating to certain split-
dollar term loans, such as a split-dollar term loan payable not later 
than the death of an individual.
    (4) Interest accruals and imputed transfers. For purposes of 
paragraphs (e) and (f) of this section, the projected fixed rate or 
rates determined under paragraph (g)(3) of this section are used for 
purposes of determining the accrual of interest each period and the 
amount of any imputed transfers. Appropriate adjustments are made to 
the interest accruals and any imputed transfers to take into account 
any difference between the projected fixed rate and the actual rate.
    (5) Example. The provisions of this paragraph (g) are illustrated 
by the following example:

    Example. (i) On January 1, 2010, Employer V and Employee F enter 
into a split-dollar life insurance arrangement under which F is 
named as the policy owner. On January 1, 2010, V makes a $100,000 
premium payment, repayable in 15 years. The premium payment is a 
split-dollar term loan. Under the arrangement between the parties, 
interest is payable on the split-dollar loan each year on January 1, 
starting January 1, 2011, at a rate equal to the value of 1-year 
LIBOR as of the payment date. The short-term AFR (based on annual 
compounding) at the time of the loan is 7 percent. Repayment of both 
the premium payment and the interest due thereon is nonrecourse to 
F. However, the parties made a representation under paragraph (d)(2) 
of this section. Assume that the value of 1-year LIBOR on January 1, 
2010, is 8 percent, compounded annually.
    (ii) The loan is subject to this paragraph (g) because the loan 
is a variable rate debt instrument that bears interest at a 
qualified floating rate. Because the interest rate is reset each 
year, under paragraph (g)(3)(ii) of this section, the short-term AFR 
(based on annual compounding) is the appropriate test rate used to 
determine whether the loan provides for sufficient interest. 
Moreover, under paragraph (g)(3)(ii) of this section, to determine 
whether the loan provides for sufficient interest, the loan is 
treated as if it provided for a fixed rate of interest equal to 8 
percent, compounded annually. Based on a discount rate of 7 percent, 
compounded annually (the short-term AFR), the present value of the 
payments under the loan is $109,107.91. The loan provides for 
sufficient interest because the loan's imputed loan amount of 
$109,107.91 (the present value of the payments) is more than the 
amount loaned of $100,000. Therefore, the loan is not a below-market 
split-dollar term loan, and interest on the loan is taken into 
account under paragraph (f) of this section.

    (h) Adjustments for interest paid at less than the stated rate--(1) 
In general. To the extent required by this paragraph (h), if accrued 
but unpaid interest on a split-dollar loan is subsequently waived, 
cancelled, or forgiven by the lender, the waiver, cancellation, or 
forgiveness is treated as if, on that date, the interest had in fact 
been paid to the lender and then retransferred by the lender to the 
borrower. To determine the characterization of any retransferred 
amount, see paragraph (e)(1)(i) of this section. For purposes of this 
paragraph (h), the amount of interest deemed transferred and 
retransferred pursuant to this paragraph (h) is determined under 
paragraph (h)(2) or (3) of this section. See Sec. 1.61-22(b)(6) for the 
treatment of amounts other than interest on a split-dollar loan that 
are waived, cancelled, or forgiven by the lender. For purposes of this 
paragraph (h), a split-dollar term loan described in paragraph (e)(5) 
of this section (for example, a split-dollar term loan payable not 
later than the death of an individual) is subject to the rules of 
paragraph (h)(3) of this section.
    (2) Split-dollar term loans. In the case of a split-dollar term 
loan, the amount of interest deemed transferred and retransferred for 
purposes of paragraph (h)(1) of this section is determined as follows:
    (i) If the loan's stated rate is less than or equal to the 
appropriate AFR (the AFR used to test the loan for sufficient interest 
under paragraph (e) of this section), the amount of interest deemed 
transferred and retransferred pursuant to this paragraph (h) is the 
excess of the amount of interest payable at the stated rate over the 
interest actually paid.
    (ii) If the loan's stated rate is greater than the appropriate AFR 
(the AFR used to test the loan for sufficient interest under paragraph 
(e) of this section), the amount of interest deemed transferred and 
retransferred pursuant to this paragraph (h) is the excess, if any, of 
the amount of interest payable at the AFR over the interest actually 
paid.
    (3) Split-dollar demand loans. In the case of a split-dollar demand 
loan, the amount of interest deemed transferred and retransferred for 
purposes of paragraph (h)(1) of this section is equal to the aggregate 
of--
    (i) For each year that the split-dollar demand loan was outstanding 
in which the loan was a below-market split-dollar demand loan, the 
excess of the amount of interest payable at the stated rate over the 
interest actually paid allocable to that year; plus
    (ii) For each year that the split-dollar demand loan was 
outstanding in which the loan was not a below-market split-dollar 
demand loan, the excess, if any, of the amount of interest payable at 
the appropriate AFR used for purposes of imputation for that year over 
the interest actually paid allocable to that year.
    (4) Examples. The provisions of this paragraph (h) are illustrated 
by the following examples:

    Example 1. (i) On January 1, 2009, Employer Y and Employee B 
entered into a split-dollar life insurance arrangement under which B 
is named as the policy owner. On January 1, 2009, Y made a $100,000 
premium payment, repayable on December 31, 2011, with interest of 5 
percent, compounded annually. The premium payment is a split-dollar 
term loan. Assume the short-term AFR (based on annual compounding) 
at the time the loan was made was 5 percent. Repayment of both the 
premium payment and the interest due thereon was fully recourse to 
B. On December 31, 2011, Y is repaid $100,000 but Y waives the 
remainder due on the loan ($15,762.50). Both Y and B use the 
calendar year as their taxable years.
    (ii) When the split-dollar loan was made, the loan was not a 
below-market loan under paragraph (e)(4)(ii) of this section. Under 
paragraph (f) of this section, Y was required to accrue compound 
interest of 5 percent each year the loan remained outstanding. B, 
however, was not entitled to any deduction for this interest under 
paragraph (c) of this section.
    (iii) Under paragraph (h)(2) of this section, the waived amount 
is treated as if, on December 31, 2011, it had in fact been paid to 
Y and was then retransferred by Y to B. The amount deemed 
transferred to Y and retransferred to B equals the excess of the 
amount of interest payable at the stated rate ($15,762.50) over the 
interest actually paid ($0), or $15,762.50. Because of the 
employment relationship between Y and B, this retransferred amount 
is treated as compensation paid by Y to B.
    Example 2. (i) On January 1, 2009, Employer Y and Employee B 
entered into a split-dollar life insurance arrangement under which B 
is named as the policy owner. On January 1, 2009, Y made a $100,000 
premium payment, repayable on the demand of Y, with interest of 7 
percent, compounded annually. The premium payment is a split-dollar 
demand loan. Assume the blended annual rate (based on annual 
compounding) in 2009 was 5 percent and in 2010 was 6 percent. 
Repayment of both the premium payment and the interest due thereon 
was fully recourse to B. On December 31, 2010, Y demands repayment 
and is repaid its $100,000 premium payment in full; however, Y 
waives all interest due on the loan. Both Y and B use the calendar 
year as their taxable years.
    (ii) For each year that the split-dollar demand loan was 
outstanding, the loan was not a below-market loan under paragraph 
(e)(3)(ii) of this section. Under paragraph (f)

[[Page 45435]]

of this section, Y was required to accrue compound interest of 7 
percent each year the loan remained outstanding. B, however, was not 
entitled to any deduction for this interest under paragraph (c) of 
this section.
    (iii) Under paragraph (h)(1)(i) of this section, a portion of 
the waived interest may be treated as if, on December 31, 2010, it 
had in fact been paid to Y and was then retransferred by Y to B. The 
amount of interest deemed transferred to Y and retransferred to B 
equals the excess, if any, of the amount of interest payable at the 
blended annual rate for each year the loan is outstanding over the 
interest actually paid with respect to that year. For 2009, the 
interest payable at the blended annual rate is $5,000 ($100,000 x 
0.05). For 2010, the interest payable at the blended annual rate is 
$6,000 ($100,000 x 0.06). Therefore, the amount of interest deemed 
transferred to Y and retransferred to B equals $11,000. Because of 
the employment relationship between Y and B, this retransferred 
amount is treated as compensation paid by Y to B.

    (i) [Reserved]
    (j) Split-dollar loans that provide for contingent payments--(1) In 
general. Except as provided in paragraph (j)(2) of this section, this 
paragraph (j) provides rules for a split-dollar loan that provides for 
one or more contingent payments. This paragraph (j), rather than 
Sec. 1.1275-4, applies to split-dollar loans that provide for one or 
more contingent payments.
    (2) Exceptions--(i) Certain contingencies. For purposes of this 
section, a split-dollar loan does not provide for contingent payments 
merely because--
    (A) The loan provides for options described in paragraph 
(e)(4)(iii)(B) of this section (for example, certain call options, put 
options, and options to extend); or
    (B) The loan is described in paragraph (e)(5) of this section 
(relating to certain split-dollar term loans, such as a split-dollar 
term loan payable not later than the death of an individual).
    (ii) Insolvency and default. For purposes of this section, a 
payment is not contingent merely because of the possibility of 
impairment by insolvency, default, or similar circumstances. However, 
if any payment on a split-dollar loan is nonrecourse to the borrower, 
the payment is a contingent payment for purposes of this paragraph (j) 
unless the parties to the arrangement make the written representation 
provided for in paragraph (d)(2) of this section.
    (iii) Remote and incidental contingencies. For purposes of this 
section, a payment is not a contingent payment merely because of a 
contingency that, as of the date the split-dollar loan is made, is 
either remote or incidental (within the meaning of Sec. 1.1275-2(h)).
    (iv) Exceptions for certain split-dollar loans. This paragraph (j) 
does not apply to a split-dollar loan described in Sec. 1.1272-1(d) 
(certain debt instruments that provide for a fixed yield) or a split-
dollar loan described in paragraph (g) of this section (relating to 
split-dollar loans providing for certain variable rates of interest).
    (3) Contingent split-dollar method--(i) In general. If a split-
dollar loan provides for one or more contingent payments, then the 
parties account for the loan under the contingent split-dollar method. 
In general, except as provided in this paragraph (j), this method is 
the same as the noncontingent bond method described in Sec. 1.1275-
4(b).
    (ii) Projected payment schedule--(A) Determination of schedule. No 
comparable yield is required to be determined. The projected payment 
schedule for the loan includes all noncontingent payments and a 
projected payment for each contingent payment. The projected payment 
for a contingent payment is the lowest possible value of the payment. 
The projected payment schedule, however, must produce a yield that is 
not less than zero. If the projected payment schedule produces a 
negative yield, the schedule must be reasonably adjusted to produce a 
yield of zero.
    (B) Split-dollar term loans payable upon the death of an 
individual. If a split-dollar term loan described in paragraph 
(e)(5)(ii)(A) or (v)(A)(1) of this section provides for one or more 
contingent payments, the projected payment schedule is determined based 
on the term of the loan as determined under paragraph (e)(5)(ii)(C) or 
(v)(B)(2) of this section, whichever is applicable.
    (C) Certain split-dollar term loans conditioned on the future 
performance of substantial services by an individual. If a split-dollar 
term loan described in paragraph (e)(5)(iii)(A)(1) or (v)(A)(2) of this 
section provides for one or more contingent payments, the projected 
payment schedule is determined based on the term of the loan as 
determined under paragraph (e)(5)(iii)(C) or (v)(B)(2) of this section, 
whichever is applicable.
    (D) Demand loans. If a split-dollar demand loan provides for one or 
more contingent payments, the projected payment schedule is determined 
based on a reasonable assumption as to when the lender will demand 
repayment.
    (E) Borrower/lender consistency. Contrary to Sec. 1.1275-
4(b)(4)(iv), the lender rather than the borrower is required to 
determine the projected payment schedule and to provide the schedule to 
the borrower and to any indirect participant as described in paragraph 
(e)(2) of this section. The lender's projected payment schedule is used 
by the lender, the borrower, and any indirect participant to compute 
interest accruals and adjustments.
    (iii) Negative adjustments. If the issuer of a split-dollar loan is 
not allowed to deduct interest or OID (for example, because of section 
163(h) or 264), then the issuer is not required to include in income 
any negative adjustment carryforward determined under Sec. 1.1275-
4(b)(6)(iii)(C) on the loan, except to the extent that at maturity the 
total payments made over the life of the loan are less than the issue 
price of the loan.
    (4) Application of section 7872--(i) Determination of below-market 
status. The yield based on the projected payment schedule determined 
under paragraph (j)(3) of this section is used to determine whether the 
loan is a below-market split-dollar loan under paragraph (e) of this 
section.
    (ii) Adjustment upon the resolution of a contingent payment. To the 
extent that interest has accrued under section 7872 on a split-dollar 
loan and the interest would not have accrued under this paragraph (j) 
in the absence of section 7872, the lender is not required to recognize 
income under Sec. 1.1275-4(b) for a positive adjustment and the 
borrower is not treated as having interest expense for a positive 
adjustment. To the same extent, there is a reversal of the tax 
consequences imposed under paragraph (e) of this section for the prior 
imputed transfer from the lender to the borrower. This reversal is 
taken into account in determining adjusted gross income.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (j). For purposes of this paragraph (j)(5), assume that the 
contingent payments are neither remote nor incidental. The examples are 
as follows:

    Example 1. (i) On January 1, 2010, Employer T and Employee G 
enter into a split-dollar life insurance arrangement under which G 
is named as the policy owner. On January 1, 2010, T makes a $100,000 
premium payment. On December 31, 2013, T will be repaid an amount 
equal to the premium payment plus an amount based on the increase, 
if any, in the price of a specified commodity for the period the 
loan is outstanding. The premium payment is a split-dollar term 
loan. Repayment of both the premium payment and the interest due 
thereon is recourse to G. Assume that the appropriate AFR for this 
loan, based on annual compounding, is 7 percent. Both T and G use 
the calendar year as their taxable years.
    (ii) Under this paragraph (j), the split-dollar loan between T 
and G provides for a

[[Page 45436]]

contingent payment. Therefore, the loan is subject to the contingent 
split-dollar method. Under this method, the projected payment 
schedule for the loan provides for a noncontingent payment of 
$100,000 and a projected payment of $0 for the contingent payment 
(because it is the lowest possible value of the payment) on December 
31, 2013.
    (iii) Based on the projected payment schedule and a discount 
rate of 7 percent, compounded annually (the appropriate AFR), the 
present value of the payments under the loan is $76,289.52. Under 
paragraphs (e)(4) and (j)(4)(i) of this section, the loan does not 
provide for sufficient interest because the loan's imputed loan 
amount of $76,289.52 (the present value of the payments) is less 
than the amount loaned of $100,000. Therefore, the loan is a below-
market split-dollar loan and the loan is recharacterized as 
consisting of two portions: an imputed loan amount of $76,289.52 and 
an imputed transfer of $23,710.48 (amount loaned of $100,000 minus 
the imputed loan amount of $76,289.52).
    (iv) In accordance with section 7872(b)(1) and paragraph 
(e)(4)(iv) of this section, on the date the loan is made, T is 
treated as transferring to G $23,710.48 (the imputed transfer) as 
compensation. In addition, T must take into account as OID an amount 
equal to the imputed transfer. See Sec. 1.1272-1 for the treatment 
of OID.
    Example 2. (i) Assume, in addition to the facts in Example 1, 
that on December 31, 2013, T receives $115,000 (its premium payment 
of $100,000 plus $15,000).
    (ii) Under the contingent split-dollar method, when the loan is 
repaid, there is a $15,000 positive adjustment ($15,000 actual 
payment minus $0 projected payment). Under paragraph (j)(4) of this 
section, because T accrued imputed interest under section 7872 on 
this split-dollar loan to G and this interest would not have accrued 
in the absence of section 7872, T is not required to include the 
positive adjustment in income, and G is not treated as having 
interest expense for the positive adjustment. To the same extent, T 
must include in income, and G is entitled to deduct, $15,000 to 
reverse their respective prior tax consequences imposed under 
paragraph (e) of this section (T's prior deduction for imputed 
compensation deemed paid to G and G's prior inclusion of this 
amount). G takes the reversal into account in determining adjusted 
gross income. That is, the $15,000 is an ``above-the-line'' 
deduction, whether or not G itemizes deductions.
    Example 3. (i) Assume the same facts as in Example 2, except 
that on December 31, 2013, T receives $127,000 (its premium payment 
of $100,000 plus $27,000).
    (ii) Under the contingent split-dollar method, when the loan is 
repaid, there is a $27,000 positive adjustment ($27,000 actual 
payment minus $0 projected payment). Under paragraph (j)(4) of this 
section, because T accrued imputed interest of $23,710.48 under 
section 7872 on this split-dollar loan to G and this interest would 
not have accrued in the absence of section 7872, T is not required 
to include $23,710.48 of the positive adjustment in income, and G is 
not treated as having interest expense for the positive adjustment. 
To the same extent, in 2013, T must include in income, and G is 
entitled to deduct, $23,710.48 to reverse their respective prior tax 
consequences imposed under paragraph (e) of this section (T's prior 
deduction for imputed compensation deemed paid to G and G's prior 
inclusion of this amount). G and T take these reversals into account 
in determining adjusted gross income. Under the contingent split-
dollar method, T must include in income $3,289.52 upon resolution of 
the contingency ($27,000 positive adjustment minus $23,710.48).

    (k) Payment ordering rule. For purposes of this section, a payment 
made by the borrower pursuant to a split-dollar life insurance 
arrangement is applied to all direct and indirect split-dollar loans in 
the following order--
    (1) A payment of interest to the extent of accrued but unpaid 
interest (including any OID) on all outstanding split-dollar loans in 
the order the interest accrued;
    (2) A payment of principal on the outstanding split-dollar loans in 
the order in which the loans were made;
    (3) A payment of amounts previously paid by a non-owner pursuant to 
a split-dollar life insurance arrangement that were not reasonably 
expected to be repaid by the owner; and
    (4) Any other payment with respect to a split-dollar life insurance 
arrangement, other than a payment taken into account under paragraphs 
(k)(1), (2), and (3) of this section.
    (l) [Reserved]
    (m) Repayments received by a lender. Any amount received by a 
lender under a life insurance contract that is part of a split-dollar 
life insurance arrangement is treated as though the amount had been 
paid to the borrower and then paid by the borrower to the lender. Any 
amount treated as received by the borrower under this paragraph (m) is 
subject to other provisions of the Internal Revenue Code as applicable 
(for example, sections 72 and 101(a)). The lender must take the amount 
into account as a payment received with respect to a split-dollar loan, 
in accordance with paragraph (k) of this section. No amount received by 
a lender with respect to a split-dollar loan is treated as an amount 
received by reason of the death of the insured.
    (n) Effective date--(1) General rule. This section applies to any 
split-dollar life insurance arrangement entered into after the date the 
final regulations are published in the Federal Register.
    (2) Early reliance. Taxpayers may rely on this section for the 
treatment of any split-dollar life insurance arrangement entered into 
on or before the date described in paragraph (n)(1) of this section, 
provided that all taxpayers who are parties to a split-dollar loan 
described in paragraph (b)(1) of this section treat the arrangement 
consistently under this section.
    (3) Modified arrangements treated as new arrangements. An 
arrangement entered into on or before the date set forth in paragraph 
(n)(1) of this section that is materially modified after the date set 
forth in paragraph (n)(1) of this section is treated as a new 
arrangement entered into on the date of the modification.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

    Par. 10. The authority citation for part 31 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805. * * *

    Par. 11. In Sec. 31.3121(a)-1, paragraph (k) is added to read as 
follows:


Sec. 31.3121(a)-1  Wages.

* * * * *
    (k) Split-dollar life insurance arrangements. Except as otherwise 
provided under section 3121(v), see Sec. 1.61-22 of this chapter for 
rules relating to the treatment of split-dollar life insurance 
arrangements.
    Par. 12. In Sec. 31.3231(e)-1, paragraph (a)(6) is added to read as 
follows:


Sec. 31.3231(e)-1  Compensation.

    (a) * * *
    (6) Split-dollar life insurance arrangements. See Sec. 1.61-22 of 
this chapter for rules relating to the treatment of split-dollar life 
insurance arrangements.
* * * * *
    Par. 13. In Sec. 31.3306(b)-1, paragraph (l) is added to read as 
follows:


Sec. 31.3306(b)-1  Wages.

* * * * *
    (l) Split-dollar life insurance arrangements. Except as otherwise 
provided under section 3306(r), see Sec. 1.61-22 of this chapter for 
rules relating to the treatment of split-dollar life insurance 
arrangements.
    Par. 14. In Sec. 31.3401(a)-1, paragraph (b)(15) is added to read 
as follows:


Sec. 31.3401(a)-1  Wages.

* * * * *
    (b) * * *
    (15) Split-dollar life insurance arrangements. See Sec. 1.61-22 of 
this chapter for rules relating to the

[[Page 45437]]

treatment of split-dollar life insurance arrangements.
* * * * *

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
[FR Doc. 02-17042 Filed 7-3-02; 9:53 am]
BILLING CODE 4830-01-P