Federal Register / Vol. 70, No. 166 / Monday, August 29, 2005 / Rules and Regulations 50967 

1Section 1.402(a)–1(a)(2) also provides rules 

regarding the taxation of the distribution of an 

annuity contract. In certain cases, the distribution 

of an annuity contract is not includible in the 

participant’s gross income until distributions are 

made from the annuity contract. 

between the National Government and 

the States, or on the distribution of 

power and responsibilities among the 

various levels of government. Therefore, 

it is determined that this rule does not 

have sufficient federalism implications 

to warrant application of consultation 

provisions of Executive Orders 12372 

and 13132. This rule does not impose 

any new reporting or recordkeeping 

requirements subject to the Paperwork 

Reduction Act, 44 U.S.C. Chapter 35. 

List of Subjects in 22 CFR Part 126 

Arms and munitions, Exports. 

■ Accordingly, for the reasons set forth 

above, title 22, chapter I, subchapter M, 

part 126 is amended as follows: 

PART 126—GENERAL POLICIES AND 

PROVISIONS 

■ 1. The authority citation for part 126 

continues to read as follows: 

Authority: Secs. 2, 38, 40, 42, and 71, 

Public Law 90–629, 90 Stat. 744 (22 U.S.C. 

2752, 2778, 2780, 2791, and 2797); E.O. 

11958, 42 FR 4311; 3 CFR, 1977 Comp., p. 

79; 22 U.S.C. 2651a; 22 U.S.C. 287c; E.O. 

12918, 59 FR 28205, 3 CFR, 1994 Comp., p. 

899; Sec. 1225, Public Law 108–375. 

■ 2. Section 126.1 is amended by 

revising paragraph (i) to read as follows: 

§ 126.1 Prohibited exports and sales to 

certain countries. 

* * * * * 

(i) Democratic Republic of the Congo. 

It is the policy of the United States to 

deny licenses, other approvals, exports 

or imports of defense articles and 

defense services destined for or 

originating in the Democratic Republic 

of the Congo except for non-lethal 

equipment and training (lethal and nonlethal) to the United Nations 

Organization Mission in the Democratic 

Republic of the Congo (MONUC), the 

transitional National Unity Government 

of the Democratic Republic of the Congo 

and the integrated Congolese national 

army and police forces, such units 

operating under the command of the 

etat-major integre of the Congolese 

Armed Forces or National Police, and 

such units in the process of being 

integrated outside the provinces of 

North and South Kivu and the Ituri 

district; and non-lethal equipment for 

humanitarian or protective use, and 

related assistance and training, as 

notified in advance to the UN. An arms 

embargo exists with respect to any 

recipient in the Democratic Republic of 

the Congo. 

Robert G. Joseph, 

Under Secretary, Arms Control and 

International Security, Department of State. 

[FR Doc. 05–17122 Filed 8–26–05; 8:45 am] 

BILLING CODE 4710–25–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9223] 

RIN 1545–BC20 

Value of Life Insurance Contracts 

When Distributed From a Qualified 

Retirement Plan 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations under section 402(a) of the 

Internal Revenue Code regarding the 

amount includible in a distributee’s 

income when life insurance contracts 

are distributed by a qualified retirement 

plan and regarding the treatment of 

property sold by a qualified retirement 

plan to a plan participant or beneficiary 

for less than fair market value. This 

document also contains final regulations 

under sections 79 and 83 of the Internal 

Revenue Code regarding the amounts 

includible in income when an employee 

is provided permanent benefits in 

combination with group-term life 

insurance or when a life insurance 

contract is transferred in connection 

with the performance of services. These 

regulations will affect administrators of, 

participants in, and beneficiaries of 

qualified retirement plans. These 

regulations will also affect employers 

who provide permanent benefits in 

combination with group-term life 

insurance for their employees and 

employees who receive those permanent 

benefits, as well as service recipients 

who transfer life insurance contracts to 

service providers in connection with the 

performance of services, and service 

providers to whom those life insurance 

contracts are transferred. 

DATES: These regulations are effective 

August 29, 2005. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the section 79 regulations, 

Betty Clary at (202) 622–6080; 

concerning the section 83 regulations, 

Robert Misner at (202) 622–6030; 

concerning the section 402 regulations, 

Bruce Perlin or Linda Marshall at (202) 

622–6090 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

A. In General 

This document contains amendments 

to the Income Tax Regulations (26 CFR 

part 1) under section 402(a) of the 

Internal Revenue Code (Code) relating to 

the amount includible in a distributee’s 

income when a life insurance contract, 

retirement income contract, endowment 

contract, or other contract providing life 

insurance protection is distributed by a 

retirement plan qualified under section 

401(a), and relating to the sale of 

property by a qualified retirement plan 

to a plan participant or beneficiary for 

less than the fair market value of the 

property. This document also contains 

amendments to the regulations under 

sections 79 and 83 relating, respectively, 

to permanent benefits that are provided 

to employees in combination with 

group-term life insurance, and to life 

insurance contracts that are transferred 

in connection with the performance of 

services. 

Section 402(a) generally provides that 

any amount actually distributed to any 

distributee by any employees’ trust 

described in section 401(a) which is 

exempt from tax under section 501(a) is 

taxable to the distributee in the taxable 

year of the distributee in which 

distributed, in accordance with section 

72. Distributions from a qualified 

employees’ trust generally are subject to 

withholding and reporting requirements 

pursuant to section 3405 and 

regulations thereunder. Section 

1.402(a)–1(a)(1)(iii) provides, in general, 

that a distribution of property by a 

section 401(a) plan is taken into account 

by the distributee at its fair market 

value. Prior to its amendment by this 

Treasury decision, § 1.402(a)–1(a)(2) 

(which was originally published in 

1956) provided, in general, that upon 

the distribution of a life insurance 

contract, the ‘‘entire cash value’’ of the 

contract must be included in the 

distributee’s income.1 Section 1.402(a)–

1(a) did not define fair market value or 

entire cash value, and questions have 

arisen regarding the interaction between 

these two provisions and regarding 

whether the term entire cash value 

includes a reduction for surrender 

charges. 

On April 30, 1975, proposed 

regulations under section 402 regarding 

the taxation of certain lump sum 

50968 Federal Register / Vol. 70, No. 166 / Monday, August 29, 2005 / Rules and Regulations 

2The tax imposed under section 402(e)(1)(A), as 

in effect at the time of the 1975 proposed 

regulations, generally was based on 10–year 

averaging of the tax otherwise payable with respect 

to a lump-sum distribution. 

distributions from qualified plans (the 

1975 proposed regulations) were 

published in the Federal Register (40 

FR 18798) to reflect changes to section 

402 made by the Employee Retirement 

Income Security Act of 1974 (ERISA) 

(Public Law 93–406, 88 Stat. 829). 

Under § 1.402(a)–1(a)(2) of the 1975 

proposed regulations, the distribution of 

an annuity contract must be treated as 

a lump sum distribution under section 

402(e) for purposes of determining the 

separate tax imposed under section 

402(e)(1)(A),2 even if the distribution of 

the annuity contract itself is not 

currently taxable. The 1975 proposed 

regulations also expanded the situations 

in which the distribution of a retirement 

income, endowment, or other life 

insurance contract is not currently 

taxable to include the situation where, 

within 60 days after the distribution of 

such contract, the contract is treated as 

a rollover contribution under section 

402(a)(5), as in effect after December 31, 

1973. 

Section 79 generally requires that the 

cost of group-term life insurance 

coverage provided by an employer on 

the life of an employee that is in excess 

of $50,000 of coverage be included in 

the income of the employee. Pursuant to 

§ 1.79–1(b), under specified 

circumstances, group-term life 

insurance may be combined with other 

benefits, referred to as permanent 

benefits. A permanent benefit is defined 

in § 1.79–0 as an economic value 

extending beyond one policy year (for 

example, a paid-up or cash surrender 

value) that is provided under a life 

insurance policy. Section 1.79–0 further 

provides that certain features are not 

permanent benefits, including: (a) a 

right to convert (or continue) life 

insurance after group life insurance 

coverage terminates, (b) any other 

feature that provides no economic 

benefit (other than current insurance 

protection) to the employee, and (c) a 

feature under which term life insurance 

is provided at a level premium for a 

period of five years or less. 

Permanent benefits provided to an 

employee are subject to taxation under 

rules described in § 1.79–1(d). Under 

those rules, the cost of the permanent 

benefits, reduced by the amount paid for 

those benefits by the employee, is 

included in the employee’s income. 

Section 1.79–1(d) provides that the cost 

of the permanent benefits cannot be less 

than an amount determined under a 

formula set forth in the regulations. 

Prior to its amendment by this Treasury 

decision, § 1.79–1(d) provided that one 

of the factors used in the formula for 

determining the cost of permanent 

benefits was ‘‘the net level premium 

reserve at the end of that policy year for 

all benefits provided to the employee by 

the policy or, if greater, the cash value 

of the policy at the end of that policy 

year.’’

Section 83(a) generally provides that 

when property is transferred to any 

person in connection with the 

performance of services, the service 

provider must include in gross income 

(as compensation income) the excess of 

the fair market value of the property 

over the amount (if any) paid for the 

property. For this purpose, the fair 

market value of the property is 

determined without regard to lapse 

restrictions and is determined at the 

first time that the transferee’s rights in 

the property are either transferable or 

not subject to a substantial risk of 

forfeiture. Prior to its amendment by 

this Treasury decision, § 1.83–3(e) 

generally provided that in the case of ‘‘a 

transfer of a life insurance contract, 

retirement income contract, endowment 

contract, or other contract providing life 

insurance protection, only the cash 

surrender value of the contract is 

considered to be property.’’

In TD 9092, published in the Federal 

Register on September 17, 2003 (68 FR 

54336), relating to split-dollar life 

insurance arrangements, § 1.83–3(e) was 

amended to add the following sentence: 

‘‘Notwithstanding the previous 

sentence, in the case of a transfer of a 

life insurance contract, retirement 

income contract, endowment contract, 

or other contract providing life 

insurance protection, or any undivided 

interest therein, that is part of a splitdollar life insurance arrangement (as 

defined in § 1.61–22(b)(1) or (2)) that is 

entered into, or materially modified 

(within the meaning of § 1.61–22(j)(2)), 

after September 17, 2003, the policy 

cash value and all other rights under 

such contract (including any 

supplemental agreements thereto and 

whether or not guaranteed), other than 

current life insurance protection, are 

treated as property for purposes of this 

section.’’

The prohibited transaction provisions 

of ERISA generally prohibit various 

transactions between plans covered by 

Title I of ERISA and certain parties in 

interest (including plan participants) 

with respect to such plans. Specifically, 

unless an exemption from the 

prohibited transaction rules applies, 

sections 406(a)(1)(A) and (D) of ERISA 

provide that a fiduciary with respect to 

a plan shall not cause the plan to engage 

in a transaction, if he knows or should 

know that such transaction constitutes a 

direct or indirect sale or exchange, or 

leasing, of any property between the 

plan and a party in interest; or transfer 

to, or use by or for the benefit of, a party 

in interest of any assets of the plan. 

Accordingly, unless a statutory or 

administrative exemption is applicable, 

the prohibited transaction rules are 

applicable to the sale of a life insurance 

contract, or annuity contract, by a plan 

to a party in interest. 

Section 4975 of the Code sets forth 

parallel rules that impose excise taxes 

on the amount involved with respect to 

prohibited transactions involving 

certain plans. The prohibited 

transaction provisions under section 

4975, as well as the exemptions from 

the application of such rules, generally 

parallel the prohibited transaction 

provisions under Title I of ERISA. 

Prohibited Transaction Exemption 

(PTE) 77–8 (1977–2 C.B. 425), 

subsequently amended and redesignated 

as Prohibited Transaction Exemption 

92–6, was jointly issued in 1977 by the 

Department of Labor and the IRS to 

provide an exemption from the 

restrictions of sections 406(a) and 

406(b)(1) and (b)(2) of ERISA and from 

the taxes imposed by sections 4975(a) 

and (b) of the Code for certain 

transactions. Under the exemption set 

forth in PTE 77–8 and PTE 92–6, an 

employee benefit plan is permitted to 

sell individual life insurance contracts 

and annuities for the cash surrender 

value of the contracts to certain 

specified parties, provided conditions 

are satisfied. Under PTE 77–8 and PTE 

92–6, such specified parties are: (1) A 

plan participant insured under such 

policies, (2) a relative of such insured 

participant who is the beneficiary under 

the contract, (3) an employer any of 

whose employees are covered by the 

plan, or (4) another employee benefit 

plan. 

The preamble to PTE 77–8 (citing Rev. 

Rul. 59–195, 1959–1 C.B. 18) noted that, 

for Federal income tax purposes, the 

value of an insurance policy is not the 

same as, and may exceed, its cash 

surrender value, and that a purchase of 

an insurance policy at its cash surrender 

value may therefore be a purchase of 

property for less than its fair market 

value. At the time PTE 77–8 was issued, 

the regulations under section 402 did 

not address the consequences of a sale 

of property by a section 401(a) plan to 

a plan participant or beneficiary for less 

than the fair market value of that 

property. In this regard, the preamble to 

PTE 77–8 stated that the Federal income 

tax consequences of such a bargain 

purchase was required to be determined 

Federal Register / Vol. 70, No. 166 / Monday, August 29, 2005 / Rules and Regulations 50969 

in accordance with generally applicable 

Federal income tax rules but that any 

income realized by a participant or 

relative of such participant upon such a 

purchase under the conditions of PTE 

77–8 would not be deemed a 

distribution from the plan to such 

participant for purposes of subchapter D 

of chapter 1 of subtitle A of the Internal 

Revenue Code (i.e., sections 401 to 424 

relating to qualified pension, profitsharing, and stock bonus plans). 

B. The 2004 Proposed Regulations 

In February 2004, the IRS issued 

proposed amendments to the 

regulations under section 402(a) (69 FR 

7384) to clarify that the requirement that 

a distribution of property be included in 

the distributee’s income at fair market 

value is controlling in those situations 

where the regulations provided for the 

inclusion of the entire cash value of a 

retirement income, endowment, or other 

life insurance contract. The 2004 

proposed regulations provided that the 

fair market value of a life insurance 

contract is determined taking into 

account the value of all rights under the 

contract, including any supplemental 

agreements thereto and whether or not 

guaranteed. The proposed regulations 

also provided that, if a qualified 

retirement plan transfers property to a 

plan participant or beneficiary for 

consideration that is less than the fair 

market value of the property, the 

transfer would be treated as a 

distribution by the plan to the 

participant or beneficiary to the extent 

the fair market value of the distributed 

property exceeds the value of the 

consideration received. Thus, under the 

proposed regulations, such a transfer 

would be treated as a distribution for 

purposes of applying the plan 

qualification requirements of section 

401(a). 

The 2004 proposed regulations also 

contained proposed amendments to 

existing regulations under section 83 to 

clarify that fair market value is also 

controlling with respect to a life 

insurance contract, retirement income 

contract, endowment contract, or other 

contract providing life insurance 

protection and thus all of the rights 

under the contract (including any 

supplemental agreements thereto and 

whether or not guaranteed) must be 

considered in determining that fair 

market value. The proposed regulations 

contained proposed amendments to 

§ 1.83–3(e), which generally apply the 

definition of property for new splitdollar life insurance arrangements to all 

situations subject to section 83 

involving the transfer of life insurance 

contracts. The proposed regulations also 

contained proposed amendments to 

§ 1.79–(d) to replace the term ‘‘cash 

value’’ in the formula for determining 

the cost of permanent benefits with the 

term ‘‘fair market value.’’

C. Determination of Fair Market Value 

As noted under the heading In 

General, § 1.402(a)–1(a)(1)(iii) does not 

define the term fair market value. In 

Rev. Rul. 59–195, the IRS addressed the 

determination of fair market value of a 

life insurance contract in situations 

similar to those in which an employer 

purchases and pays the premiums on an 

insurance policy on the life of one of its 

employees for several years and on 

which further premiums must be paid, 

and subsequently sells such policy. The 

IRS held that the value of such a policy 

for purposes of computing taxable gain 

to the employee in the year of purchase 

should be determined under the method 

of valuation prescribed in § 25.2512–6 

of the Gift Tax Regulations. Under this 

method, the value of such a policy is not 

its cash surrender value but the 

interpolated terminal reserve at the date 

of sale plus the proportionate part of 

any premium paid by the employer 

prior to the date of the sale which is 

applicable to a period subsequent to the 

date of the sale. Section 25.2512–6 also 

provides that if ‘‘because of the unusual 

nature of the contract such 

approximation is not reasonably close to 

the full value, this method may not be 

used.’’ Thus, this method may not be 

used to determine the fair market value 

of an insurance policy where the reserve 

does not reflect the value of all of the 

relevant features of the policy. 

Q&A–10 of Notice 89–25 (1989–1 C.B. 

662) described a distribution from a 

qualified plan of a life insurance policy 

with a value substantially higher than 

the cash surrender value stated in the 

policy. The notice concluded that the 

practice of using cash surrender value as 

fair market value is not appropriate 

where the total policy reserves, 

including life insurance reserves (if any) 

computed under section 807(d), together 

with any reserves for advance 

premiums, dividend accumulations, 

etc., represent a much more accurate 

approximation of the policy’s fair 

market value. 

Since Notice 89–25 was issued, life 

insurance contracts have been marketed 

that are structured in a manner which 

results in a temporary period during 

which neither a contract’s reserves nor 

its cash surrender value represent the 

fair market value of the contract. For 

example, some life insurance contracts 

may provide for large surrender charges 

and other charges that are not expected 

to be paid because they are expected to 

be eliminated or reversed in the future 

(under the contract or under another 

contract for which the first contract is 

exchanged), but this future elimination 

or reversal is not always reflected in the 

calculation of the contract’s reserve. If 

such a contract is distributed prior to 

the elimination or reversal of those 

charges, both the cash surrender value 

and the reserve under the contract could 

significantly understate the fair market 

value of the contract. Thus, in some 

cases, it would not be appropriate to use 

either the net surrender value (i.e., the 

contract’s cash value after reduction for 

any surrender charges) or, because of 

the unusual nature of the contract, the 

contract’s reserves to determine the fair 

market value of the contract. 

Accordingly, Q&A–10 of Notice 89–25 

should not be interpreted to provide 

that a contract’s reserves (including life 

insurance reserves (if any) computed 

under section 807(d), together with any 

reserves for advance premiums, 

dividend accumulations, etc.) are 

always an accurate representation of the 

contract’s fair market value. 

The IRS and Treasury recognized that 

taxpayers could have difficulty 

determining the fair market value of a 

life insurance contract for which the 

contract’s reserves (including life 

insurance reserves (if any) computed 

under section 807(d), together with any 

reserves for advance premiums, 

dividend accumulations, etc.) are not an 

accurate representation of the contract’s 

fair market value. Accordingly, the IRS 

issued Rev. Proc. 2004–16 (2004–10 

I.R.B. 559), which provided interim 

rules under which the cash value 

(without reduction for surrender 

charges) of a life insurance contract 

distributed from a qualified plan may be 

treated as the fair market value of that 

contract, provided that certain 

requirements are satisfied. This safe 

harbor for determining fair market value 

was also available for purposes of 

sections 79 and 83. 

D. Comments and Public Hearing on the 

2004 Proposed Regulations and Rev. 

Proc. 2004–16 

The IRS received comments on the 

2004 proposed regulations, and a public 

hearing was held on June 9, 2004. While 

none of the commentators objected to 

the proposed amendments to the 

regulations, a number of commentators 

raised concerns regarding the safe 

harbor formula for fair market value set 

forth in Rev. Proc. 2004–16. Several 

commentators recommended that final 

guidance provide more than one safe 

harbor for determining the fair market 

value of a policy and asserted that the 

safe harbor formulas under Rev. Proc. 

50970 Federal Register / Vol. 70, No. 166 / Monday, August 29, 2005 / Rules and Regulations 

2004–16 produce a value that is too high 

and does not reflect market realities. 

Suggestions were made that the 

interpolated terminal reserve (ITR) and 

tax reserve valuation methods under 

section 807(d) be used as alternatives to 

the interim safe harbor formula. 

Some commentators claimed that the 

interim safe harbor provided by Rev. 

Proc. 2004–16 was not usable for all 

types of life insurance policies. In 

particular, these commentators asserted 

that the formulas did not function well 

for traditional whole life policies. In 

addition, commentators were concerned 

about the possible double-counting of 

certain dividends under the formulas, 

and the fact that the formulas did not 

make an explicit adjustment for 

withdrawals or distributions, nor did 

they provide for any recognition of the 

possibility that a surrender charge 

would apply in the future. 

E. Rev. Proc. 2005–25—Safe Harbors for 

Determining Fair Market Value 

After reviewing the comments to the 

prior guidance, the IRS and Treasury 

concluded that the safe harbor formulas 

in Rev. Proc. 2004–16 did not function 

well for certain types of traditional 

policies, and also should be revised to 

reflect a discount for the possibility that 

a surrender charge would apply in 

certain situations. Accordingly, Rev. 

Proc. 2005–25 (2005–17 I.R.B. 962) was 

issued to modify and supersede Rev. 

Proc. 2004–16 in order to make 

adjustments to the safe harbor formulas. 

These new safe harbor formulas replace 

the formulas in Rev. Proc. 2004–16 for 

distributions, sales, and other transfers 

made on or after February 13, 2004, and 

for permanent benefits provided on or 

after February 13, 2004. For all periods, 

including periods before May 1, 2005, 

taxpayers may rely on the safe harbors 

in Rev. Proc. 2005–25. In addition, for 

periods on or after February 13, 2004, 

and before May 1, 2005, taxpayers may 

rely on the safe harbors in Rev. Proc. 

2004–16. 

Explanation of Provisions 

These final regulations retain the 

rules set forth in the 2004 proposed 

regulations under section 402(a) 

providing that the requirement that a 

distribution of property be included in 

the distributee’s income at fair market 

value is controlling in those situations 

where the former regulations provided 

for the inclusion of the entire cash value 

of a retirement income, endowment, or 

other life insurance contract. Thus, 

these final regulations clarify that, in 

those cases where a qualified plan 

distributes a life insurance contract, 

retirement income contract, endowment 

contract, or other contract providing life 

insurance protection, the fair market 

value of such a contract (i.e., the value 

of all rights under the contract, 

including any supplemental agreements 

thereto and whether or not guaranteed) 

is generally included in the distributee’s 

income, and not merely the entire cash 

value of the contract. However, these 

final regulations retain the rules from 

existing final regulations setting forth 

the situations under which a 

distribution of such a contract is not 

currently includible in income. 

These final regulations also set forth 

a portion of the rules included in the 

1975 proposed regulations. Under those 

rules, the distribution of an annuity 

contract must be treated as a lump sum 

distribution for purposes of determining 

the amount of tax under the 10-year 

averaging rule of section 402(e) (as in 

effect prior to the amendment by the 

Tax Reform Act of 1986, Public Law 99–

514, 100 Stat. 2085), even if the 

distribution of the annuity contract 

itself is not currently taxable. The 

distribution of a retirement income, 

endowment, or other life insurance 

contract is not taxable in the situation 

where within 60 days after the 

distribution of such contract, the 

contract is treated as a rollover 

contribution under section 402(a)(5), as 

in effect after December 31, 1973. 

Although the final regulations reject the 

use of the term entire cash value as 

found in the 1975 proposed regulations, 

no inference should be made that other 

rules in the 1975 proposed regulations 

that have not been included in these 

final regulations have also been rejected. 

These final regulations retain the 

rules provided in the 2004 proposed 

regulations that, if a qualified plan 

transfers property to a plan participant 

or beneficiary for consideration that is 

less than the fair market value of the 

property, the transfer is treated as a 

distribution under the plan to the 

participant or beneficiary to the extent 

the fair market value of the distributed 

property exceeds the value of the 

consideration. Thus, in contrast to the 

statement to the contrary in the 

preamble to PTE 77–8, these regulations 

provide that any bargain element in the 

sale is treated as a distribution under 

section 402(a). In addition, any such 

bargain element is treated as a 

distribution under the plan for all other 

purposes of the Code, including the 

qualification requirements of section 

401(a). Thus, for example, this bargain 

element is treated as a distribution for 

purposes of applying the limitations on 

in-service distributions from certain 

qualified retirement plans and the 

limitations of section 415. The rule 

treating the bargain element in a sale as 

a distribution from a qualified plan 

applies to transfers that occur on or after 

August 29, 2005. For transfers before 

that date, the bargain element in the sale 

must be included in the plan 

participant’s income under section 61. 

However, such a transfer of a life 

insurance contract, retirement income 

contract, endowment contract, or other 

contract providing life insurance 

protection occurring before that date is 

deemed not to give rise to a distribution 

for purposes of applying the 

requirements of subchapter D of chapter 

1 of subtitle A of the Code. 

These final regulations also retain the 

rules set forth in the 2004 proposed 

regulations under sections 79 and 83 

that clarify that fair market value is also 

controlling with respect to life 

insurance contracts under those sections 

and, thus, that all of the rights under the 

contract (including any supplemental 

agreements thereto and whether or not 

guaranteed) must be considered in 

determining that fair market value. 

These final regulations amend § 1.79–

1(d) to replace the term cash value in 

the formula for determining the cost of 

permanent benefits with the term fair 

market value. These final regulations 

also amend § 1.83–3(e) generally to 

apply the definition of property for new 

split-dollar life insurance arrangements 

to all situations involving the transfer of 

a life insurance contract, retirement 

income contract, endowment contract, 

or other contract providing life 

insurance protection. Section 83(a) 

requires that the excess of the fair 

market value of the property over the 

amount paid for the property be 

included in income. The purpose of the 

changes to the regulations is to clarify 

that, unless specifically excepted from 

the definition of permanent benefits or 

fair market value, the value of all 

features of a life insurance policy 

providing an economic benefit to a 

service provider (including, for 

example, the value of a springing cash 

value feature) must be included in 

determining the employee’s income. 

These final regulations do not affect 

the relief granted by the provisions of 

Section IV, paragraph 4 of Notice 2002–

8 (2002–1 C.B. 398) to the parties to any 

insurance contract that is part of a preJanuary 28, 2002, split-dollar life 

insurance arrangement. Also, consistent 

with the effective date of the final splitdollar life insurance regulations at 

§ 1.61–22(j), these final regulations do 

not apply to the transfer of a life 

insurance contract which is part of a 

split-dollar life insurance arrangement 

entered into on or before September 17, 

2003, and not materially modified after 

Federal Register / Vol. 70, No. 166 / Monday, August 29, 2005 / Rules and Regulations 50971 

that date. However, taxpayers are 

reminded that, in determining the fair 

market value of property transferred 

under section 83, lapse restrictions 

(such as life insurance contract 

surrender charges) are ignored. 

Effective Date 

These regulations are effective August 

29, 2005. The amendments to 

§ 1.402(a)–1(a) apply to any distribution 

of a retirement income, endowment, or 

other life insurance contract occurring 

on or after February 13, 2004. The 

amendment to § 1.79–1 is applicable to 

permanent benefits provided on or after 

February 13, 2004. The amendment to 

§ 1.83–3(e) is applicable to any transfer 

occurring on or after February 13, 2004. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 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. In addition, 

because no collection of information is 

imposed on small entities, the 

provisions of the Regulatory Flexibility 

Act (5 U.S.C. chapter 6) do not apply, 

and therefore, a Regulatory Flexibility 

Analysis is not required. Pursuant to 

section 7805(f) of the Code, the notice 

of proposed rulemaking preceding these 

regulations was submitted to the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal authors of these 

regulations are Bruce Perlin and Linda 

Marshall, Office of Division Counsel/ 

Associate Chief Counsel (Tax Exempt 

and Government Entities). However, 

other personnel from the IRS and 

Treasury participated in the 

development of these regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read, in part, as 

follows: 

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

■ Par. 2. In § 1.79–1, paragraph (d)(3) is 

revised to read as follows: 

§ 1.79–1 Group-term life insurance—

general rules. 

* * * * * 

(d) * * * 

(3) Formula for determining deemed 

death benefit. The deemed death benefit 

(DDB) at the end of any policy year for 

any particular employee is equal to—

R/Y 

Where—

R is the net level premium reserve at the end 

of that policy year for all benefits 

provided to the employee by the policy 

or, if greater, the fair market value of the 

policy at the end of that policy year; and 

Y is the net single premium for insurance 

(the premium for one dollar of paid-up, 

whole life insurance) at the employee’s 

age at the end of that policy year. 

* * * * * 

■ Par. 3. In § 1.83–3, paragraph (e), the 

fourth and fifth sentences are revised to 

read as follows: 

§ 1.83–3 Meaning and use of certain terms. 

* * * * * 

(e) * * * In the case of a transfer of 

a life insurance contract, retirement 

income contract, endowment contract, 

or other contract providing life 

insurance protection, or any undivided 

interest therein, the policy cash value 

and all other rights under such contract 

(including any supplemental 

agreements thereto and whether or not 

guaranteed), other than current life 

insurance protection, are treated as 

property for purposes of this section. 

However, in the case of the transfer of 

a life insurance contract, retirement 

income contract, endowment contract, 

or other contract providing life 

insurance protection, which was part of 

a split-dollar arrangement (as defined in 

§ 1.61–22(b)) entered into (as defined in 

§ 1.61–22(j)) on or before September 17, 

2003, and which is not materially 

modified (as defined in § 1.61–22(j)(2)) 

after September 17, 2003, only the cash 

surrender value of the contract is 

considered to be property. * * * 

* * * * * 

■ Par. 4. Section 1.402(a)–1 is amended 

by: 

■ 1. Revising paragraph (a)(1)(iii). 

■ 2. Revising paragraph (a)(2). 

The revisions read as follows: 

§ 1.402(a)–1 Taxability of beneficiary under 

a trust which meets the requirements of 

section 401(a). 

(a) * * * 

(1) * * * 

(iii) Except as provided in paragraph 

(b) of this section, a distribution of 

property by a trust described in section 

401(a) and exempt under section 501(a) 

shall be taken into account by the 

distributee at its fair market value. In 

the case of a distribution of a life 

insurance contract, retirement income 

contract, endowment contract, or other 

contract providing life insurance 

protection, or any interest therein, the 

policy cash value and all other rights 

under such contract (including any 

supplemental agreements thereto and 

whether or not guaranteed) are included 

in determining the fair market value of 

the contract. In addition, in the case of 

a transfer of property that occurs on or 

after August 29, 2005 where a trust 

described in section 401(a) and exempt 

under section 501(a) transfers property 

to a plan participant or beneficiary in 

exchange for consideration and where 

the fair market value of the property 

transferred exceeds the value of the 

consideration, then the excess of the fair 

market value of the property transferred 

by the trust over the value of the 

consideration received by the trust is 

treated as a distribution to the 

distributee under the plan for all 

purposes under the Internal Revenue 

Code. Where such a transfer occurs 

before that date, the excess of the fair 

market value of the property transferred 

by the trust over the value of the 

consideration received by the trust is 

includible in the gross income of the 

participant or beneficiary under section 

61. However, such a transfer of a life 

insurance contract, retirement income 

contract, endowment contract, or other 

contract providing life insurance 

protection occurring before that date is 

not treated as a distribution for purposes 

of applying the requirements of 

subchapter D of chapter 1 of subtitle A 

of the Internal Revenue Code. 

* * * * * 

(2) If a trust described in section 

401(a) and exempt under section 501(a) 

purchases an annuity contract for an 

employee and distributes it to the 

employee in a year in which the trust is 

exempt, and the contract contains a cash 

surrender value which may be available 

to an employee by surrendering the 

contract, such cash surrender value will 

not be considered income to the 

employee unless and until the contract 

is surrendered. For the rule as to 

nontransferability of annuity contracts 

issued after 1962, see § 1.401–9(b)(1). 

For additional requirements regarding 

distributions of annuity contracts, see, 

e.g., §§ 1.401(a)–20, Q&A–2, 

1.401(a)(31)–1, Q&A–17, and 

1.401(a)(9)–6, Q&A–4. However, the 

distribution of an annuity contract must 

be treated as a lump sum distribution 

for purposes of determining the amount 

of tax under the 10-year averaging rule 

of section 402(e) (as in effect prior to 

amendment by the Tax Reform Act of 

50972 Federal Register / Vol. 70, No. 166 / Monday, August 29, 2005 / Rules and Regulations 

1986, Public Law 99–514, 100 Stat. 

2085). If, however, the contract 

distributed by such exempt trust is a life 

insurance contract, retirement income 

contract, endowment contract, or other 

contract providing life insurance 

protection, the fair market value of the 

contract at the time of distribution must 

be included in the distributee’s income 

in accordance with the provisions of 

section 402(a), except to the extent that, 

within 60 days after the distribution of 

the contract, all or any portion of such 

value is irrevocably converted into a 

contract under which no part of any 

proceeds payable on death at any time 

would be excludable under section 

101(a) (relating to life insurance 

proceeds), or the contract is treated as 

a rollover contribution under section 

402(c). If the contract distributed by 

such trust is a transferable annuity 

contract, or a retirement income, 

endowment, or other life insurance 

contract and such contract is not treated 

as a rollover contribution under section 

402(c), then, notwithstanding the 

preceding sentence, the fair market 

value of the contract is includible in the 

distributee’s gross income unless, 

within such 60 days, such contract is 

made nontransferable. 

* * * * * 

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: August 9, 2005. 

Eric Solomon, 

Acting Deputy Assistant Secretary for Tax 

Policy. 

[FR Doc. 05–17046 Filed 8–26–05; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117 

[CGD11–05–023] 

Drawbridge Operation Regulations; 

Petaluma River, Blackpoint, CA 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of temporary deviation 

from regulations. 

SUMMARY: The Commander, Eleventh 

Coast Guard District, has issued a 

temporary deviation from the regulation 

governing the operation of the 

Blackpoint Railroad Drawbridge across 

the Petaluma River, mile 0.8, at 

Blackpoint, CA. This deviation allows 

the bridge to remain in the closed-tonavigation position for necessary bridge 

repair. 

DATES: This deviation is effective from 

6:30 a.m. until 8 p.m. on Monday 

August 29, 2005. 

ADDRESSES: Materials referred to in this 

document are available for inspection or 

copying at Commander (oan), Eleventh 

Coast Guard District, Building 50–3, 

Coast Guard Island, Alameda, CA 

94501–5100 between 8 a.m. and 4 p.m., 

Monday through Friday, except Federal 

holidays. The telephone number is (510) 

437–3516. Commander (oan), Eleventh 

Coast Guard District maintains the 

public docket for this temporary 

deviation. 

FOR FURTHER INFORMATION CONTACT: 

David H. Sulouff, Chief, Bridge Section, 

Eleventh Coast Guard District, 

telephone (510) 437–3516. 

SUPPLEMENTARY INFORMATION: The 

Sonoma-Marin Area Rail Transit District 

requested to secure the Blackpoint 

Drawbridge, mile 0.8, Petaluma River, in 

the closed-to-navigation position on 29 

August 2005, during daylight hours for 

bridge repair. The drawbridge provides 

unlimited vertical clearance in the full 

open-to-navigation position, and 7 feet 

vertical clearance, above Mean High 

Water, when closed. The drawbridge is 

normally maintained in the fully open 

position, except for the crossing of 

trains or for maintenance, as required by 

33 CFR 117.187. 

The proposed work was coordinated 

with waterway users. From 6:30 a.m. to 

8 p.m. on Monday, August 29, 2005, the 

drawspan may be secured in the closedto-navigation position and need not 

open for vessels. If safe to do so, a vessel 

can pass through the bridge during this 

period. The drawspan will be able to 

open in an emergency with a one-hour 

advance notice. The drawspan shall 

resume normal operations after 8 p.m. 

on August 29, 2005. 

In accordance with 33 CFR 117.35(c), 

this work will be performed with all due 

speed in order to return the bridge to 

normal operation as soon as possible. 

This deviation from the operating 

regulations is authorized under 33 CFR 

117.35. 

Dated: August 16, 2005. 

Kevin J. Eldridge, 

Rear Admiral, U.S. Coast Guard, Commander, 

Eleventh Coast Guard District. 

[FR Doc. 05–17094 Filed 8–26–05; 8:45 am] 

BILLING CODE 4910–15–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117 

[CGD07–04–124] 

RIN 1625–AA09 

Drawbridge Operation Regulation; 

Skidaway Bridge (SR 204), Intracoastal 

Waterway, Mile 592.9, Savannah, 

Chatham County, GA 

AGENCY: Coast Guard, DHS. 

ACTION: Final rule. 

SUMMARY: The Coast Guard is changing 

the operating regulations of the 

Skidaway Bridge (SR 204) across the 

Intracoastal Waterway, mile 592.9, in 

Savannah, Georgia. This rule allows the 

bridge to open on signal, except that 

from Monday through Friday, not 

including Federal holidays, the bridge 

need only open on the hour between 

6:31 a.m. and 8:59 a.m. and on the hour 

and half hour between 4:31 p.m. and 

6:29 p.m. 

DATES: This rule is effective September 

28, 2005. 

ADDRESSES: Comments and material 

received from the public, as well as 

documents indicated in this preamble as 

being available in the docket, are part of 

docket (CGD07–04–124) and are 

available for inspection or copying at 

Commander (obr), Seventh Coast Guard 

District, 909 SE 1st Avenue, Suite 432, 

Miami, Florida 33131, between 7:30 

a.m. and 4 p.m., Monday through 

Friday, except Federal holidays. Bridge 

Branch (obr), Seventh Coast Guard 

District, maintains the public docket for 

this rulemaking. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Gwin Tate, Project Manager, Seventh 

Coast Guard District, Bridge Branch, 

(305) 415–6747. 

SUPPLEMENTARY INFORMATION: 

Regulatory History 

On December 3, 2004, we published 

a notice of proposed rulemaking 

(NPRM) entitled Drawbridge Operation 

Regulations; Skidaway Bridge (SR 204), 

Intracoastal Waterway, Mile 592.9, 

Savannah, Chatham County, GA in the 

Federal Register (69 FR 70209). We 

received 8 letters commenting on the 

proposed rule. No public meeting was 

requested, and none was held. 

Background and Purpose 

On January 7, 2004, the General 

Manager of the Landings Association, a 

residential development with over 8500 

residents that comprises approximately