PLR 1041006: The IRS granted more time for split-dollar loan representations

Plain-English summary

The IRS granted a subsidiary up to 30 days to prepare and sign written representations concerning nonrecourse split-dollar life insurance loans made to employee participants. The representations state that a reasonable person would expect the loan payments to be made, which can affect whether otherwise noncontingent payments are treated as contingent. The IRS found that the taxpayer met the standards for relief after its tax return preparer mistakenly treated the loans as recourse loans. The ruling is limited to the filing deadline and does not decide whether the other requirements for the loan treatment were satisfied.

Ruling snapshot

• Question: May the taxpayer file the required split-dollar loan representations after the original deadline?
• Outcome: Approved
• Key authorities: IRC § 7872; Treas. Reg. §§ 1.7872-15 and 301.9100-1 through 301.9100-3; IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201041006
Release Date: 10/15/2010
Index Number: 9100.00-00, 7872.00-00
Person To Contact:
------------------------ ------------------------, ID No. ------------
------------- Telephone Number:
---------------------------------------------------------- ---------------------
------------------------ Refer Reply To:
------------ CC:FIP:B02
---------------------------------- PLR-105288-10
Date:
July 6, 2010

Legend

Taxpayer = --------------------------------------------------------------

Parent = -------------------------------------------------

Company A = -------------------------------

Company B = -----------------------------

Company C = ----------------------------------

Law Firm = ------------------------------

State = -----------

Year 1 = -------

Year 2 = -------

Year 3 =
Year 4 = -------

Year 5 = -------

Year 6 = -------

Year 7 = -------
PLR-105288-10 2

Year 8 = -------

Date 1 = -------------------

Dear -------------:

    This is in reply to a letter dated January 28, 2010, requesting an extension of

time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations for Taxpayer to file written representations under § 1.7872-15(d)(2)(ii) of
the Income Tax Regulations. If a written representation under § 1.7872-15(d)(2)(ii) is
considered timely filed and the other requirements under § 1.7872-15(d)(2)(ii) are
satisfied, then an otherwise noncontingent payment on a split-dollar loan that is
nonrecourse to the borrower is not a contingent payment under § 1.7872-15.

Facts

    Taxpayer is a subsidiary of Parent. Both Parent and Taxpayer are State non-

profit corporations that are exempt from taxation under section 501(a) of the Internal
Revenue Code as organizations described in section 501(c)(3) and are classified as
public charities under section 509(a)(1). Taxpayer is an accrual basis taxpayer whose
fiscal year ends on Date 1.

    Since Year 1, Parent has had a split-dollar life insurance program for certain of

its executive level employees and employees of its subsidiary corporations, including
Taxpayer. In Year 2, Parent hired Company A to consult on matters relating to the split-
dollar program and to administer the program. Company A recommended revising the
split-dollar plan and in Year 3, Parent implemented a new split-dollar life insurance
program. Company B subsequently acquired Company A and became Parent’s
consultant and administrator of the split-dollar program. In Year 5, Parent implemented
a new split-dollar life insurance program (“current SDP”) upon the recommendation of
Company B. The current SDP was entered into after the Treasury Department’s
issuance of final regulations under §§ 1.61-22 and 1.7872-15 pertaining to split-dollar
life insurance arrangements (the “Split-Dollar Regulations”).

    Under the current SDP, Taxpayer pays the premiums on life insurance policies

for certain executive level employees. The premium payments made by Taxpayer are
treated as loans pursuant to § 1.7872-15 whereby the Taxpayer is the lender and the
employee participants are the borrowers (the “parties to the loans”). Taxpayer
represents that the loans were to each have a stated interest rate equal to the
applicable federal rate so as not to be “below-market split-dollar loans” under the Split-
Dollar Regulations. Taxpayer represents that a reasonable person would expect that all
payments under the loans will be made as described in § 1.7872-15(d)(2)(i).
PLR-105288-10 3

    Company B was instrumental in implementing the current SDP for Parent,

Taxpayer, and employee participants (collectively, “Plan Participants”): Company B
was responsible for drafting the governing documents, advising Plan Participants
regarding the set-up of the current SDP, determining the type of life insurance policies
associated with the current SDP, and administering the current SDP. Taxpayer
represents that the Plan Participants lacked knowledge and experience with split-dollar
life insurance arrangements and the Split-Dollar Regulations, and therefore, relied on
Company B’s guidance in developing, implementing, and administering the current
SDP.

    Company B provided Taxpayer’s tax return preparer with a governing document

pertaining to the current SDP, but did not provide the preparer with a copy of the plan’s
participation agreement. Due to some confusing language in the governing document,
the tax return preparer erroneously concluded that the loans involved in the current SDP
were recourse loans. The tax return preparer has provided an affidavit stating that
discussions with Company B representatives regarding the current SDP confirmed his
conclusion that the loans were recourse in nature. Therefore, Taxpayer’s Year 4 tax
return, the return corresponding to the taxable year in which the Taxpayer made the first
split-dollar loans to certain employee participants under the current SDP, reflected the
loans as recourse loans. Since the return preparer erroneously deemed the loans to be
recourse, Taxpayer did not execute or file the written representation for nonrecourse
split-dollar loans pursuant to § 1.7872-15(d)(2).

 In Year 6, Company B ceased administering the current SDP and Taxpayer hired

Company C to administer the current SDP.

   Due to the decline in the value of common stocks and many bonds from Year 6

to early Year 7, the cash surrender values of the life insurance policies under the
current SDP declined. Taxpayer employed counsel from Law Firm to review the current
SDP and advise Taxpayer on options to revise or terminate the plan. Counsel from Law
Firm determined that under applicable State law, the loans under the current SDP were
not recourse loans, but rather nonrecourse loans secured by the life insurance policies.
Subsequently, Taxpayer filed a request for an extension of time to make the written
representations under §§ 1.7872-15(d)(2)(i) and (ii).

     Taxpayer makes the following representations. The granting of relief under

§ 301.9100-3 would not result in Taxpayer having a lower tax liability in the aggregate
for all years to which the election applies than it would have had if the election had been
timely made (taking into account the time value of money). Taxpayer did not knowingly
choose not to file the election. Taxpayer did not use hindsight in requesting relief.
Finally, Taxpayer represents that it is not seeking to alter a return position for which an
accuracy-related penalty has been or could be imposed under § 6662. In support of its
ruling request, Taxpayer has submitted the affidavits of its Chief Executive Officer, tax
PLR-105288-10 4

return preparer, and counsel from Law Firm regarding the events that led to Taxpayer’s
failure to make the regulatory election pursuant to §§ 1.7872-15(d)(2)(i) and (ii).

Law and Analysis

   Section 1.7872-15(d)(1) provides that, except as provided in § 1.7872-15(d)(2), if

a payment on a split-dollar loan is nonrecourse to the borrower, the payment is a
contingent payment for purposes of § 1.7872-15.

    Section 1.7872-15(d)(2)(i) provides that an otherwise noncontingent payment on

a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under
§ 1.7872-15 if the parties to the split-dollar life insurance arrangement represent in
writing that a reasonable person would expect that all payments under the loan will be
made. Section 1.7872-15(d)(2)(ii) describes the time and manner requirements for
providing the written representation required by § 1.7872-15(d)(2)(i). Section 1.7872-
15(d)(2)(ii) provides, in part, that the written representation be signed by both the
borrower and lender not later than the last day (including extensions) for filing the
federal income tax return of the borrower or lender, whichever is earlier, for the taxable
year in which the lender makes the first split-dollar loan under the split-dollar life
insurance arrangement.

    Section 301.9100-1(b) defines election to include an application for relief in

respect of tax; a request to adopt, change, or retain an accounting method or
accounting period. The term does not include an application for an extension of time for
filing a return under § 6081.

    Section 301.9100-1(c) provides that the Commissioner has discretion to grant a

reasonable extension of time to make a regulatory election (defined in §301.9100-1(b)
as an election whose due date is prescribed by regulation or by a revenue ruling, a
revenue procedure, a notice, or an announcement published in the Internal Revenue
Bulletin), or a statutory election (but no more than 6 months except in the case of a
taxpayer who is abroad), under all subtitles of the Internal Revenue Code except
subtitles E, G, H, and I.

   Section 301.9100-3 sets forth parameters for determining whether, under

particular facts and circumstances, the Commissioner will grant an extension of time for
regulatory elections that do not meet the requirements for an automatic extension under
§ 301.9100-2. Section 301.9100-3(a) provides that when a taxpayer does not meet the
requirements for an automatic extension under § 301.9100-2, the taxpayer must provide
evidence satisfactorily establishing that the taxpayer acted reasonably and in good faith
and that granting relief will not prejudice the Government.

    Section 301.9100-3(b)(1) provides that, subject to § 301.9100-3(b)(3), a taxpayer

will be deemed to have acted reasonably and in good faith if the taxpayer satisfies at
least one of the following five criteria: (i) the request for relief was made before the
PLR-105288-10 5

Service discovered the failure to make the regulatory election; (ii) the failure to make the
election was due to intervening events beyond the taxpayer’s control; (iii) after
exercising reasonable diligence, the taxpayer was unaware of the necessity for the
election; (iv) the taxpayer reasonably relied on the written advice of the Service; or (v)
the taxpayer reasonably relied upon a qualified tax professional, including a tax
professional employed by the taxpayer, and that tax professional failed to make or failed
to advise the taxpayer to make the election.

     Section 301.9100-3(b)(2) provides that a taxpayer has not reasonably relied on a

qualified tax professional if the taxpayer knew, or should have known, that the
professional was either (i) not competent to render advice on the regulatory election, or
(ii) not aware of all relevant facts.

    Section 301.9100-3(b)(3) provides that a taxpayer will not be deemed to have

acted reasonably and in good faith if the taxpayer does one of the following: (i) seeks to
alter a return position for which an accuracy-related penalty has been or could be
imposed under section 6662 at the time the taxpayer requests relief and the new
position requires or permits a regulatory election for which relief is requested; (ii) was
informed in all material respects of the required election and the subsequent tax
consequences, but chose not to make the election; or (iii) uses hindsight in requesting
relief.

   Section 301.9100-3(c)(1) provides that the interests of the Government are

prejudiced if granting relief would result in the taxpayer having a lower liability in the
aggregate for all years to which the regulatory election applies than the taxpayer would
have had if the election had been timely made (taking into account the time value of
money).

Conclusion

   Based on the information submitted and Taxpayer’s representations, we

conclude that Taxpayer has satisfied the requirements for granting a reasonable
extension of time to file the written representations as required under §§ 1.7872-
15(d)(2)(i) and (ii). Taxpayer is therefore granted a period of time not to exceed 30 days
from the date of this letter to prepare and have both parties to the loan sign the written
representations. Provided that the written representations are timely signed by both
parties to the loan as required by this letter and filed with the Taxpayer’s tax return for
Year 8, each written representation will be deemed effective for all years in which the
corresponding split-dollar arrangement has been in effect. In accordance with § 1.7872-
15(d)(2)(ii), a copy of each written representation should be attached to Taxpayer’s tax
return for any subsequent taxable year in which Taxpayer makes a split-dollar loan to
which the representation applies.
PLR-105288-10 6

    Except as specifically ruled upon above, no opinion is expressed concerning any

federal income tax consequences relating to the facts herein under any other provision
of the Code. This ruling is limited to the timeliness of the filing requirement of the
written representations under §§ 1.7872-15(d)(2)(i) and (ii); no opinion is expressed with
regard to whether Taxpayer satisfies the other requirements under §§ 1.7872-15(d)(2)(i)
and (ii), the loan treatment requirements under § 1.7872-15(a)(2), or whether payments
under the Loans are otherwise noncontingent payments for purposes of § 1.7872-15.

   No opinion is expressed with regard to whether the tax liability of Taxpayer is not

lower in the aggregate for all years to which the election applies than such tax liability
would have been if the election had been timely made (taking into account the time
value of money). Upon audit of the federal income tax returns involved, the director’s
office will determine such tax liability for the years involved. If the director’s office
determines that such tax liability is lower, that office will determine the federal income
tax effect.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

                                               Sincerely,


                                               David B. Silber
                                               David B. Silber
                                               Chief, Branch 2
                                               Office of Associate Chief Counsel
                                               (Financial Institutions and Products)