Page:United States Statutes at Large Volume 111 Part 1.djvu/976

 Ill STAT. 952 PUBLIC LAW 105-34—AUG. 5, 1997 (2) COORDINATION WITH TRANSFERS FOR VALUE.— Paragraph (2) of section 101(a) is amended by adding at the end the following new flush sentence: "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).". (c) PRO RATA ALLOCATION OF INTEREST EXPENSE TO POLICY CASH VALUES.—Section 264 is amended by adding at the end the following new subsection: "(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. " (4) EXCEPTION FOR CERTAIN POLICIES AND CONTRACTS. — "(A) POLICIES AND CONTRACTS COVERING 2O-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 INCLU- SION. —Paragraph (1) shall not apply to any annuity contract to which section 72(u) applies.

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