rp-08-42.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part 1, §§ 101, 7702.)

Rev. Proc. 2008-42

SECTION 1. PURPOSE
This revenue procedure provides a procedure by which an issuer of a life
insurance contract may automatically obtain a waiver, under § 7702(f)(8) or
§ 101(f)(3)(H) of the Internal Revenue Code, for certain reasonable errors that caused
the contract to fail to satisfy the requirements of § 7702 or § 101(f), as applicable. Rev.
Rul. 91-17, 1991-C.B. 190, is amplified.
SECTION 2. BACKGROUND
.01 Definition of a life insurance contract
.
(1) Section 7702(a) provides that, for a contract to qualify as a life insurance
contract for Federal income tax purposes, the contract must be a life insurance contract
under the applicable law and must either--
(a) satisfy the cash value accumulation test of § 7702(b), or

2
(b) both meet the guideline premium requirements of § 7702(c) and fall within the
cash value corridor of § 7702(d).
(2) A contract meets the cash value accumulation test of § 7702(b) if, by the
terms of the contract, the cash surrender value of the contract may not at any time
exceed the net single premium that would have to be paid at that time to fund future
benefits under the contract.
(3) A contract meets the guideline premium requirements of § 7702(c) if the sum
of the premiums paid under the contract does not at any time exceed the guideline
premium limitation as of that time. The guideline premium limitation as of any date is
the greater of the guideline single premium, or the sum of the guideline level premiums
to that date. The guideline single premium is the premium that would be required on the
date the contract is issued to fund the future benefits under the contract.
(4) A contract falls within the cash value corridor of § 7702(d) if the death benefit
under the contract at any time is not less than the applicable percentage of the cash
surrender value, based on the table set forth in § 7702(d)(2).
(5) Section 7702 is effective for contracts issued after December 31, 1984, in tax
years ending after that date.
.02 Definition and tax treatment of a flexible premium life insurance contract
. A
flexible premium life insurance contract is a life insurance contract that provides for the
payment of one or more premiums that are not fixed by the insurer as to both timing and
amount. Section 101(f) provides that any amount paid by reason of the death of the
insured under a flexible premium life insurance contract is excluded from gross income

3
only if the contract satisfies either (1) the guideline premium limitation and the
applicable percentage of cash value test of § 101(f)(1)(A)(i) and (ii), or (2) the cash
value test of § 101(f)(1)(B). The limitations of § 101(f) generally apply to contracts
issued before January 1, 1985.
.03 Correction procedure for reasonable errors
. Section 7702(f)(8) provides that
if a taxpayer establishes to the satisfaction of the Secretary that the requirements of
§ 7702(a) for any contract year were not satisfied due to reasonable error, and
reasonable steps are being taken to remedy the error, the Secretary may waive the
failure to satisfy those requirements. The Internal Revenue Service (Service) may
waive civil penalties for failure to satisfy the reporting, withholding, and deposit
requirements for income deemed received under § 7702(g) and (h), as well. See
Rev.
Rul. 91-17. Section 101(f)(3)(H) provides similar authority for the Secretary to waive the
failure to satisfy the requirements of § 101(f). In order to request a waiver under
§ 7702(f)(8) or § 101(f)(3)(H), a taxpayer generally must request a letter ruling from the
Service under the procedures set forth in Rev. Proc. 2008-1, 2008-1 I.R.B. 1 (or any
successor).
.04 Changes to correction procedure
. In Notice 2007-15, 2007-1 C.B. 503, the
Service requested comments as to how various correction procedures -- including those
for obtaining a waiver with respect to errors that are reasonable within the meaning of
§ 7702(f)(8) or § 101(f)(3)(H) -- may be improved. This revenue procedure incorporates
a number of changes that taxpayers suggested in response to Notice 2007-15.
Specifically, this revenue procedure provides a simplified procedure under which a

4
taxpayer may obtain a waiver for a limited class of errors under these provisions without
incurring the cost of requesting a letter ruling.
SECTION 3. SCOPE
.01 In general. This revenue procedure applies to any issuer of a life insurance
contract that failed to satisfy the requirements of § 7702 or § 101(f), as applicable, due
to an eligible reasonable error, provided reasonable steps are taken to remedy the
error.
.02 Issuer
. For purposes of this revenue procedure, the term "issuer" is any
company that issues a contract that is intended to satisfy the requirements of § 7702 or
§ 101(f). The term also includes a company that insures a contract holder under a
contract originally issued by another company.
.03 Eligible reasonable error
. An eligible reasonable error for purposes of this
revenue procedure exists if: (1) the issuer has compliance procedures with specific,
clearly articulated provisions that if followed would have prevented the contract from
failing to satisfy the requirements of § 7702 or § 101(f); (2) an employee or independent
contractor of the issuer acted, or failed to act, in accordance with the compliance
procedures; and (3) such act or failure to act was inadvertent, and was the sole reason
that the contract failed to satisfy the requirements of either § 7702 or § 101(f). Thus, for
example, the term eligible reasonable error includes an employee's incorrect recording
of the age or gender of the insured, or of the incorrect amount or time of payment of the
insured’s premium payment.
.04 Reasonable steps to remedy
. The requirement that reasonable steps be

5
taken to remedy the eligible reasonable error is satisfied for purposes of this revenue
procedure if the issuer refunds excess premium with interest and/or increases the death
benefit on the contract no later than the date on which the issuer files the federal
income tax return to which the tax return attachment described in section 4.03 of this
revenue procedure is affixed. The remedy required under this section 3.04 of this
revenue procedure does not include changes to the issuer's compliance procedures,
since the definition of an eligible reasonable error under section 3.03 of this revenue
procedure requires that the system already have specific, clearly articulated procedures
that if followed would have prevented the error.
.05 Non-eligible errors
. Although the automatic waiver provided under this
revenue procedure is not available with respect to an error that is not described in
section 3.03 of this revenue procedure, relief may be available under other correction
procedures. For example, neither a defective legal interpretation nor a computer
programming error would satisfy the requirement of section 3.03(1) of this revenue
procedure that the issuer's compliance procedures, if followed, would have prevented
the error. If such an error is reasonable, however, the issuer may request a waiver by
letter ruling under the procedures set forth in Rev. Proc. 2008-1 (or any successor). In
addition, errors that are not reasonable may be eligible for correction by closing
agreement under the procedure set forth in Rev. Proc. 2008-40, page ___, this Bulletin.
SECTION 4. PROCEDURE
.01 Automatic waiver
. The failure of one or more life insurance contracts to
satisfy the requirements of § 7702 or § 101(f), as applicable, due to reasonable error will

6
be treated as waived pursuant to the authority of § 7702(f)(8) or § 101(f)(3)(H), as
applicable, provided the issuer (1) is within the scope of section 3.01 of this revenue
procedure, and (2) files both the waiver statement described in section 4.02 and the tax
return attachment described in section 4.03 of this revenue procedure.
.02 Waiver statement
. An automatic waiver for a reasonable error described in
Section 3 of this revenue procedure is available to an issuer only if it files with the
Service, in duplicate, a statement entitled “Automatic Waiver Request under Rev. Proc.
2008-42" in which the issuer (1) provides a brief description of the error and the steps
taken to remedy the error; (2) lists the policy numbers of the life insurance contracts for
which it seeks an automatic waiver; and (3) provides the representations described in
section 4.04 of this revenue procedure. This statement should be signed and dated,
and submitted to the Commissioner of Internal Revenue, Attn: CC:FIP:4, Room 3550,
1111 Constitution Avenue, NW, Washington, DC 20224, no later than the date on which
the issuer files the federal income tax return to which the tax return attachment
described in section 4.03 of this revenue procedure is affixed.
.03 Tax return attachment
. In addition, the issuer must attach to its timely-filed
(including extensions) Federal income tax return, for the taxable year during which the
issuer relies upon this revenue procedure to obtain a § 101(f)(3)(H) or § 7702(f)(8)
waiver, a statement that reads: "Issuer has submitted an Automatic Waiver Request
under section 4.02 of Rev. Proc. 2008-42 for certain errors that caused one or more life
insurance contracts it issued to fail to comply with § 7702(f)(8) or § 101(f) of the Internal
Revenue Code. An issuer filing its return electronically should attach this statement as

7
an Adobe Portable Document format (PDF) file named "Rev. Proc. 2008-42."
.04 Representations. The waiver statement required under section 4.02 of this
revenue procedure must include representations to the effect that the issuer is within
the scope of section 3 of this revenue procedure and that the issuer is otherwise entitled
to the requested waiver. The representations must be executed under penalties of
perjury by an appropriate party (as set forth in section 7.01 of Rev. Proc. 2008-1 (or its
successor)). The issuer must retain documentation available for audit to support the
representations.
.05 Electronic submissions
. The waiver statement required under section 4.02 of
this revenue procedure may be submitted to the Service electronically, in read-only
format, on a CD-ROM. Adobe Portable Document format is a suitable format. Other
formats may be arranged on a case-by-case basis. The issuer must provide a total of
two CD-ROMs.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective July 21, 2008, the date of its publication in
the Internal Revenue Bulletin.
SECTION 6. EFFECT ON OTHER DOCUMENTS
Rev. Rul. 91-17, 1991-C.B. 190, is amplified to provide an automatic procedure
by which an issuer of a life insurance contract may automatically obtain a waiver for
certain reasonable errors that caused the contract to fail to satisfy the requirements of
§ 7702 or § 101, as applicable.
SECTION 7. PAPERWORK REDUCTION ACT

8
The collections of information in this revenue procedure have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under control number 1545-1752.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.
Books and records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally tax returns and return information are confidential, as required by 26 U.S.C.
6103.
DRAFTING INFORMATION
The principal author of this revenue procedure is Josephine H. Firehock of the
Office of Associate Chief Counsel (Financial Institutions & Products). For further
information regarding this revenue procedure contact Branch 4 of that office at (202)
622-3970 (not a toll-free call).