Comments Concerning IRS Notice 2001–10
I. Characterizing Equity SDAs
- Transition Issues
- Taxing Earnings under Equity SDA under Interim Guidance
We suggest clarifying when policy CSV might be taxable prior to payment under the Interim Guidance. Paragraph A.3 of the Interim Guidance provides that an employee will have compensation income when the employee acquires a substantially vested interest in the policy's CSV, reduced by any consideration paid by the employee for her interest in the policy. This statement suggests the Section 83 approach outlined by TAM 96-04-001. However, Paragraph A.4 of the Interim Guidance then states:
[p]ending the publication of further guidance, the IRS will not treat an employer as having made a transfer of a portion of the cash surrender value of a life insurance contract to an employee for purposes of section 83 solely because the interest or other earnings credited to the cash surrender value of the contract cause the cash surrender value to exceed the portion thereof payable to the employer on termination of the split dollar arrangement. If future guidance provides that such earning increments are to be treated as transfers of property for purposes of section 83, it will apply prospectively.
The meaning of these provisions when read together is somewhat unclear. Some commentators have suggested that these provisions mean that Paragraph A.3 will not apply to existing Equity SDAs until further guidance is provided. Alternatively, it has been suggested that there can be no tax under Section 83 pending further guidance unless the employer receives a recovery of its premium payments (i.e., a rollout event) or the employee otherwise accesses CSV by a withdrawal or surrender of the policy. 7
7 Special tax treatment for Equity SDAs in existence prior to the Notice, in addition to the transition rule, is suggested in Section II below.