Monthly LRA Update: August 2022

LEGISLATIVE DEVELOPMENTS

Inflation Reduction Act of 2022

On July 27 Senate Majority Leader, Charles Schumer (D-NY) announced a deal with Senator Joe Manchin (D-WV) to pursue legislation through the Budget Reconciliation process that was established in 2021. The new effort (smaller than the prior Build Back Better legislation) is now being referred to as the Inflation Reduction Act of 2022.

According to a 1-page summary that was released, the Act would raise $739 billion in revenue and spend $433 billion on energy, climate and healthcare.

Key provisions include

• Corporate Minimum Tax: Similar to the Build Back Better proposal, the Act aims to establish a 15% minimum tax on financial statement income for corporations with more than $1 billion of book income.
• Prescription Drug Pricing Reform: Medicare would be allowed to negotiate drug prices.
• Carried Interest: The Act contains provisions narrowing the so-called “carried interest loophole.” Current law taxes the performance-based compensation paid to managers of certain investment partnerships at long-term capital-gains rates rather than as ordinary income provided that a three-year holding period is met. The Act would generally require partners to hold investments for a period of five years in order to qualify for the long-term capital-gains rate.

While Senator Manchin was a key holdout in proceeding, attention now shifts to Senator Sinema (D-AZ), whose support for this legislation will be essential. News reports indicate that Sinema may want certain changes to the Act.

REGULATORY DEVELOPMENTS

FRB Regulation O FAQ – Split Dollar Life Insurance Arrangements

The Federal Reserve maintains a website with Frequently Asked Questions (FAQs) about Regulation O. On July 8 a new FAQ was added to the page:

Q3: Would a bank’s payment of premiums as part of a split dollar life insurance arrangement constitute an extension of credit to an insider?

A3: No, provided certain conditions are satisfied. Under a split dollar life insurance arrangement, a bank pays the premiums on a policy insuring the life of an employee of the bank. Split dollar life insurance arrangements can take many forms. For example, the insurance policy can be owned by the bank, the employee, or a third party (typically a trust). Regardless of form, the bank is entitled to receive from the proceeds of the insurance policy a pre-negotiated amount upon the death of the insured or when the insured surrenders the policy.

When the bank provides this arrangement for an insider, a split dollar life insurance arrangement does not give rise to an extension of credit to the insider where (i) the bank is not entitled to payment in an amount greater than the premiums paid by the bank (for example, the bank is not entitled to payment of the premiums plus some assessed interest), and (ii) the insider has no independent obligation to repay the premiums to the bank, other than out of the proceeds of the insurance policy.

Observations

The new FAQ concludes that a split dollar life insurance arrangement (where the bank pays the premiums) would not give rise to an extension of credit if two conditions are satisfied. The first condition is that the bank is not entitled to payment of an amount greater than the premiums paid. In our experience, it is quite common for a bank’s interest in the split dollar arrangement to reflect some interest or accumulation of cash surrender value.

The second condition is that the insider is not independently obligated to repay the bank (i.e., the only source of repayment to the bank is the proceeds of the insurance policy). In our experience, split dollar arrangements often are unclear on respective rights and obligations if the policy proceeds are insufficient or if the policy approaches lapse. Examples of unclear situations include determining whether or not the bank is obligated to pay additional premiums to prevent a policy from lapsing and whether the bank is entitled to any recovery if the policy lapses.

While the FAQ takes the position that certain arrangements (as described) would not constitute an extension of credit to an insider, it does not provide direct guidance for arrangements that do not meet the specified conditions.The FAQ website directs readers to a Contact Us form to submit additional questions or comments.