a-02-96.pdf

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Part IV - Items of General Interest

Termination of Appeals Settlement Initiative For Corporate Owned Life Insurance
(COLI) Cases

Announcement 2002-96

The Internal Revenue Service announces that the Appeals settlement initiative
with respect to broad-based leveraged COLI plans purchased after June 20, 1986, will
be terminated, and that the Internal Revenue Service and the Department of Justice will
vigorously defend or prosecute all future COLI litigation.
APPEALS SETTLEMENT INITIATIVE FOR COLI CASES
In August 2001, Appeals implemented a coordinated settlement initiative for
broad-based COLI cases that generally permitted taxpayers to settle if they agreed to
concede 80% of the interest deductions claimed with respect to their COLI plans.
To date, the Service has successfully litigated three cases involving broad-based
COLI transactions.
See
Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254 (1999),
aff'd
, 254 F.3d 1313 (11th Cir. 2001), cert. denied, __ U.S. __, 122 S.Ct. 1537 (2002);
IRS v. CM Holdings, Inc., 254 B.R. 578 (D. Del. 2000), aff'd, 301 F.3d 96 (3d Cir. 2002),
petition for reh=g en banc filed
, Sept. 27, 2002; and American Electric Power v. United
States, 136 F. Supp. 2d 762 (S.D. Ohio 2001), appeal filed, No.01-3495 (6th Cir. Apr.
20, 2001). In all three cases, the courts denied the claimed interest deductions on the
ground that the COLI plans lacked economic substance. In
CM Holdings
, the appellate
court also sustained the application of accuracy-related penalties for the

understatement of income resulting from the claimed interest deductions.
As a consequence, the Service has determined that the Appeals COLI
settlement initiative will be terminated, subject to a 45-day window within which
taxpayers will be permitted to enter into the current settlement arrangement.
PROCEDURES FOR TERMINATION OF APPEALS SETTLEMENT INITIATIVE
Formal notification of the Service=s termination of the settlement initiative has
been made by letter to taxpayers identified with COLI Plans by the Large and Mid-Size
Business (LMSB) Operating Division or by the Appeals Office having jurisdiction over
the taxpayer's case. In order for taxpayers to qualify for the settlement initiative, a
written offer to settle must be mailed or delivered to the Service within 45 days after the
date of the letter. The written offer to settle must include the following:
1. Taxpayer's offer to concede 80% of the claimed COLI interest deductions; and
2. Taxpayer's offer to sign a closing agreement providing that no amount
disallowed as an interest deduction shall be allowable as a deduction under any other
provision of the Internal Revenue Code, nor allowed as an adjustment to the taxpayer's
investment in the contract (basis) under section 72, nor allowed as an adjustment to the
taxpayer's basis in any other asset, in any year.
Detailed instructions for opting into the settlement initiative are set forth in the
Service=s letter to each affected taxpayer.

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Qualifying taxpayers who do not receive such a letter by October 18, 2002, and
who want to make an offer to settle under this Announcement should notify the Appeals
ACI Coordinator for COLI in writing at the address listed below on or before November
18, 2002.

Under the procedures outlined above, Appeals will continue to accommodate
taxpayers who wish to surrender their COLI policies by entering into closing agreements
that finalize the tax consequences of such surrender transactions.
PAPERWORK REDUCTION ACT
The collection of information contained in this announcement has been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. ' 3507) under control number 1545-1802. An
agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays a valid OMB
number.
The collection of information in this announcement is in the section titled
PROCEDURES FOR TERMINATION OF APPEALS SETTLEMENT INITIATIVE. This
information is required to inform the Internal Revenue Service of a respondent=s desire
to participate in the settlement initiative. The likely respondents are businesses or other
for-profit institutions, small businesses or organizations, and individuals.
The estimated total annual reporting burden is 200 hours.
The estimated annual burden per respondent varies from 3 hours to 7 hours,
depending on individual circumstances, with an estimated average of 5 hours. The
estimated number of respondents is 40.
The estimated frequency of responses is one time per respondent.

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Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue
law. Generally tax returns and tax return information are confidential, as required by 26

U.S.C. ' 6103.
MISCELLANEOUS
In the event that a taxpayer fails to comply with the offer procedures set forth
above or the detailed instructions contained in the Service=s notification letter, Appeals
will not entertain further settlement discussions with that taxpayer relative to its COLI
interest deductions. Furthermore, the Service and the Department of Justice will
vigorously defend or prosecute all future COLI litigation that may be initiated.
For further information regarding this notice you may contact Neil Regberg,
Appeals ACI Coordinator for COLI at (513) 263-4823 (not a toll-free call). Mr. Regberg
may also be reached by fax at (513) 263-4800 and by mail at the following address:
312 Elm Street, Suite 2330, P.O. Box 2026, Cincinnati, OH 45202-2763.

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