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 insur

ance 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 splitdollar 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 pur

September 9, 2002 482 2002–36 I.R.B.

The denominator of the fraction is 730 days or 24 months (depending on the measure of time used in the numerator).

DRAFTING INFORMATION

The principal author of this notice is Sara Paige Shepherd of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Ms. Shepherd at (202) 622–4960 (not a toll-free number).

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determina- tion of correct tax liability. (Also Part I, § 42; 1.42–14.)

Rev. Proc. 2002–56