110 STAT. 2090
PUBLIC LAW 104-191—AUG. 21, 1996
Subtitle A—Company-Owned Life
Insurance
SEC. 501. DENIAL OF DEDUCTION FOR INTEREST ON LOANS WITH
RESPECT TO COMPANY-OWNED LIFE INSURANCE.
(a) IN GENERAL. — Paragraph (4) of section 264(a) is amended—
(1) by inserting ", or any endowment or annuity contracts
owned by the taxpayer covering any individual," after "the
life of any individual", and
(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—
(1) by striking "Any" in subsection (a)(4) and inserting
"Except as provided in subsection (d), any", and
(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 Mood^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
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