Writer Suggests Changes to Guidance on Split-Dollar Arrangements


Timothy A. Rogan has suggested changes to the guidance on the valuation of life insurance under a split-dollar arrangement.

Document Type: IRS Tax Correspondence

Tax Analysts Document Number: Doc 2002-12254 (2 original pages) [PDF]

Tax Analysts Electronic Citation: 2002 TNT 101-32

Citations: (Undated)


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


Timothy A. Rogan of Stockton, Calif., has suggested changes to the guidance on the valuation of life insurance under a split-dollar arrangement. (For a summary of Notice 2002-8, 2002-4 IRB 398, see Tax Notes, Jan. 7, 2002, p. 35; for the full text, see Doc 2002-386 (7 original pages) [PDF], 2002 TNT 3-5 , or H&D, Jan. 4, 2002, p. 129.)

Rogan suggests that no deduction should be allowed unless the life insurance is deductible to the company, that all assignments used for banks or collateral on loans should be marked in a different fashion, and that a standard form is needed.


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


Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20044

Re: comments on Notice 2002-8 (Not-168656-01)

Dear Sir or Madam:

[1] The valuation of split dollar has been questioned for the last twenty years with many schools of thought on the issue. With the establishment of low cost term rates, many insurance carriers have side stepped the issue by using special low cost insurance rates which are not sold to the general public and are only used in the valuation process. My comments:


1. One table should be created rather than comparing the different insurance company variations on the same insured. Sometimes the driving force of the sale is on the cost of the economic benefit not on whether the product performs the best for the client.

2. Enforcement issues: Since the Internal Revenue staff may be confused by the form of split dollar, ie. Equity, Collateral, Endorsement, Private, Controlling Shareholder, Reverse, etc., a standardized form needs to be implemented and enforced by the insurance carriers. This form would have to be signed by the owners of the contract and would detail the calculation of the economic benefit. Annual 1099 informational reports can be sent to the policy owner regarding the calculation of the economic benefit. If the form is not attached to the contract, then section 7872 would apply. At the termination or release of the assignment, a 1099 would be sent to the policy owner for the full amount of the cash value of the contract. It would be up to the owner of the contract to determine the tax and gift tax implications to the Internal Revenue Service. Currently, no reporting exists at the termination of the assignment form and income may not be reported.

3. All assignments used for Banks or collateral on loans shall be marked in a different fashion. At death or termination of the assignment, a 1099 for the full cash value is sent.

4. Reverse Split dollar: No deduction should be allowed unless the life insurance is deductible to the company.

5. No agreement split dollar. Used primarily when doubt exists with the IRS in determining the income or gift tax implications. If verbal partnerships, trusts or other agreements are used, audits will be a distinct disadvantage.


[2] As a life insurance professional for the past 20 years, it is difficult for me to understand the misunderstanding of the tax implications of this contract. If used in a business setting, it should be used as a employee benefit; if used in a personal situation, the economic benefit should be determined in the same fashion but under no circumstances should a life insurance contract avoid gain when compared to other employee benefits such as options or other incentives.

[3] The burden of these changes need to be placed upon the creators of the problem not on the entire general public. The total number of split dollar contracts are very small, yet individually they can shelter many thousands of dollars. By recognizing the gain at the death or termination of the split dollar contract, more income may result at a much lower cost than without the mandated reporting. The calculation of the economic benefit can be as easy as the average of 30 insurance companies' economic benefit or as complicated as and intricate valuation including the current insurability of the client (substandard risks are helped as only standard rates are used).

[4] Last, a coordination between estate tax and income tax auditors should be increased as an income or gift tax deficiency may occur on an annual basis rather than waiting until termination of the contract. Through the use of automation in the tax reporting of these contracts, more revenue may occur.

[5] Thank you.

Sincerely,
Timothy A. Rogan CLU, ChFC
5145 Gadwall Circle
Stockton, CA 95207
(209) 956-2800



Code Section: Section 7872 -- Below-Market-Rate Loans
Geographic Identifier: United States
Subject Area: Insurance company taxation
Cross Reference: For a summary of Notice 2002-8, 2002-4 IRB 398, see Tax Notes, Jan. 7,
2002, p. 35; for the full text, see Doc 2002-386 (7 original pages) [PDF],
2002 TNT 3-5 , or H&D, Jan. 4, 2002, p. 129.
Author: Rogan, Timothy A.