1054 Federal Register / Vol. 63, No. 5 / Thursday, January 8, 1998 / Rules and Regulations

2A sample disclosure form may be found in 12

CFR part 226, Appendix H–14.

(b)(2)(x), (b)(2)(xi), and (b)(2)(xii),

respectively.

The revisions read as follows:

§ 560.210 Disclosures for adjustable-rate

mortgage loans, adjustment notices, and

interest-rate caps.

* * * * *

(b) * * *

(2) A loan program disclosure for each

adjustable-rate home loan program in

which the consumer expresses an

interest. The following disclosures, as

applicable, shall be provided: 2

* * * * *

(viii) At the option of the savings

association, either of the following:

(A) An historical example, based on a

$10,000 loan amount, illustrating how

payments and the loan balance would

have been affected by interest rate

changes implemented according to the

terms of the loan program disclosure.

The example shall reflect the most

recent 15 years of index values. The

example shall reflect all significant loan

program terms, such as negative

amortization, interest rate carryover,

interest rate discounts, and interest rate

and payment limitations, that would

have been affected by the index

movement during the period; or

(B) The maximum interest rate and

payment for a $10,000 loan originated at

the initial interest rate (index value plus

margin, adjusted by the amount of any

discount or premium) in effect as of an

identified month and year for the loan

program disclosure assuming the

maximum periodic increases in rates

and payments under the program; and

the initial interest rate and payment for

that loan and a statement that the

periodic payment may increase or

decrease substantially depending on

changes in the rate.

(ix) An explanation of how the

consumer may calculate the payments

for the loan amount to be borrowed

based on either:

(A) The most recent payment shown

in the historical example in paragraph

(b)(2)(viii)(A) of this section; or

(B) The initial interest rate used to

calculate the maximum interest rate and

payment in paragraph (b)(2)(viii)(B) of

this section.

* * * * *

Dated: December 30, 1997.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 98–443 Filed 1–7–98; 8:45 am]

BILLING CODE 6720–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8754]

RIN 1545–AS76

Debt Instruments With Original Issue

Discount; Annuity Contracts

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the federal

income tax treatment of certain annuity

contracts. The regulations determine

which of these contracts are taxed as

debt instruments for purposes of the

original issue discount provisions of the

Internal Revenue Code. The regulations

provide needed guidance to owners and

issuers of these contracts.

DATES: Effective date: The regulations

are effective February 9, 1998.

Applicability dates: For dates of

applicability, see § 1.1275–1(j)(8).

FOR FURTHER INFORMATION CONTACT:

Jonathan R. Zelnik, (202) 622–3930 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Sections 163(e) and 1271 through

1275 of the Internal Revenue Code

(Code) provide rules for the treatment of

debt instruments that have original

issue discount (OID).

On February 2, 1994, the IRS and

Treasury published in the Federal

Register (59 FR 4799) final regulations

under the OID provisions. On April 7,

1995, the IRS published in the Federal

Register (60 FR 17731) a notice of

proposed rulemaking relating to the

federal income tax treatment of annuity

contracts that are not issued by

insurance companies subject to tax

under subchapter L of the Code. The

proposed regulations treat certain of

these annuity contracts as debt

instruments for purposes of the OID

provisions.

The IRS received a number of written

comments on the proposed regulations.

In addition, on August 8, 1995, the IRS

held a public hearing on the proposed

regulations. The proposed regulations,

with certain changes in response to

comments, are adopted as final

regulations. The comments and changes

are discussed below.

Explanation of Provisions

Certain Annuity Contracts

The OID provisions generally apply to

issuers and holders of debt instruments.

The term debt instrument means any

instrument or contractual arrangement

that constitutes indebtedness under

general principles of federal income tax

law. See section 1275(a)(1) and

§ 1.1275–1(d).

Section 1275(a)(1)(B) excepts two

types of annuity contracts from the

definition of debt instrument (and,

therefore, from the OID provisions).

First, section 1275(a)(1)(B)(i) excepts an

annuity contract to which section 72

applies if the contract ‘‘depends (in

whole or in substantial part) on the life

expectancy of 1 or more individuals.’’

Second, section 1275(a)(1)(B)(ii) excepts

an annuity contract to which section 72

applies if the contract is issued by ‘‘an

insurance company subject to tax under

subchapter L’’ and the circumstances of

the contract’s issuance meet certain

criteria.

The proposed regulations address

only the first exception, which is

contained in section 1275(a)(1)(B)(i).

Under the proposed regulations, an

annuity contract qualifies for the

exception in section 1275(a)(1)(B)(i)

only if all payments under the contract

are periodic payments that: (1) are made

at least annually for the life (or lives) of

one or more individuals; (2) do not

increase at any time during the life of

the contract; and (3) are part of a series

of payments that begins within one year

of the date of the initial investment in

the contract. An annuity contract that is

otherwise described in the preceding

sentence, however, does not fail to

qualify for the exception in section

1275(a)(1)(B)(i) merely because it also

provides for a payment (or payments)

made by reason of the death of one or

more individuals. Thus, under the

proposed regulations, the exception in

section 1275(a)(1)(B)(i) applies only to

an immediate annuity contract with

level (or decreasing) payments for the

life (or lives) of one or more individuals.

No deferred annuity contract qualifies

for the exception.

Several commentators questioned the

approach of the proposed regulations. In

particular, they contended that the

exception in section 1275(a)(1)(B)(i)

should not be limited to those annuity

contracts that require periodic payments

to begin within one year of the date of

the initial investment in the contract.

That is, deferred annuities, if dependent

in whole or substantial part on an

individual’s (or several individuals’)

survival, should also qualify for the

exception in section 1275(a)(1)(B)(i).
Federal Register / Vol. 63, No. 5 / Thursday, January 8, 1998 / Rules and Regulations 1055

Other commentators took issue with this

point of view and contended that the

proposed regulations should be

finalized without substantial change.

After a careful review of this issue,

the IRS and the Treasury have modified

the regulations to eliminate the

requirement that annuity distributions

begin within one year of the date of the

initial investment in the contract.

Instead, as suggested by the legislative

history, the final regulations interpret

section 1275(a)(1)(B)(i) as excepting

from the definition of debt instrument

only those annuity contracts that

contain terms ensuring that the life

contingency under the contract is both

‘‘real and significant.’’ H.R. Conf. Rep.

No. 861, 98th Cong., 2d Sess. 887

(1984), 1984–3 (Vol. 2) C.B. 141. The

Treasury and the IRS have determined

that the life contingency under an

annuity contract is ‘‘real and

significant’’ within the meaning of the

legislative history only if, on the day the

contract is purchased, there is a high

probability that total distributions under

the contract will increase

commensurately with the longevity of

the individual (or individuals) over

whose life (or lives) the distributions are

to be made. (These individuals are

hereinafter referred to as annuitants.)

The final regulations, therefore, provide

a two-pronged general rule: An annuity

contract qualifies for the exception in

section 1275(a)(1)(B)(i) only if it both:

(1) provides for periodic distributions

made at least annually for the life (or

joint lives) of an individual (or a

reasonable number of individuals); and

(2) contains no terms or provisions that

can significantly reduce the probability

that total distributions will increase

commensurately with longevity.

The final regulations identify several

types of terms and provisions that can

significantly reduce the probability that

total distributions under the contract

will increase commensurately with

longevity. These terms and provisions

include the availability of a cash

surrender option, the availability of a

loan secured by the contract, minimum

payout provisions, maximum payout

provisions, and provisions that allow

decreasing payouts. Subject to limited

exceptions, the presence of any of these

terms or provisions causes an annuity

contract to fail to qualify for the

exception in section 1275(a)(1)(B)(i).

The list of identified terms and

provisions in the final regulations is not

exclusive. A contract fails to qualify for

the exception in section 1275(a)(1)(B)(i)

if the contract contains any other term

or provision that can significantly

reduce the probability that total

distributions under the contract will

increase commensurately with

longevity.

Cash Surrender Options and Loans

Secured by the Contract

If the holder of an annuity contract

can exchange or surrender all or part of

the contract for a distribution or for

distributions that are not contingent on

life, the holder’s decision whether, and

when, to exchange or surrender the

contract can render the life contingency

insignificant. Similarly, if the holder of

an annuity contract can borrow against

the contract, the holder’s decision

whether, and when, to borrow can have

a comparable effect. The final

regulations, therefore, provide that, if

either the issuer or a person acting in

concert with the issuer explicitly or

implicitly makes available either a cash

surrender option or a loan secured by

the contract, then the contract contains

a term that can significantly reduce the

probability that total distributions on

the contract will increase

commensurately with longevity. That

availability, therefore, causes the

contract to fail to qualify for the

exception in section 1275(a)(1)(B)(i).

Minimum Payout Provisions

If an annuity contract guarantees that

a minimum amount will be distributed

regardless of the death of the individual

(or individuals) over whose life (or

lives) payments are to be made, the

minimum amount is not subject to the

life contingency. In addition, the larger

the minimum amount relative to

aggregate expected distributions over

the remaining (joint) life expectancy of

the annuitant (or annuitants), the less

likely it is that total distributions under

the contract will increase

commensurately with the longevity of

the annuitant (or annuitants). A

sufficiently large minimum amount

renders the life contingency virtually

meaningless. For example, consider a

contract that provides for monthly

distributions to begin on the annuity

starting date and to extend for the longer

of the life of the annuitant or 20 years,

regardless of the annuitant’s age. If the

annuitant has a life expectancy as of the

annuity starting date of 5 years, it is

likely that distributions will be made for

exactly 20 years, regardless of when the

annuitant dies. In this case, although the

form of the contract indicates that it

depends on life, the existence of the

minimum payout provision significantly

reduces the probability that total

distributions under the contract will

depend on longevity.

Because the existence of a minimum

payout provision can significantly

reduce the probability that total

distributions under the contract will

increase commensurately with

longevity, the existence of any such

provision generally causes the contract

to fail to qualify for the exception in

section 1275(a)(1)(B)(i). The final

regulations provide only two exceptions

to this general rule. First, an annuity

contract does not fail to be described in

section 1275(a)(1)(B)(i) merely because

it contains a minimum payout provision

that guarantees a death benefit no

greater than the unrecovered

consideration paid for the contract.

Second, an annuity contract does not

fail to be described in section

1275(a)(1)(B)(i) merely because the

contract provides that, after

annuitization, distributions may be

guaranteed to continue for a term

certain that is no longer than one-half of

the period of time from the annuity

starting date to the expected date of the

‘‘terminating death.’’

The terminating death is the

annuitant death that, in general, causes

annuity payments to cease under the

contract. The expected date of the

terminating death is determined as of

the annuity starting date with respect to

all then-surviving annuitants by

reference to the applicable mortality

table prescribed under section

417(e)(3)(A)(ii)(I). See Rev. Rul. 95–6,

1995–1 C.B. 80, for the applicable

mortality table that is prescribed for this

purpose as of January 8, 1998.

Maximum Payout Provisions

If an annuity contract provides that

distributions will cease if an annuitant

lives beyond a specified date, total

distributions under the contract may fail

to increase commensurately with

longevity. If the specified date is

relatively early (when compared to the

annuitant’s life expectancy as of the

annuity starting date), its existence

significantly reduces the probability that

total distributions under the contract

will increase commensurately with

longevity. Conversely, if the specified

date is very late (when compared to the

annuitant’s life expectancy as of the

annuity starting date), its existence does

not significantly reduce the probability

that total distributions under the

contract will increase commensurately

with longevity. For example, consider

an annuity contract that provides that

distributions will be made for the life of

the annuitant but in no event for more

than 30 years. If the annuitant is a

relatively young person, this maximum

payout provision significantly

attenuates the life contingency. On the

other hand, if the annuitant has a life

expectancy of 10 years on the annuity

starting date, this maximum payout
1056 Federal Register / Vol. 63, No. 5 / Thursday, January 8, 1998 / Rules and Regulations

provision is unlikely to determine the

total distributions.

Because the existence of a maximum

payout provision can significantly

reduce the probability that total

distributions under the contract will

increase commensurately with

longevity, the final regulations provide

that the existence of any maximum

payout provision generally causes the

contract to fail to qualify for the

exception in section 1275(a)(1)(B)(i).

There is a single exception to this

general rule in cases where the period

of time between the annuity starting

date and the date after which (under the

maximum payout provision) no

distributions will be made is at least

twice as long as the period of time from

the annuity starting date to the expected

date of the terminating death.

Decreasing Payout Provisions

The connection between longevity

and distributions under an annuity

contract is apparent in the case of a

contract that provides for equal annual

distributions for life. For each year the

annuitant lives, another equal

distribution is made. If distributions

decrease over time, this connection can

become attenuated. Consider an annuity

contract that provides for a distribution

upon annuitization of $100,000

followed by annual distributions of $10

per year for life. Although this contract

provides for periodic distributions for

life, the pattern of the distributions

causes the amount distributed to fail to

adequately reflect longevity.

If the amount of distributions under

an annuity contract during any contract

year may be less than the amount of

distributions during the preceding year,

the final regulations provide that this

possibility can significantly reduce the

probability that total distributions under

the contract will increase

commensurately with longevity. Thus,

the existence of this possibility

generally causes the contract to fail to

qualify for the exception in section

1275(a)(1)(B)(i). There is a single

exception to this general rule for certain

variable distributions that are closely

tied to investment experience, inflation,

or similar fluctuating criteria. In these

cases, because the provision can result

in comparable increases in the amount

of distributions, the possibility that the

distributions may decline from year to

year does not significantly reduce the

probability that total distributions under

the contract will increase

commensurately with longevity.

Private and Charitable Gift Annuity

Contracts

Several commentators expressed

concerns that the proposed regulations,

if finalized, would alter the tax

treatment traditionally afforded private

and charitable gift annuity contracts.

Private annuity contracts are typically

issued as consideration in intra-family

transfers of property. Charitable gift

annuity contracts are typically issued by

charitable institutions in exchange for a

transfer of cash or property greater in

value than the annuity. Because these

contracts may call for periodic

distributions to begin more than one

year after they are issued, there was

concern that, under the proposed

regulations, they might fail to qualify for

the exception in section 1275(a)(1)(B)(i).

In many cases, distributions under

private and charitable gift annuity

contracts are entirely contingent on the

survival of one individual (or a small

number of individuals). These contracts

are not indebtedness under general

principles of federal income tax law

and, therefore, are not within the

definition of debt instrument in section

1275(a)(1)(A). For almost all other

private and charitable gift annuities, the

final regulations address the concern by

removing the requirement that the

distributions begin within one year of

the date of the initial investment in the

contract.

Annuity Contracts Issued by Foreign

Insurance Companies

One commentator asked the IRS to

clarify the treatment of annuity

contracts issued by a foreign insurance

company that does not engage in a trade

or business within the United States. In

particular, the commentator asked for

guidance on whether such an annuity

contract qualifies under section

1275(a)(1)(B)(ii), which provides a broad

exception from the definition of debt

instrument for certain annuity contracts

issued by ‘‘an insurance company

subject to tax under subchapter L.’’

These regulations do not address the

exception in section 1275(a)(1)(B)(ii).

The Treasury and the IRS, however,

welcome comments on the proper scope

of that provision.

Certain Compensation Arrangements

Several commentators questioned

whether the proposed regulations apply

to certain compensation arrangements

whose distributions are taxed under

section 72. The timing rules of the OID

provisions do not apply to

compensation arrangements that are

subject to other specific Code or

regulations provisions. For example, if

an arrangement is described in the first

sentence of section 404(a) or in section

404(b) or if amounts under the

arrangement are includible under

sections 83, 403, or 457, or under

§ 1.61–2, the arrangement is not subject

to the OID timing provisions. See also

§§ 1.1273–2(d) and 1.1274–1(a), under

which a nonpublicly traded debt

instrument issued for services has an

issue price equal to its stated

redemption price at maturity and,

therefore, has no OID.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these

regulations. Because the notice of

proposed rulemaking preceding the

regulations was issued prior to March

29, 1996, the Regulatory Flexibility Act

(5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Code,

the notice of proposed rulemaking was

submitted to the Small Business

Administration for comment on its

impact on small business.

Drafting Information

Several persons from the Office of

Chief Counsel and the Treasury

Department participated in developing

these regulations.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendment to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by removing the

entries for ‘‘Sections 1.1271–1 through

1.1274–5’’ and ‘‘Sections 1.1275–1

through 1.1275–5’’ and adding the

following entries in numerical order to

read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1271–1 also issued under 26

U.S.C. 1275(d).

Section 1.1272–1 also issued under 26

U.S.C. 1275(d).

Section 1.1272–2 also issued under 26

U.S.C. 1275(d).

Section 1.1272–3 also issued under 26

U.S.C. 1275(d).

Section 1.1273–1 also issued under 26

U.S.C. 1275(d).

Section 1.1273–2 also issued under 26

U.S.C. 1275(d).
Federal Register / Vol. 63, No. 5 / Thursday, January 8, 1998 / Rules and Regulations 1057

Section 1.1274–1 also issued under 26

U.S.C. 1275(d).

Section 1.1274–2 also issued under 26

U.S.C. 1275(d).

Section 1.1274–3 also issued under 26

U.S.C. 1275(d).

Section 1.1274–4 also issued under 26

U.S.C. 1275(d).

Section 1.1274–5 also issued under 26

U.S.C. 1275(d). * * *

Section 1.1275–1 also issued under 26

U.S.C. 1275(d).

Section 1.1275–2 also issued under 26

U.S.C. 1275(d).

Section 1.1275–3 also issued under 26

U.S.C. 1275(d).

Section 1.1275–4 also issued under 26

U.S.C. 1275(d).

Section 1.1275–5 also issued under 26

U.S.C. 1275(d). * * *

Par. 2. Section 1.1271–0 is amended

by adding entries for paragraphs (i)

through (j)(8) to § 1.1275–1 to read as

follows:

§ 1.1271–0 Original issue discount;

effective dates; table of contents.

* * * * *

§ 1.1275–1 Definitions.

* * * * *

(i) [Reserved]

(j) Life annuity exception under section

1275(a)(1)(B)(i).

(1) Purpose.

(2) General rule.

(3) Availability of a cash surrender option.

(4) Availability of a loan secured by the

contract.

(5) Minimum payout provision.

(6) Maximum payout provision.

(7) Decreasing payout provision.

(8) Effective dates.

* * * * *

Par. 3. Section 1.1275–1 is amended

by:

1. Revising the first sentence of

paragraph (d).

2. Adding and reserving paragraph (i).

3. Adding paragraph (j).

The revision and additions read as

follows:

§ 1.1275–1 Definitions.

* * * * *

(d) Debt instrument. Except as

provided in section 1275(a)(1)(B)

(relating to certain annuity contracts;

see paragraph (j) of this section), debt

instrument means any instrument or

contractual arrangement that constitutes

indebtedness under general principles

of Federal income tax law (including,

for example, a certificate of deposit or

a loan). * * *

* * * * *

(i) [Reserved]

(j) Life annuity exception under

section 1275(a)(1)(B)(i)—(1) Purpose.

Section 1275(a)(1)(B)(i) excepts an

annuity contract from the definition of

debt instrument if section 72 applies to

the contract and the contract depends

(in whole or in substantial part) on the

life expectancy of one or more

individuals. This paragraph (j) provides

rules to ensure that an annuity contract

qualifies for the exception in section

1275(a)(1)(B)(i) only in cases where the

life contingency under the contract is

real and significant.

(2) General rule—(i) Rule. For

purposes of section 1275(a)(1)(B)(i), an

annuity contract depends (in whole or

in substantial part) on the life

expectancy of one or more individuals

only if—

(A) The contract provides for periodic

distributions made not less frequently

than annually for the life (or joint lives)

of an individual (or a reasonable

number of individuals); and

(B) The contract does not contain any

terms or provisions that can

significantly reduce the probability that

total distributions under the contract

will increase commensurately with the

longevity of the annuitant (or

annuitants).

(ii) Terminology. For purposes of this

paragraph (j):

(A) Contract. The term contract

includes all written or unwritten

understandings among the parties as

well as any person or persons acting in

concert with one or more of the parties.

(B) Annuitant. The term annuitant

refers to the individual (or reasonable

number of individuals) referred to in

paragraph (j)(2)(i)(A) of this section.

(C) Terminating death. The phrase

terminating death refers to the annuitant

death that can terminate periodic

distributions under the contract. (See

paragraph (j)(2)(i)(A) of this section.) For

example, if a contract provides for

periodic distributions until the later of

the death of the last-surviving annuitant

or the end of a term certain, the

terminating death is the death of the

last-surviving annuitant.

(iii) Coordination with specific rules.

Paragraphs (j) (3) through (7) of this

section describe certain terms and

conditions that can significantly reduce

the probability that total distributions

under the contract will increase

commensurately with the longevity of

the annuitant (or annuitants). If a term

or provision is not specifically

described in paragraphs (j) (3) through

(7) of this section, the annuity contract

must be tested under the general rule of

paragraph (j)(2)(i) of this section to

determine whether it depends (in whole

or in substantial part) on the life

expectancy of one or more individuals.

(3) Availability of a cash surrender

option—(i) Impact on life contingency.

The availability of a cash surrender

option can significantly reduce the

probability that total distributions under

the contract will increase

commensurately with the longevity of

the annuitant (or annuitants). Thus, the

availability of any cash surrender option

causes the contract to fail to be

described in section 1275(a)(1)(B)(i). A

cash surrender option is available if

there is reason to believe that the issuer

(or a person acting in concert with the

issuer) will be willing to terminate or

purchase all or a part of the annuity

contract by making one or more

payments of cash or property (other

than an annuity contract described in

this paragraph (j)).

(ii) Examples. The following

examples illustrate the rules of this

paragraph (j)(3):

Example 1. (i) Facts. On March 1, 1998, X

issues a contract to A for cash. The contract

provides that, effective on any date chosen by

A (the annuity starting date), X will begin

equal monthly distributions for A’s life. The

amount of each monthly distribution will be

no less than an amount based on the

contract’s account value as of the annuity

starting date, A’s age on that date, and

permanent purchase rate guarantees

contained in the contract. The contract also

provides that, at any time before the annuity

starting date, A may surrender the contract to

X for the account value less a surrender

charge equal to a declining percentage of the

account value. For this purpose, the initial

account value is equal to the cash invested.

Thereafter, the account value increases

annually by at least a minimum guaranteed

rate.

(ii) Analysis. The ability to obtain the

account value less the surrender charge, if

any, is a cash surrender option. This ability

can significantly reduce the probability that

total distributions under the contract will

increase commensurately with A’s longevity.

Thus, the contract fails to be described in

section 1275(a)(1)(B)(i).

Example 2. (i) Facts. On March 1, 1998, X

issues a contract to B for cash. The contract

provides that beginning on March 1, 1999, X

will distribute to B a fixed amount of cash

each month for B’s life. Based on X’s

advertisements, marketing literature, or

illustrations or on oral representations by X’s

sales personnel, there is reason to believe

that an affiliate of X stands ready to purchase

B’s contract for its commuted value.

(ii) Analysis. Because there is reason to

believe that an affiliate of X stands ready to

purchase B’s contract for its commuted value,

a cash surrender option is available within

the meaning of paragraph (j)(3)(i) of this

section. This availability can significantly

reduce the probability that total distributions

under the contract will increase

commensurately with B’s longevity. Thus,

the contract fails to be described in section

1275(a)(1)(B)(i).

(4) Availability of a loan secured by

the contract—(i) Impact on life

contingency. The availability of a loan

secured by the contract can significantly

reduce the probability that total
1058 Federal Register / Vol. 63, No. 5 / Thursday, January 8, 1998 / Rules and Regulations

distributions under the contract will

increase commensurately with the

longevity of the annuitant (or

annuitants). Thus, the availability of any

such loan causes the contract to fail to

be described in section 1275(a)(1)(B)(i).

A loan secured by the contract is

available if there is reason to believe

that the issuer (or a person acting in

concert with the issuer) will be willing

to make a loan that is directly or

indirectly secured by the annuity

contract.

(ii) Example. The following example

illustrates the rules of this paragraph

(j)(4):

Example. (i) Facts. On March 1, 1998, X

issues a contract to C for $100,000. The

contract provides that, effective on any date

chosen by C (the annuity starting date), X

will begin equal monthly distributions for C’s

life. The amount of each monthly

distribution will be no less than an amount

based on the contract’s account value as of

the annuity starting date, C’s age on that date,

and permanent purchase rate guarantees

contained in the contract. From marketing

literature circulated by Y, there is reason to

believe that, at any time before the annuity

starting date, C may pledge the contract to

borrow up to $75,000 from Y. Y is acting in

concert with X.

(ii) Analysis. Because there is reason to

believe that Y, a person acting in concert

with X, is willing to lend money against C’s

contract, a loan secured by the contract is

available within the meaning of paragraph

(j)(4)(i) of this section. This availability can

significantly reduce the probability that total

distributions under the contract will increase

commensurately with C’s longevity. Thus,

the contract fails to be described in section

1275(a)(1)(B)(i).

(5) Minimum payout provision—(i)

Impact on life contingency. The

existence of a minimum payout

provision can significantly reduce the

probability that total distributions under

the contract will increase

commensurately with the longevity of

the annuitant (or annuitants). Thus, the

existence of any minimum payout

provision causes the contract to fail to

be described in section 1275(a)(1)(B)(i).

(ii) Definition of minimum payout

provision. A minimum payout provision

is a contractual provision (for example,

an agreement to make distributions over

a term certain) that provides for one or

more distributions made—

(A) After the terminating death under

the contract; or

(B) By reason of the death of any

individual (including distributions

triggered by or increased by terminal or

chronic illness, as defined in section

101(g)(1) (A) and (B)).

(iii) Exceptions for certain minimum

payouts—(A) Recovery of consideration

paid for the contract. Notwithstanding

paragraphs (j)(2)(i)(A) and (j)(5)(i) of this

section, a contract does not fail to be

described in section 1275(a)(1)(B)(i)

merely because it provides that, after the

terminating death, there will be one or

more distributions that, in the aggregate,

do not exceed the consideration paid for

the contract less total distributions

previously made under the contract.

(B) Payout for one-half of life

expectancy. Notwithstanding

paragraphs (j)(2)(i)(A) and (j)(5)(i) of this

section, a contract does not fail to be

described in section 1275(a)(1)(B)(i)

merely because it provides that, if the

terminating death occurs after the

annuity starting date, distributions

under the contract will continue to be

made after the terminating death until a

date that is no later than the halfway

date. This exception does not apply

unless the amounts distributed in each

contract year will not exceed the

amounts that would have been

distributed in that year if the

terminating death had not occurred

until the expected date of the

terminating death, determined under

paragraph (j)(5)(iii)(C) of this section.

(C) Definition of halfway date. For

purposes of this paragraph (j)(5)(iii), the

halfway date is the date halfway

between the annuity starting date and

the expected date of the terminating

death, determined as of the annuity

starting date, with respect to all thensurviving annuitants. The expected date

of the terminating death must be

determined by reference to the

applicable mortality table prescribed

under section 417(e)(3)(A)(ii)(I).

(iv) Examples. The following

examples illustrate the rules of this

paragraph (j)(5):

Example 1. (i) Facts. On March 1, 1998, X

issues a contract to D for cash. The contract

provides that, effective on any date D chooses

(the annuity starting date), X will begin equal

monthly distributions for the greater of D’s

life or 10 years, regardless of D’s age as of the

annuity starting date. The amount of each

monthly distribution will be no less than an

amount based on the contract’s account value

as of the annuity starting date, D’s age on that

date, and permanent purchase rate

guarantees contained in the contract.

(ii) Analysis. A minimum payout provision

exists because, if D dies within 10 years of

the annuity starting date, one or more

distributions will be made after D’s death.

The minimum payout provision does not

qualify for the exception in paragraph

(j)(5)(iii)(B) of this section because D may

defer the annuity starting date until his

remaining life expectancy is less than 20

years. If, on the annuity starting date, D’s life

expectancy is less than 20 years, the

minimum payout period (10 years) will last

beyond the halfway date. The minimum

payout provision, therefore, can significantly

reduce the probability that total distributions

under the contract will increase

commensurately with D’s longevity. Thus,

the contract fails to be described in section

1275(a)(1)(B)(i).

Example 2. (i) Facts. The facts are the same

as in Example 1 of this paragraph (j)(5)(iv)

except that the monthly distributions will

last for the greater of D’s life or a term

certain. D may choose the length of the term

certain subject to the restriction that, on the

annuity starting date, the term certain must

not exceed one-half of D’s life expectancy as

of the annuity starting date. The contract also

does not provide for any adjustment in the

amount of distributions by reason of the

death of D or any other individual, except for

a refund of D’s aggregate premium payments

less the sum of all prior distributions under

the contract.

(ii) Analysis. The minimum payout

provision qualifies for the exception in

paragraph (j)(5)(iii)(B) of this section because

distributions under the minimum payout

provision will not continue past the halfway

date and the contract does not provide for

any adjustments in the amount of

distributions by reason of the death of D or

any other individual, other than a guaranteed

death benefit described in paragraph

(j)(5)(iii)(A) of this section. Accordingly, the

existence of this minimum payout provision

does not prevent the contract from being

described in section 1275(a)(1)(B)(i).

(6) Maximum payout provision—(i)

Impact on life contingency. The

existence of a maximum payout

provision can significantly reduce the

probability that total distributions under

the contract will increase

commensurately with the longevity of

the annuitant (or annuitants). Thus, the

existence of any maximum payout

provision causes the contract to fail to

be described in section 1275(a)(1)(B)(i).

(ii) Definition of maximum payout

provision. A maximum payout

provision is a contractual provision that

provides that no distributions under the

contract may be made after some date

(the termination date), even if the

terminating death has not yet occurred.

(iii) Exception. Notwithstanding

paragraphs (j)(2)(i)(A) and (j)(6)(i) of this

section, an annuity contract does not

fail to be described in section

1275(a)(1)(B)(i) merely because the

contract contains a maximum payout

provision, provided that the period of

time from the annuity starting date to

the termination date is at least twice as

long as the period of time from the

annuity starting date to the expected

date of the terminating death,

determined as of the annuity starting

date, with respect to all then-surviving

annuitants. The expected date of the

terminating death must be determined

by reference to the applicable mortality

table prescribed under section

417(e)(3)(A)(ii)(I).

(iv) Example. The following example

illustrates the rules of this paragraph

(j)(6):
Federal Register / Vol. 63, No. 5 / Thursday, January 8, 1998 / Rules and Regulations 1059

Example. (i) Facts. On March 1, 1998, X

issues a contract to E for cash. The contract

provides that beginning on April 1, 1998, X

will distribute to E a fixed amount of cash

each month for E’s life but that no

distributions will be made after April 1,

2018. On April 1, 1998, E’s life expectancy

is 9 years.

(ii) Analysis. A maximum payout provision

exists because if E survives beyond April 1,

2018, E will receive no further distributions

under the contract. The period of time from

the annuity starting date (April 1, 1998) to

the termination date (April 1, 2018) is 20

years. Because this 20-year period is more

than twice as long as E’s life expectancy on

April 1, 1998, the maximum payout

provision qualifies for the exception in

paragraph (j)(6)(iii) of this section.

Accordingly, the existence of this maximum

payout provision does not prevent the

contract from being described in section

1275(a)(1)(B)(i).

(7) Decreasing payout provision—(i)

General rule. If the amount of

distributions during any contract year

(other than the last year during which

distributions are made) may be less than

the amount of distributions during the

preceding year, this possibility can

significantly reduce the probability that

total distributions under the contract

will increase commensurately with the

longevity of the annuitant (or

annuitants). Thus, the existence of this

possibility causes the contract to fail to

be described in section 1275(a)(1)(B)(i).

(ii) Exception for certain variable

distributions. Notwithstanding

paragraph (j)(7)(i) of this section, if an

annuity contract provides that the

amount of each distribution must

increase and decrease in accordance

with investment experience, cost of

living indices, or similar fluctuating

criteria, then the possibility that the

amount of a distribution may decrease

for this reason does not significantly

reduce the probability that the

distributions under the contract will

increase commensurately with the

longevity of the annuitant (or

annuitants).

(iii) Examples. The following

examples illustrate the rules of this

paragraph (j)(7):

Example 1. (i) Facts. On March 1, 1998, X

issues a contract to F for $100,000. The

contract provides that beginning on March 1,

1999, X will make distributions to F each

year until F’s death. Prior to March 1, 2009,

distributions are to be made at a rate of

$12,000 per year. Beginning on March 1,

2009, distributions are to be made at a rate

of $3,000 per year.

(ii) Analysis. If F is alive in 2009, the

amount distributed in 2009 ($3,000) will be

less than the amount distributed in 2008

($12,000). The exception in paragraph

(j)(7)(ii) of this section does not apply. The

decrease in the amount of any distributions

made on or after March 1, 2009, can

significantly reduce the probability that total

distributions under the contract will increase

commensurately with F’s longevity. Thus,

the contract fails to be described in section

1275(a)(1)(B)(i).

Example 2. (i) Facts. On March 1, 1998, X

issues a contract to G for cash. The contract

provides that, effective on any date G chooses

(the annuity starting date), X will begin

monthly distributions to G for G’s life. Prior

to the annuity starting date, the account

value of the contract reflects the investment

return, including changes in the market

value, of an identifiable pool of assets. When

G chooses the annuity starting date, G must

also choose whether the distributions are to

be fixed or variable. If fixed, the amount of

each monthly distribution will remain

constant at an amount that is no less than an

amount based on the contract’s account value

as of the annuity starting date, G’s age on that

date, and permanent purchase rate

guarantees contained in the contract. If

variable, the monthly distributions will

fluctuate to reflect the investment return,

including changes in the market value, of the

pool of assets. The monthly distributions

under the contract will not otherwise decline

from year to year.

(ii) Analysis. Because the only possible

year-to-year declines in annuity distributions

are described in paragraph (j)(7)(ii) of this

section, the possibility that the amount of

distributions may decline from the previous

year does not reduce the probability that total

distributions under the contract will increase

commensurately with G’s longevity. Thus,

the potential fluctuation in the annuity

distributions does not cause the contract to

fail to be described in section 1275(a)(1)(B)(i).

(8) Effective dates—(i) In general.

Except as provided in paragraph (j)(8)

(ii) and (iii) of this section, this

paragraph (j) is applicable for interest

accruals on or after February 9, 1998 on

annuity contracts held on or after

February 9, 1998.

(ii) Grandfathered contracts. This

paragraph (j) does not apply to an

annuity contract that was purchased

before April 7, 1995. For purposes of

this paragraph (j)(8), if any additional

investment in such a contract is made

on or after April 7, 1995, and the

additional investment is not required to

be made under a binding contractual

obligation that was entered into before

April 7, 1995, then the additional

investment is treated as the purchase of

a contract after April 7, 1995.

(iii) Contracts consistent with the

provisions of FI–33–94, published at

1995–1 C.B. 920. See

§ 601.601(d)(2)(ii)(b) of this chapter.

This paragraph (j) does not apply to a

contract purchased on or after April 7,

1995, and before February 9, 1998, if all

payments under the contract are

periodic payments that are made at least

annually for the life (or lives) of one or

more individuals, do not increase at any

time during the term of the contract, and

are part of a series of distributions that

begins within one year of the date of the

initial investment in the contract. An

annuity contract that is otherwise

described in the preceding sentence

does not fail to be described therein

merely because it also provides for a

payment (or payments) made by reason

of the death of one or more individuals.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: December 19, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 98–20 Filed 1–7–98; 8:45 am]

BILLING CODE 4830–01–U

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 9

[FRL–5943–2]

OMB Approval Numbers Under the

Paperwork Reduction Act

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Final rule.

SUMMARY: In compliance with the

Paperwork Reduction Act (PRA), this

technical amendment amends the table

that lists the Office of Management and

Budget (OMB) control numbers issued

under the PRA for Regulation of Fuels

and Fuel Additives, Standards for

Reformulated and Conventional

Gasoline.

EFFECTIVE DATE: This final rule is

effective February 9, 1998.

FOR FURTHER INFORMATION CONTACT:

Ervin Pickell (telephone: (303) 969–

6485).

SUPPLEMENTARY INFORMATION: EPA is

today amending the table of currently

approved information collection request

(ICR) control numbers issued by OMB

for various EPA regulations. Today’s

amendment updates the table to list

those information requirements

promulgated in the rulemaking Fuels

and Fuel Additives, Standards for

Reformulated and Conventional

Gasoline which appeared in the Federal

Register on February 16, 1994 (59 FR

7716–7878). The information collection

associated with this rule was approved

by OMB on March 18, 1994 and a notice

of OMB approval, which displayed the

OMB No. 2060–0277, was published in

the Federal Register on April 18, 1994

(59 FR 18392). The affected regulations

are codified at 40 Code of Federal

Regulations (CFR) part 80 and part 9.

EPA will continue to present OMB

control numbers in a consolidated table