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TITLE 26-INTERNAL REVENUE CODE within the -meaning of section 401(c)(1) shall be treated as consideration contributed by the employer, and there shall not be taken into account any portion of the premiums or other consideration for the contract paid whie the employee was an owner-employee which is properly allocable (as determined under regulations prescribed by the Secre- tary) to the cost of life, accident, health, or other insurance. (3) Life insurance contracts (A) This paragraph shall apply to any life insurance contract- (I) purchased as a part of a plan de- scribed in section 403(a), or (ii) purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indi- rectly to a participant in such trust or to a beneficiary of such participant. (B) Any contribution to a plan described in subparagraph (A)(i) or a trust described in subparagraph (A)(ii) which is allowed as a deduction under section 404, and any income of a trust described in subparagraph (A)(ii), which is determined in accordance with regulations prescribed by the Secre- tary to have been applied to purchase the life insurance protection under a contract described in subparagraph (A), is includible in the gross income of the participant for the taxable year when so applied. (C) In the case of the death of an individ- ual insured under a contract described in subparagraph (A), an amount equal to the cash surrender value of the contract imme- diately before the death of the insured shall be treated as a payment under such plan or a distribution by such trust, and the excess of the amount payable by reason of the death of the insured over such cash sur- render value shall not be includible in gross income under this section and shall be treated as provided in section 101. (4) Amounts constructively received (A) Assignments or pledges If during any taxable year an owner-em- ployee assigns (or agrees to assign) or pledges (or agrees to pledge) any portion of his interest in a trust described in section 401(a) which is exempt from tax under sec- tion 501(a), an individual retirement ac- count described in section 408(a), an individ- ual retirement annuity described in section 408(b) or any portion of the value of a con- tract purchased as part of a plan described in section 403(a), such portion shall be treated as having been received by such owner-employee as a distribution from such trust or as an amount received under the contract. (B) Loans on contracts If during any taxable year, an owner-em- ployee receives, directly or indirectly, any amount from any insurance company as a loan under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) or purchased as part of a plan described in section 403(a), and issued by such insurance company, such amount shall be treated as an amount received under the contract. (5) Penalties applicable to certain amounts received by owner-employees (A) This paragraph shall apply- (I) to amounts (other than any amount received by an individual in his capacity as a policyholder of an annuity, endow- ment, or life insurance contract which is in the nature of a dividend or similar dis- tribution) which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) and which are received by an individual, who is, or has been, an owner-employee, before such individual attains the age of 59V2 years, for any reason other than the individual's becoming disabled (within the meaning of paragraph (7) of this subsec- tion), but only to the extent that such amounts are attributable to contributions paid on behalf of such individual (other than contributions made by him as an owner-employee) while he was an owner- employee, and (ii) to amounts which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) at any time by an individual who is, or has been, an owner-employee, or by the successor of such individual, but only to the extent that such amounts are deter- mined, under regulations prescribed by the Secretary, to exceed the bciieftts pro- vided for such individual under the plan formula. (B) If a person receives an amount to which this paragraph applies, his tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of the amount so received which is includible in his gross income for such tax- able year. (6) Owner-employee defined For purposes of this subsection, the term "owner-employee" has the meaning assigned to it by section 401(c)(3) and includes an indi- vidual for whose benefit an indivi'ual retire- ment account or annuity described in section 408(a) or (b) is maintained. (7) Meaning of disabled For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determin- able physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An in- dividual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Sec- retary may require. (n) Annuities under retired serviceman's family pro. tection plan or survivor benefit plan Subsections (b) and (d) shall not apply in the case of amounts received after December 31, 1965, as an annuity under chapter 73 of title 10 of the United States Code, but all such 71-999 0 - 78 - 9 (Vol. 7) Page 101