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Policyholder Dividends Received Under 'Split Dollar' Arrangements; Rev. Rul. 64-328

AUG. 16, 1965

GCM 33062

DATED AUG. 16, 1965
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Language
    English
  • Tax Analysts Electronic Citation
    65 GCM 8-16
Citations: GCM 33062

 

CC:I:I-1184 Date: August 16, 1965

 

Br2:RML

 

 

Memorandum to:

 

Harold T. Swartz

 

Assistant Commissioner (Technical)

 

 

Attention:

 

Director, Tax Rulings Division

 

 

This refers to your memorandum (T:R:A-WEW), dated April 16, 1965, transmitting a proposed revenue ruling to this office for our consideration. The proposed ruling discusses the effect of policyholder dividends received under "split dollar" arrangements described in Rev. Rul. 64-328, I.R.B. 1964-51, 7. The principal holding of the proposed ruling is that policy dividends, whether paid by the insurer in cash to the employee, or used to purchase additional insurance for the employee, confers a taxable economic benefit on the employee in addition to the taxable benefit specifically described in Rev. Rul. 64-238. In addition, the ruling permits the use of the current published premium rates of the insurer for individual one-year term life insurance in lieu of the rates set forth in Rev. Rul. 55-747, C.B. 1955-2, 228, for determining the value of the insurance protection the employee receives under a "split dollar" arrangement or under a trust qualified under section 401(a) of the Code.

This office concurs generally in the holdings of the proposed ruling, subject, however, to the following suggestions:

1. It should be stressed that the treatment of dividends set forth in the ruling applies whether the arrangement is cast under the endorsement system or under the collateral assignment system.

2. The proposed ruling is confusing as to whether the amount of the dividend is includible in the employee's income without regard to the amount contributed by the employee, or whether it should be aggregated with the value of other benefits received under the arrangement, with only the excess of such aggregated amount over the amount paid by the employee being includible in his gross income. In the second and third paragraphs on page 2, it is held that the amount of the dividend "is includible in the employee's gross income," whereas, the last sentence of the first paragraph on page 3 states "in other words, the amount includible in the employee's gross income in any year is equal to the excess of the total value of all benefits received, less the amount, if any, contributed by the employee from his own funds." It is our view that the employee must include only the excess of the total value of all benefits received by him under the arrangement over the amounts provided by him.

3. The first full paragraph on page 2, holding that cash dividend payments will reduce the employer's basis in the policy, should be omitted. As written it would appear that this result is prescribed even where the cash dividends are paid to the employee under the arrangement. To reduce the employer's basis in such a case would require some theory of constructive receipt. The employer would then be equally entitled to a compensation deduction based on constructive payment. The design of Rev. Rul. 64-328 is to avoid theories of constructive receipt and constructive payment, and to tax the employee on the value of the economic benefits he receives.

4. The proposed ruling attempts to bring within its scope (first paragraph on page 3) all cash payments made to the employee under the arrangement. It is suggested that the ruling be limited to the treatment of policy dividends. Cash payments from the employer to the employee, even if pursuant to a "split dollar" arrangement, may constitute DIRECT payments of compensation, and may fall outside the scope of this ruling.

5. The second paragraph on page 3 should be omitted. Rev. Rul. 64-328 covered this issue and no purpose would be served by repeating the holding here.

In accordance with the above suggestions, the test of the proposed revenue ruling from page 1 through the second paragraph on page 3 should be redrafted along the following lines:

"Advice has been requested regarding the proper income tax treatment of policyholder dividends paid on life insurance policies purchased under so-called 'split dollar' arrangements of the types considered in Revenue Ruling 64-328, I.R.B. 1964-51, 7.

"Revenue Ruling 64-328 holds that the typical 'split dollar' arrangement confers an economic, benefit on the employee, the value of which must be included in the gross income of the employee. In that ruling, current insurance protection is the only benefit which the employee receives and consequently only the value of that benefit is referred to as being includible in the employee's gross income. However, the employee may receive other benefits, such as cash dividends or additional life insurance, the value of which would likewise be includible in the employee's gross income. The amount includible in the employee's gross income each year is equal to the excess of the total value of all the benefits received under the arrangement for such year, less the amount, if any, provided by the employee for that year.

"Revenue Ruling 64-328 considered two major types of 'split dollar' arrangements; the endorsement system and the collateral assignment system. That ruling indicates that while the two systems differ in form, in substance they result in the same economic benefit to the employee. Accordingly, the treatment to be accorded the additional benefits received by the employee on account of policy dividends under a 'split dollar' arrangement would be the same whether the endorsement system or the collateral assignment system is used.

"If the policy dividend is distributed to the employee, the amount of the dividend must be aggregated with the other benefits received by the employee under the arrangement for purposes of determining the amount includible in the employee's gross income. Similarly, if the policy dividend is used to purchase for the employee additional one-year term insurance, or paid-up life insurance (in which the employee has a nonforfeitable interest) for a period of more than one year, the employee receives an additional economic benefit, the value of which is equal to the amount of the dividend. If, in the case where the policy dividend is used to purchase additional paid-up life insurance for a period of more than one year, the employer retains the right to the cash surrender value or to a part of the cash surrender value of such additional insurance, the annual value of the additional insurance coverage is includible in the employee's gross income in the same manner as set forth in Revenue Ruling 64-328; the amount of the benefit to be so included each year may be determined in the manner set forth in that ruling."

The administrative file is returned herewith.

By: Mitchell Rogovin

 

Chief Counsel

 

Internal Revenue Service

 

Enclosure:

 

Adm. file
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Language
    English
  • Tax Analysts Electronic Citation
    65 GCM 8-16
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