Split Dollar Arrangements: A Beleaguered Technique

Posted: 12 Sep 2002


In January 2002, Treasury and the Internal Revenue Service issued Notice 2002-8, a notice that was considered generally favorable for split dollar arrangements, in that it grandfathered a great many split dollar arrangements that were in existence or implemented prior to January 28, 2002. The rules under this Notice for arrangements that were not grandfathered, although not as generous, were generally seen as workable, with a few issues, until the issuance of final regulations. The final regulations, the Notice warned, would be even less generous, and would impose a system of two mutually exclusive regimes of taxing split dollar arrangements, the "economic benefit regime" and "loan regime." On July 3rd, the Service and Treasury issued the anticipated Proposed Regulations setting forth the system of taxation that governs split dollar arrangements entered into after the date of the Final Regulations. These Regulations were much worse than expected and imposed new levels of taxation on the parties to a split dollar arrangement that had not previously existed. Only July 28th, an article appeared in the New York Times discussing a form of split dollar arrangement that permitted the transfer of large amounts of assets to the insured's family at little or no gift tax, utilizing a loophole in the Service's previously issued Revenue Rulings, which was not completely closed by Notice 2002-8. On August 16th, the Service and Treasury issued Notice 2002-59, to prohibit what is referred to in the Release to the Notice as an abusive tax avoidance transaction using split dollar life insurance. In a New York Times article dated August 17th, the reporter stated that Treasury acted after being sent a copy of the July 24th New York Times article by Rep. Lloyd Doggett (Tx-D). On July 30th, Congress passed the Sarbanes-Oxley Bill, which President Bush subsequently signed into law. This new law prohibits loans and other "extensions of credit" by any publicly traded company to its executives after July 30, 2002. When the Bill was reviewed prior to passage, the possibility of the inclusion of split dollar transactions in the prohibition against extension of credit and loans was raised with Senator Sarbanes, who refused to rule out the possibility (although at the same time admitting that Congress had not considered the implications to split dollar arrangements), which would terminate split dollar arrangements between publicly traded companies and their executives. Until the words "extension of credit," as they appear in the Sarbanes-Oxley bill, are explained, no publicly traded company should enter into a new split dollar arrangement with any of its executives, whether or not it is an economic benefit arrangement, and certainly not using a loan arrangement. This article discusses developments in this area, and current planning possibilities.

Suggested Citation

Mancini, Mary Ann, Split Dollar Arrangements: A Beleaguered Technique. Available at SSRN: https://ssrn.com/abstract=330160

Mary Ann Mancini (Contact Author)

Steptoe & Johnson LLP ( email )

1330 Connecticut Avenue, N.W.
Washington, DC 20036
United States

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