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IRS Notice on Split-Dollar Life Insurance Arrangements
The IRS today released an advance copy of Notice 2008-42 providing that a modification of a split-dollar life insurance arrangement that does not include any change to the life insurance contract underlying the arrangement will not be treated as a material change in the life insurance contract for purposes of sections 101(j) and 264(f).
For an electronic version of the four-page notice:
Notice 2008-42
Background
For these purposes, 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.
Treasury and the IRS issued regulations in 2003 concerning the taxation of
participants in a split-dollar life insurance arrangement.
The Pension Protection Act of 2006 added section 101(j) to the Code to address situations involving an employer-owned life insurance contract and the amount of death benefits excluded from gross income of the policyholder.
The Taxpayer Relief Act of 1997 added section 264(f) to the Code to provide that no deduction is allowed for any portion of the taxpayer's interest expense which is allocable to unborrowed policy cash value with respect to a life insurance policy or an annuity or endowment contract.
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Notice 2008-42
Today’s guidance applies sections 101(j) and 264(f) to "life insurance contracts" that do not include the terms of an arrangement, such as a split-dollar arrangement, of which the contract is a part.
Notice 2008-42 provides if the parties to a split-dollar life insurance arrangement modify the terms of the arrangement but do not modify the terms of the life insurance contract underlying the arrangement, the modification will not be treated as a material change in the life insurance contract for purposes of sections 101(j) and 264(f), even if the modification is treated as a material modification of the split-dollar arrangement for purposes of Reg. section 1.61-22(j).
Notice 2008-42 will appear in Internal Revenue Bulletin 2008-15, dated April 14. 2008.
For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or
rspeizma@kpmg.com
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