rp-08-39.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 301.7121-1: Closing Agreements.
(Also Part I, § 7702A.)

Rev. Proc. 2008-39

SECTION 1. PURPOSE
This revenue procedure provides a procedure by which an issuer of a life
insurance contract may remedy an inadvertent non-egregious failure to comply
with the modified endowment contract rules under § 7702A of the Internal
Revenue Code. Rev. Proc. 2001-42, 2001-2 C.B. 212, and Rev. Proc. 2007-19,
2007-1 C.B. 515, are superseded.
SECTION 2. BACKGROUND
.01 Definition of a modified endowment contract (MEC).

(1) Section 7702A(a) provides that a life insurance contract is a MEC if the
contract—
(a) is entered into on or after June 21, 1988, and fails to meet the 7-pay
test of § 7702A(b), or

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(b) is received in exchange for a contract described in paragraph (a) of
this section 2.01(1).
(2) A contract fails to meet the 7-pay test if the accumulated amount paid
under the contract at any time during the first 7 contract years exceeds the sum
of the net level premiums which would have to be paid on or before such time if
the contract were to provide for paid-up future benefits (as defined in
§§ 7702A(c)(3) and 7702(f)(4)) after the payment of 7 level annual premiums.
(3) Section 72(e)(12) provides that, for purposes of determining amounts
includible in gross income, all MECs issued by the same company to the same
contract holder during any calendar year are treated as one MEC.
.02 Tax treatment of amounts received under a MEC.
Section 72(e)(10)
provides that a MEC is subject to the rules of § 72(e)(2)(B), which tax non-
annuity distributions on an income-out-first basis, and the rules of § 72(e)(4)(A)
(as modified by §§ 72(e)(10)(A)(ii) and 72(e)(10)(B)), which generally deem loans
and assignments or pledges of any portion of the value of a MEC to be non-
annuity distributions. Moreover, under § 72(v), the portion of any annuity or non-
annuity distribution received under a MEC that is includible in gross income is
subject to a 10% additional tax unless the distribution is made on or after the
date on which the taxpayer attains age 59 1/2, is attributable to the taxpayer's
becoming disabled (within the meaning of § 72(m)(7)), or is part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and the taxpayer's beneficiary.

3
.03 Authority to enter into closing agreements.
Under § 7121, the
Secretary is authorized to enter into an agreement in writing with any person
relating to the liability of such person (or of the person or estate for whom he
acts) in respect of any internal revenue tax for any period. Such agreement is
generally final and conclusive, except upon a showing of fraud, malfeasance, or
misrepresentation of a material fact.
.04 Correction procedure for inadvertent MECs.
Rev. Proc. 2001-42 set
forth circumstances under which the Internal Revenue Service (Service) would
enter into closing agreements under which life insurance contracts would be
treated as if they were not MECs, notwithstanding inadvertent non-egregious
failures to comply with the rules of § 7702A. Under Rev. Proc. 2001-42, an
issuer was required to provide information about the contracts that were subject
to the closing agreement, including a template for each contract setting forth the
cumulative amounts paid under the contract, the contract's cumulative 7-pay
premium, the overage, if any, for each contract year, the earnings rate applicable
for each contract year, and the overage earnings for each contract year. In
addition, the issuer was required to pay under the closing agreement an amount
based on the contract's overage, overage earnings, and tax and interest thereon.
Rev. Proc. 2001-42 was modified and amplified by Rev. Proc. 2007-19, primarily
to use indices that are more accessible to taxpayers than those previously
required to be used and to permit the submission of information in an electronic
format.

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.05 Changes to correction procedure.
In Notice 2007-15, 2007-1 C.B.
503, the Service requested comments as to how various correction procedures --
including those for inadvertent MECs under Rev. Proc. 2001-42 -- may be
improved. This revenue procedure incorporates a number of changes that
taxpayers suggested in response to Notice 2007-15. Significant changes include
providing an alternative computation of the amount required to be paid under a
closing agreement with regard to an inadvertent MEC, eliminating certain
informational items that must be submitted, and revising some language of the
model closing agreement.
SECTION 3. DEFINITIONS
The following definitions and rules apply solely for purposes of this
revenue procedure.
.01 Testing period.
The 7-year period described in § 7702A(b) or such
additional period as may be required under § 7702A(c)(3) if a contract undergoes
a material change.
.02 Amount paid.
The amount paid (as defined in § 7702A(e)(1)) under a
contract in any contract year (as defined in § 7702A(e)(2)) equals the premiums
paid for the contract during the year, reduced by amounts to which § 72(e)
applies (determined without regard to § 72(e)(4)(A)) but not including amounts
includible in gross income. For this purpose, premiums paid do not include—
(1) any portion of any premium paid during the contract year that is
returned (with interest) to the contract holder within 60 days after the end
of the contract year in order to comply with the 7-pay test, or

5
(2) the cash surrender value (as defined in § 7702(f)(2)(A)) of
another life insurance contract (other than a contract that fails the 7-pay
test) exchanged for the contract.
.03 7-pay premium.
(1) In general. Except as otherwise provided in section 3.03(2) of this
revenue procedure, the 7-pay premium for a contract is the net level premium
(computed in accordance with the rules in § 7702A(c)) that would have to be paid
for the contract if the contract were to provide for paid up future benefits after the
payment of 7 level annual premiums.
(2) 7-pay premium for a contract that undergoes a material change.
If a
contract (other than a contract that fails the 7-pay test) is materially changed, the
contract is treated as newly issued on the date of the material change and the 7-
pay premium for the changed contract is an amount equal to the excess, if any,
of—
(a) the net level premium (computed in accordance with the rules in
§ 7702A(c)) that would have to be paid for the changed contract if the contract
were to provide for paid up future benefits after the payment of 7 level annual
premiums, over
(b) a proportionate share of the cash surrender value (as defined in
section 3.04 of this revenue procedure) under the contract.
.04 Proportionate share of cash surrender value.
The proportionate share
of the cash surrender value of a contract is the amount obtained by multiplying—

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(1) the cash surrender value (as defined in § 7702(f)(2)(A)) of the contract,
by
(2) a fraction, the numerator of which is the net level premium (computed
in accordance with the rules in § 7702A(c)) that would have to be paid for the
changed or new contract if such contract were to provide for paid up future
benefits after the payment of 7 level annual premiums, and the denominator of
which is the net single premium (determined using the rules in § 7702) for such
contract at that time.
.05 Overage.
A contract's overage is the amount of the excess, if any,
of—
(1) the sum of amounts paid under the contract during the testing period
for the contract year and all prior contract years, over
(2) the sum of the 7-pay premiums for the contract year and all prior
contract years of the testing period.
.06 Overage earnings.
The overage earnings for a contract year is the
amount obtained by multiplying—
(1) the sum of a contract's overage for the contract year and its cumulative
overage earnings for all prior contract years, by—
(2) the earnings rate set forth in section 3.07 of this revenue procedure.
.07 Earnings rates.

(1) Contracts other than variable contracts.
Except as otherwise provided
in sections 3.07(3) and 3.07(8) of this revenue procedure, the earnings rate
applicable to a contract year is the general account total return (as defined in

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section 3.07(2) of this revenue procedure) for the calendar year in which the
contract year begins.
(2) General account total return.

(a) Pre-2008 contract years.
The general account total return applicable
to a contract year that begins before January 1, 2008, is the rate set forth in the
following table for the calendar year in which the contract year begins.
Year General Account Total Return
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
10.2%
9.7%
9.8%
9.2%
8.6%
7.5%
8.3%
7.8%
7.7%
7.6%
6.9%
7.4%
8.0%
7.5%
7.2%
6.2%
6.1%
5.6%
6.0%
6.0%

(b) Post-2007 contract years. The general account total return applicable
to a contract year that begins after December 31, 2007, is the arithmetic average
(weighted on a 50-50 basis) of the following two rates:
(i) Moody's Seasoned Corporate Aaa Bond Yield, frequency annual, or
any successor thereto; and

8
(ii) Moody's Seasoned Corporate Baa Bond Yield, frequency annual, or
any successor thereto. Both rates are publicly available at
www.federalreserve.gov.
Thus, for example, under this methodology the general
account total return for 2007 is (5.555833 + 6.4825)/2 = 6.0191665 = 6.0%.
(3) Variable contracts described in § 817(d).

(a) Pre-2008 contract years. The earnings rate applicable to a contract
year that begins before January 1, 2008, is the rate set forth in the following table
for the calendar year in which the contract year begins.

Year Variable Contracts Earnings Rate
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
13.5%
17.4%
1.4%
25.4%
5.9%
13.9%
-1.0%
23.0%
14.3%
17.8%
19.7%
12.8%
-5.5%
-7.1%
-14.1%
19.6%
6.9%
2.1%
10.0%
3.6%

(b) Post-2007 contract years.
Except as otherwise provided in section
3.07(8) of this revenue procedure, the earnings rate applicable to a contract year
that begins after December 31, 2007, is equal to the sum of—

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(i) 10 percent of the general account total return (as defined in section
3.07(2) of this revenue procedure), and
(ii) 90 percent of the separate account total return (as defined in section
3.07(4) of this revenue procedure) for the calendar year in which the contract
year begins.
(4) Separate account total return. Except as otherwise provided in section
3.07(8) of this revenue procedure, the separate account total return equals—
(a) 75 percent of the equity fund total return (as defined in section 3.07(5)
of this revenue procedure), plus
(b) 25 percent of the bond fund total return (as defined in section 3.07(6)
of this revenue procedure), less (c) 1.1 percentage point.
(5) Equity fund total return.
The equity fund total return equals—
(a) the calendar year percentage return (as defined in section 3.07(7) of
this revenue procedure) represented by the end-of-year values of the Standard
and Poor's (S&P) 500 Total Return Index, with daily dividend reinvestment, or
any successor thereto, less
(b) 1.5 percentage point.
(6) Bond fund total return.
The bond fund total return equals—
(a) the calendar year percentage return (as defined in section 3.07(7) of
this revenue procedure) represented by the end-of-year values of the Merrill
Lynch U.S. Corporate Master Index (C0A0), or any successor thereto, less
(b) 1.0 percentage point.

10
The Merrill Lynch U.S. Corporate Master Index (C0A0) is publicly available
at www.mlindex.ml.com
. Under this methodology, the bond fund total return for
2007 is (1689.135-1614.188) /1614.188 - .01 = 3.64301 percent.
(7) Calendar year percentage return.
The calendar year percentage
return for an index described in section 3.07(5) or section 3.07(6) of this revenue
procedure is calculated by—
(a) dividing the end-of-year value of the index for the calendar year by the
end-of-year value of the index for the immediately preceding calendar year, and
(b) subtracting 1 from the result obtained under paragraph (a) of this
section 3.07(7).
(8) Incomplete calendar year.
If the general account total return or the
separate account total return for a calendar year cannot be determined because
the calendar year in which the contract year begins has not ended, then the
earnings rate for the contract year (or portion thereof) is determined using the
general account total return and, if applicable, the average separate account total
return, for the 3 calendar years immediately preceding the calendar year in which
the contract year begins.
.08 Proportionate share of overage earnings allocable to taxable
distributions. The proportionate share of overage earnings allocable to taxable
distributions under a contract is the amount obtained by multiplying—
(1) the total amount of the taxable distributions under the contract, by
(2) a fraction, the numerator of which is the contract's cumulative overage
earnings and the denominator of which is the total income on the contract.

11
.09 Total income on a contract.
The total income on a contract as of any
date is an amount equal to the excess, if any, of—
(1) the contract's cash surrender value (as defined in § 7702(f)(2)(A)) on
such date, over
(2) the premiums paid under the contract before such date, reduced by
amounts to which § 72(e) applies (determined without regard to § 72(e)(4)(A))
but not including amounts includible in the contract holder's gross income.
.10 Distribution frequency factor.
The distribution frequency factor for a
contract is—
(1) .8, if--
(a) the interest rate with respect to any portion of a policy loan that could
be made under the contract at any time (including policy loans that could be
made after a contractually specified date in the future) is guaranteed not to
exceed the sum of:
(i) 1 percentage point, plus
(ii) the rate at which earnings are credited to the portion of the contract's
cash surrender value (as defined in § 7702(f)(2)(A)) that is allocable to such
portion of the policy loan; or
(b) the contract holder has an option to make a partial withdrawal of the
contract's cash surrender value that reduces the death benefit (as defined in
§ 7702(f)(3)) under the contract by less than an amount determined by
multiplying—

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(i) the death benefit under the contract immediately before the withdrawal,
by (ii) the percentage obtained by dividing the withdrawn amount by the
contract's cash surrender value (as defined in § 7702(f)(2)(A)) immediately
before the withdrawal; and
(2) .5 for all other contracts.
.11 Applicable percentage.
(1) In general. The applicable percentage for a contract is—
(a) 15%, if the death benefit under the contract is less than $50,000,
(b) 28%, if the death benefit under the contract is equal to or exceeds
$50,000 but is less than $180,000, and
(c) 36%, if the death benefit under the contract is equal to or exceeds
$180,000.
(2) Determination of amount of death benefit.
For purposes of determining
the applicable percentage, the death benefit under the contract is the death
benefit (as defined in § 7702(f)(3)) as of any date within 120 days of the date of
the request for closing agreement, or the last day the contract is in force.
.12 Reported amount.
The reported amount for a contract is the amount
that—
(1) the issuer reports on a timely filed information return as includible in
the contract holder's gross income, or
(2) the contract holder includes in gross income on a timely filed income
tax return.

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.13 Aggregation of contracts.
All MECs issued by the same issuer to the
same contract holder during any calendar year are treated as one MEC.
SECTION 4. SCOPE
.01 Applicability.
Except as provided in section 4.02, this revenue
procedure applies to any issuer of one or more life insurance contracts that
desires to remedy the inadvertent non-egregious failure of contracts to comply
with the requirements of § 7702A. For this purpose, the term "issuer" means any
company that issues a contract that is intended to satisfy the definition of a life
insurance contract under § 7702 and comply with the MEC rules under § 7702A.
The term also includes a company that insures a contract holder under a contract
originally issued by another company.
.02 Inapplicability.
The Service may exclude a contract from the
correction mechanism provided under this revenue procedure if the contract's
status as a MEC resulted from a failure to comply with the requirements of
§ 7702A that—
(1) is attributable to one or more defective interpretations or positions that
the Service determines to be a significant feature of a program to sell investment
oriented contracts, or
(2) arises where the controlling statutory provision, as supplemented by
any legislative history or guidance published by the Service, is clear on its face
and the Service determines that failure to follow the provision results in a
significant increase in the investment orientation of a contract.

14
.03 Example.
Pursuant to section 4.02 of this revenue procedure, the
Service generally will not apply the correction mechanism under this revenue
procedure to a MEC if the contract provides for paid-up future benefits after the
payment of less than 7 level annual premiums.
SECTION 5. PROCEDURE
.01 Request for a ruling.
An issuer that seeks relief under this revenue
procedure must submit a request for a ruling that meets the requirements of Rev.
Proc. 2008-1, 2008-1 I.R.B. 1 (or any successor). Additionally, the submission
must contain the following information:
(1) the policy number for each contract;
(2) a description of the defect[s] that caused the contract[s] to fail to
comply with the 7-pay test, including an explanation of how and why the defect[s]
arose; and
(3) a description of the administrative procedures the issuer has
implemented to ensure that none of its contracts will inadvertently fail the 7-pay
test in the future.
.02 Closing agreement.
The issuer also must submit a proposed closing
agreement, in triplicate, executed by the issuer, in the same form as the model
closing agreement in section 6 of this revenue procedure. The amount shown in
Section 1(A) of the proposed closing agreement is the amount required to be
paid (determined under section 5.03 of this revenue procedure) for all of the
contracts covered by the agreement.

15
.03 Determination of amount required to be paid with regard to a contract.

The amount required to be paid with regard to a contract under this section 5.03
is either the amount determined based on overage earnings under section
5.03(1) or, at the election of the issuer, the amount determined based on overage
under section 5.03(2).
(1) Amount determined based on overage earnings.

(a) In general. Except as provided in section 5.03(1)(b) of this revenue
procedure, the amount determined based on overage earnings under this section
5.03(1) is the sum of-
(i) the income tax (determined using, in lieu of the contract holder’s actual
tax rate, the applicable percentage for the contract under section 3.11 of this
revenue procedure) and the additional tax under § 72(v) with regard to amounts
(other than reported amounts (as defined in section 3.12 of this revenue
procedure)) received (or deemed received) under the contract during the period
commencing with the date 2 years before the date on which the contract first
failed to satisfy the MEC rules and ending on the effective date of the closing
agreement;
(ii) any interest computed under § 6621(a)(2) as if the amounts
determined under section 5.03(1)(a)(i) of this revenue procedure are
underpayments by the contract holder[s] for the tax year[s] in which the amounts
are received (or deemed received); and

16
(iii) an amount, not less than $0, obtained by multiplying-- (A) the excess,
if any, of the contract's cumulative overage earnings over the proportionate share
of overage earnings allocable to taxable distributions under the contract, by
(B) the applicable percentage for the contract, and by
(C) the distribution frequency factor for the contract under section 3.10 of
this revenue procedure.
(b) Special rule for contracts with de minimis overage earnings. If the
overage earnings of a contract at all times during the testing period do not
exceed $100, then the amount determined under this section 5.03(1) of this
revenue procedure is determined without regard to paragraphs (i) and (ii) of
section 5.03(1)(a) of this revenue procedure.
(2) Amount determined based on overage.
An issuer may elect to pay an
amount equal to 100% of the overage as defined in section 3.05 of this revenue
procedure, rather than the amount determined under section 5.03(1)(a) of this
revenue procedure based on overage earnings with respect to a contract.
(3) Examples of the determination of the amount required to be paid with
regard to a contract.
(a) Example 1.
A, an individual, purchases a life insurance contract other
than a contract described in sections 3.07(3) or 4.02 of this revenue procedure.
The death benefit of the contract exceeds $180,000 on every day within 120
days of the date of the request for closing agreement. The net level premium
(assuming paid-up future benefits after seven annual premium payments) for the
contract is $10,490. The contract provides that, within 60 days after the end of a

17
contract year, the issuer will return (with interest) the amount of any excess
premium that would cause the contract to be a MEC under § 7702A.
The interest rate on all portions of any policy loans will always exceed the
rate at which interest is credited to the contract's associated cash value by more
than 1 percentage point. A partial withdrawal of the cash surrender value (within
the meaning of § 7702(f)(2)(A)) always reduces the death benefit by an amount
not less than the amount determined by multiplying the death benefit immediately
before the withdrawal by the percentage obtained by dividing the withdrawn
amount by the cash surrender value immediately before the withdrawal.
A
pays a premium of $10,000 when the contract is issued on January 1,
2001. At the beginning of each of the next 6 contract years, A pays additional
premiums of $10,750, $10,800, $10,700, $11,500, $11,000, and $10,000,
respectively. Due to an inadvertent error, the issuer fails to return any of the
excess premiums.

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The issuer desires to enter into a closing agreement to remedy the failure
to comply with § 7702A. The issuer prepares the following template with regard
to the contract.
Contract
year
Cumulative
Amounts
Paid
Cumulative
7-pay
premium
Overage Earnings
Rate
Overage
Earnings
1 (2001) 10,000 10,490 0 7.5% 0
2 (2002) 20,750 20,980 0 7.2% 0
3 (2003) 31,550 31,470 80 6.2% 4.96
4 (2004) 42,250 41,960 290 6.1% 17.99
5 (2005) 53,750 52,450 1,300 5.6% 74.09
6 (2006) 64,750 62,940 1,810 6.0% 114.42
7 (2007) 74,750 73,430 1,320 6.0% 91.89

Prior to A's payment of the $10,800 premium at the beginning of contract
year 3, the cumulative premiums paid for the contract do not exceed the
contract's cumulative 7-pay premiums. Therefore, there are no overage earnings
in contract years 1 and 2.
Upon payment of the $10,800 premium at the beginning of contract year
3, however, the cumulative amount paid for the contract ($31,550) exceeds the
contract's cumulative 7-pay premiums ($31,470) by $80. As the earnings rate for
the calendar year in which contract year 3 begins is 6.2%, the contract's overage
earnings for contract year 3 equal $4.96 ($80 x 6.2%).

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For contract year 4, the overage is $290 ($42,250 - $41,960). The
cumulative overage earnings for all prior contract years equal $4.96. The
earnings rate is 6.1%. The overage earnings for contract year 4 equal $17.99
(($290 + $4.96) x 6.1%).
For contract year 5, the overage is $1,300 ($53,750 - $52,450). The
cumulative overage earnings for all prior contract years equal $22.95 ($4.96 +
$17.99). The earnings rate is 5.6%. The overage earnings for contract year 5
equal $74.09 (($1,300 + $22.95) x 5.6%).
For contract year 6, the overage is $1,810 ($64,750 - $62,940). The
cumulative overage earnings for all prior contract years equal $97.04 ($4.96 +
$17.99 + $74.09). The earnings rate is 6.0%. The overage earnings for contract
year 6 equal $114.42 ($1,810 + $97.04) x 6.0%).
For contract year 7, the overage is $1,320 ($74,750 - $73,430). The
cumulative overage earnings for all prior contract years equal $211.46 ($4.96 +
$17.99 + $74.09 + $114.42). The earnings rate is 6.0%. The overage earnings
for contract year 7 equal $91.89 (($1,320 + $211.46) x 6.0%).
The cumulative overage earnings for the contract equal $303.35 ($4.96 +
$17.99 + $74.09 + $114.42 + $91.89). Under sections 3.10 and 3.11 of this
revenue procedure, the distribution frequency factor is .5 and the applicable
percentage is 36%. Accordingly, the amount determined based on overage
earnings under section 5.03(1) of this revenue procedure is $54.60 ($303.35 x .5
x 36%).

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The amount determined based on overage under section 5.03(2) of this
revenue procedure is equal to 100% of the overage, or $1,320. The issuer may
elect to pay either this amount or the amount determined under section 5.03(1) of
this revenue procedure ($54.60) under the terms of the closing agreement with
regard to the contract.
(b) Example 2. The facts are the same as in Example 1 except that, at the
beginning of contract year 5, A receives $3,000 as a policy loan. The contract's
cash value (within the meaning of § 72(e)(3)(A)(i)) immediately prior to the loan is
$58,500, which exceeds A
's investment in the contract ($53,750) by $4,750.
Each year A pays the interest on the policy loan. The issuer does not file a timely
information return with regard to the deemed distribution resulting from the policy
loan and A
does not include the distribution in gross income reported on the
income tax return for the taxable years in which the deemed distribution is
received. The total income on the contract (as defined in section 3.09 of this
revenue procedure) is $14,500.
The amount determined based on overage earnings under section 5.03(1)
of this revenue procedure is the sum of-
(1) an amount equal to the income tax (determined using an applicable
percentage of 36%) and the additional tax under § 72(v) with regard to the
$3,000 deemed distribution in contract year 5;
(2) interest computed under § 6621(a)(2) as if the amounts determined
under (1) were underpayments for the taxable year in which the distributions are
deemed to have occurred; and

21
(3) 36% of $120.30, which is the excess of the contract's cumulative
overage earnings over the proportionate share of the overage earnings allocable
to taxable distributions ($303.35 - $62.76), multiplied by the distribution
frequency factor (.5). (The proportionate share of overage earnings allocable to
taxable distributions is obtained by multiplying the total amount of the taxable
distribution under the contract ($3,000), by a fraction, the numerator of which is
the contract's cumulative overage earnings ($303.35) and the denominator of
which is the total income on the contract ($14,500).)
The amount determined based on overage under section 5.03(2) of this
revenue procedure is equal to 100% of the overage, or $1,320. The issuer may
elect to pay either this amount or the amount determined under section 5.03(1) of
this revenue procedure under the terms of the closing agreement with regard to
the contract.
.04 Payment of amount.
The issuer is required to pay the amount
determined under section 5.03 of this revenue procedure within 60 days of the
date of execution of the closing agreement by the Service. Payment shall be
made by check payable to the "United States Treasury" delivered, together with a
fully executed copy of the closing agreement, to Internal Revenue Service,
Receipt & Control Stop 31, 201 W. Rivercenter Blvd., Covington, KY 41011.
.05 Correction of contracts.

(1) General rules.
If, on the date of the execution of the closing
agreement by the Service, the testing period (as defined in section 3.01 of this
revenue procedure) for a contract has more than 90 days remaining, then the

22
issuer must bring the contract into compliance with § 7702A. The issuer may
bring a contract into compliance with § 7702A either by either increasing the
contract's death benefit or returning the contract's excess premiums and
earnings thereon to the contract holder. The issuer shall take the corrective
action required under this section 5.05(1) of this revenue procedure within 90
days of the date of execution of the closing agreement by the Service.
(2) No corrective action required if Service executes closing agreement on
a date within ninety (90) days of the expiration of testing period. If the testing
period for a contract expires on or before the date within 90 days of the execution
of the closing agreement by the Service, then the issuer is not required to take
any corrective action under section 5.05(1) of this revenue procedure.
.06 Representations.
The submission must include representations to the
effect that the issuer is within the scope of section 4 of this revenue procedure
and that amount due to the Service under the closing agreement is computed
correctly under section 5.03(1) or (2) of this revenue procedure, as applicable.
The representations must be executed under penalties of perjury by an
appropriate party (as set forth in section 7.01 of Rev. Proc. 2008-1 (or its
successor). The issuer must retain documentation available for audit to support
the representations.
.07 Electronic submissions.
The information required under section
5.01(1) of this revenue procedure may be submitted to the Service electronically,
in read-only format, on a CD-ROM. Adobe Portable Document format is a
suitable format. Other formats may be arranged on a case-by-case basis. The

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issuer must provide a total of three CD-ROMs, one for each of the three copies of
the closing agreement.
SECTION 6. MODEL CLOSING AGREEMENT
Effective as of date executed by Internal
Revenue Service _____________________

CLOSING AGREEMENT AS TO FINAL DETERMINATION
COVERING SPECIFIC MATTERS
UNDER SECTION 7702A

THIS CLOSING AGREEMENT ("Agreement") is made pursuant to § 7121
of the Internal Revenue Code (the "Code") by and between [Insert Taxpayer
name, address, and EIN] ("Taxpayer") and the Commissioner of Internal
Revenue (the "Service").
WHEREAS,
A. Taxpayer is the issuer of one or more life insurance contracts under
§ 7702.

B. Pursuant to Rev. Proc. 2008-39, 2008-29, an issuer under certain
circumstances may remedy an inadvertent non-egregious failure to comply with
the modified endowment contract rules under § 7702A.

C. By letter dated [Insert date], Taxpayer submitted to the Service,
pursuant to Rev. Proc. 2008-1, 2008-1 I.R.B. 1 [or successor Rev. Proc., if
applicable], a request for this Agreement covering [Insert number] modified
endowment contracts identified on Exhibit A attached to this Agreement (the
“Contracts”).

D. Taxpayer intended that each of the Contracts not be a modified
endowment contract under § 7702A. Taxpayer represents that the Contract[s] is
[are] not described in Sec. 4.02 of Rev. Proc. 2008-39 and that the Contracts
identified on Exhibit A are eligible for relief under Rev. Proc. 2008-39.

E. Taxpayer represents that the amount determined under Sec. 5.03 of
Rev. Proc. 2008-39 is $ [Insert amount]. Taxpayer represents that this amount
has been computed correctly under the provisions of Rev. Proc. 2008-39.

F. To ensure that the Contract[s] is [are] not treated as [a] modified
endowment contract[s], Taxpayer and the Service have entered into this
Agreement.

24

NOW THEREFORE IT IS HEREBY FURTHER DETERMINED AND
AGREED BETWEEN TAXPAYER AND THE SERVICE AS FOLLOWS:

1. In consideration for the agreement of the Service as set forth in Section
2 below, Taxpayer agrees as follows:

(A) Taxpayer will pay to the Service the amount of $ [Insert amount]
at the time and in the manner described in Section 3 below.

(B) The amount paid pursuant to Section 1(A) above is not deductible
by Taxpayer, nor is such amount refundable, subject to credit or
offset, or otherwise recoverable by Taxpayer from the Service.

(C) For purposes of Taxpayer's complying with its reporting and
withholding obligations under the Code,
(i) neither the investment in the contract for purposes of § 72,
nor the premiums paid for purposes of § 7702, on any
Contract can be increased by any portion of the amount set
forth in Section 1(A) above. If any such increases are made,
they are entitled to no effect.
(ii) neither the investment in the contract for purposes of § 72,
nor the premiums paid, for purposes of § 7702, on any
Contract can be increased by any portion of the amount
which Taxpayer represents to be the income on the contract
for all of the Contracts in the aggregate. If any such
increases are made, they are entitled to no effect.
(D) To bring Contract[s] for which the testing period (as defined in Sec.
3.01 of Rev. Proc. 2008-39) will not have expired on or before the
date 90 days after the execution of this Agreement into compliance
with § 7702A, either by an increase in death benefit[s] or the return
of the excess premiums and earnings thereon to the Contract
holder[s].

2. In consideration of the agreement of Taxpayer set forth in Section 1
above, the Service agrees as follows:

(A) To treat each Contract as having satisfied the requirements of
§ 7702A during the period from the date of issuance of the Contract
through and including the later of—

(i) date of the execution of this Agreement, and
(ii) the date of the corrective actions described in Section 1(D)
above;

25
(B) To treat the corrective action described in Section 1(D) above as
having no effect on the date the Contract was issued, entered into,
or purchased for purposes of any provision of the Code or the
regulations thereunder;

(C) To waive civil penalties for failure of Taxpayer to satisfy the
reporting, withholding, and/or deposit requirements for income
subject to tax under § 72(e)(10) that was received or deemed
received by a Contract holder under a Contract in a calendar year
ending prior to the date of execution of this Agreement; and

(D) To treat no portion of the amount described in Section 1(A) above
as income to the Contract holders.

3. The actions required of Taxpayer in Section 1(D) above shall be taken
by Taxpayer no later than 90 days after the date of execution of this Agreement
by the Service. Payment of the amount described in Section 1(A) above shall be
made within 60 days of the date of execution of this Agreement by the Service by
check payable to the "United States Treasury," delivered together with a copy of
this executed Agreement to Internal Revenue Service, Receipt & Control Stop
31, 201 W. Rivercenter Blvd., Covington, KY 41011.

4. This Agreement is, and shall be construed as being, for the benefit of
Taxpayer. The Contract holders covered by this Agreement are intended
beneficiaries of this Agreement. This Agreement shall not be construed as
creating any liability of an issuer to the Contract holders.

5. Neither the Service nor Taxpayer shall endeavor by litigation or other
means to attack the validity of this Agreement.

6. This Agreement may not be cited or relied upon as precedent in the
disposition of any other matter.

NOW THIS CLOSING AGREEMENT FURTHER WITNESSETH, that
Taxpayer and the Service mutually agree that the matters so determined shall be
final and conclusive, except as follows:

1. The matter to which this Agreement relates may be reopened in the
event of fraud, malfeasance, or misrepresentation of material facts set forth
herein.

2. This Agreement is subject to sections of the Code that expressly
provide that effect be given to their provisions (including any stated exception for
Code § 7122) notwithstanding any other law or rule of law.

26
3. To the extent this Agreement relates to any tax period after the date on
which it is executed, it is subject to any law, enacted after such date, that applies
to that tax period.

IN WITNESS WHEREOF, the parties have subscribed their names in
triplicate. By signing the above parties certify that they have read and agreed to
the terms of this document.

[Insert Taxpayer name]
Date Signed: _____________ By: _________________________

Title: ________________________

COMMISSIONER OF INTERNAL REVENUE
Date Signed: _____________ By: _________________________

Title: ________________________
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective July 21, 2008, the date of its
publication in the Internal Revenue Bulletin.
SECTION 8. EFFECT ON OTHER DOCUMENTS
This revenue procedure supersedes Rev. Proc. 2001-42 and Rev. Proc.
2007-19.
SECTION 9. PAPERWORK REDUCTION ACT
The collections of information in this revenue procedure have been
reviewed and approved by the Office of Management and Budget in accordance

27
with the Paperwork Reduction Act (44 U.S.C. 3507) under control number
1545-1752.
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 control number.
Books and 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 return information are
confidential, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue procedure is Katherine A. Hossofsky
of the Office of Associate Chief Counsel (Financial Institutions & Products). For
further information regarding this revenue procedure contact Branch 4 of that
office at (202) 622-3970 (not a toll-free call).