AALU Analyzes Proposed 412(i) Guidance

AALU notes that the proposed guidance does not propose new gift tax regulations. Instead, it says, the IRS appears to be trying to reach the same result through a "clarification" of existing gift tax regulations.

Under those regulations, it is commonly understood that interpolated terminal reserve can be used as the measure of fair market value for gift tax purposes, AALU says. IRS now seems to be saying, AALU says, that such an understanding may be incorrect, especially in situations in which the cash surrender value does not meet the formulaic standard.

The effective date of this portion of the guidance is not clear, AALU says. AALU says an argument can be made that the gift tax provisions should apply only to future arrangements, not to arrangements that are already in place.

AALU suggests that some parties could propose formulas other than the IRS safe harbor formula for establishing fair market value.

However, AALU says, the IRS probably wants to show that it will accept fair market value calculations based on alternative formulas only in rare and unusual circumstances.

Any taxpayer who uses a fair market value figure that is lower than the figure the IRS formula would produce probably should be prepared for a fight with the IRS, AALU says.

Another issue, AALU says, is the definition of "reasonable charges." An insurer can use reasonable charges to reduce the value of the policy if the insurer actually imposes the charges and expects the policyholder to pay them, AALU says.

But AALU says the "reasonable charges" definition is unclear about matters such as agent commissions. The IRS probably should treat an agent commission as a reasonable charge, but it says nothing about agent commissions in the guidance, AALU says.