An Overview Of The 2003 Proposed Regulations
The focus of these additional proposed regulations is the methodology related to the calculation of equity split dollar under what the IRS calls the “Economic Benefit Regime.”
Although there are numerous issues that have never been addressed by the IRS involving economic benefit calculations outside of equity arrangements, the IRS was emphatic in the preamble to these 2003 proposed regulations that they only affect equity split dollar under the economic benefit approach. They stated that other issues would be addressed in the final regulations, based on comments received on the 2002 proposed regulations.
In these 2003 proposed regulations, the IRS taxes the equity (cash value) build-up associated with split dollar as constructive income under Tax Code Section 61. Section 61 is a broad Tax Code provision covering many types of income, including income that is considered constructively received (i.e., funds, or assets, where a client maintains certain rights or control, such as life insurance values, even if they do not actually take physical receipt of the funds).