Title 26, Chapter 79

Internal Revenue Code — 7 active sections

Table of Contents (7 sections)

§ 7701 Definitions
§ 7702 Life insurance contract defined
§ 7702A Modified endowment contract defined
§ 7702B Treatment of qualified long-term care insurance
§ 7703 Determination of marital status
§ 7704 Certain publicly traded partnerships treated as corporations
§ 7705 Certified professional employer organizations

§ 7701. Definitions

History & diffs →

§ 7701. Definitions

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—
- (1) The term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.
- (2) The term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture, or organization.
- (3) The term “corporation” includes associations, joint-stock companies, and insurance companies.
- (4) The term “domestic” when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations.
- (5) The term “foreign” when applied to a corporation or partnership means a corporation or partnership which is not domestic.
- (6) The term “fiduciary” means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.
- (7) The term “stock” includes shares in an association, joint-stock company, or insurance company.
- (8) The term “shareholder” includes a member in an association, joint-stock company, or insurance company.
- (9) The term “United States” when used in a geographical sense includes only the States and the District of Columbia.
- (10) The term “State” shall be construed to include the District of Columbia, where such construction is necessary to carry out provisions of this title.
- (11)
  - (A) The term “Secretary of the Treasury” means the Secretary of the Treasury, personally, and shall not include any delegate of his.
  - (B) The term “Secretary” means the Secretary of the Treasury or his delegate.
- (12)
  - (A) The term “or his delegate”—
    - (i) when used with reference to the Secretary of the Treasury, means any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority, to perform the function mentioned or described in the context; and
    - (ii) when used with reference to any other official of the United States, shall be similarly construed.
  - (B) The term “delegate,” in relation to the performance of functions in Guam or American Samoa with respect to the taxes imposed by chapters 1, 2, and 21, also includes any officer or employee of any other department or agency of the United States, or of any possession thereof, duly authorized by the Secretary (directly, or indirectly by one or more redelegations of authority) to perform such functions.
- (13) The term “Commissioner” means the Commissioner of Internal Revenue.
- (14) The term “taxpayer” means any person subject to any internal revenue tax.
- (15) The term “military or naval forces of the United States” and the term “Armed Forces of the United States” each includes all regular and reserve components of the uniformed services which are subject to the jurisdiction of the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy, or the Secretary of the Air Force, and each term also includes the Coast Guard. The members of such forces include commissioned officers and personnel below the grade of commissioned officers in such forces.
- (16) The term “withholding agent” means any person required to deduct and withhold any tax under the provisions of section 1441, 1442, 1443, or 1461.
- (17) As used in section 2516, if the husband and wife therein referred to are divorced, wherever appropriate to the meaning of such section, the term “wife” shall be read “former wife” and the term “husband” shall be read “former husband”; and, if the payments described in such section are made by or on behalf of the wife or former wife to the husband or former husband instead of vice versa, wherever appropriate to the meaning of such section, the term “husband” shall be read “wife” and the term “wife” shall be read “husband.”
- (18) The term “international organization” means a public international organization entitled to enjoy privileges, exemptions, and immunities as an international organization under the International Organizations Immunities Act ( 22 U.S.C. 288–288f ).
- (19) The term “domestic building and loan association” means a domestic building and loan association, a domestic savings and loan association, and a Federal savings and loan association—
  - (A) which is subject by law to supervision and examination by State or Federal authority having supervision over such associations;
  - (B) the business of which consists principally of acquiring the savings of the public and investing in loans; and
  - (C) at least 60 percent of the amount of the total assets of which (at the close of the taxable year) consists of—
    - (i) cash,
    - (ii) obligations of the United States or of a State or political subdivision thereof, and stock or obligations of a corporation which is an instrumentality of the United States or of a State or political subdivision thereof, but not including obligations the interest on which is excludable from gross income under section 103,
    - (iii) certificates of deposit in, or obligations of, a corporation organized under a State law which specifically authorizes such corporation to insure the deposits or share accounts of member associations,
    - (iv) loans secured by a deposit or share of a member,
    - (v) loans (including redeemable ground rents, as defined in section 1055) secured by an interest in real property which is (or, from the proceeds of the loan, will become) residential real property or real property used primarily for church purposes, loans made for the improvement of residential real property or real property used primarily for church purposes, provided that for purposes of this clause, residential real property shall include single or multifamily dwellings, facilities in residential developments dedicated to public use or property used on a nonprofit basis for residents, and mobile homes not used on a transient basis,
    - (vi) loans secured by an interest in real property located within an urban renewal area to be developed for predominantly residential use under an urban renewal plan approved by the Secretary of Housing and Urban Development under part A or part B of title I of the Housing Act of 1949, as amended, or located within any area covered by a program eligible for assistance under section 103 of the Demonstration Cities and Metropolitan Development Act of 1966, as amended, and loans made for the improvement of any such real property,
    - (vii) loans secured by an interest in educational, health, or welfare institutions or facilities, including structures designed or used primarily for residential purposes for students, residents, and persons under care, employees, or members of the staff of such institutions or facilities,
    - (viii) property acquired through the liquidation of defaulted loans described in clause (v), (vi), or (vii),
    - (ix) loans made for the payment of expenses of college or university education or vocational training, in accordance with such regulations as may be prescribed by the Secretary,
    - (x) property used by the association in the conduct of the business described in subparagraph (B), and
    - (xi) any regular or residual interest in a REMIC, but only in the proportion which the assets of such REMIC consist of property described in any of the preceding clauses of this subparagraph; except that if 95 percent or more of the assets of such REMIC are assets described in clauses (i) through (x), the entire interest in the REMIC shall qualify.
- (20) For the purpose of applying the provisions of section 79 with respect to group-term life insurance purchased for employees, for the purpose of applying the provisions of sections 104, 105, and 106 with respect to accident and health insurance or accident and health plans, and for the purpose of applying the provisions of subtitle A with respect to contributions to or under a stock bonus, pension, profit-sharing, or annuity plan, and with respect to distributions under such a plan, or by a trust forming part of such a plan, and for purposes of applying section 125 with respect to cafeteria plans, the term “employee” shall include a full-time life insurance salesman who is considered an employee for the purpose of chapter 21.
- (21) The term “levy” includes the power of distraint and seizure by any means.
- (22) The term “Attorney General” means the Attorney General of the United States.
- (23) The term “taxable year” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the taxable income is computed under subtitle A. “Taxable year” means, in the case of a return made for a fractional part of a year under the provisions of subtitle A or under regulations prescribed by the Secretary, the period for which such return is made.
- (24) The term “fiscal year” means an accounting period of 12 months ending on the last day of any month other than December.
- (25) The terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the taxable income is computed under subtitle A.
- (26) The term “trade or business” includes the performance of the functions of a public office.
- (27) The term “Tax Court” means the United States Tax Court.
- (28) Any term used in this subtitle with respect to the application of, or in connection with, the provisions of any other subtitle of this title shall have the same meaning as in such provisions.
- (29) The term “Internal Revenue Code of 1986” means this title, and the term “Internal Revenue Code of 1939” means the Internal Revenue Code enacted February 10, 1939 , as amended.
- (30) The term “United States person” means—
  - (A) a citizen or resident of the United States,
  - (B) a domestic partnership,
  - (C) a domestic corporation,
  - (D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and
  - (E) any trust if—
    - (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
    - (ii) one or more United States persons have the authority to control all substantial decisions of the trust.
- (31)
  - (A) The term “foreign estate” means an estate the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A.
  - (B) The term “foreign trust” means any trust other than a trust described in subparagraph (E) of paragraph (30).
- (32) The term “cooperative bank” means an institution without capital stock organized and operated for mutual purposes and without profit, which—
  - (A) is subject by law to supervision and examination by State or Federal authority having supervision over such institutions, and
  - (B) meets the requirements of subparagraphs (B) and (C) of paragraph (19) of this subsection (relating to definition of domestic building and loan association).
- (33) The term “regulated public utility” means—
  - (A) A corporation engaged in the furnishing or sale of—
    - (i) electric energy, gas, water, or sewerage disposal services, or
    - (ii) transportation (not included in subparagraph (C)) on an intrastate, suburban, municipal, or interurban electric railroad, on an intrastate, municipal, or suburban trackless trolley system, or on a municipal or suburban bus system, or
    - (iii) transportation (not included in clause (ii)) by motor vehicle—
  - (B) A corporation engaged as a common carrier in the furnishing or sale of transportation of gas by pipe line, if subject to the jurisdiction of the Federal Energy Regulatory Commission.
  - (C) A corporation engaged as a common carrier (i) in the furnishing or sale of transportation by railroad, if subject to the jurisdiction of the Surface Transportation Board, or (ii) in the furnishing or sale of transportation of oil or other petroleum products (including shale oil) by pipe line, if subject to the jurisdiction of the Federal Energy Regulatory Commission or if the rates for such furnishing or sale are subject to the jurisdiction of a public service or public utility commission or other similar body of the District of Columbia or of any State.
  - (D) A corporation engaged in the furnishing or sale of telephone or telegraph service, if the rates for such furnishing or sale meet the requirements of subparagraph (A).
  - (E) A corporation engaged in the furnishing or sale of transportation as a common carrier by air, subject to the jurisdiction of the Secretary of Transportation.
  - (F) A corporation engaged in the furnishing or sale of transportation by a water carrier subject to jurisdiction under subchapter II of chapter 135 of title 49.
  - (G) A rail carrier subject to part A of subtitle IV of title 49, if (i) substantially all of its railroad properties have been leased to another such railroad corporation or corporations by an agreement or agreements entered into before January 1, 1954 , (ii) each lease is for a term of more than 20 years, and (iii) at least 80 percent or more of its gross income (computed without regard to dividends and capital gains and losses) for the taxable year is derived from such leases and from sources described in subparagraphs (A) through (F), inclusive. For purposes of the preceding sentence, an agreement for lease of railroad properties entered into before January 1, 1954 , shall be considered to be a lease including such term as the total number of years of such agreement may, unless sooner terminated, be renewed or continued under the terms of the agreement, and any such renewal or continuance under such agreement shall be considered part of the lease entered into before January 1, 1954 .
  - (H) A common parent corporation which is a common carrier by railroad subject to part A of subtitle IV of title 49 if at least 80 percent of its gross income (computed without regard to capital gains or losses) is derived directly or indirectly from sources described in subparagraphs (A) through (F), inclusive. For purposes of the preceding sentence, dividends and interest, and income from leases described in subparagraph (G), received from a regulated public utility shall be considered as derived from sources described in subparagraphs (A) through (F), inclusive, if the regulated public utility is a member of an affiliated group (as defined in section 1504) which includes the common parent corporation.
- [(34)
- (35) The term “enrolled actuary” means a person who is enrolled by the Joint Board for the Enrollment of Actuaries established under subtitle C of the title III of the Employee Retirement Income Security Act of 1974.
- (36)
  - (A) The term “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title. For purposes of the preceding sentence, the preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund.
  - (B) A person shall not be a “tax return preparer” merely because such person—
    - (i) furnishes typing, reproducing, or other mechanical assistance,
    - (ii) prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by whom he is regularly and continuously employed,
    - (iii) prepares as a fiduciary a return or claim for refund for any person, or
    - (iv) prepares a claim for refund for a taxpayer in response to any notice of deficiency issued to such taxpayer or in response to any waiver of restriction after the commencement of an audit of such taxpayer or another taxpayer if a determination in such audit of such other taxpayer directly or indirectly affects the tax liability of such taxpayer.
- (37) The term “individual retirement plan” means—
  - (A) an individual retirement account described in section 408(a), and
  - (B) an individual retirement annuity described in section 408(b).
- (38) The term “joint return” means a single return made jointly under section 6013 by a husband and wife.
- (39) If any citizen or resident of the United States does not reside in (and is not found in) any United States judicial district, such citizen or resident shall be treated as residing in the District of Columbia for purposes of any provision of this title relating to—
  - (A) jurisdiction of courts, or
  - (B) enforcement of summons.
- (40)
  - (A) The term “Indian tribal government” means the governing body of any tribe, band, community, village, or group of Indians, or (if applicable) Alaska Natives, which is determined by the Secretary, after consultation with the Secretary of the Interior, to exercise governmental functions.
  - (B) No determination under subparagraph (A) with respect to Alaska Natives shall grant or defer any status or powers other than those enumerated in section 7871. Nothing in the Indian Tribal Governmental Tax Status Act of 1982, or in the amendments made thereby, shall validate or invalidate any claim by Alaska Natives of sovereign authority over lands or people.
- (41) The term “TIN” means the identifying number assigned to a person under section 6109.
- (42) The term “substituted basis property” means property which is—
  - (A) transferred basis property, or
  - (B) exchanged basis property.
- (43) The term “transferred basis property” means property having a basis determined under any provision of subtitle A (or under any corresponding provision of prior income tax law) providing that the basis shall be determined in whole or in part by reference to the basis in the hands of the donor, grantor, or other transferor.
- (44) The term “exchanged basis property” means property having a basis determined under any provision of subtitle A (or under any corresponding provision of prior income tax law) providing that the basis shall be determined in whole or in part by reference to other property held at any time by the person for whom the basis is to be determined.
- (45) The term “nonrecognition transaction” means any disposition of property in a transaction in which gain or loss is not recognized in whole or in part for purposes of subtitle A.
- (46) In determining whether there is a collective bargaining agreement between employee representatives and 1 or more employers, the term “employee representatives” shall not include any organization more than one-half of the members of which are employees who are owners, officers, or executives of the employer. An agreement shall not be treated as a collective bargaining agreement unless it is a bona fide agreement between bona fide employee representatives and 1 or more employers.
- [(47)
- (48)
  - (A)
    - (i) A vehicle shall not be treated as a highway vehicle if such vehicle is specially designed for the primary function of transporting a particular type of load other than over the public highway and because of this special design such vehicle’s capability to transport a load over the public highway is substantially limited or impaired.
    - (ii) For purposes of clause (i), a vehicle’s design is determined solely on the basis of its physical characteristics.
    - (iii) For purposes of clause (i), in determining whether substantial limitation or impairment exists, account may be taken of factors such as the size of the vehicle, whether such vehicle is subject to the licensing, safety, and other requirements applicable to highway vehicles, and whether such vehicle can transport a load at a sustained speed of at least 25 miles per hour. It is immaterial that a vehicle can transport a greater load off the public highway than such vehicle is permitted to transport over the public highway.
  - (B) A trailer or semitrailer shall not be treated as a highway vehicle if it is specially designed to function only as an enclosed stationary shelter for the carrying on of an off-highway function at an off-highway site.
- (49) The term “qualified blood collector organization” means an organization which is—
  - (A) described in section 501(c)(3) and exempt from tax under section 501(a),
  - (B) primarily engaged in the activity of the collection of human blood,
  - (C) registered with the Secretary for purposes of excise tax exemptions, and
  - (D) registered by the Food and Drug Administration to collect blood.
- (50)
  - (A) An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4).
  - (B) Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.
(b)
- (1) For purposes of this title (other than subtitle B)—
  - (A) An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):
    - (i) Such individual is a lawful permanent resident of the United States at any time during such calendar year.
    - (ii) Such individual meets the substantial presence test of paragraph (3).
    - (iii) Such individual makes the election provided in paragraph (4).
  - (B) An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)).
- (2)
  - (A)
    - (i) If an alien individual is a resident of the United States under paragraph (1)(A) with respect to any calendar year, but was not a resident of the United States at any time during the preceding calendar year, such alien individual shall be treated as a resident of the United States only for the portion of such calendar year which begins on the residency starting date.
    - (ii) In the case of an individual who is a lawfully permanent resident of the United States at any time during the calendar year, but does not meet the substantial presence test of paragraph (3), the residency starting date shall be the first day in such calendar year on which he was present in the United States while a lawful permanent resident of the United States.
    - (iii) In the case of an individual who meets the substantial presence test of paragraph (3) with respect to any calendar year, the residency starting date shall be the first day during such calendar year on which the individual is present in the United States.
    - (iv) In the case of an individual who makes the election provided by paragraph (4) with respect to any calendar year, the residency starting date shall be the 1st day during such calendar year on which the individual is treated as a resident of the United States under that paragraph.
  - (B) An alien individual shall not be treated as a resident of the United States during a portion of any calendar year if—
    - (i) such portion is after the last day in such calendar year on which the individual was present in the United States (or, in the case of an individual described in paragraph (1)(A)(i), the last day on which he was so described),
    - (ii) during such portion the individual has a closer connection to a foreign country than to the United States, and
    - (iii) the individual is not a resident of the United States at any time during the next calendar year.
  - (C)
    - (i) For purposes of subparagraphs (A)(iii) and (B), an individual shall not be treated as present in the United States during any period for which the individual establishes that he has a closer connection to a foreign country than to the United States.
    - (ii) Clause (i) shall not apply to more than 10 days on which the individual is present in the United States.
- (3)
  - (A) Except as otherwise provided in this paragraph, an individual meets the substantial presence test of this paragraph with respect to any calendar year (hereinafter in this subsection referred to as the “current year”) if—
    - (i) such individual was present in the United States on at least 31 days during the calendar year, and
    - (ii) the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days: In the case of days in: The applicable multiplier is: Current year 1 1st preceding year ⅓ 2nd preceding year ⅙
  - (B) An individual shall not be treated as meeting the substantial presence test of this paragraph with respect to any current year if—
    - (i) such individual is present in the United States on fewer than 183 days during the current year, and
    - (ii) it is established that for the current year such individual has a tax home (as defined in section 911(d)(3) without regard to the second sentence thereof) in a foreign country and has a closer connection to such foreign country than to the United States.
  - (C) Subparagraph (B) shall not apply to any individual with respect to any current year if at any time during such year—
    - (i) such individual had an application for adjustment of status pending, or
    - (ii) such individual took other steps to apply for status as a lawful permanent resident of the United States.
  - (D) An individual shall not be treated as being present in the United States on any day if—
    - (i) such individual is an exempt individual for such day, or
    - (ii) such individual was unable to leave the United States on such day because of a medical condition which arose while such individual was present in the United States.
- (4)
  - (A) An alien individual shall be deemed to meet the requirements of this subparagraph if such individual—
    - (i) is not a resident of the United States under clause (i) or (ii) of paragraph (1)(A) with respect to a calendar year (hereinafter referred to as the “election year”),
    - (ii) was not a resident of the United States under paragraph (1)(A) with respect to the calendar year immediately preceding the election year,
    - (iii) is a resident of the United States under clause (ii) of paragraph (1)(A) with respect to the calendar year immediately following the election year, and
    - (iv) is both—
      - (I) present in the United States for a period of at least 31 consecutive days in the election year, and
      - (II) present in the United States during the period beginning with the first day of such 31-day period and ending with the last day of the election year (hereinafter referred to as the “testing period”) for a number of days equal to or exceeding 75 percent of the number of days in the testing period (provided that an individual shall be treated for purposes of this subclause as present in the United States for a number of days during the testing period not exceeding 5 days in the aggregate, notwithstanding his absence from the United States on such days).
  - (B) An alien individual who meets the requirements of subparagraph (A) shall, if he so elects, be treated as a resident of the United States with respect to the election year.
  - (C) An alien individual who makes the election provided by subparagraph (B) shall be treated as a resident of the United States for the portion of the election year which begins on the 1st day of the earliest testing period during such year with respect to which the individual meets the requirements of clause (iv) of subparagraph (A).
  - (D) The rules of subparagraph (D)(i) of paragraph (3) shall apply for purposes of determining an individual’s presence in the United States under this paragraph.
  - (E) An election under subparagraph (B) shall be made on the individual’s tax return for the election year, provided that such election may not be made before the individual has met the substantial presence test of paragraph (3) with respect to the calendar year immediately following the election year.
  - (F) An election once made under subparagraph (B) remains in effect for the election year, unless revoked with the consent of the Secretary.
- (5) For purposes of this subsection—
  - (A) An individual is an exempt individual for any day if, for such day, such individual is—
    - (i) a foreign government-related individual,
    - (ii) a teacher or trainee,
    - (iii) a student, or
    - (iv) a professional athlete who is temporarily in the United States to compete in a sports event—
      - (I) which is organized for the primary purpose of benefiting an organization which is described in section 501(c)(3) and exempt from tax under section 501(a),
      - (II) all of the net proceeds of which are contributed to such organization, and, 1 1 So in original. The comma probably should not appear.
      - (III) which utilizes volunteers for substantially all of the work performed in carrying out such event.
  - (B) The term “foreign government-related individual” means any individual temporarily present in the United States by reason of—
    - (i) diplomatic status, or a visa which the Secretary (after consultation with the Secretary of State) determines represents full-time diplomatic or consular status for purposes of this subsection,
    - (ii) being a full-time employee of an international organization, or
    - (iii) being a member of the immediate family of an individual described in clause (i) or (ii).
  - (C) The term “teacher or trainee” means any individual—
    - (i) who is temporarily present in the United States under subparagraph (J) or (Q) of section 101(15) of the Immigration and Nationality Act (other than as a student), and
    - (ii) who substantially complies with the requirements for being so present.
  - (D) The term “student” means any individual—
    - (i) who is temporarily present in the United States—
      - (I) under subparagraph (F) or (M) of section 101(15) of the Immigration and Nationality Act, or
      - (II) as a student under subparagraph (J) or (Q) of such section 101(15), and
    - (ii) who substantially complies with the requirements for being so present.
  - (E)
    - (i) An individual shall not be treated as an exempt individual by reason of clause (ii) of subparagraph (A) for the current year if, for any 2 calendar years during the preceding 6 calendar years, such person was an exempt person under clause (ii) or (iii) of subparagraph (A). In the case of an individual all of whose compensation is described in section 872(b)(3), the preceding sentence shall be applied by substituting “4 calendar years” for “2 calendar years”.
    - (ii) For any calendar year after the 5th calendar year for which an individual was an exempt individual under clause (ii) or (iii) of subparagraph (A), such individual shall not be treated as an exempt individual by reason of clause (iii) of subparagraph (A), unless such individual establishes to the satisfaction of the Secretary that such individual does not intend to permanently reside in the United States and that such individual meets the requirements of subparagraph (D)(ii).
- (6) For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if—
  - (A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
  - (B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
- (7) For purposes of this subsection—
  - (A) Except as provided in subparagraph (B), (C), or (D), an individual shall be treated as present in the United States on any day if such individual is physically present in the United States at any time during such day.
  - (B) If an individual regularly commutes to employment (or self-employment) in the United States from a place of residence in Canada or Mexico, such individual shall not be treated as present in the United States on any day during which he so commutes.
  - (C) If an individual, who is in transit between 2 points outside the United States, is physically present in the United States for less than 24 hours, such individual shall not be treated as present in the United States on any day during such transit.
  - (D) An individual who is temporarily present in the United States on any day as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States shall not be treated as present in the United States on such day unless such individual otherwise engages in any trade or business in the United States on such day.
- (8) The Secretary may prescribe regulations under which an individual who (but for subparagraph (B) or (D) of paragraph (3)) would meet the substantial presence test of paragraph (3) is required to submit an annual statement setting forth the basis on which such individual claims the benefits of subparagraph (B) or (D) of paragraph (3), as the case may be.
- (9)
  - (A) For purposes of this title, an alien individual who has not established a taxable year for any prior period shall be treated as having a taxable year which is the calendar year.
  - (B) If—
    - (i) an individual is treated under paragraph (1) as a resident of the United States for any calendar year, and
    - (ii) after the application of subparagraph (A), such individual has a taxable year other than a calendar year,
- (10) If—
  - (A) an alien individual was treated as a resident of the United States during any period which includes at least 3 consecutive calendar years (hereinafter referred to as the “initial residency period”), and
  - (B) such individual ceases to be treated as a resident of the United States but subsequently becomes a resident of the United States before the close of the 3rd calendar year beginning after the close of the initial residency period,
- (11) The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.
(c) The terms “includes” and “including” when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined.
(d) Where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, references in this title to possessions of the United States shall be treated as also referring to the Commonwealth of Puerto Rico.
(e) For purposes of chapter 1—
- (1) A contract which purports to be a service contract shall be treated as a lease of property if such contract is properly treated as a lease of property, taking into account all relevant factors including whether or not—
  - (A) the service recipient is in physical possession of the property,
  - (B) the service recipient controls the property,
  - (C) the service recipient has a significant economic or possessory interest in the property,
  - (D) the service provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance under the contract,
  - (E) the service provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient, and
  - (F) the total contract price does not substantially exceed the rental value of the property for the contract period.
- (2) An arrangement (including a partnership or other pass-thru entity) which is not described in paragraph (1) shall be treated as a lease if such arrangement is properly treated as a lease, taking into account all relevant factors including factors similar to those set forth in paragraph (1).
- (3)
  - (A) Notwithstanding paragraphs (1) and (2), and except as provided in paragraph (4), any contract or arrangement between a service provider and a service recipient—
    - (i) with respect to—
      - (I) the operation of a qualified solid waste disposal facility,
      - (II) the sale to the service recipient of electrical or thermal energy produced at a cogeneration or alternative energy facility, or
      - (III) the operation of a water treatment works facility, and
    - (ii) which purports to be a service contract,
  - (B) For purposes of subparagraph (A), the term “qualified solid waste disposal facility” means any facility if such facility provides solid waste disposal services for residents of part or all of 1 or more governmental units and substantially all of the solid waste processed at such facility is collected from the general public.
  - (C) For purposes of subparagraph (A), the term “cogeneration facility” means a facility which uses the same energy source for the sequential generation of electrical or mechanical power in combination with steam, heat, or other forms of useful energy.
  - (D) For purposes of subparagraph (A), the term “alternative energy facility” means a facility for producing electrical or thermal energy if the primary energy source for the facility is not oil, natural gas, coal, or nuclear power.
  - (E) For purposes of subparagraph (A), the term “water treatment works facility” means any treatment works within the meaning of section 212(2) of the Federal Water Pollution Control Act.
- (4)
  - (A) Paragraph (3) shall not apply to any qualified solid waste disposal facility, cogeneration facility, alternative energy facility, or water treatment works facility used under a contract or arrangement if—
    - (i) the service recipient (or a related entity) operates such facility,
    - (ii) the service recipient (or a related entity) bears any significant financial burden if there is nonperformance under the contract or arrangement (other than for reasons beyond the control of the service provider),
    - (iii) the service recipient (or a related entity) receives any significant financial benefit if the operating costs of such facility are less than the standards of performance or operation under the contract or arrangement, or
    - (iv) the service recipient (or a related entity) has an option to purchase, or may be required to purchase, all or a part of such facility at a fixed and determinable price (other than for fair market value).
  - (B) For purposes of subparagraph (A), there shall not be taken into account—
    - (i) any right of a service recipient to inspect any facility, to exercise any sovereign power the service recipient may possess, or to act in the event of a breach of contract by the service provider, or
    - (ii) any allocation of any financial burden or benefits in the event of any change in any law.
  - (C)
    - (i) For purposes of clause (ii) of subparagraph (A), there shall not be taken into account any temporary shut-down of the facility for repairs, maintenance, or capital improvements, or any financial burden caused by the bankruptcy or similar financial difficulty of the service provider.
    - (ii) For purposes of clause (iii) of subparagraph (A), there shall not be taken into account any significant financial benefit merely because payments by the service recipient under the contract or arrangement are decreased by reason of increased production or efficiency or the recovery of energy or other products.
- (5) This subsection shall not apply to any property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B) (relating to low-income housing) if—
  - (A) such property is operated by or for an organization described in paragraph (3) or (4) of section 501(c), and
  - (B) at least 80 percent of the units in such property are leased to low-income tenants (within the meaning of section 167(k)(3)(B)) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990).
- (6) The Secretary may prescribe such regulations as may be necessary or appropriate to carry out the provisions of this subsection.
(f) The Secretary shall prescribe such regulations as may be necessary or appropriate to prevent the avoidance of those provisions of this title which deal with—
- (1) the linking of borrowing to investment, or
- (2) diminishing risks,
(g) For purposes of subtitle A, in determining the amount of gain or loss (or deemed gain or loss) with respect to any property, the fair market value of such property shall be treated as being not less than the amount of any nonrecourse indebtedness to which such property is subject.
(h)
- (1) For purposes of this title, in the case of a qualified motor vehicle operating agreement which contains a terminal rental adjustment clause—
  - (A) such agreement shall be treated as a lease if (but for such terminal rental adjustment clause) such agreement would be treated as a lease under this title, and
  - (B) the lessee shall not be treated as the owner of the property subject to an agreement during any period such agreement is in effect.
- (2) For purposes of this subsection—
  - (A) The term “qualified motor vehicle operating agreement” means any agreement with respect to a motor vehicle (including a trailer) which meets the requirements of subparagraphs (B), (C), and (D) of this paragraph.
  - (B) An agreement meets the requirements of this subparagraph if under such agreement the sum of—
    - (i) the amount the lessor is personally liable to repay, and
    - (ii) the net fair market value of the lessor’s interest in any property pledged as security for property subject to the agreement,
  - (C) An agreement meets the requirements of this subparagraph if such agreement contains a separate written statement separately signed by the lessee—
    - (i) under which the lessee certifies, under penalty of perjury, that it intends that more than 50 percent of the use of the property subject to such agreement is to be in a trade or business of the lessee, and
    - (ii) which clearly and legibly states that the lessee has been advised that it will not be treated as the owner of the property subject to the agreement for Federal income tax purposes.
  - (D) An agreement meets the requirements of this subparagraph if the lessor does not know that the certification described in subparagraph (C)(i) is false.
- (3)
  - (A) For purposes of this subsection, the term “terminal rental adjustment clause” means a provision of an agreement which permits or requires the rental price to be adjusted upward or downward by reference to the amount realized by the lessor under the agreement upon sale or other disposition of such property.
  - (B) The term “terminal rental adjustment clause” also includes a provision of an agreement which requires a lessee who is a dealer in motor vehicles to purchase the motor vehicle for a predetermined price and then resell such vehicle where such provision achieves substantially the same results as a provision described in subparagraph (A).
(i)
- (1) A taxable mortgage pool shall be treated as a separate corporation which may not be treated as an includible corporation with any other corporation for purposes of section 1501.
- (2) For purposes of this title—
  - (A) Except as otherwise provided in this paragraph, a taxable mortgage pool is any entity (other than a REMIC) if—
    - (i) substantially all of the assets of such entity consists of debt obligations (or interests therein) and more than 50 percent of such debt obligations (or interests) consists of real estate mortgages (or interests therein),
    - (ii) such entity is the obligor under debt obligations with 2 or more maturities, and
    - (iii) under the terms of the debt obligations referred to in clause (ii) (or underlying arrangement), payments on such debt obligations bear a relationship to payments on the debt obligations (or interests) referred to in clause (i).
  - (B) Any portion of an entity which meets the definition of subparagraph (A) shall be treated as a taxable mortgage pool.
  - (C) Nothing in this subsection shall be construed to treat any domestic building and loan association (or portion thereof) as a taxable mortgage pool.
  - (D) To the extent provided in regulations, equity interest of varying classes which correspond to maturity classes of debt shall be treated as debt for purposes of this subsection.
- (3) If—
  - (A) a real estate investment trust is a taxable mortgage pool, or
  - (B) a qualified REIT subsidiary (as defined in section 856(i)(2)) of a real estate investment trust is a taxable mortgage pool,
(j)
- (1) For purposes of this title—
  - (A) the Thrift Savings Fund shall be treated as a trust described in section 401(a) which is exempt from taxation under section 501(a);
  - (B) any contribution to, or distribution from, the Thrift Savings Fund shall be treated in the same manner as contributions to or distributions from such a trust; and
  - (C) subject to section 401(k)(4)(B) and any dollar limitation on the application of section 402(e)(3), contributions to the Thrift Savings Fund shall not be treated as distributed or made available to an employee or Member nor as a contribution made to the Fund by an employee or Member merely because the employee or Member has, under the provisions of subchapter III of chapter 84 of title 5, United States Code, and section 8351 of such title 5, an election whether the contribution will be made to the Thrift Savings Fund or received by the employee or Member in cash.
- (2) Notwithstanding any other provision of law, the Thrift Savings Fund is not subject to the nondiscrimination requirements applicable to arrangements described in section 401(k) or to matching contributions (as described in section 401(m)), so long as it meets the requirements of this section.
- (3) Paragraph (1) shall not be construed to provide that any amount of the employee’s or Member’s basic pay which is contributed to the Thrift Savings Fund shall not be included in the term “wages” for the purposes of section 209 of the Social Security Act or section 3121(a) of this title .
- (4) For purposes of this subsection, the terms “Member”, “employee”, and “Thrift Savings Fund” shall have the same respective meanings as when used in subchapter III of chapter 84 of title 5, United States Code.
- (5) No provision of law not contained in this title shall apply for purposes of determining the treatment under this title of the Thrift Savings Fund or any contribution to, or distribution from, such Fund.
(k) In the case of any payment which, except for section 501(b) of the Ethics in Government Act of 1978, might be made to any officer or employee of the Federal Government but which is made instead on behalf of such officer or employee to an organization described in section 170(c)—
- (1) such payment shall not be treated as received by such officer or employee for all purposes of this title and for all purposes of any tax law of a State or political subdivision thereof, and
- (2) no deduction shall be allowed under any provision of this title (or of any tax law of a State or political subdivision thereof) to such officer or employee by reason of having such payment made to such organization.
(l) The Secretary may prescribe regulations recharacterizing any multiple-party financing transaction as a transaction directly among any 2 or more of such parties where the Secretary determines that such recharacterization is appropriate to prevent avoidance of any tax imposed by this title.
(m) Any designation by the Commodity Futures Trading Commission of a contract market which could not have been made under the law in effect on the day before the date of the enactment of the Commodity Futures Modernization Act of 2000 shall apply for purposes of this title except to the extent provided in regulations prescribed by the Secretary.
(n) For purposes of this title, any organization which is otherwise a convention or association of churches shall not fail to so qualify merely because the membership of such organization includes individuals as well as churches or because individuals have voting rights in such organization.
(o)
- (1) In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—
  - (A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
  - (B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.
- (2)
  - (A) The potential for profit of a transaction shall be taken into account in determining whether the requirements of subparagraphs (A) and (B) of paragraph (1) are met with respect to the transaction only if the present value of the reasonably expected pre-tax profit from the transaction is substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected.
  - (B) Fees and other transaction expenses shall be taken into account as expenses in determining pre-tax profit under subparagraph (A). The Secretary shall issue regulations requiring foreign taxes to be treated as expenses in determining pre-tax profit in appropriate cases.
- (3) For purposes of paragraph (1), any State or local income tax effect which is related to a Federal income tax effect shall be treated in the same manner as a Federal income tax effect.
- (4) For purposes of paragraph (1)(B), achieving a financial accounting benefit shall not be taken into account as a purpose for entering into a transaction if the origin of such financial accounting benefit is a reduction of Federal income tax.
- (5) For purposes of this subsection—
  - (A) The term “economic substance doctrine” means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.
  - (B) In the case of an individual, paragraph (1) shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.
  - (C) The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.
  - (D) The term “transaction” includes a series of transactions.
(p)
- (1) For other definitions, see the following sections of Title 1 of the United States Code:
- (1) Singular as including plural, section 1.
- (2) Plural as including singular, section 1.
- (3) Masculine as including feminine, section 1.
- (4) Officer, section 1.
- (5) Oath as including affirmation, section 1.
- (6) County as including parish, section 2.
- (7) Vessel as including all means of water transportation, section 3.
- (8) Vehicle as including all means of land transportation, section 4.
- (9) Company or association as including successors and assigns, section 5.
- (2) For effect of cross references in this title, see section 7806(a).

§ 7702. Life insurance contract defined

History & diffs →

§ 7702. Life insurance contract defined

(a) For purposes of this title, the term “life insurance contract” means any contract which is a life insurance contract under the applicable law, but only if such contract—
- (1) meets the cash value accumulation test of subsection (b), or
- (2)
  - (A) meets the guideline premium requirements of subsection (c), and
  - (B) falls within the cash value corridor of subsection (d).
(b)
- (1) A contract meets the cash value accumulation test of this subsection if, by the terms of the contract, the cash surrender value of such contract may not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract.
- (2) Determinations under paragraph (1) shall be made—
  - (A) on the basis of interest at the greater of an annual effective rate of 4 percent or the rate or rates guaranteed on issuance of the contract,
  - (B) on the basis of the rules of subparagraph (B)(i) (and, in the case of qualified additional benefits, subparagraph (B)(ii)) of subsection (c)(3), and
  - (C) by taking into account under subparagraphs (A) and (D) of subsection (e)(1) only current and future death benefits and qualified additional benefits.
(c) For purposes of this section—
- (1) A contract meets the guideline premium requirements of this subsection if the sum of the premiums paid under such contract does not at any time exceed the guideline premium limitation as of such time.
- (2) The term “guideline premium limitation” means, as of any date, the greater of—
  - (A) the guideline single premium, or
  - (B) the sum of the guideline level premiums to such date.
- (3)
  - (A) The term “guideline single premium” means the premium at issue with respect to future benefits under the contract.
  - (B) The determination under subparagraph (A) shall be based on—
    - (i) reasonable mortality charges which meet the requirements prescribed in regulations to be promulgated by the Secretary or that do not exceed the mortality charges specified in the prevailing commissioners’ standard tables as defined in subsection (f)(10),
    - (ii) any reasonable charges (other than mortality charges) which (on the basis of the company’s experience, if any, with respect to similar contracts) are reasonably expected to be actually paid, and
    - (iii) interest at the greater of an annual effective rate of 6 percent or the rate or rates guaranteed on issuance of the contract.
  - (C) Except as provided in subsection (f)(7), the determination under subparagraph (A) shall be made as of the time the contract is issued.
  - (D)
    - (i) If any charge is not specified in the contract, the amount taken into account under subparagraph (B)(ii) for such charge shall be zero.
    - (ii) If any company does not have adequate experience for purposes of the determination under subparagraph (B)(ii), to the extent provided in regulations, such determination shall be made on the basis of the industry-wide experience.
- (4) The term “guideline level premium” means the level annual amount, payable over a period not ending before the insured attains age 95, computed on the same basis as the guideline single premium, except that paragraph (3)(B)(iii) shall be applied by substituting “4 percent” for “6 percent”.
(d) For purposes of this section—
- (1) A contract falls within the cash value corridor of this subsection if the death benefit under the contract at any time is not less than the applicable percentage of the cash surrender value.
- (2) In the case of an insured with an attained age as of the beginning of the contract year of: The applicable percentage shall decrease by a ratable portion for each full year: More than: But not more than: From: To: 0 40 250 250 40 45 250 215 45 50 215 185 50 55 185 150 55 60 150 130 60 65 130 120 65 70 120 115 70 75 115 105 75 90 105 105 90 95 105 100.
(e)
- (1) For purposes of this section (other than subsection (d))—
  - (A) the death benefit (and any qualified additional benefit) shall be deemed not to increase,
  - (B) the maturity date, including the date on which any benefit described in subparagraph (C) is payable, shall be deemed to be no earlier than the day on which the insured attains age 95, and no later than the day on which the insured attains age 100,
  - (C) the death benefits shall be deemed to be provided until the maturity date determined by taking into account subparagraph (B), and
  - (D) the amount of any endowment benefit (or sum of endowment benefits, including any cash surrender value on the maturity date determined by taking into account subparagraph (B)) shall be deemed not to exceed the least amount payable as a death benefit at any time under the contract.
- (2) Notwithstanding paragraph (1)(A)—
  - (A) for purposes of computing the guideline level premium, an increase in the death benefit which is provided in the contract may be taken into account but only to the extent necessary to prevent a decrease in the excess of the death benefit over the cash surrender value of the contract,
  - (B) for purposes of the cash value accumulation test, the increase described in subparagraph (A) may be taken into account if the contract will meet such test at all times assuming that the net level reserve (determined as if level annual premiums were paid for the contract over a period not ending before the insured attains age 95) is substituted for the net single premium, and
  - (C) for purposes of the cash value accumulation test, the death benefit increases may be taken into account if the contract—
    - (i) has an initial death benefit of $5,000 or less and a maximum death benefit of $25,000 or less,
    - (ii) provides for a fixed predetermined annual increase not to exceed 10 percent of the initial death benefit or 8 percent of the death benefit at the end of the preceding year, and
    - (iii) was purchased to cover payment of burial expenses or in connection with prearranged funeral expenses.
(f) For purposes of this section—
- (1)
  - (A) The term “premiums paid” means the premiums paid under the contract less amounts (other than amounts includible in gross income) to which section 72(e) applies and less any excess premiums with respect to which there is a distribution described in subparagraph (B) or (E) of paragraph (7) and any other amounts received with respect to the contract which are specified in regulations.
  - (B) If, in order to comply with the requirements of subsection (a)(2)(A), 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 a contract year, the amount so returned (excluding interest) shall be deemed to reduce the sum of the premiums paid under the contract during such year.
  - (C) 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)
  - (A) The cash surrender value of any contract shall be its cash value determined without regard to any surrender charge, policy loan, or reasonable termination dividends.
  - (B) The net surrender value of any contract shall be determined with regard to surrender charges but without regard to any policy loan.
- (3) The term “death benefit” means the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefits).
- (4) The term “future benefits” means death benefits and endowment benefits.
- (5)
  - (A) The term “qualified additional benefits” means any—
    - (i) guaranteed insurability,
    - (ii) accidental death or disability benefit,
    - (iii) family term coverage,
    - (iv) disability waiver benefit, or
    - (v) other benefit prescribed under regulations.
  - (B) For purposes of this section, qualified additional benefits shall not be treated as future benefits under the contract, but the charges for such benefits shall be treated as future benefits.
  - (C) In the case of any additional benefit which is not a qualified additional benefit—
    - (i) such benefit shall not be treated as a future benefit, and
    - (ii) any charge for such benefit which is not prefunded shall not be treated as a premium.
- (6) The payment of a premium which would result in the sum of the premiums paid exceeding the guideline premium limitation shall be disregarded for purposes of subsection (a)(2) if the amount of such premium does not exceed the amount necessary to prevent the termination of the contract on or before the end of the contract year (but only if the contract will have no cash surrender value at the end of such extension period).
- (7)
  - (A) If there is a change in the benefits under (or in other terms of) the contract which was not reflected in any previous determination or adjustment made under this section, there shall be proper adjustments in future determinations made under this section.
  - (B) If—
    - (i) a change described in subparagraph (A) reduces benefits under the contract,
    - (ii) the change occurs during the 15-year period beginning on the issue date of the contract, and
    - (iii) a cash distribution is made to the policyholder as a result of such change,
  - (C) If the change referred to in subparagraph (B)(ii) occurs during the 5-year period beginning on the issue date of the contract, the recapture ceiling is—
    - (i) in the case of a contract to which subsection (a)(1) applies, the excess of—
      - (I) the cash surrender value of the contract, immediately before the reduction, over
      - (II) the net single premium (determined under subsection (b)), immediately after the reduction, or
    - (ii) in the case of a contract to which subsection (a)(2) applies, the greater of—
      - (I) the excess of the aggregate premiums paid under the contract, immediately before the reduction, over the guideline premium limitation for the contract (determined under subsection (c)(2), taking into account the adjustment described in subparagraph (A)), or
      - (II) the excess of the cash surrender value of the contract, immediately before the reduction, over the cash value corridor of subsection (d) (determined immediately after the reduction).
  - (D) If the change referred to in subparagraph (B) occurs after the 5-year period referred to under subparagraph (C), the recapture ceiling is the excess of the cash surrender value of the contract, immediately before the reduction, over the cash value corridor of subsection (d) (determined immediately after the reduction and whether or not subsection (d) applies to the contract).
  - (E) Under regulations prescribed by the Secretary, subparagraph (B) shall apply also to any distribution made in anticipation of a reduction in benefits under the contract. For purposes of the preceding sentence, appropriate adjustments shall be made in the provisions of subparagraphs (C) and (D); and any distribution which reduces the cash surrender value of a contract and which is made within 2 years before a reduction in benefits under the contract shall be treated as made in anticipation of such reduction.
- (8) If the taxpayer establishes to the satisfaction of the Secretary that—
  - (A) the requirements described in subsection (a) for any contract year were not satisfied due to reasonable error, and
  - (B) reasonable steps are being taken to remedy the error,
- (9) In the case of any contract which is a variable contract (as defined in section 817), the determination of whether such contract meets the requirements of subsection (a) shall be made whenever the death benefits under such contract change but not less frequently than once during each 12-month period.
- (10) For purposes of subsection (c)(3)(B)(i), the term “prevailing commissioners’ standard tables” means the most recent commissioners’ standard tables prescribed by the National Association of Insurance Commissioners which are permitted to be used in computing reserves for that type of contract under the insurance laws of at least 26 States when the contract was issued. If the prevailing commissioners’ standard tables as of the beginning of any calendar year (hereinafter in this paragraph referred to as the “year of change”) are different from the prevailing commissioners’ standard tables as of the beginning of the preceding calendar year, the issuer may use the prevailing commissioners’ standard tables as of the beginning of the preceding calendar year with respect to any contract issued after the change and before the close of the 3-year period beginning on the first day of the year of change.
(g)
- (1)
  - (A) If at any time any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), the income on the contract for any taxable year of the policyholder shall be treated as ordinary income received or accrued by the policyholder during such year.
  - (B) For purposes of this paragraph, the term “income on the contract” means, with respect to any taxable year of the policyholder, the excess of—
    - (i) the sum of—
      - (I) the increase in the net surrender value of the contract during the taxable year, and
      - (II) the cost of life insurance protection provided under the contract during the taxable year, over
    - (ii) the premiums paid (as defined in subsection (f)(1)) under the contract during the taxable year.
  - (C) If, during any taxable year of the policyholder, a contract which is a life insurance contract under the applicable law ceases to meet the definition of life insurance contract under subsection (a), the income on the contract for all prior taxable years shall be treated as received or accrued during the taxable year in which such cessation occurs.
  - (D) For purposes of this paragraph, the cost of life insurance protection provided under the contract shall be the lesser of—
    - (i) the cost of individual insurance on the life of the insured as determined on the basis of uniform premiums (computed on the basis of 5-year age brackets) prescribed by the Secretary by regulations, or
    - (ii) the mortality charge (if any) stated in the contract.
- (2) If any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), the excess of the amount paid by the reason of the death of the insured over the net surrender value of the contract shall be deemed to be paid under a life insurance contract for purposes of section 101 and subtitle B.
- (3) If any contract which is a life insurance contract under the applicable law does not meet the definition of life insurance contract under subsection (a), such contract shall, notwithstanding such failure, be treated as an insurance contract for purposes of this title.
(h)
- (1) References in subsections (a) and (g) to a life insurance contract shall be treated as including references to a contract which is an endowment contract under the applicable law.
- (2) For purposes of this title (other than paragraph (1)), the term “endowment contract” means a contract which is an endowment contract under the applicable law and which meets the requirements of subsection (a).
(i)
- (1) In the case of a qualified 20-pay contract, this section shall be applied by substituting “3 percent” for “4 percent” in subsection (b)(2).
- (2) For purposes of paragraph (1), the term “qualified 20-pay contract” means any contract which—
  - (A) requires at least 20 nondecreasing annual premium payments, and
  - (B) is issued pursuant to an existing plan of insurance.
- (3) For purposes of this subsection, the term “existing plan of insurance” means, with respect to any contract, any plan of insurance which was filed by the company issuing such contract in 1 or more States before September 28, 1983 , and is on file in the appropriate State for such contract.
(j)
- (1) In determining whether any plan or arrangement described in paragraph (2) is a life insurance contract, the requirement of subsection (a) that the contract be a life insurance contract under applicable law shall not apply.
- (2) For purposes of this subsection, a plan or arrangement is described in this paragraph if—
  - (A) such plan or arrangement provides for the payment of benefits by reason of the death of the individuals covered under such plan or arrangement, and
  - (B) such plan or arrangement is provided by a church for the benefit of its employees and their beneficiaries, directly or through an organization described in section 414(e)(3)(A) or an organization described in section 414(e)(3)(B)(ii).
- (3) For purposes of this subsection—
  - (A) The term “church” means a church or a convention or association of churches.
  - (B) The term “employee” includes an employee described in section 414(e)(3)(B).
(k) The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

§ 7702A. Modified endowment contract defined

History & diffs →

§ 7702A. Modified endowment contract defined

(a) 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) or this paragraph.
(b) 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)
- (1) 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 7702(b)(2) 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.
- (2)
  - (A) If there is a reduction in benefits under the contract within the 1st 7 contract years, this section shall be applied as if the contract had originally been issued at the reduced benefit level.
  - (B) Any reduction in benefits attributable to the nonpayment of premiums due under the contract shall not be taken into account under subparagraph (A) if the benefits are reinstated within 90 days after the reduction in such benefits.
- (3)
  - (A) If there is a material change in the benefits under (or in other terms of) the contract which was not reflected in any previous determination under this section, for purposes of this section—
    - (i) such contract shall be treated as a new contract entered into on the day on which such material change takes effect, and
    - (ii) appropriate adjustments shall be made in determining whether such contract meets the 7-pay test of subsection (b) to take into account the cash surrender value under the contract.
  - (B) For purposes of subparagraph (A), the term “material change” includes any increase in the death benefit under the contract or any increase in, or addition of, a qualified additional benefit under the contract. Such term shall not include—
    - (i) any increase which is attributable to the payment of premiums necessary to fund the lowest level of the death benefit and qualified additional benefits payable in the 1st 7 contract years (determined after taking into account death benefit increases described in subparagraph (A) or (B) of section 7702(e)(2)) or to crediting of interest or other earnings (including policyholder dividends) in respect of such premiums, and
    - (ii) to the extent provided in regulations, any cost-of-living increase based on an established broad-based index if such increase is funded ratably over the remaining period during which premiums are required to be paid under the contract.
- (4) In the case of a contract—
  - (A) which provides an initial death benefit of $10,000 or less, and
  - (B) which requires at least 7 nondecreasing annual premium payments,
- (5) The Secretary may by regulations prescribe rules for taking into account expenses solely attributable to the collection of premiums paid more frequently than annually.
- (6) If—
  - (A) a contract provides a death benefit which is payable only upon the death of 1 insured following (or occurring simultaneously with) the death of another insured, and
  - (B) there is a reduction in such death benefit below the lowest level of such death benefit provided under the contract during the 1st 7 contract years,
(d) 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.
(e) For purposes of this section—
- (1)
  - (A) 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) 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) 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) The term “contract year” means the 12-month 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) Except as otherwise provided in this section, terms used in this section shall have the same meaning as when used in section 7702.

§ 7702B. Treatment of qualified long-term care insurance

History & diffs →

§ 7702B. Treatment of qualified long-term care insurance

(a) For purposes of this title—
- (1) a qualified long-term care insurance contract shall be treated as an accident and health insurance contract,
- (2) amounts (other than policyholder dividends, as defined in section 808, or premium refunds) received under a qualified long-term care insurance contract shall be treated as amounts received for personal injuries and sickness and shall be treated as reimbursement for expenses actually incurred for medical care (as defined in section 213(d)),
- (3) any plan of an employer providing coverage under a qualified long-term care insurance contract shall be treated as an accident and health plan with respect to such coverage,
- (4) except as provided in subsection (e)(3), amounts paid for a qualified long-term care insurance contract providing the benefits described in subsection (b)(2)(A) shall be treated as payments made for insurance for purposes of section 213(d)(1)(D), and
- (5) a qualified long-term care insurance contract shall be treated as a guaranteed renewable contract subject to the rules of section 816(e).
(b) For purposes of this title—
- (1) The term “qualified long-term care insurance contract” means any insurance contract if—
  - (A) the only insurance protection provided under such contract is coverage of qualified long-term care services,
  - (B) such contract does not pay or reimburse expenses incurred for services or items to the extent that such expenses are reimbursable under title XVIII of the Social Security Act or would be so reimbursable but for the application of a deductible or coinsurance amount,
  - (C) such contract is guaranteed renewable,
  - (D) such contract does not provide for a cash surrender value or other money that can be—
    - (i) paid, assigned, or pledged as collateral for a loan, or
    - (ii) borrowed,
  - (E) all refunds of premiums, and all policyholder dividends or similar amounts, under such contract are to be applied as a reduction in future premiums or to increase future benefits, and
  - (F) such contract meets the requirements of subsection (g).
- (2)
  - (A) A contract shall not fail to be described in subparagraph (A) or (B) of paragraph (1) by reason of payments being made on a per diem or other periodic basis without regard to the expenses incurred during the period to which the payments relate.
  - (B)
    - (i) Paragraph (1)(B) shall not apply to expenses which are reimbursable under title XVIII of the Social Security Act only as a secondary payor.
    - (ii) No provision of law shall be construed or applied so as to prohibit the offering of a qualified long-term care insurance contract on the basis that the contract coordinates its benefits with those provided under such title.
  - (C) Paragraph (1)(E) shall not apply to any refund on the death of the insured, or on a complete surrender or cancellation of the contract, which cannot exceed the aggregate premiums paid under the contract. Any refund on a complete surrender or cancellation of the contract shall be includible in gross income to the extent that any deduction or exclusion was allowable with respect to the premiums.
(c) For purposes of this section—
- (1) The term “qualified long-term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which—
  - (A) are required by a chronically ill individual, and
  - (B) are provided pursuant to a plan of care prescribed by a licensed health care practitioner.
- (2)
  - (A) The term “chronically ill individual” means any individual who has been certified by a licensed health care practitioner as—
    - (i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity,
    - (ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (i), or
    - (iii) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.
  - (B) For purposes of subparagraph (A), each of the following is an activity of daily living:
    - (i) Eating.
    - (ii) Toileting.
    - (iii) Transferring.
    - (iv) Bathing.
    - (v) Dressing.
    - (vi) Continence.
- (3) The term “maintenance or personal care services” means any care the primary purpose of which is the provision of needed assistance with any of the disabilities as a result of which the individual is a chronically ill individual (including the protection from threats to health and safety due to severe cognitive impairment).
- (4) The term “licensed health care practitioner” means any physician (as defined in section 1861(r)(1) of the Social Security Act) and any registered professional nurse, licensed social worker, or other individual who meets such requirements as may be prescribed by the Secretary.
(d)
- (1) If the aggregate of—
  - (A) the periodic payments received for any period under all qualified long-term care insurance contracts which are treated as made for qualified long-term care services for an insured, and
  - (B) the periodic payments received for such period which are treated under section 101(g) as paid by reason of the death of such insured,
- (2) For purposes of paragraph (1), the per diem limitation for any period is an amount equal to the excess (if any) of—
  - (A) the greater of—
    - (i) the dollar amount in effect for such period under paragraph (4), or
    - (ii) the costs incurred for qualified long-term care services provided for the insured for such period, over
  - (B) the aggregate payments received as reimbursements (through insurance or otherwise) for qualified long-term care services provided for the insured during such period.
- (3) For purposes of this subsection—
  - (A) all persons receiving periodic payments described in paragraph (1) with respect to the same insured shall be treated as 1 person, and
  - (B) the per diem limitation determined under paragraph (2) shall be allocated first to the insured and any remaining limitation shall be allocated among the other such persons in such manner as the Secretary shall prescribe.
- (4) The dollar amount in effect under this subsection shall be $175 per day (or the equivalent amount in the case of payments on another periodic basis).
- (5) In the case of a calendar year after 1997, the dollar amount contained in paragraph (4) shall be increased at the same time and in the same manner as amounts are increased pursuant to section 213(d)(10).
- (6) For purposes of this subsection, the term “periodic payment” means any payment (whether on a periodic basis or otherwise) made without regard to the extent of the costs incurred by the payee for qualified long-term care services.
(e) Except as otherwise provided in regulations prescribed by the Secretary, in the case of any long-term care insurance coverage (whether or not qualified) provided by a rider on or as part of a life insurance contract or an annuity contract—
- (1) This title shall apply as if the portion of the contract providing such coverage is a separate contract.
- (2) No deduction shall be allowed under section 213(a) for any payment made for coverage under a qualified long-term care insurance contract if such payment is made as a charge against the cash surrender value of a life insurance contract or the cash value of an annuity contract.
- (3) For purposes of this subsection, the term “portion” means only the terms and benefits under a life insurance contract or annuity contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage.
- (4) For purposes of this subsection, none of the following shall be treated as an annuity contract:
  - (A) A trust described in section 401(a) which is exempt from tax under section 501(a).
  - (B) A contract—
    - (i) purchased by a trust described in subparagraph (A),
    - (ii) purchased as part of a plan described in section 403(a),
    - (iii) described in section 403(b),
    - (iv) provided for employees of a life insurance company under a plan described in section 818(a)(3), or
    - (v) from an individual retirement account or an individual retirement annuity.
  - (C) A contract purchased by an employer for the benefit of the employee (or the employee’s spouse).
(f)
- (1) If—
  - (A) an individual receives coverage for qualified long-term care services under a State long-term care plan, and
  - (B) the terms of such plan would satisfy the requirements of subsection (b) were such plan an insurance contract,
- (2) For purposes of paragraph (1), the term “State long-term care plan” means any plan—
  - (A) which is established and maintained by a State or an instrumentality of a State,
  - (B) which provides coverage only for qualified long-term care services, and
  - (C) under which such coverage is provided only to—
    - (i) employees and former employees of a State (or any political subdivision or instrumentality of a State),
    - (ii) the spouses of such employees, and
    - (iii) individuals bearing a relationship to such employees or spouses which is described in any of subparagraphs (A) through (G) of section 152(d)(2).
(g)
- (1) The requirements of this subsection are met with respect to any contract if the contract meets—
  - (A) the requirements of the model regulation and model Act described in paragraph (2),
  - (B) the disclosure requirement of paragraph (3), and
  - (C) the requirements relating to nonforfeitability under paragraph (4).
- (2)
  - (A) The requirements of this paragraph are met with respect to any contract if such contract meets—
    - (i) The following requirements of the model regulation:
      - (I) Section 7A (relating to guaranteed renewal or noncancellability), and the requirements of section 6B of the model Act relating to such section 7A.
      - (II) Section 7B (relating to prohibitions on limitations and exclusions).
      - (III) Section 7C (relating to extension of benefits).
      - (IV) Section 7D (relating to continuation or conversion of coverage).
      - (V) Section 7E (relating to discontinuance and replacement of policies).
      - (VI) Section 8 (relating to unintentional lapse).
      - (VII) Section 9 (relating to disclosure), other than section 9F thereof.
      - (VIII) Section 10 (relating to prohibitions against post-claims underwriting).
      - (IX) Section 11 (relating to minimum standards).
      - (X) Section 12 (relating to requirement to offer inflation protection), except that any requirement for a signature on a rejection of inflation protection shall permit the signature to be on an application or on a separate form.
      - (XI) Section 23 (relating to prohibition against preexisting conditions and probationary periods in replacement policies or certificates).
    - (ii) The following requirements of the model Act:
      - (I) Section 6C (relating to preexisting conditions).
      - (II) Section 6D (relating to prior hospitalization).
  - (B) For purposes of this paragraph—
    - (i) The terms “model regulation” and “model Act” mean the long-term care insurance model regulation, and the long-term care insurance model Act, respectively, promulgated by the National Association of Insurance Commissioners (as adopted as of January 1993).
    - (ii) Any provision of the model regulation or model Act listed under clause (i) or (ii) of subparagraph (A) shall be treated as including any other provision of such regulation or Act necessary to implement the provision.
    - (iii) For purposes of this section and section 4980C, the determination of whether any requirement of a model regulation or the model Act has been met shall be made by the Secretary.
- (3) The requirement of this paragraph is met with respect to any contract if such contract meets the requirements of section 4980C(d).
- (4)
  - (A) The requirements of this paragraph are met with respect to any level premium contract, if the issuer of such contract offers to the policyholder, including any group policyholder, a nonforfeiture provision meeting the requirements of subparagraph (B).
  - (B) The nonforfeiture provision required under subparagraph (A) shall meet the following requirements:
    - (i) The nonforfeiture provision shall be appropriately captioned.
    - (ii) The nonforfeiture provision shall provide for a benefit available in the event of a default in the payment of any premiums and the amount of the benefit may be adjusted subsequent to being initially granted only as necessary to reflect changes in claims, persistency, and interest as reflected in changes in rates for premium paying contracts approved by the appropriate State regulatory agency for the same contract form.
    - (iii) The nonforfeiture provision shall provide at least one of the following:
      - (I) Reduced paid-up insurance.
      - (II) Extended term insurance.
      - (III) Shortened benefit period.
      - (IV) Other similar offerings approved by the appropriate State regulatory agency.
- (5) For coordination of the requirements of this subsection with State requirements, see section 4980C(f).

§ 7703. Determination of marital status

History & diffs →

§ 7703. Determination of marital status

(a) For purposes of part V of subchapter B of chapter 1 and those provisions of this title which refer to this subsection—
- (1) the determination of whether an individual is married shall be made as of the close of his taxable year; except that if his spouse dies during his taxable year such determination shall be made as of the time of such death; and
- (2) an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.
(b) For purposes of those provisions of this title which refer to this subsection, if—
- (1) an individual who is married (within the meaning of subsection (a)) and who files a separate return maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a child (within the meaning of section 152(f)(1)) with respect to whom such individual is entitled to a deduction for the taxable year under section 151 (or would be so entitled but for section 152(e)),
- (2) such individual furnishes over one-half of the cost of maintaining such household during the taxable year, and
- (3) during the last 6 months of the taxable year, such individual’s spouse is not a member of such household,

§ 7704. Certain publicly traded partnerships treated as corporations

History & diffs →

§ 7704. Certain publicly traded partnerships treated as corporations

(a) For purposes of this title, except as provided in subsection (c), a publicly traded partnership shall be treated as a corporation.
(b) For purposes of this section, the term “publicly traded partnership” means any partnership if—
- (1) interests in such partnership are traded on an established securities market, or
- (2) interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof).
(c)
- (1) Subsection (a) shall not apply to any publicly traded partnership for any taxable year if such partnership met the gross income requirements of paragraph (2) for such taxable year and each preceding taxable year beginning after December 31, 1987 , during which the partnership (or any predecessor) was in existence. For purposes of the preceding sentence, a partnership shall not be treated as being in existence during any period before the 1st taxable year in which such partnership (or a predecessor) was a publicly traded partnership.
- (2) A partnership meets the gross income requirements of this paragraph for any taxable year if 90 percent or more of the gross income of such partnership for such taxable year consists of qualifying income.
- (3) This subsection shall not apply to any partnership which would be described in section 851(a) if such partnership were a domestic corporation. To the extent provided in regulations, the preceding sentence shall not apply to any partnership a principal activity of which is the buying and selling of commodities (not described in section 1221(a)(1)), or options, futures, or forwards with respect to commodities.
(d) For purposes of this section—
- (1) Except as otherwise provided in this subsection, the term “qualifying income” means—
  - (A) interest,
  - (B) dividends,
  - (C) real property rents,
  - (D) gain from the sale or other disposition of real property (including property described in section 1221(a)(1)),
  - (E) income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber), industrial source carbon dioxide, or the transportation or storage of any fuel described in subsection (b), (c), (d), or (e) of section 6426, or any alcohol fuel defined in section 6426(b)(4)(A) or any biodiesel fuel as defined in section 40A(d)(1),
  - (F) any gain from the sale or disposition of a capital asset (or property described in section 1231(b)) held for the production of income described in any of the foregoing subparagraphs of this paragraph, and
  - (G) in the case of a partnership described in the second sentence of subsection (c)(3), income and gains from commodities (not described in section 1221(a)(1)) or futures, forwards, and options with respect to commodities.
- (2) Interest shall not be treated as qualifying income if—
  - (A) such interest is derived in the conduct of a financial or insurance business, or
  - (B) such interest would be excluded from the term “interest” under section 856(f).
- (3) The term “real property rent” means amounts which would qualify as rent from real property under section 856(d) if—
  - (A) such section were applied without regard to paragraph (2)(C) thereof (relating to independent contractor requirements), and
  - (B) stock owned, directly or indirectly, by or for a partner would not be considered as owned under section 318(a)(3)(A) by the partnership unless 5 percent or more (by value) of the interests in such partnership are owned, directly or indirectly, by or for such partner.
- (4) The term “qualifying income” also includes any income which would qualify under section 851(b)(2)(A) or 856(c)(2).
- (5) In the case of the sale or other disposition of real property described in section 1221(a)(1), gross income shall not be reduced by inventory costs.
(e) If—
- (1) a partnership fails to meet the gross income requirements of subsection (c)(2),
- (2) the Secretary determines that such failure was inadvertent,
- (3) no later than a reasonable time after the discovery of such failure, steps are taken so that such partnership once more meets such gross income requirements, and
- (4) such partnership agrees to make such adjustments (including adjustments with respect to the partners) or to pay such amounts as may be required by the Secretary with respect to such period,
(f) As of the 1st day that a partnership is treated as a corporation under this section, for purposes of this title, such partnership shall be treated as—
- (1) transferring all of its assets (subject to its liabilities) to a newly formed corporation in exchange for the stock of the corporation, and
- (2) distributing such stock to its partners in liquidation of their interests in the partnership.
(g)
- (1) Subsection (a) shall not apply to an electing 1987 partnership.
- (2) For purposes of this subsection, the term “electing 1987 partnership” means any publicly traded partnership if—
  - (A) such partnership is an existing partnership (as defined in section 10211(c)(2) of the Revenue Reconciliation Act of 1987),
  - (B) subsection (a) has not applied (and without regard to subsection (c)(1) would not have applied) to such partnership for all prior taxable years beginning after December 31, 1987 , and before January 1, 1998 , and
  - (C) such partnership elects the application of this subsection, and consents to the application of the tax imposed by paragraph (3), for its first taxable year beginning after December 31, 1997 .
- (3)
  - (A) There is hereby imposed for each taxable year on the income of each electing 1987 partnership a tax equal to 3.5 percent of such partnership’s gross income for the taxable year from the active conduct of trades and businesses by the partnership.
  - (B) For purposes of this paragraph, in the case of a partnership which is a partner in another partnership, the gross income referred to in subparagraph (A) shall include the partnership’s distributive share of the gross income of such other partnership from the active conduct of trades and businesses of such other partnership. A similar rule shall apply in the case of lower-tiered partnerships.
  - (C) For purposes of this title, the tax imposed by this paragraph shall be treated as imposed by chapter 1 other than for purposes of determining the amount of any credit allowable under chapter 1 and shall be paid by the partnership. Section 6655 shall be applied to such partnership with respect to such tax in the same manner as if the partnership were a corporation, such tax were imposed by section 11, and references in such section to taxable income were references to the gross income referred to in subparagraph (A).
- (4) An election and consent under this subsection shall apply to the taxable year for which made and all subsequent taxable years unless revoked by the partnership. Such revocation may be made without the consent of the Secretary, but, once so revoked, may not be reinstated.

§ 7705. Certified professional employer organizations

History & diffs →

§ 7705. Certified professional employer organizations

(a) For purposes of this title, the term “certified professional employer organization” means a person who applies to be treated as a certified professional employer organization for purposes of section 3511 and has been certified by the Secretary as meeting the requirements of subsection (b).
(b) A person meets the requirements of this subsection if such person—
- (1) demonstrates that such person (and any owner, officer, and other persons as may be specified in regulations) meets such requirements as the Secretary shall establish, including requirements with respect to tax status, background, experience, business location, and annual financial audits,
- (2) agrees that it will satisfy the bond and independent financial review requirements of subsection (c) on an ongoing basis,
- (3) agrees that it will satisfy such reporting obligations as may be imposed by the Secretary,
- (4) computes its taxable income using an accrual method of accounting unless the Secretary approves another method,
- (5) agrees to verify on such periodic basis as the Secretary may prescribe that it continues to meet the requirements of this subsection, and
- (6) agrees to notify the Secretary in writing within such time as the Secretary may prescribe of any change that materially affects the continuing accuracy of any agreement or information that was previously made or provided under this subsection.
(c)
- (1) An organization meets the requirements of this paragraph if such organization—
  - (A) meets the bond requirements of paragraph (2), and
  - (B) meets the independent financial review requirements of paragraph (3).
- (2)
  - (A) A certified professional employer organization meets the requirements of this paragraph if the organization has posted a bond for the payment of taxes under subtitle C (in a form acceptable to the Secretary) that is in an amount at least equal to the amount specified in subparagraph (B).
  - (B) For the period April 1 of any calendar year through March 31 of the following calendar year, the amount of the bond required is equal to the greater of—
    - (i) 5 percent of the organization’s liability under section 3511 for taxes imposed by subtitle C during the preceding calendar year (but not to exceed $1,000,000), or
    - (ii) $50,000.
- (3) A certified professional employer organization meets the requirements of this paragraph if such organization—
  - (A) has, as of the most recent audit date, caused to be prepared and provided to the Secretary (in such manner as the Secretary may prescribe) an opinion of an independent certified public accountant as to whether the certified professional employer organization’s financial statements are presented fairly in accordance with generally accepted accounting principles, and
  - (B) provides to the Secretary an assertion regarding Federal employment tax payments and an examination level attestation on such assertion from an independent certified public accountant not later than the last day of the second month beginning after the end of each calendar quarter.
- (4) For purposes of the requirements of paragraphs (2) and (3), all certified professional employer organizations that are members of a controlled group within the meaning of sections 414(b) and (c) shall be treated as a single organization.
- (5) If the certified professional employer organization fails to file the assertion and attestation required by paragraph (3) with respect to any calendar quarter, then the requirements of paragraph (3) with respect to such failure shall be treated as not satisfied for the period beginning on the due date for such attestation.
- (6) For purposes of paragraph (3)(A), the audit date shall be six months after the completion of the organization’s fiscal year.
(d) The Secretary may suspend or revoke a certification of any person under subsection (b) for purposes of section 3511 if the Secretary determines that such person is not satisfying the agreements or requirements of subsections (b) or (c), or fails to satisfy applicable accounting, reporting, payment, or deposit requirements.
(e) For purposes of this title—
- (1) The term “work site employee” means, with respect to a certified professional employer organization, an individual who—
  - (A) performs services for a customer pursuant to a contract which is between such customer and the certified professional employer organization and which meets the requirements of paragraph (2), and
  - (B) performs services at a work site meeting the requirements of paragraph (3).
- (2) A contract meets the requirements of this paragraph with respect to an individual performing services for a customer if such contract is in writing and provides that the certified professional employer organization shall—
  - (A) assume responsibility for payment of wages to such individual, without regard to the receipt or adequacy of payment from the customer for such services,
  - (B) assume responsibility for reporting, withholding, and paying any applicable taxes under subtitle C, with respect to such individual’s wages, without regard to the receipt or adequacy of payment from the customer for such services,
  - (C) assume responsibility for any employee benefits which the service contract may require the certified professional employer organization to provide, without regard to the receipt or adequacy of payment from the customer for such benefits,
  - (D) assume responsibility for recruiting, hiring, and firing workers in addition to the customer’s responsibility for recruiting, hiring, and firing workers,
  - (E) maintain employee records relating to such individual, and
  - (F) agree to be treated as a certified professional employer organization for purposes of section 3511 with respect to such individual.
- (3) The requirements of this paragraph are met with respect to an individual if at least 85 percent of the individuals performing services for the customer at the work site where such individual performs services are subject to 1 or more contracts with the certified professional employer organization which meet the requirements of paragraph (2) (but not taking into account those individuals who are excluded employees within the meaning of section 414(q)(5)).
(f) The Secretary shall make available to the public the name and address of—
- (1) each person certified as a professional employer organization under subsection (a), and
- (2) each person whose certification as a professional employer organization is suspended or revoked under subsection (d).
(g) Except to the extent necessary for purposes of section 3511, nothing in this section shall be construed to affect the determination of who is an employee or employer for purposes of this title.
(h) The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

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