PLR 1041007: The IRS granted more time for a split-dollar loan representation

Plain-English summary

The IRS granted a taxpayer up to 30 days to prepare and sign a written representation concerning nonrecourse split-dollar life insurance loans. The representation states 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 relying on a tax preparer's mistaken understanding of the loan terms. 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 representation 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: 201041007
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-105289-10
Date:
July 6, 2010

Legend

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

Employer = --------------------------------------------------------------

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

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

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

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

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

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

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

Year 5 = -------

Year 6 = -------
PLR-105289-10 2

Year 7 = -------

Year 8 = -------

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

   This is in reply to a letter dated January 28, 2010, and supplemental

correspondence dated May 4, 2010, requesting an extension of time under §§
301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations for
Taxpayer to file a written representation under § 1.7872-15(d)(2)(ii) of the Income Tax
Regulations. If this 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

  Employer and Parent, Employer’s parent corporation, are State non-profit

corporations 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).

    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
Employer. 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, Employer pays the premiums on a life insurance policy

owned by Taxpayer. The premium payments made by Employer are treated as loans
pursuant to the Split-Dollar Regulations, whereby Employer is the lender and the
Taxpayer is the borrower (the “parties to the loan”). 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. Employer made
the first loan under the current SDP to Taxpayer in Year 5. Taxpayer represents that a
PLR-105289-10 3

reasonable person would expect that all payments under the loans will be made as
described in § 1.7872-15(d)(2)(i).

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

Employer, and employee participants, including Taxpayer (collectively, “Plan
Participants”): Company B was responsible for 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
Taxpayer lacked knowledge and experience with regards to split-dollar life insurance
arrangements and the Split-Dollar Regulations, and therefore, relied on Employer’s
guidance, representations, conclusions, and information regarding the current SDP.
Employer, in turn, relied on Company B’s guidance in developing, implementing, and
administering the current SDP.

     Company B provided Employer’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, Employer did not execute
or file the written representations for nonrecourse split-dollar loans pursuant to
§ 1.7872-15(d)(2), and neither did Taxpayer.

 In Year 6, Company B ceased administering the current SDP and Employer 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. Employer employed counsel from Law Firm to review the current
SDP and advise Employer 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, Employer informed Taxpayer that the loans were nonrecourse loans and
that a written representation should have been filed by both Taxpayer and Employer to
ensure that payments on the loans were not treated as contingent payments. Employer
further explained that the written representation should have been made in Year 5 when
the first loan was made to Taxpayer under the plan and asked that Taxpayer file 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
PLR-105289-10 4

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 Taxpayer, Employer’s Chief
Executive Officer, Employer’s tax return preparer, and Employer’s 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) of the regulations 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
PLR-105289-10 5

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
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 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 representation 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
representation. Provided that the written representation is timely signed by both parties
to the loan as required by this letter and filed with the Taxpayer’s tax return for Year 8,
PLR-105289-10 6

the written representation will be deemed effective for all years in which the
Arrangement has been in effect. In accordance with § 1.7872-15(d)(2)(ii), a copy of the
written representation should be attached to Taxpayer’s tax return for any subsequent
taxable year in which Employer makes a split-dollar loan to Taxpayer to which the
representation applies.

    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 representation under §§ 1.7872-15(d)(2)(i) and (ii); no opinion is expressed with
regard to whether Taxpayer satisfied 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 Loan 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)