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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