Comments Concerning IRS Notice 2001–10
I. Characterizing Equity SDAs
- Section 7872
We agree that Section 7872, as a policy matter, is an appropriate vehicle for taxing Equity SDAs prospectively when the employee is the beneficial owner of the policy. 2 The employer may be viewed as a lender extending funds (premium payments) to the borrower (the employee), with the borrower being required to return the promised funds on termination of the Equity SDA without making interest payments at the applicable federal rate. The fact that the amounts extended by the employer might only be repaid from policy proceeds is probative as to the nature of the loan (i.e., recourse vs. non-recourse), and not to whether the arrangement constitutes a loan.
How Section 7872 might apply to Equity SDAs should be clarified before taxpayers can reasonably be expected to elect below-market loan treatment. The Notice states that "[t]he amount, timing and characterization of the imputed payments to the borrower under a below-market loan depend on the relationship between the borrower and the lender and whether the loan is characterized as a demand loan or term loan." We agree with this statement and discuss below how Section 7872 might apply to Equity SDAs.
2 We note, however, that treating Equity SDAs as "loans" may be viewed as inconsistent with the legislative history to the Deficit Reduction Act of 1984, which suggests that Congress did not intend to convert pre-existing non-loan arrangements such as Equity SDAs into "loans" for purposes of Section 7872.