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

(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 surren- der value. The proportionate share of the cash surrender value of a contract is the amount obtained by multiplying—

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(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

(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%.

(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

(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.

after December 31, 2007, is equal to the sum of—

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ing 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.

.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.