A Fringe Benefit Primer for the Closely Held C Corporation (Part II) — footnotes

²⁸ An example of discriminatory types of group-term coverage would be funding retired life reserve group-term insurance for key employees (which would provide a fund for post-retirement premiums), while providing only pre-retirement group-term coverage for nonkey employees.

²⁹ See Rev. Rul. 64-328, 1964-2 CB 11.

³⁰ Id.

³¹ Notice 2002-8, 2002-1 CB 398, revoking Notice 2001-10, 2001-1 CB 459; see Regs. Secs. 1.61-2(d)(2)(ii)(A) and -22; 1.83-6(a)(5); 1.301-1(a) and 1.7872-15.

³² See TD 9092 (9/11/03).

³³ See the discussion of “Interest-Free Loans” in Altieri, “A Fringe Benefit Primer for the Closely Held C Corporation (Part I),” 35 The Tax Adviser 624 (October 2004).

³⁴ There appears to be no authority on this issue. If such authority exists, investment interest expense is deductible to the extent of a taxpayer’s net investment income for the year.

³⁵ See Regs. Sec. 1.61-22(c)(1).

³⁶ See Notice 2001-10, note 31 supra.

³⁷ Rev. Rul. 55-747, 1955-2 CB 228. Rev. Rul. 64-328, note 29 supra, also cites this table.

³⁸ Rev. Rul. 66-110, 1966-1 CB 12.

³⁹ See note 37, supra.

⁴⁰ Under Sec. 264(d), at least four of the last seven premium payments must have been made without borrowing the cash surrender value.

⁴¹ See the text at note 38, supra.

⁴² See Sec. 72(e)(5) and Regs. Sec. 1.72-11(b).

⁴³ The policyholder, if a cash-basis taxpayer, must actually pay the interest element on the cash-value borrowings to obtain a Sec. 163(a) interest deduction. The insurance company cannot simply deduct the interest cost from additional cash-value borrowings; see Henry P. Keith, 139 F2d 596 (2d Cir. 1944) and Rev. Rul. 73-482, 1973-2 CB 44.

⁴⁴ The years in which the company had an interest in the policy will be counted in the seven-year period; see Rev. Rul. 71-309, 1971-2 CB 168.

⁴⁵ See Rev. Rul. 60-31, 1960-1 CB 174, and Rev. Proc. 71-19, 1971-1 CB 698.

⁴⁶ See George C. Martin, 96 TC 814 (1991); Olmsted Inc. Life Agency, 304 F2d 16 (8th Cir. 1962); Howard Veit, 8 TC 809 (1947); and James F. Oates, 207 F2d 711 (7th Cir. 1953).

⁴⁷ Problems develop under the Employee Retirement Income Security Act of 1974 (ERISA) if this benefit is provided to nonhighly compensated employees.

⁴⁸ A limited period between the execution of the deferred-compensation arrangement and the employee’s retirement will make it more difficult for the company and the employee to argue that the payments are reasonable compensation for services to be rendered. Also, the IRS will not rule on a factual situation involving deferred compensation for past services rendered; see Rev. Proc. 71-19, note 45 supra, and Rev. Proc. 92-65, 1992-2 CB 428. Pending legislation addresses this issue, as well as others effecting nonqualified deferred compensation; see HR 4520.

⁴⁹ See S. Rep’t No. 96-1035, 96th Cong., 2d Sess. (1980).

⁵⁰ Otherwise, the employee could be deemed in receipt of a taxable cash equivalent or economic benefit.

⁵¹ See ERISA Section 301.

⁵² It is unclear whether ERISA would apply to a deferred-compensation arrangement covering only one key employee, because the statutory language affording the exemption is stated only in the plural; see Altieri, “Non-qualified Compensation Agreements and ERISA,” 55 Ohio CPA Journal 42 (1996).

⁵³ See Rev. Rul. 72-25, 1972-1 CB 127.

⁵⁴ A C corporation subject to the alternative minimum tax would want to plan for a possible positive adjusted current earnings adjustment attributable to an influx of regular income-tax-free life insurance proceeds.

⁵⁵ Sec. 264(a) will prevent the company from deducting its premium costs while maintaining the contract, however.

⁵⁶ See IRS Letter Ruling 8113017 (12/30/80).

⁵⁷ See GCM 39230 (5/7/84); IRS Letter Rulings 9242007 (7/16/92), 9214035 (12/30/91) and 9210013 (12/5/91); DOL Advisory Opinion Letters 94-31A (9/9/94) and 92-13A (5/19/92); and DOL Letter to the IRS dated 12/13/85.

⁵⁸ See Rev. Proc. 92-64, 1992-2 CB 422; see also Rev. Proc. 92-65, 1992-2 CB 428, as to related constructive-receipt issues when using a trust arrangement.

⁵⁹ See McAllister v. Resolution Trust Corp., 201 F3d 570 (5th Cir. 2000), and Goodman v. Resolution Trust Corp., 7 F3d 1123 (4th Cir. 1993).

⁶⁰ See Sec. 402(b) and Regs. Secs. 1.402(b)-1(a) and 1.83-3. The employee would have taxable income, even though he or she may have no cash available from the funding vehicle.