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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2002.
SEC. 1322. TREATMENT OF DEATH BENEFITS FROM COR-
PORATE-OWNED LIFE INSURANCE.
(a) IN GENERAL.—Section 101 of the Internal Revenue
Code of 1986 (relating to certain death benefits) is amended
by adding at the end the following new subsection:
‘‘(j) TREATMENT OF CERTAIN EMPLOYER-OWNED LIFE
INSURANCE CONTRACTS.—
‘‘(1) GENERAL RULE.—In the case of an em-
ployer-owned life insurance contract, the amount ex-
cluded from gross income of an applicable policy-
holder by reason of paragraph (1) of subsection (a)
shall not exceed an amount equal to the sum of the
premiums and other amounts paid by the policy-
holder for the contract.
‘‘(2) EXCEPTIONS.—In the case of an employer-
owned life insurance contract with respect to which
the notice and consent requirements of paragraph (4)
are met, paragraph (1) shall not apply to any of the
following:
‘‘(A) EXCEPTIONS
BASED
ON
INSURED’S
STATUS.—Any amount received by reason of the
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death of an insured who, with respect to an ap-
plicable policyholder—
‘‘(i) was an employee at any time dur-
ing the 12-month period before the insured’s
death, or
‘‘(ii) is, at the time the contract is
issued—
‘‘(I) a director,
‘‘(II) a highly compensated em-
ployee within the meaning of section
414(q) (without regard to paragraph
(1)(B)(ii) thereof), or
‘‘(III) a highly compensated indi-
vidual within the meaning of section
105(h)(5), except that ‘35 percent’ shall
be substituted for ‘25 percent’ in sub-
paragraph (C) thereof.
‘‘(B) EXCEPTION FOR AMOUNTS PAID TO IN-
SURED’S HEIRS.—Any amount received by rea-
son of the death of an insured to the extent—
‘‘(i) the amount is paid to a member
of the family (within the meaning of section
267(c)(4)) of the insured, any individual
who is the designated beneficiary of the in-
sured under the contract (other than the ap-
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plicable policyholder), a trust established for
the benefit of any such member of the fam-
ily or designated beneficiary, or the estate of
the insured, or
‘‘(ii) the amount is used to purchase
an equity (or capital or profits) interest in
the applicable policyholder from any person
described in clause (i).
‘‘(3) EMPLOYER-OWNED
LIFE
INSURANCE
CON-
TRACT.—
‘‘(A) IN
GENERAL.—For purposes of this
subsection, the term ‘employer-owned life insur-
ance contract’ means a life insurance contract
which—
‘‘(i) is owned by a person engaged in
a trade or business and under which such
person (or a related person described in sub-
paragraph (B)(ii)) is directly or indirectly
a beneficiary under the contract, and
‘‘(ii) covers the life of an insured who
is an employee with respect to the trade or
business of the applicable policyholder on
the date the contract is issued.
For purposes of the preceding sentence, if cov-
erage for each insured under a master contract
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is treated as a separate contract for purposes of
sections 817(h), 7702, and 7702A, coverage for
each such insured shall be treated as a separate
contract.
‘‘(B) 
APPLICABLE
POLICYHOLDER.—For
purposes of this subsection—
‘‘(i) IN GENERAL.—The term ‘applica-
ble policyholder’ means, with respect to any
employer-owned life insurance contract, the
person described in subparagraph (A)(i)
which owns the contract.
‘‘(ii) RELATED
PERSONS.—The term
‘applicable policyholder’ includes any per-
son which—
‘‘(I) bears a relationship to the
person described in clause (i) which is
specified 
in 
section 
267(b) 
or
707(b)(1), or
‘‘(II) is engaged in trades or busi-
nesses with such person which are
under common control (within the
meaning of subsection (a) or (b) of sec-
tion 52).
‘‘(4) NOTICE
AND
CONSENT
REQUIREMENTS.—
The notice and consent requirements of this para-
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graph are met if, before the issuance of the contract,
the employee—
‘‘(A) is notified in writing that the applica-
ble policyholder intends to insure the employee’s
life and the maximum face amount for which the
employee could be insured at the time the con-
tract was issued,
‘‘(B) provides written consent to being in-
sured under the contract and that such coverage
may continue after the insured terminates em-
ployment, and
‘‘(C) is informed in writing that an appli-
cable policyholder will be a beneficiary of any
proceeds payable upon the death of the employee.
‘‘(5) 
DEFINITIONS.—For 
purposes 
of 
this
subsection—
‘‘(A) EMPLOYEE.—The term ‘employee’ in-
cludes an officer, director, and highly com-
pensated employee (within the meaning of sec-
tion 414(q)).
‘‘(B) INSURED.—The term ‘insured’ means,
with respect to an employer-owned life insurance
contract, an individual covered by the contract
who is a United States citizen or resident. In the
case of a contract covering the joint lives of 2 in-
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dividuals, references to an insured include both
of the individuals.’’.
(b) REPORTING REQUIREMENTS.—Subpart A of part
III of subchapter A of chapter 61 of the Internal Revenue
Code of 1986 (relating to information concerning persons
subject to special provisions) is amended by inserting after
section 6039H the following new section:
‘‘SEC. 6039I. RETURNS AND RECORDS WITH RESPECT TO
EMPLOYER-OWNED LIFE INSURANCE CON-
TRACTS.
‘‘(a) IN GENERAL.—Every applicable policyholder
owning 1 or more employer-owned life insurance contracts
issued after the date of the enactment of this section shall
file a return (at such time and in such manner as the Sec-
retary shall by regulations prescribe) showing for each year
such contracts are owned—
‘‘(1) the number of employees of the applicable
policyholder at the end of the year,
‘‘(2) the number of such employees insured under
such contracts at the end of the year,
‘‘(3) the total amount of insurance in force at the
end of the year under such contracts,
‘‘(4) the name, address, and taxpayer identifica-
tion number of the applicable policyholder and the