IRS, Treasury Come Together on Split-Dollar Approach

August 19, 2002 ( - The Bush administration has taken steps to close down a tax shelter involving undervaluation of taxable policy benefits under split-dollar life insurance arrangements.

In Notice 2002-59 , the Treasury Department and Internal Revenue Service said they were cracking down in cases where the parties attempt to avoid taxes by using a variety of undervaluation techniques, including:

  • inappropriately high current term insurance rates
  • prepayment of premiums

The IRS noted that 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.

“The notice makes clear that using any scheme to underestimate the value of benefits for income or gift tax purposes won’t be respected,” Treasury Acting Assistant Secretary for Tax Policy Pamela Olson said in a news release.

Split Arrangements

A split-dollar life insurance arrangement involves two parties agreeing to split the premiums or benefits, or both, of a life insurance policy. These arrangements are used to compensate employees or to make gifts to one or more family members, according to the Treasury Department.

In the notice, IRS and Treasury said they were cutting off the ability of taxpayers to manipulate certain published insurance rates to confer policy benefits other than current life insurance protection on another party.

IRS said taxpayers now are limited in their use of rates under Table 2001, a table of one-year premium rates (commonly referred to as the “P.S. 58” rates) used to determine the value of current life insurance protection on a single life provided under a split-dollar arrangement. They also are limited in using the insurer’s lower published premium rates.

However, the notice limits a party in a split-dollar arrangement to using Table 2001 rates or the insurer’s lower rates only for the purpose of valuing current life insurance protection for life insurance purposes “when, and to the extent, such protection is conferred as an economic benefit by one party on another party.”

The benefits must be determined without regard to consideration or premiums paid by the other party, IRS said.

A copy of Notice 2002-59