n-02-59.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III - Administrative, Procedural, and Miscellaneous
Split-Dollar Life Insurance Arrangements

Notice 2002-59
SECTION 1. PURPOSE
This notice explains the standards for valuing current life insurance protection
under a split-dollar life insurance arrangement.
SECTION 2. BACKGROUND
.01 Rev. Rul. 64-328, 1964-2 C.B. 11, held that the table of one-year premium
rates set forth in Rev. Rul. 55-747, 1955-2 C.B. 228, commonly referred to as the “P.S.
58” rates, may be used to determine the value of the current life insurance protection
provided to an employee under a split-dollar life insurance arrangement. Rev. Rul. 66-
110, 1966-1 C.B. 12, amplified Rev. Rul. 64-328 in this respect by holding that the
insurer’s published premium rates for one-year term insurance may be used to
measure the value of the current life insurance protection if those rates are available to
all standard risks and are lower than the P.S. 58 rates. Rev. Rul. 67-154, 1967-1 C.B.
11, modified Rev. Rul. 66-110 by holding that an insurer’s published term rates must be
available for initial issue insurance (as distinguished from rates for dividend options) in
order to be substituted for the P.S. 58 rates set forth in Rev. Rul. 55-747.
.02 Notice 2001-10, 2001-1 C.B. 459, revoked Rev. Rul. 55-747 and provided
that, for taxable years beginning after December 31, 2001, the Treasury Department
and the Internal Revenue Service would no longer treat or accept the P.S. 58 rates set
forth therein as a proper measure of the value of current life insurance protection for

Federal tax purposes. One concern expressed in Notice 2001-10 with regard to the
P.S. 58 rates was that certain taxpayers were using P.S. 58 rates to understate the
economic benefits provided under certain split-dollar life insurance arrangements, a
practice never authorized by published guidance.
Notice 2001-10 set forth a new table of one-year term premiums, captioned as
Table 2001, to determine the value of current life insurance protection on a single life
provided under a split-dollar life insurance arrangement for taxable years ending after
January 29, 2001. Under Notice 2001-10, Table 2001 is to serve as an “interim
substitute” for the P.S. 58 rates. Notice 2001-10 also allowed taxpayers to continue to
determine the value of current life insurance protection by using the insurer’s lower
published premium rates that are available to all standard risks for initial issue one-year
term insurance as set forth in Rev. Rul. 66-110, subject to additional limitations
provided in that notice.
.03 Notice 2002-8, 2002-4 I.R.B. 398, revokes Notice 2001-10 and provides that,
pending the consideration of comments and publication of further guidance, Rev. Rul.
55-747 remains revoked, as provided in and with the transitional relief described in Part
IV.B.1 of Notice 2001-10. For split-dollar life insurance arrangements entered into
before the effective date of future guidance, Notice 2002-8 allows taxpayers to use the
premium rates in Table 2001 to determine the value of current life insurance protection
on a single life. Notice 2002-8 also provides that taxpayers should make appropriate
adjustments to the Table 2001 rates if the life insurance protection covers more than
one life. For arrangements entered into before the effective date of future guidance,
Notice 2002-8 provides that, to the extent provided by Rev. Rul. 66-110, as amplified by

Rev. Rul. 67-154, taxpayers may continue to determine the value of current life
insurance protection by using the insurer’s lower published premium rates that are
available to all standard risks for initial issue one-year term insurance, subject to certain
express limitations. Thus, until the publication of further guidance and subject to the
narrow exception in Part III.1 of Notice 2002-8, taxpayers may value the current life
insurance protection by using either the premium rates in Table 2001 or the insurer’s
published premium rates (as described in the preceding sentence), provided that those
published premium rates are lower than the rates set forth in Table 2001 (hereinafter
the “insurer’s lower published premium rates”).
.04 On July 9, 2002, Treasury and the Service published proposed regulations
relating to split-dollar life insurance arrangements (67 Fed. Reg. 45414). The proposed
regulations reserve on the valuation of economic benefits received under an equity
split-dollar life insurance arrangement under the economic benefit regime. However, for
an equity split-dollar life insurance arrangement entered into on or before the date of
publication of final regulations, in order for the parties to rely on the proposed
regulations, the value of all economic benefits taken into account by the parties under
the economic benefit regime must exceed the value of the current life insurance
protection (determined using the life insurance premium factor designated in guidance
published in the Internal Revenue Bulletin), thereby reflecting the fact that such an
arrangement provides the non-owner with economic benefits that are more valuable
than current life insurance protection.
The proposed regulations provide no new guidance on the valuation of current
life insurance protection. In a footnote quoted immediately below, however, the

preamble of those proposed regulations indicates that Part III.1 of Notice 2002-8
provides for only limited availability of the P.S. 58 rates for taxable years beginning after
December 31, 2001:
Notice 2002-8 also provides that an employer and employee may
continue to use the P.S. 58 rates set forth in Rev. Rul. 55-747 (1955-2
C.B. 228), which was revoked by Notice 2001-10, only with respect to
split-dollar life insurance arrangements entered into before January 28,
2002, in which a contractual arrangement between the employer and
employee provides that the P.S. 58 rates will be used to determine the
value of the current life insurance protection provided to the employee (or
to the employee and one or more additional persons). Taxpayers may not
use the P.S. 58 rates for “reverse” split-dollar life insurance arrangements
or for split-dollar life insurance arrangements outside of the compensatory
context.
SECTION 3. VALUATION OF CURRENT LIFE INSURANCE PROTECTION
.01 Treasury and the Service understand that, under certain split-dollar life
insurance arrangements (some of which are referred to as “reverse” split-dollar), one
party holding a right to current life insurance protection uses inappropriately high
current term insurance rates, prepayment of premiums, or other techniques to confer
policy benefits other than current life insurance protection on another party. The use of
such techniques by any party to understate the value of these other policy benefits
distorts the income, employment, or gift tax consequences of the arrangement and
does not conform to, and is not permitted by, any published guidance.

.02 A party participating in a split-dollar life insurance arrangement may use the
premium rates in Table 2001 or the insurer’s lower published premium rates only for the
purpose of valuing current life insurance protection for Federal tax purposes when, and
to the extent, such protection is conferred as an economic benefit by one party on
another party, determined without regard to consideration or premiums paid by such
other party. (See
, for example, benefits described in Rev. Rul. 64-328 (in the
compensatory context), Rev. Rul. 78-420, 1978-2 C.B. 67 (in the gift context), and Rev.
Rul. 79-50, 1979-1 C.B. 138 (in the corporation-shareholder context).) Thus, if one
party has any right to current life insurance protection, neither the premium rates in
Table 2001 nor the insurer's lower published premium rates may be relied upon to
value such party's current life insurance protection for the purpose of establishing the
value of any policy benefits to which another party may be entitled.
For example, if a donor pays the premiums on a life insurance policy that is part
of a split-dollar life insurance arrangement between the donor and a trust and, under
the arrangement, the trust has the right to current life insurance protection, the current
life insurance protection has been conferred as an economic benefit by the donor on
the trust, and the donor is permitted to value such current life insurance protection for
Federal tax purposes using either the premium rates in Table 2001 or the insurer’s
lower published premium rates. In contrast, if a donor pays the premiums on a life
insurance policy that is part of a split-dollar life insurance arrangement between the
donor and a trust, and the donor (or the donor’s estate) has the right to current life
insurance protection under the policy, neither the premium rates in Table 2001 nor the
insurer’s lower published premium rates may be relied upon to value the donor’s current

life insurance protection for the purpose of establishing the value of the policy benefits
conferred upon the trust for Federal tax purposes. Similar results obtain if the trust
pays for all or a portion of its share of the policy benefits provided under the split-dollar
life insurance arrangement.
SECTION 4. DRAFTING INFORMATION
The principal author of this notice is Rebecca E. Asta of the Office of the
Associate Chief Counsel (Financial Institutions and Products). For further information
regarding this notice, contact Ms. Asta at (202) 622-3930 or Lane Damazo of the Office
of the Associate Chief Counsel (Passthroughs and Special Industries) at (202) 622-
3090 (not toll-free calls).