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26 U.S.C. § 264 — Certain amounts paid in connection with insurance contracts

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26 U.S.C. § 264 — Certain amounts paid in connection with insurance contracts

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Source location: Title 26, Chapter 1, § 264; chapter-001-normal-taxes-and-surtaxes.md

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**(a) General rule** No deduction shall be allowed for— (1) Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract. (2) Any amount paid or accrued on indebtedness incurred or continued to purchase or carry a single premium life insurance, endowment, or annuity contract. (3) Except as provided in subsection (d), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of such contract (either from the insurer or otherwise). (4) Except as provided in subsection (e), any interest paid or accrued on any indebtedness with respect to 1 or more life insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individual. Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954. Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963. Paragraph (4) shall apply with respect to contracts purchased after June 20, 1986. **(b) Exceptions to subsection (a)(1)** Subsection (a)(1) shall not apply to— (1) any annuity contract described in section 72(s)(5), and (2) any annuity contract to which section 72(u) applies. **(c) Contracts treated as single premium contracts** For purposes of subsection (a)(2), a contract shall be treated as a single premium contract— (1) if substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is purchased, or (2) if an amount is deposited after March 1, 1954, with the insurer for payment of a substantial number of future premiums on the contract. **(d) Exceptions** Subsection (a)(3) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or continued as part of a plan referred to in subsection (a)(3)— (1) if no part of 4 of the annual premiums due during the 7-year period (beginning with the date the first premium on the contract to which such plan relates was paid) is paid under such plan by means of indebtedness, (2) if the total of the amounts paid or accrued by such person during such taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of subsection (a)(3) does not exceed $100, (3) if such amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in his financial obligations, or (4) if such indebtedness was incurred in connection with his trade or business. For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new 7-year period described in such paragraph with respect to such contract shall commence on the date the first such increased premium is paid. **(e) 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 term “applicable period” means the 12-month period beginning on the date the policy is issued (and each successive 12-month period thereafter) unless the taxpayer elects a number of months (not greater than 12) other than such 12-month period to be its applicable period. Such an election shall be made not later than the 90th day after the date of the enactment of this sentence and, if made, shall apply to the taxpayer’s first taxable year ending on or after October 13, 1995, and all subsequent taxable years unless revoked with 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 taxpayer. (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. **(f) Pro rata allocation of interest expense to policy cash values** (1) **In general** — No deduction shall be allowed for that portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values. (2) **Allocation** — For purposes of paragraph (1), the portion of the taxpayer’s interest expense which is allocable to unborrowed policy cash values is an amount which bears the same ratio to such interest expense as— (A) the taxpayer’s average unborrowed policy cash values of life insurance policies, and annuity and endowment contracts, issued after June 8, 1997, bears to (B) the sum of— (i) in the case of assets of the taxpayer which are life insurance policies or annuity or endowment contracts, the average unborrowed policy cash values of such policies and contracts, and (ii) in the case of assets of the taxpayer not described in clause (i), the average adjusted bases (within the meaning of section 1016) of such assets. (3) **Unborrowed policy cash value** — For purposes of this subsection, the term “unborrowed policy cash value” means, with respect to any life insurance policy or annuity or endowment contract, the excess of— (A) the cash surrender value of such policy or contract determined without regard to any surrender charge, over (B) the amount of any loan with respect to such policy or contract. If the amount described in subparagraph (A) with respect to any policy or contract does not reasonably approximate its actual value, the amount taken into account under subparagraph (A) shall be the greater of the amount of the insurance company liability or the insurance company reserve with respect to such policy or contract (as determined for purposes of the annual statement approved by the National Association of Insurance Commissioners) or shall be such other amount as is determined by the Secretary. (4) **Exception for certain policies and contracts** (A) *Policies and contracts covering 20-percent owners, officers, directors, and employees* — Paragraph (1) shall not apply to any policy or contract owned by an entity engaged in a trade or business if such policy or contract covers only 1 individual and if such individual is (at the time first covered by the policy or contract)— (i) a 20-percent owner of such entity, or (ii) an individual (not described in clause (i)) who is an officer, director, or employee of such trade or business. A policy or contract covering a 20-percent owner of such entity shall not be treated as failing to meet the requirements of the preceding sentence by reason of covering the joint lives of such owner and such owner’s spouse. (B) *Contracts subject to current income inclusion* — Paragraph (1) shall not apply to any annuity contract to which section 72(u) applies. (C) *Coordination with paragraph (2)* — Any policy or contract to which paragraph (1) does not apply by reason of this paragraph shall not be taken into account under paragraph (2). (D) *20-percent owner* — For purposes of subparagraph (A), the term “20-percent owner” has the meaning given such term by subsection (e)(4). (E) *Master contracts* — If coverage for each insured under a master contract 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 for purposes of subparagraph (A). For purposes of the preceding sentence, the term “master contract” shall not include any group life insurance contract (as defined in section 848(e)(2)). (5) **Exception for policies and contracts held by natural persons; treatment of partnerships and S corporations** (A) *Policies and contracts held by natural persons* (i) *In general* — This subsection shall not apply to any policy or contract held by a natural person. (ii) *Exception where business is beneficiary* — If a trade or business is directly or indirectly the beneficiary under any policy or contract, such policy or contract shall be treated as held by such trade or business and not by a natural person. (iii) *Special rules* (I) *Certain trades or businesses not taken into account* — Clause (ii) shall not apply to any trade or business carried on as a sole proprietorship and to any trade or business performing services as an employee. (II) *Limitation on unborrowed cash value* — The amount of the unborrowed cash value of any policy or contract which is taken into account by reason of clause (ii) shall not exceed the benefit to which the trade or business is directly or indirectly entitled under the policy or contract. (iv) *Reporting* — The Secretary shall require such reporting from policyholders and issuers as is necessary to carry out clause (ii). (B) *Treatment of partnerships and S corporations* — In the case of a partnership or S corporation, this subsection shall be applied at the partnership and corporate levels. (6) **Special rules** (A) *Coordination with subsection (a) and section 265* — If interest on any indebtedness is disallowed under subsection (a) or section 265— (i) such disallowed interest shall not be taken into account for purposes of applying this subsection, and (ii) the amount otherwise taken into account under paragraph (2)(B) shall be reduced (but not below zero) by the amount of such indebtedness. (B) *Coordination with section 263A* — This subsection shall be applied before the application of section 263A (relating to capitalization of certain expenses where taxpayer produces property). (7) **Interest expense** — The term “interest expense” means the aggregate amount allowable to the taxpayer as a deduction for interest (within the meaning of section 265(b)(4)) for the taxable year (determined without regard to this subsection, section 265(b), and section 291). (8) **Aggregation rules** (A) *In general* — All members of a controlled group (within the meaning of subsection (e)(5)(B)) shall be treated as 1 taxpayer for purposes of this subsection. (B) *Treatment of insurance companies* — This subsection shall not apply to an insurance company subject to tax under subchapter L, and subparagraph (A) shall be applied without regard to any member of an affiliated group which is an insurance company.

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Federal law — U.S. Code and appendices · legal_authorities

26 U.S.C. § 101 — Certain death benefits

**(a) Proceeds of life insurance contracts payable by reason of death** (1) **General rule** — Except as otherwise provided in paragraphs (2) and (3), subsection (d), subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured. (2) **Transfer for valuable consideration** — In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee. The preceding sentence shall not apply in the case of such a transfer— (A) if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor, or (B) if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. The term “other amounts” in the first sentence of this paragraph includes interest paid or accrued by the transferee on indebtedness with respect to such contract or any interest therein if such interest paid or accrued is not allowable as a deduction by reason of section 264(a)(4). (3) **Exception to valuable consideration rules for commercial transfers** (A) *In general* — The second sentence of paragraph (2) shall not apply in the case of a transfer of a life insurance contract, or any intere

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26 U.S.C. § 1 — Tax imposed

**(a) Married individuals filing joint returns and surviving spouses** There is hereby imposed on the taxable income of— (1) every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013, and (2) every surviving spouse (as defined in section 2(a)), a tax determined in accordance with the following table: If taxable income is:The tax is: Not over $36,90015% of taxable income. Over $36,900 but not over $89,150$5,535, plus 28% of the excess over $36,900. Over $89,150 but not over $140,000$20,165, plus 31% of the excess over $89,150. Over $140,000 but not over $250,000$35,928.50, plus 36% of the excess over $140,000. Over $250,000$75,528.50, plus 39.6% of the excess over $250,000. **(b) Heads of households** There is hereby imposed on the taxable income of every head of a household (as defined in section 2(b)) a tax determined in accordance with the following table: If taxable income is:The tax is: Not over $29,60015% of taxable income. Over $29,600 but not over $76,400$4,440, plus 28% of the excess over $29,600. Over $76,400 but not over $127,500$17,544, plus 31% of the excess over $76,400. Over $127,500 but not over $250,000$33,385, plus 36% of the excess over $127,500. Over $250,000$77,485, plus 39.6% of the excess over $250,000. **(c) Unmarried individuals (other than surviving spouses and heads of households)** There is hereby imposed on the taxable income of every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 7703) a tax determined in accordance with the following table: If taxable income is:The tax is: Not over $22,10015% of taxable income. Over $22,100 but not over $53,50

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26 U.S.C. § 86 — Social security and tier 1 railroad retirement benefits

**(a) In general** (1) **In general** — Except as provided in paragraph (2), gross income for the taxable year of any taxpayer described in subsection (b) (notwithstanding section 207 of the Social Security Act) includes social security benefits in an amount equal to the lesser of— (A) one-half of the social security benefits received during the taxable year, or (B) one-half of the excess described in subsection (b)(1). (2) **Additional amount** — In the case of a taxpayer with respect to whom the amount determined under subsection (b)(1)(A) exceeds the adjusted base amount, the amount included in gross income under this section shall be equal to the lesser of— (A) the sum of— (i) 85 percent of such excess, plus (ii) the lesser of the amount determined under paragraph (1) or an amount equal to one-half of the difference between the adjusted base amount and the base amount of the taxpayer, or (B) 85 percent of the social security benefits received during the taxable year. **(b) Taxpayers to whom subsection (a) applies** (1) **In general** — A taxpayer is described in this subsection if— (A) the sum of— (i) the modified adjusted gross income of the taxpayer for the taxable year, plus (ii) one-half of the social security benefits received during the taxable year, exceeds (B) the base amount. (2) **Modified adjusted gross income** — For purposes of this subsection, the term “modified adjusted gross income” means adjusted gross income— (A) determined without regard to this section and sections 85(c), 135, 137, 221, 911, 931, and 933, and (B) increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax. **(c) Base amount and adjusted base amount** For purposes of this

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26 U.S.C. § 26 — Limitation based on tax liability; definition of tax liability

**(a) Limitation based on amount of tax** The aggregate amount of credits allowed by this subpart for the taxable year shall not exceed the sum of— (1) the taxpayer’s regular tax liability for the taxable year reduced by the foreign tax credit allowable under section 27, and (2) the tax imposed by section 55(a) for the taxable year. **(b) Regular tax liability** For purposes of this part— (1) **In general** — The term “regular tax liability” means the tax imposed by this chapter for the taxable year. (2) **Exception for certain taxes** — For purposes of paragraph (1), any tax imposed by any of the following provisions shall not be treated as tax imposed by this chapter: (A) section 55 (relating to minimum tax), (B) section 59A (relating to base erosion and anti-abuse tax), (C) subsection (m)(5)(B), (q), (t), or (v) of section 72 (relating to additional taxes on certain distributions), (D) section 143(m) (relating to recapture of proration of Federal subsidy from use of mortgage bonds and mortgage credit certificates), (E) section 530(d)(4) (relating to additional tax on certain distributions from Coverdell education savings accounts), (F) section 531 (relating to accumulated earnings tax), (G) section 541 (relating to personal holding company tax), (H) section 1351(d)(1) (relating to recoveries of foreign expropriation losses), (I) section 1374 (relating to tax on certain built-in gains of S corporations), (J) section 1375 (relating to tax imposed when passive investment income of corporation having subchapter C earnings and profits exceeds 25 percent of gross receipts), (K) subparagraph (A) of section 7518(g)(6) (relating to nonqualified withdrawals from capital construction funds taxed at highest marginal rate), (L) sections 87

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Federal law — U.S. Code and appendices · legal_authorities

26 U.S.C. § 265 — Expenses and interest relating to tax-exempt income

**(a) General rule** No deduction shall be allowed for— (1) **Expenses** — Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (whether or not any amount of such interest is received or accrued) wholly exempt from the taxes imposed by this subtitle. (2) **Interest** — Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes imposed by this subtitle. (3) **Certain regulated investment companies** — In the case of a regulated investment company which distributes during the taxable year an exempt-interest dividend (including exempt-interest dividends paid after the close of the taxable year as described in section 855), that portion of any amount otherwise allowable as a deduction which the amount of the income of such company wholly exempt from taxes under this subtitle bears to the total of such exempt income and its gross income (excluding from gross income, for this purpose, capital gain net income, as defined in section 1222(9)). (4) **Interest related to exempt-interest dividends** — Interest on indebtedness incurred or continued to purchase or carry shares of stock of a regulated investment company which during the taxable year of the holder thereof distributes exempt-interest dividends. (5) **Special rules for application of paragraph (2) in the case of short sales** — For purposes of paragraph (2)— (A) *In general* — The term “interest” includes any

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Federal law — U.S. Code and appendices · legal_authorities

26 U.S.C. § 264 — Certain amounts paid in connection with

Page 1009 TITLE 26—INTERNAL REVENUE CODE § 264 ALLOCATION RATIO FOR APPORTIONING STORAGE COSTS AND RELATED HANDLING COSTS Pub. L. 100–647, title I, § 1008(b)(8), Nov. 10, 1988, 102 Stat. 3438, provided that: ‘‘The allocation used in the regulations prescribed under section 263A(h)(2) of the Internal Revenue Code of 1986 for apportioning storage costs and related handling costs shall be determined by dividing the amount of such costs by the beginning in- ventory balances and the purchases during the year and by multiplying the resulting allocation ratio by inven- tory amounts determined in accordance with the provi- sions of the joint explanatory statement of the com- mittee of conference of the conference report accom- panying H.R. 3838 (H.R. Rept. No. 99–841, Vol. II., 99th Cong., 2d Sess. II–306–307 (1986)).’’ AMORTIZATION OF PAST SERVICE PENSION COSTS Pub. L. 100–203, title X, § 10204, Dec. 22, 1987, 101 Stat. 1330–394, provided that: ‘‘(a) IN GENERAL.—For purposes of sections 263A and 460 of the Internal Revenue Code of 1986, the allocable costs (within the meaning of section 263A(a)(2) or sec- tion 460(c) of such Code, whichever is applicable) with respect to any property shall include contributions paid to or under a pension or annuity plan whether or not such contributions represent past service costs. ‘‘(b) EFFECTIVE DATE.— ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), subsection (a) shall apply to costs incurred after December 31, 1987, in taxable years ending after such date. ‘‘(2) SPECIAL RULE FOR INVENTORY PROPERTY.—In the case of any property which is inventory in the hands of the taxpayer— ‘‘(A) IN GENERAL.—Subsection (a) shall apply to taxable years beginning after December 31, 1987. ‘‘(B) CHANGE IN METHOD OF ACCOUNTING.

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