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.

.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 over- age 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

(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

July 21, 2008 147 2008–29 I.R.B.

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%).

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%).

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 Exam- ple 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

(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 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 Ser- vice 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 issuer must provide a total of three CD-ROMs, one for each of the three copies of the closing agreement.

2008–29 I.R.B. 148 July 21, 2008