[Federal Register Volume 68, Number 90 (Friday, May 9, 2003)]
[Proposed Rules]
[Pages 24898-24903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11568]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-164754-01]
RIN 1545-BA44


Split-Dollar Life Insurance Arrangements

AGENCY: Internal Revenue Service (IRS), Treasury.

[[Page 24899]]


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

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the 
valuation of economic benefits under certain equity 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 July 8, 2003. 
Requests to speak and outlines of topics to be discussed at the public 
hearing scheduled for July 29, 2003, must be received by July 8, 2003.

ADDRESSES: Send submissions to CC:PA: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 4 p.m. to: CC:PA: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 the IRS 
Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, please 
contact Elizabeth Kaye at (202) 622-4920. To be placed on the 
attendance list for the hearing, please contact LaNita Van Dyke at 
(202) 622-7180.

SUPPLEMENTARY INFORMATION:

Background and Overview of Notice of Proposed Rulemaking

1. Summary of the Prior Notice of Proposed Rulemaking

    On July 9, 2002, a notice of proposed rulemaking (REG-164754-01) 
was published in the Federal Register (67 FR 45414) proposing 
comprehensive rules for the income, gift, and employment taxation of 
equity and non-equity split-dollar life insurance arrangements (the 
2002 proposed regulations). The 2002 proposed regulations will apply to 
split-dollar life insurance arrangements entered into after the date 
final regulations are published in the Federal Register and to 
arrangements entered into on or before that date that are materially 
modified after that date. Under certain conditions, taxpayers may rely 
on the 2002 proposed regulations for split-dollar life insurance 
arrangements entered into on or before the date final regulations are 
published in the Federal Register.
    In general, a split-dollar life insurance arrangement is an 
arrangement between two or more parties to allocate the policy benefits 
and, in some cases, the costs of a life insurance contract. Under a so-
called equity split-dollar life insurance arrangement, one party to the 
arrangement typically receives an interest in the policy cash value (or 
equity) of the life insurance policy disproportionate to that party's 
share of policy premiums. That party also typically receives the 
benefit of current life insurance protection under the arrangement. 
Under a so-called non-equity split-dollar life insurance arrangement, 
one party typically provides the other party with current life 
insurance protection but not any interest in the policy cash value.
    The 2002 proposed regulations provide two mutually exclusive 
regimes for taxation of split-dollar life insurance arrangements--a 
loan regime and an economic benefit regime. Under the loan regime 
(which is set forth in Sec.  1.7872-15 of the 2002 proposed 
regulations), the non-owner of the life insurance contract is treated 
as loaning the amount of its premium payments to the owner of the 
contract. The loan regime generally will govern the taxation of 
collateral assignment arrangements. Under the economic benefit regime 
(which is set forth in Sec.  1.61-22(d) through (g) of the 2002 
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.
    The 2002 proposed regulations reserved on the rules for valuing 
economic benefits provided to the non-owner under an equity split-
dollar life insurance arrangement governed by the economic benefit 
regime, pending receipt of comments from interested parties. The 
preamble to the 2002 proposed regulations notes that any proposal ``for 
a specific methodology should be objective and administrable'' and 
describes a potential approach under which the non-owner would include 
in income the difference between current premium payments and the net 
present value of the amount to be repaid to the owner in the future.
    A public hearing on the 2002 proposed regulations was held on 
October 23, 2002. In addition, interested parties have submitted 
detailed comments on the 2002 proposed regulations, including comments 
on the valuation of economic benefits provided to a non-owner under an 
equity split-dollar life insurance arrangement governed by the economic 
benefit regime.

2. Explanation of Provisions and Summary of Comments

a. Overview
    These proposed regulations, which supplement the 2002 proposed 
regulations, provide guidance on the valuation of economic benefits 
(including the valuation of an interest in policy cash value) under an 
equity split-dollar life insurance arrangement governed by the economic 
benefit regime. These proposed regulations apply for purposes of 
Federal income, employment, and gift taxes.
    These proposed regulations address only those comments received by 
the IRS and the Treasury Department on the valuation of economic 
benefits under an equity split-dollar life insurance arrangement 
governed by the economic benefit regime. Comments received on other 
issues regarding the 2002 proposed regulations and comments on these 
proposed regulations will be addressed when both sets of proposed 
regulations are finalized.
    These proposed regulations provide that in the case of an equity 
split-dollar life insurance arrangement, the value of the economic 
benefits provided to the non-owner under the arrangement for a taxable 
year equals the cost of any current life insurance protection provided 
to the non-owner, the amount of policy cash value to which the non-
owner has current access (to the extent that such amount was not 
actually taken into account for a prior taxable year), and the value of 
any other economic benefits provided to the non-owner (to the extent 
not actually taken into account for a prior taxable year). The terms 
owner and non-owner are defined in Sec.  1.61-22(c)(1) and (2) of the 
2002 proposed regulations.
b. Current Access to Policy Cash Value
    Generally, under an equity split-dollar life insurance arrangement 
governed by the economic benefit regime, the owner of the life 
insurance contract pays policy premiums, thereby establishing a pool of 
assets with respect to which the non-owner has certain rights under the 
arrangement (for example, rights of withdrawal, borrowing, surrender, 
or assignment). Additionally, the pool of assets is held by a third 
party, the life insurance company, effectively placing the cash value 
beyond the reach of the employer or the employer's general creditors in 
many cases. Thus, an equity split-dollar life insurance arrangement 
confers on the non-owner rights to

[[Page 24900]]

direct or indirect economic enjoyment of policy cash value, making 
current taxation of the non-owner's interest in the cash value 
appropriate under the doctrines of constructive receipt, economic 
benefit, and cash equivalence.
    These proposed regulations provide that the non-owner has current 
access to any portion of the policy cash value that is directly or 
indirectly accessible by the non-owner, inaccessible to the owner, or 
inaccessible to the owner's general creditors. For this purpose, 
``access'' is to be construed broadly and includes any direct or 
indirect right under the arrangement of the non-owner to obtain, use, 
or realize potential economic value from the policy cash value. Thus, 
for example, a non-owner has current access to policy cash value if the 
non-owner can directly or indirectly make a withdrawal from the policy, 
borrow from the policy, or effect a total or partial surrender of the 
policy. Similarly, for example, the non-owner has current access if the 
non-owner can anticipate, assign (either at law or in equity), 
alienate, pledge, or encumber the policy cash value or if the policy 
cash value is available to the non-owner's creditors by attachment, 
garnishment, levy, execution, or other legal or equitable process. 
Policy cash value is inaccessible to the owner if the owner does not 
have the full rights to policy cash value normally held by an owner of 
a life insurance contract. Policy cash value is inaccessible to the 
owner's general creditors if, under the terms of the split-dollar life 
insurance arrangement or by operation of law or any contractual 
undertaking, the creditors cannot, for any reason, effectively reach 
the full policy cash value in the event of the owner's insolvency.
    In a typical equity split-dollar life insurance arrangement, the 
non-owner has current access to all portions of the policy cash value 
in excess of the amount payable to the owner. In many arrangements, the 
non-owner may also have current access to the portion of the cash value 
payable to the owner if, for example, that portion of the policy cash 
value is for any reason not accessible to the owner or the owner's 
general creditors.
    Under these proposed regulations, policy cash value is determined 
without regard to surrender charges or other similar charges or 
reductions. To provide uniformity, certainty, and administrative ease, 
policy cash value generally is determined on the last day of the non-
owner's taxable year. In addition, solely for purposes of employment 
tax (as defined in Sec.  1.61-22(c)(5) of the 2002 proposed 
regulations) and the penalty for failure to pay estimated income taxes, 
the portion of the policy cash value that is treated as provided by the 
owner to the non-owner during the non-owner's taxable year is treated 
as so provided on the last day of that taxable year. The IRS and the 
Treasury Department request comments regarding circumstances in which 
it might be appropriate to use a different date for employment tax 
withholding purposes.
    Several commentators on the 2002 proposed regulations asserted that 
those regulations were contrary to the intention, announced by the IRS 
and the Treasury Department in Notice 2002-8 (2002-1 C.B. 398), to 
publish proposed regulations that will not treat an owner as having 
made a transfer of a portion of the cash surrender value of a life 
insurance contract to a non-owner for purposes of section 83 solely 
because interest or other earnings credited to the cash surrender value 
of the contract cause the cash surrender value to exceed the portion 
thereof payable to the owner. The valuation methodology described in 
these proposed regulations, however, does not treat an owner as having 
made a transfer under section 83 solely because of growth in policy 
cash value. Rather, this approach, consistent with the doctrines of 
constructive receipt, economic benefit, and cash equivalence, treats 
the non-owner as having a taxable interest in policy cash value only to 
the extent that the non-owner has current access to the policy cash 
value.
    Several commentators stated that a non-owner who includes in income 
a portion of the policy cash value should be credited with ``inside 
build-up'' on that portion of the policy cash value. This result might 
be appropriate if there were actual transfers of ownership of the 
underlying life insurance contract (or a portion thereof) from the 
owner to the non-owner. Here, by contrast to transfers described in 
Sec.  1.61-22(g) of the 2002 proposed regulations, no part of the life 
insurance contract is actually transferred from the owner to the non-
owner by reason of the non-owner's taking policy cash value into 
account.
    In addition, some commentators expressed the view that, under the 
economic benefit regime, if the policy cash value in one year is less 
than the policy cash value in a prior year, the non-owner should be 
allowed a loss to the extent this difference was included in income in 
the prior year. Consistent with the underlying doctrines of 
constructive receipt, economic benefit, and cash equivalence, a loss 
should not be allowed in this situation. Note, however, that under 
Sec.  1.61-22(g)(4)(ii)(A) of the 2002 proposed regulations, if a life 
insurance contract is transferred from an owner to a non-owner (the 
transferee), the transferee's investment in the contract under section 
72(e) will include the amount of economic benefits previously taken 
into account by the transferee prior to the transfer.
c. Current Term Life Insurance Protection
    These proposed regulations provide that, in the case of an equity 
split-dollar life insurance arrangement governed by the economic 
benefit regime, the value of the economic benefits provided to a non-
owner for a taxable year also includes the cost of current life 
insurance protection provided to the non-owner. The cost of 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. The 
amount of the current life insurance protection (including paid-up 
additions thereto) provided to the non-owner for a taxable year equals 
the excess of the average death benefit of the life insurance contract 
over the sum of the total amount payable to the owner (including any 
outstanding policy loans that offset amounts otherwise payable to the 
owner) under the split-dollar life insurance arrangement and the 
portion of the policy cash value actually taken into account for the 
current taxable year or for any prior taxable year. This subtraction of 
the portion of the policy cash value actually taken into account by the 
non-owner prevents the non-owner from being taxed twice on the same 
amount, once as part of the policy cash value to which the non-owner 
has current access and again as an amount provided to the non-owner in 
the form of death benefit protection.
d. Other Economic Benefits
    These proposed regulations provide that, in the case of an equity 
split-dollar life insurance arrangement governed by the economic 
benefit regime, the value of all other economic benefits provided to 
the non-owner must be taken into account (to the extent not actually 
taken into account for a prior taxable year). For this purpose, the 
term ``other economic benefits'' should be construed broadly to include 
any benefit, right, or feature of the life insurance contract (other 
than current life insurance protection and policy cash value)

[[Page 24901]]

provided to the non-owner under the arrangement.

Proposed Effective Date

    These proposed regulations will have the same applicability date as 
that set forth in Sec.  1.61-22(j) of the 2002 proposed regulations. 
Thus, these proposed regulations will apply to split-dollar life 
insurance arrangements entered into after the date final regulations 
are published in the Federal Register and to arrangements entered into 
on or before that date that are materially modified after that date.
    In addition, taxpayers may rely on these proposed regulations for 
equity split-dollar life insurance arrangements entered into on or 
before the date final regulations are published in the Federal Register 
if the conditions in Sec.  1.61-22(j)(2)(i) of the 2002 proposed 
regulations are met. For taxable years beginning after December 31, 
2002, however, parties to an equity split-dollar life insurance 
arrangement may rely on these proposed regulations only if the value of 
all economic benefits taken into account by the parties is determined 
in accordance with these proposed regulations. These proposed 
regulations also conform to the early reliance rules in Sec.  1.83-
6(a)(5)(ii)(B) and Sec.  1.301-1(q)(4)(ii) of the 2002 proposed 
regulations to that set forth in the preceding sentence.

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 has been determined that section 553(b) of the Administrative 
Procedure Act (5 U.S.C. Chapter 5) does not apply to these regulations, 
and because these regulations do not impose a collection of information 
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
does not apply. 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 July 29, 2003, beginning at 
10 a.m. in the IRS Auditorium in the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Thus, the public hearing 
concerning these proposed regulations will be held on a date sooner 
than the usual 120 days after the date of publication of proposed 
regulations in the Federal Register. The IRS and the Treasury 
Department believe that this shorter period is sufficient for taxpayers 
to comment on these proposed regulations because the issue addressed by 
these proposed regulations is narrowly focused and taxpayers have 
already submitted comments on this issue in connection with the 2002 
proposed regulations.
    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 July 
8, 2003. 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 author of these proposed regulations is Elizabeth 
Kaye of the Office of Associate Chief Counsel (Income Tax and 
Accounting). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

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

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

    Par. 2. Section 1.61-22, as proposed on July 9, 2002, at 67 FR 
45423, is amended as follows:
    1. The text of paragraph (d)(3)(ii) is added.
    2. Paragraph (j)(2)(iii) is added.
    The additions read as follows:


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

* * * * *
    (d) * * *
    (3) * * *
    (ii) Valuation of economic benefits--(A) In general. In the case of 
a split-dollar life insurance arrangement described in paragraph 
(d)(3)(i) of this section, the value of the economic benefits provided 
to a non-owner for a taxable year under the arrangement equals--
    (1) The cost of current life insurance protection provided to the 
non-owner as determined under paragraph (d)(3)(ii)(B) of this section;
    (2) The amount of policy cash value to which the non-owner has 
current access within the meaning of paragraph (d)(3)(ii)(C) of this 
section (to the extent that such amount was not actually taken into 
account for a prior taxable year); and
    (3) The value of any economic benefits not described in paragraph 
(d)(3)(ii)(A)(1) or (2) of this section provided to the non-owner (to 
the extent not actually taken into account for a prior taxable year).
    (B) Valuation of current term life insurance protection. In the 
case of a split-dollar life insurance arrangement described in 
paragraph (d)(3)(i) of this section, the amount of the current life 
insurance protection (including paid-up additions thereto) provided to 
the non-owner for a taxable year equals the excess of the average death 
benefit of the life insurance contract over the sum of the total amount 
payable to the owner under the split-dollar life insurance arrangement 
and the portion of the policy cash value actually taken into account 
for the current taxable year or for any prior taxable year. The total 
amount payable to the owner is increased by the amount of any 
outstanding policy loan. The cost of 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 24902]]

permitted in guidance published in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2)(ii) of this chapter).
    (C) Current access. For purposes of this paragraph (d)(3), a non-
owner has current access to that portion of the policy cash value that 
is directly or indirectly accessible by the non-owner, inaccessible to 
the owner, or inaccessible to the owner's general creditors.
    (D) Valuation date--(1) General rules. For purposes of paragraph 
(d)(3)(ii)(A) of this section, the policy cash value is determined on 
the last day of the taxable year of the non-owner. Notwithstanding the 
previous sentence, if the split-dollar life insurance arrangement 
terminates during the taxable year of the non-owner, the policy cash 
value is determined on the day that the arrangement terminates.
    (2) Artifice or device. Notwithstanding paragraph (d)(3)(ii)(D)(1) 
of this section, if any artifice or device is used to understate the 
amount of policy cash value to which the non-owner has current access 
on the valuation date in paragraph (d)(3)(ii)(D)(1) of this section, 
then, for purposes of paragraph (d)(3)(ii)(A) of this section, the date 
on which the amount of policy cash value is determined is the date on 
which the amount of policy cash value is greatest during that taxable 
year.
    (E) Policy cash value. For purposes of this paragraph (d)(3), 
policy cash value is determined without regard to surrender charges or 
other similar charges or reductions.
    (F) Special rule for certain taxes. For purposes of employment tax 
(as defined in paragraph (c)(5) of this section), and sections 6654 and 
6655 (relating to the failure to pay estimated income tax), that 
portion of the policy cash value (as determined under paragraph 
(d)(3)(ii)(A)(2) of this section) that is treated as provided by the 
owner to the non-owner under paragraph (d)(1) of this section shall be 
treated as so provided on the last day of the taxable year of the non-
owner. Notwithstanding the previous sentence, if the split-dollar life 
insurance arrangement terminates during the taxable year of the non-
owner, such portion of the policy cash value shall be treated as so 
provided on the day that the arrangement terminates.
    (G) Examples. The following examples illustrate the rules of this 
paragraph (d)(3)(ii). Except as otherwise provided, both examples 
assume the following facts: employer (R) is the owner (as defined in 
paragraph (c)(1) of this section) and employee (E) is the non-owner (as 
defined in paragraph (c)(2) of this section) of a life insurance 
contract that is part of an equity split-dollar life insurance 
arrangement that is subject to the provisions of paragraphs (d) through 
(g) of this section; the contract is a life insurance contract as 
defined in section 7702 and not a modified endowment contract as 
defined in section 7702A; R does not withdraw or obtain a loan of any 
portion of the policy cash value and does not surrender any portion of 
the life insurance contract; the compensation paid to E is reasonable; 
E is not provided any economic benefits described in paragraph 
(d)(3)(ii)(A)(3) of this section; E does not make any premium payments; 
E's taxable year is the calendar year; and E reports on E's Federal 
income tax return for each year that the equity split-dollar life 
insurance arrangement is in effect the amount of income required to be 
reported under paragraph (d) of this section. The examples are as 
follows:

     Example 1. (i) Facts. In year 1, R and E enter into the equity 
split-dollar life insurance arrangement. Under the arrangement R 
pays all of the premiums on the life insurance contract until the 
termination of the arrangement or E's death. The arrangement also 
provides that upon termination of the arrangement or E's death, R is 
entitled to receive the lesser of the aggregate premiums paid or the 
policy cash value of the contract and E is entitled to receive any 
remaining amounts. Under the terms of the arrangement and applicable 
state law, the policy cash value is fully accessible by R and R's 
creditors but E has the right to borrow or withdraw the portion of 
the policy cash value exceeding the amount payable to R upon 
termination of the arrangement or E's death. To fund the 
arrangement, R purchases a life insurance contract with constant 
death benefit protection equal to $1,500,000. As of December 31 of 
year 1, the policy cash value equals $55,000 and R has paid $60,000 
of premiums on the life insurance contract. As of December 31 of 
year 2, the policy cash value equals $140,000 and R has paid 
aggregate premiums of $120,000 on the life insurance contract. As of 
December 31 of year 3, the policy cash value equals $240,000 and R 
has paid $180,000 of premiums on the life insurance contract.
    (ii) Analysis. Under the terms of the equity split-dollar life 
insurance arrangement, E has the right for year 1 and all subsequent 
years to borrow or withdraw the portion of the policy cash value 
exceeding the amount payable to R. Thus, under paragraph 
(d)(3)(ii)(C) of this section, E has current access to such portion 
of the policy cash value for each year that the arrangement is in 
effect. In addition, because R pays all of the premiums on the life 
insurance contract, R provides to E all of the economic benefits 
that E receives under the arrangement. Therefore, under paragraph 
(d)(1) of this section, E includes in gross income the value of all 
economic benefits described in paragraphs (d)(3)(ii)(A)(1) and (2) 
of this section provided to E under the arrangement.
    (iii) Results for year 1. For year 1, E is provided, under 
paragraph (d)(3)(ii)(A)(2) of this section, $0 of policy cash value 
(excess of $55,000 policy cash value determined as of December 31 of 
year 1 over $55,000 payable to R). For year 1, E is also provided, 
under paragraph (d)(3)(ii)(A)(1) of this section, current life 
insurance protection of $1,445,000 ($1,500,000 minus $55,000 payable 
to R). Thus, E includes in gross income for year 1 the cost of 
$1,445,000 of current life insurance protection.
    (iv) Results for year 2. For year 2, E is provided, under 
paragraph (d)(3)(ii)(A)(2) of this section, $20,000 of policy cash 
value ($140,000 policy cash value determined as of December 31 of 
year 2 minus $120,000 payable to R). For year 2, E is also provided, 
under paragraph (d)(3)(ii)(A)(1) of this section, current life 
insurance protection of $1,360,000 ($1,500,000 minus the sum of 
$120,000 payable to R and the aggregate of $20,000 of policy cash 
value that E actually includes in income on E's year 1 and year 2 
income tax returns). Thus, E includes in gross income for year 2 the 
sum of $20,000 of policy cash value and the cost of $1,360,000 of 
current life insurance protection.
    (v) Results for year 3. For year 3, E is provided, under 
paragraph (d)(3)(ii)(A)(2) of this section, $40,000 of policy cash 
value ($240,000 policy cash value determined as of December 31 of 
year 3 minus the sum of $180,000 payable to R and $20,000 of 
aggregate policy cash value that E actually included in gross income 
on E's year 1 and year 2 federal income tax returns). For year 3, E 
is also provided, under paragraph (d)(3)(ii)(A)(1) of this section, 
current life insurance protection of $1,260,000 ($1,500,000 minus 
the sum of $180,000 payable to R and $60,000 of aggregate policy 
cash value that E actually includes in gross income on E's year 1, 
year 2, and year 3 federal income tax returns). Thus, E includes in 
gross income for year 3 the sum of $40,000 of policy cash value and 
the cost of $1,260,000 of current life insurance protection.
     Example 2. (i) Facts. The facts are the same as in Example 1 
except that E cannot directly or indirectly access any portion of 
the policy cash value, but the terms of the equity split-dollar life 
insurance arrangement or applicable state law provide that the 
policy cash value in excess of the amount payable to R upon 
termination of the arrangement or E's death is inaccessible to R's 
general creditors.
    (ii) Analysis. Under the terms of the equity split-dollar life 
insurance arrangement or applicable state law, the portion of the 
policy cash value exceeding the amount payable to R is inaccessible 
to R's general creditors. Thus, under paragraph (d)(3)(ii)(C) of 
this section, E has current access to such portion of the policy 
cash value for each year that the arrangement is in effect. In 
addition, because R pays all of the premiums on the life insurance 
contract, R provides to E all of the economic benefits that E 
receives under the arrangement. Therefore, under paragraph (d)(1) of 
this section, E includes in gross income the value of all economic 
benefits described in paragraphs (d)(3)(ii)(A)(1) and (2) of this 
section provided to E under the arrangement.

[[Page 24903]]

    (iii) Results for years 1, 2 and 3. The results for this example 
are the same as the results in Example 1.
* * * * *
    (j) * * *
    (2) * * *
    (iii) Valuation of economic benefits. Notwithstanding paragraph 
(j)(2)(ii) of this section, for taxable years beginning after December 
31, 2002, 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 is determined in accordance 
with paragraph (d)(3)(ii) of this section.
* * * * *
    Par. 3. Section 1.83-6, as proposed on July 9, 2002, at 67 FR 
45428, is amended by adding paragraph (a)(5)(ii)(B)(3) to read as 
follows:


Sec.  1.83-6  Deduction by employer.

    (a) * * *
    (5) * * *
    (ii) * * *
    (B) * * *
    (3) Valuation of economic benefits. Notwithstanding paragraph 
(a)(5)(ii)(B)(2) of this section, for taxable years beginning after 
December 31, 2002, parties to an arrangement described in Sec.  1.61-
22(d)(3) may rely on this section only if the value of all economic 
benefits taken into account by the parties is determined in accordance 
with Sec.  1.61-22(d)(3)(ii).
* * * * *
    Par. 4. Section 1.301-1, as proposed on July 9, 2002, at 67 FR 
45428, is amended by adding paragraph (q)(4)(ii)(C) to read as follows:


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

* * * * *
    (q) * * *
    (4) * * *
    (ii) * * *
    (C) Valuation of economic benefits. Notwithstanding paragraph 
(q)(4)(ii)(B) of this section, for taxable years beginning after 
December 31, 2002, parties to an arrangement described in Sec.  1.61-
22(d)(3) may rely on this section only if the value of all economic 
benefits taken into account by the parties is determined in accordance 
with Sec.  1.61-22(d)(3)(ii).
* * * * *

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
[FR Doc. 03-11568 Filed 5-8-03; 8:45 am]
BILLING CODE 4830-01-P