Attorney Points Out Inconsistencies in Split-Dollar Regs


An attorney has submitted comments on the proposed regulations (REG-164754-01) affecting the taxation of split-dollar life insurance arrangements.

Document Type: Public Comments on Regulations

Tax Analysts Document Number: Doc 2002-24530 (2 original pages) [PDF]

Tax Analysts Electronic Citation: 2002 TNT 212-27

Citations: (19 Sep 2002)


=============== SUMMARY ===============


Jonathan S. Brenner of Feingold and Alpert LLP, New York, has submitted comments on the proposed regulations (REG-164754-01) affecting the taxation of split-dollar life insurance arrangements. (For a summary of REG-164754-01, see Tax Notes, July 15, 2002, p. 361; for the full text, see Doc 2002-16108 (24 original pages) [PDF], 2002 TNT 135-10 , or H&D, July 5, 2002, p. 175.)

Brenner is concerned that there are inconsistencies between the preamble and regs "as to the circumstances in which a donor is treated as the owner of [a] policy." Brenner also urges that the regs "explicitly acknowledge that they are subject to the grantor trust rules," and that section 101 applies to death benefits.


=============== FULL TEXT ===============

September 19, 2002

Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Attention: CC: ITA: RU (Reg-164754-01) Room 5226

Re: Proposed Split-Dollar Regulations

Dear Sirs:

[1] We write in response to your request for comments with respect to the Proposed Regulations published July 9, 2002 (67 Fed. Reg. 45414) regarding split-dollar life insurance arrangements.

[2] 1. There appears to be an inconsistency between the Preamble and the text of the Proposed Regulations as to the circumstances in which a donor is treated as the owner of the policy. By way of background, the Preamble states as a general rule that the person named as the policy owner is to be treated as the owner of the policy. This general rule is incorporated in the first sentence of Proposed Regulation Section 1.61-22(c)(1)(i) and to that extent the Preamble is consistent with the Proposed Regulations. The Preamble goes on to state that the general rule is subject to two exceptions. The Preamble's second exception to the general rule states that a donor will be treated as the owner of a policy (even if the donee is the stated owner) if, at all times, the only economic benefits available to the donee (for example, a life insurance trust) under the arrangement is the value of current life insurance protection. In accordance with the Preamble as well as existing law (see Rev. Rul. 64-328, 1964-2 C.B. 11 (in the compensatory context) and Rev. Rul. 78-420, 1978-2 C.B. 67 (in the gift context)), this exception should not apply in a case where the donee (for example, a life insurance trust) is the stated owner and is entitled to anything other than solely the value of the current life insurance protection, e.g., where the donee is entitled to the greater of the cash surrender value of the policy or reimbursement of premiums. In that case, the general rule regarding ownership noted above should apply. Proposed Regulations Section 1.61-22(c)(1)(ii)(A)(2), which is intended to implement this second exception, treats the donor rather than the trust as the owner IF the rule of Proposed Regulations Section 1.61-22(d)(2) is met. Proposed Regulation Section 1.61- 22(d)(2), however, describes a situation in which the only economic benefit provided to the non-owner (presumably determined under the general rule; see comment 2, below) is current life insurance protection. This proposed regulation provides a result that is contrary to the rule enunciated in the Preamble. If the proposed regulation is to implement the statement in the Preamble, the donor should be treated as the owner UNLESS the rule of Proposed Regulations Section 1.61-22(d)(2) is met.

[3] 2. Proposed Regulations Section 1.61-22(d)(2) appears to be circular in its use of the term "non-owner" to the extent that Proposed Regulations Section 1.61-22(c)(1)(ii)(A)(2) cross references Proposed Regulations Section 1.61-22(d)(2) in determining who is the owner. We would suggest that the following words be inserted after the term "non-owner" in the first sentence of Proposed Regulations Section 1.61-22(d)(2): "(determined pursuant to Paragraph (c)(1)(i) without regard to the provisions of Paragraph (c)(1)(ii))."

[4] 3. While we doubt that the Proposed Regulations were intended to override the general principles of the grantor trust rules which treat the sole grantor of a grantor trust and the trust as one entity, Proposed Regulations Section 1.61-22(f) does not take such provisions into account. If the trust is a grantor trust, as to which the non-owner is the sole grantor, the non-owner would have an investment in the contract. Similarly, the receipt by the trust of payments from the non-owner/grantor would not be included in the trust's income. We suggest that final regulations explicitly acknowledge that they are subject to the grantor trust rules.

[5] 4. We suggest that Proposed Regulations Section 1.61- 22(f)(3) contain a provision similar to Proposed Regulations Section 1.61-22(f)(2)(ii) regarding the tax free receipt of death benefits. That is, Code Section 101 should apply to death benefits payable to the owner (in situations not involving loans).

[6] 5. There is a statement in the Preamble that "If the donor makes premium payments that are not split-dollar loans . . . the donor is treated as making a gift to the trust equal to the amount of that payment." This is inconsistent with Proposed Regulations Section 1.61-22(b)(5) which suggests that Rift treatment only applies to the extent the payment is not in consideration of economic benefits. We suggest that the Preamble should reflect this limitation.

Respectfully submitted,

Jonathan S. Brenner
Feingold & Alpert, L.L.P.
New York, N.Y.



Code Section: Section 61 -- Gross Income Defined; Section 101 -- Death Benefits
Geographic Identifier: United States
Subject Area: Insurance company taxation
Industry Group: Insurance
Cross Reference: For a summary of REG-164754-01, see Tax Notes, July 15, 2002, p. 361;
for the full text, see Doc 2002-16108 (24 original pages) [PDF], 2002 TNT
135-10 , or H&D, July 5, 2002, p. 175.
Author: Brenner, Jonathan S.
Institutional Author: Feingold & Alpert LLP