The Treasury Department and Internal Revenue Service have no authority to limit the tax-free nature of life insurance death benefits related to a split-dollar contract, industry representatives say.
“The Treasury Department cannot by fiat simply read a provision out of the Internal Revenue Code,” says Albert J. “Bud” Schiff, president of the Association for Advanced Life Underwriting, Falls Church, Va.
“Nor can it impose by regulation a limitation on the statutory death benefit exclusion when the underlying statute has not granted the authority to impose such a limitation,” Schiff says in testimony before the Department and the IRS on a recently proposed rule on split-dollar.
Schiff spoke on behalf of AALU and the National Association of Insurance and Financial Advisors, Falls Church, Va.
The controversy surrounds a statement in the proposed rule, which was issued on July 9, 2002, which says that the death benefit from a split-dollar policy is excludable under Section 101(a) of the tax code only to the extent that the amount is allocable to current life insurance protection under the contract.
Laurie D. Lewis, chief counsel for federal taxes with the American Council of Life Insurers, Washington, says there is no statutory exception to the Section 101(a) exclusion of benefits receive under a life insurance contract.
“We fail to understand how proposed regulations could attempt to tax amounts that are expressly excluded from gross income under the statute,” Lewis says.
The testimony came at a hearing on the proposed split-dollar regulation.
The complicated proposal seeks to tax split-dollar arrangements under one of two mutually exclusive regimes.
Under the “economic benefits regime,” the owner of the life insurance contract is treated as providing economic benefits to the nonowner, and those benefits must be fully and consistently accounted for.
Under the “loan regime,” the nonowner is treated as loaning premium payments to the owner, and certain tax requirements applying to loans will govern the agreement.
Lewis, however, questions the mandatory nature of the mutually exclusive regimes.
Parties to a split-dollar arrangment should be allowed to elect whether to be taxed under the economic benefit regime or the loan regime, Lewis says.
She also questions the artificial division of the parties to a split-dollar arrangement as “owners” and “nonowners.”
A split-dollar arrangement, Lewis says, is one in which two or more parties agree to share the costs and benefits of a life insurance policy.
The manner in which the parties share these different rights may vary from arrangement to arrangement, she says.
The proposed treatment of parties as either “owners” or “nonowners” should be withdrawn, Lewis says.