INTERIM GUIDANCE FOR SPLIT-DOLLAR LIFE INSURANCE.

IRS Notice 2001-10, Jan. 9, provides interim guidance for split-dollar life insurance arrangements between employers and employees.

The IRS generally will accept the parties' characterization of the employer's payments under a split-dollar arrangement as long as the characterization is consistent with the substance of the arrangement, has been followed consistently from inception, and fully accounts for all the economic benefits conferred on the employee.

The IRS will permit an employer's payments under a split-dollar arrangement to be characterized as loans for tax purposes, provided that all of the conditions set forth above are satisfied. In such cases, the tax consequences of the payments treated as loans will be determined under Sec. 7872; the employee will not have additional compensation income for the value of the insurance protection provided under the life insurance contract; and the cash surrender value of the contract will not represent property that has been transferred to the employee for Sec. 83 purposes.

However, the employee ordinarily would have additional gross income if the employer's advances were not repaid in accordance with the terms of the arrangement. The employee also could have gross income under Sec. 72 for distributions received under the life insurance contract.

Also, the IRS revoked Rev. Rul. 55-747 and will no longer accept P.S. 58 rates. The IRS has provided an interim rate table which may be used to determine the value of current life insurance protection, but taxpayers may use the P.S. 58 rates for tax years ending on or before Dec. 31, 2001.