ABATax Comment Concerning IRS Notice 2001-10

Section of Taxation
Submission to the Federal Executive Branch

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Comments Concerning IRS Notice 2001–10
April 2001

I.  Characterizing Equity SDAs

  1. Section 83
     
    1. Employer Tax

      The Notice addresses only employee tax issues. We request guidance regarding the employer's tax treatment upon a "transfer of property" in the context of Equity SDAs.
       

      1. Income Inclusion

        It is unclear whether the employer must recognize income when transferring CSV to one of its employees under an Equity SDA. The transfer of appreciated property to satisfy a contractual obligation is normally treated as a taxable sale or exchange. Assuming the employer is treated as the beneficial owner of the policy, the employer's transfer of its CSV to the employee in accordance with split-dollar documents would appear to be a taxable to the employer, at least in part, depending upon whether the transferred CSV was attributable to policy earnings, employer contributions or both.

      2. Deduction

        Another important question is whether an employer can deduct amounts reported as compensation under Section 83 to the employee. Section 83(h) appears on its face to provide for this result. However, Section 83 regulations also provide that a deduction is only available to the extent that the amount would otherwise be deductible under Section 162 or Section 212. The reference raises the question whether of Section 264 in any way restricts deductibility because the employer has rights as a policy beneficiary. Our view is that Section 264 should not limit deductibility, as the employer would ordinarily have no rights to recover any amounts reported as compensation income by the employee.

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