§501. DENIAL OF DEDUCTION FOR INTEREST ON LOANS WITH RESPECT TO COMPANY-OWNED LIFE INSURANCE.

Health Insurance Portability and Accountability Act of 1996

TITLE V—REVENUE OFFSETS

(a) In General.—Paragraph (4) of section 264(a) is amended—

(a)(1) by inserting ‘‘, or any endowment or annuity contracts owned by the taxpayer covering any individual,’’ after ‘‘the life of any individual’’, and

(a)(2) by striking all that follows ‘‘carried on by the taxpayer’’ and inserting a period.

(b) Exception for Contracts Relating to Key Persons; Permissible Interest Rates.—Section 264 is amended—

(b)(1) by striking "Any" in subsection (a)(4) and inserting ‘‘Except as provided in subsection (d), any’’, and

(b)(2) by adding at the end the following new subsection:

‘‘(d) Special Rules For Application of Subsection (a)(4).—

‘‘(1) Exception for key persons.—Subsection (a)(4) shall not apply to any interest paid or accrued on any indebtedness with respect to policies or contracts covering an individual who is a key person to the extent that the aggregate amount of such indebtedness with respect to policies and contracts covering such individual does not exceed $50,000.

‘‘(2) Interest rate cap on key persons and pre-1986 contracts.—

‘‘(A) In general.—No deduction shall be allowed by reason of paragraph (1) or the last sentence of subsection (a) with respect to interest paid or accrued for any month beginning after December 31, 1995, to the extent the amount of such interest exceeds the amount which would have been determined if the applicable rate of interest were used for such month.

‘‘(B) Applicable rate of interest.—For purposes of subparagraph (A)—

‘‘(i) In general.—The applicable rate of interest for any month is the rate of interest described as Moody's Corporate Bond Yield Average-Monthly Average Corporates as published by Moody's Investors Service, Inc., or any successor thereto, for such month.

‘‘(ii) Pre-1986 contracts.—In the case of indebtedness on a contract purchased on or before June 20, 1986—

‘‘(I) which is a contract providing a fixed rate of interest, the applicable rate of interest for any month shall be the Moody's rate described in clause (i) for the month in which the contract was purchased, or

‘‘(II) which is a contract providing a variable rate of interest, the applicable rate of interest for any month in an applicable period shall be such Moody's rate for the third month preceding the first month in such period.

For purposes of subclause (II), the taxpayer shall elect an applicable period for such contract on its return of tax imposed by this chapter for its first taxable year ending on or after October 13, 1995. Such applicable period shall be for any number of months (not greater than 12) specified in the election and may not be changed by the taxpayer without the consent of the Secretary.

‘‘(3) Key person.—For purposes of paragraph (1), the term 'key person' means an officer or 20-percent owner, except that the number of individuals who may be treated as key persons with respect to any taxpayer shall not exceed the greater of—

‘‘(A) 5 individuals, or

‘‘(B) the lesser of 5 percent of the total officers and employees of the taxpayer or 20 individuals.

‘‘(4) 20-percent owner.—For purposes of this subsection, the term '20-percent owner' means—

‘‘(A) if the taxpayer is a corporation, any person who owns directly 20 percent or more of the outstanding stock of the corporation or stock possessing 20 percent or more of the total combined voting power of all stock of the corporation, or

‘‘(B) if the taxpayer is not a corporation, any person who owns 20 percent or more of the capital or profits interest in the employer.

‘‘(5) Aggregation rules.—

‘‘(A) In general.—For purposes of paragraph (4)(A) and applying the $50,000 limitation in paragraph (1)—

‘‘(i) all members of a controlled group shall be treated as one taxpayer, and

‘‘(ii) such limitation shall be allocated among the members of such group in such manner as the Secretary may prescribe.

‘‘(B) Controlled group.—For purposes of this paragraph, all persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as members of a controlled group.’’.

(c) Effective Dates(26 USC 264)

(c)(1) In general.—The amendments made by this section shall apply to interest paid or accrued after October 13, 1995.

(c)(2) Transition rule for existing indebtedness.—

(c)(2)(A) In general.—In the case of—

(c)(2)(A)(i) indebtedness incurred before January 1, 1996, or

(c)(2)(A)(ii) indebtedness incurred before January 1, 1997 with respect to any contract or policy entered into in 1994 or 1995 the amendments made by this section shall not apply to qualified interest paid or accrued on such indebtedness after October 13, 1995, and before January 1, 1999.

(c)(2)(B) Qualified interest.—For purposes of subparagraph (A), the qualified interest with respect to any indebtedness for any month is the amount of interest (otherwise deductible) which would be paid or accrued for such month on such indebtedness if—

(c)(2)(B)(i) in the case of any interest paid or accrued after December 31, 1995, indebtedness with respect to no more than 20,000 insured individuals were taken into account, and

(c)(2)(B)(ii) the lesser of the following rates of interest were used for such month:

(c)(2)(B)(ii)(I) The rate of interest specified under the terms of the indebtedness as in effect on October 13, 1995 (and without regard to modification of such terms after such date).

(c)(2)(B)(ii)(II) The applicable percentage of the rate of interest described as Moody's Corporate Bond Yield Average-Monthly Average Corporates as published by Moody's Investors Service, Inc., or any successor thereto, for such month.

For purposes of clause (i), all persons treated as a single employer under subsection (a) or (b) of section 52 of the Internal Revenue Code of 1986 or subsection (m) or (o) of section 414 of such Code shall be treated as 1 person. Subclause (II) of clause (ii) shall not apply to any month before January 1, 1996.

(c)(2)(C) Applicable percentage.—For purposes of subparagraph (B), the applicable percentage is as follows:

(c)(3) Special rule for grandfathered contracts.—This section shall not apply to any contract purchased on or before June 20, 1986, except that section 264(d)(2) of the Internal Revenue Code of 1986 shall apply to interest paid or accrued after October 13, 1995.

(d) SPREAD OF INCOME INCLUSION ON SURRENDER, ETC. OF CONTRACTS. (26 USC 264)—

(d)(1) In general.—If any amount is received under any life insurance policy or endowment or annuity contract described in paragraph (4) of section 264(a) of the Internal Revenue Code of 1986—

(d)(1)(A) on the complete surrender, redemption, or maturity of such policy or contract during calendar year 1996, 1997, or 1998, or

(d)(1)(B) in full discharge during any such calendar year of the obligation under the policy or contract which is in the nature of a refund of the consideration paid for the policy or contract,

then (in lieu of any other inclusion in gross income) such amount shall be includible in gross income ratably over the 4-taxable year period beginning with the taxable year such amount would (but for this paragraph) be includible. The preceding sentence shall only apply to the extent the amount is includible in gross income for the taxable year in which the event described in subparagraph (A) or (B) occurs.

(d)(2) Special rules for applying section 264.—A contract shall not be treated as—

(d)(2)(A) failing to meet the requirement of section 264(c)(1) of the Internal Revenue Code of 1986, or

(d)(2)(B) a single premium contract under section 264(b)(1) of such Code, solely by reason of an occurrence described in subparagraph (A) or (B) of paragraph (1) of this subsection or solely by reason of no additional premiums being received under the contract by reason of a lapse occurring after October 13, 1995.

(d)(3) Special rule for deferred acquisition costs.—In the case of the occurrence of any event described in subparagraph (A) or (B) of paragraph (1) of this subsection with respect to any policy or contract—

(d)(3)(A) section 848 of the Internal Revenue Code of 1986 shall not apply to the unamortized balance (if any) of the specified policy acquisition expenses attributable to such policy or contract immediately before the insurance company's taxable year in which such event occurs, and

(d)(3)(B) there shall be allowed as a deduction to such company for such taxable year under chapter 1 of such Code an amount equal to such unamortized balance.