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: (
=============== SUMMARY ===============
Jonathan S. Brenner of Feingold and Alpert LLP, 
,
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 ===============
Internal Revenue Service
Ben Franklin Station
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
[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.
Code Section: Section 61 -- Gross Income
Defined; Section 101 -- Death Benefits
Geographic Identifier:
Subject Area: Insurance company taxation
Industry Group: Insurance
Cross Reference: For a summary of
REG-164754-01, see Tax Notes,
for the full text, see Doc 2002-16108 (24 original pages) [PDF],
2002 TNT
135-10 
,
or H&D,
Author: Brenner, Jonathan S.
Institutional Author: Feingold & Alpert LLP