IRS Releases Proposed Split-Dollar Rules
By Steven Brostoff
The Internal Revenue Service has issued proposed rules on equity split-dollar arrangements that have some practitioners questioning the viability of the product.
Three sources, all of whom asked not to be identified, told National Underwriter that the IRS appears to have anticipated every possible use of split-dollar that could be considered “abusive” and shut it down.
One source said he expects the industry to work hard to try and alter the regulations. He noted that the IRS has set a deadline of Oct. 7, 2002 for written comments and has scheduled a public hearing for Oct. 23.
In all likelihood, he said, the IRS will not issue a final rule until next year.
At that time, this source said, the industry will have to examine the final rule and possibly make a decision on whether to challenge the IRS in court.
Laurie Lewis, chief counsel with the American Council of Life Insurers, Washington, says, however, that the proposed regulations still require a lot of study.
While some media reports, she says, have raised questions about the viability of equity split-dollar, nothing in the proposal says that life insurers cannot use split-dollar.
The proposed rules apply to split-dollar arrangments entered into after the regulations are published as final regulation, and to existing arrangements that are “materially modified” after the publication date, the IRS says.
However, the IRS is seeking comments on whether certain material modifications should be disregarded in determining whether an existing arrangement is treated as a new arrangement.
In the proposed rules, the IRS says that as indicated in Notice 2002-8, split-dollar life insurance arrangements will be subject to two mutually exclusive tax regimes.
Under the economic benefit regime, the owner of the life insurance contract is treated as providing economic benefits to the non-owner, and those benefits must be accounted for fully and consistently by both the owner and non-owner.