Page:United States Statutes at Large Volume 102 Part 4.djvu/694

 102 STAT. 3664

PUBLIC LAW 100-647—NOV. 10, 1988

"(d) DISTRIBUTIONS AFFECTED.—If a contract fails to meet the 7-pay test of subsection (b), such contract shall be treated as failing to meet such requirements only in the case of— "(1) distributions during the contract year in which the failure takes effect and during any subsequent contract year, and "(2) under regulations prescribed by the Secretary, distributions (not described in paragraph (1)) in anticipation of such failure. For purposes of the preceding sentence, any distribution which is made within 2 years before the failure to meet the 7-pay test shall be treated as made in anticipation of such failure. "(e) DEFINITIONS.—For purposes of this section— "(1) AMOUNT PAID.—

"(A) IN GENERAL.—The term 'amount paid' means— "(i) the premiums paid under the contract, reduced by "(ii) amounts to which section 72(e) applies (determined without regard to paragraph (4)(A) thereof) but not including amounts includible in gross income. "(B) TREATMENT OF CERTAIN PREMIUMS RETURNED.—If, in

order to comply with the requirements of subsection (b), any portion of any premium paid during any contract year is returned by the insurance company (with interest) within 60 days after the end of such contract year, the amount so returned (excluding interest) shall be deemed to reduce the sum of the premiums paid under the contract during such contract year. "(C) INTEREST RETURNED INCLUDIBLE IN GROSS INCOME.—

Notwithstanding the provisions of section 72(e), the amount of any interest returned as provided in subparagraph (B) shall be includible in the gross income of the recipient. "(2) CONTRACT YEAR.—The term 'contract year' means the 12month period beginning with the 1st month for which the contract is in effect, and each 12-month period beginning with the corresponding month in subsequent calendar years. "(3) OTHER TERMS.—Except as otherwise provided in this section, terms used in this section shall have the same meaning as when used in section 7702." (2) CLERICAL AMENDMENT.—The table of sections for chapter 79 of the 1986 Code is amended by inserting after the item relating to section 7702 the following new item: "Sec. 7702A. Modified endowment contract defined." (d) OTHER MODIFICATIONS.— (1) TREATMENT OF LOANS.—Subparagraph

(A) of section 72(e)(4) of the 1986 Code (relating to loans treated as distributions) is amended by adding at the end thereof the following new sentence: "The preceding sentence shall not apply for purposes of determining investment in the contract, except that the investment in the contract shall be increased by any amount included in gross income by reason of the amount treated as received under the preceding sentence." (2) ANTI-ABUSE RULES.—Subsection (e) of section 72 of the 1986

Code is amended by adding at the end thereof the following new paragraph: "(11) ANTI-ABUSE RULES.—

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