102 STAT. 3662
PUBLIC LAW 100-647—NOV. 10, 1988 (1) IN GENERAL.—Section 72 of the 1986 Code (relating to annuities; certain proceeds of endowment and life insurance contracts) is amended by redesignating subsection (v) as subsection (w) and by inserting after subsection (u) the following new subsection:
"(v) 10-PERCENT ADDITIONAL TAX FOR TAXABLE DISTRIBUTIONS FROM MODIFIED ENDOWMENT CONTRACTS.—
"(1) IMPOSITION OF ADDITIONAL TAX.—If any taxpayer receives
any amount under a modified endowment contract (as defined in section 7702A), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income. "(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS.—
Paragraph (1) shall not apply to any distribution— "(A) made on or after the date on which the taxpayer attains age 59 ¥2, "(B) which is attributable to the taxpayer's becoming disabled (within the meaning of subsection (m)(7)), or "(C) which is part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and his beneficiary." (2) TECHNICAL AMENDMENT.—Subparagraph (C) of section 26(b)(2) of the 1986 Code is amended by striking out "or (q)" and inserting in lieu thereof "(q), or (v)". (c) MODIFIED ENDOWMENT CONTRACT DEFINED.—
(1) IN GENERAL.—Chapter 79 of the 1986 Code is amended by inserting after section 7702 the following new section: "SEC. 7702A. MODIFIED ENDOWMENT CONTRACT DEFINED.
"(a) GENERAL RULE.—For purposes of section 72, the term 'modified endowment contract' means any contract meeting the requirements of section 7702— "(1) which— "(A) is entered into on or after June 21, 1988, and "(B) fails to meet the 7-pay test of subsection (b), or "(2) which is received in exchange for a contract described in paragraph (1). "(b) 7-PAY TEST.—For purposes of subsection (a), a contract fails to meet the 7-pay test of this subsection if the accumulated amount paid under the contract at any time during the 1st 7 contract years exceeds the sum of the net level premiums which would have been paid on or before such time if the contract provided for paid-up future benefits after the payment of 7 level annual premiums, "(c) COMPUTATIONAL RULES.—
"(1) IN GENERAL.—Except as provided in this subsection, the determination under subsection (b) of the 7 level annual premiums shall be made— "(A) as of the time the contract is issued, and "(B) by applying the rules of section 770203X2) and of section 7702(e) (other than paragraph (2)(C) thereof), except that the death benefit provided for the 1st contract year shall be deemed to be provided until the maturity date without regard to any scheduled reduction after the 1st 7 contract years.
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