Page 213

TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57. 173, 707 of this title. § 264. Certain amounts paid in connection with insur- ance contracts (a) General rule No deduction shall be allowed for- (1) Premiums paid on any life insurance policy covering the life of any officer or em- ployee, or of any person financially interested in any trade or business carried on by the tax- payer, when the taxpayer is directly or indi- rectly a beneficiary under such policy. (2) Any amount paid or accrued on indebt- edness incurred or continued to purchase or carry a single premium life insurance, endow'- ment, or annuity contract. (3) Except as provided in subsection (c), any amount paid or accrued on indebtedness in- curred or continued to purchase or carry a life insurance, endowment, or annuity con- tract (other than a single premium contract or a contract treated as a single premium con- tract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of such contract (either from the insurer or otherwise). Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954. Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963. (b) Contracts treated as single premium contracts For purposes of subsection (a)(2), a contract shall be treated as a single premium contract- (1) if substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is pur- chased, or (2) if an amount is deposited after March 1, 1954, with the insurer for payment of a sub- stantial number of future premiums on the contract. (c) Exceptions Subsection (a)(3) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or con- tinued as part of a plan referred to in subsec- tion (a)(3)- (1) if no part of 4 of the annual premiums due during the 7-year period (beginning with the date the first premium on the contract to which such plan relates was paid) is paid under such plan by means of indebtedness, (2) if the total of the amounts paid or ac- crued by such person during such taxable year for which (without regard to this para- graph) no deduction would be allowable by reason of subsection (a)(3) does not exceed $100. (3) if such amount was paid or accrued on indebtedness incurred because of an unfore- seen substantial loss of income or unforeseen substantial increase in his financial obliga- tions, or (4) if such indebtedness was incurred in con- nection with his trade or business. For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new 7-year period described in such pa.agraph with respect to such contract shall commence on the date of first such in- creased premium is paid. (Aug. 16, 1954, ch. 736, 68A Stat. 77; Feb. 26, 1964, Pub. L. 88-272, title II, §215(a), (b), 78 Stat. 55.) AMENDMENTS 1964-Subsec. (a). Pub. L. 88-272 inserted par. (3), and provided that it shall apply only to contracts pur- chased after August 6, 1963. Subsec. (c). Pub. L. 88-272 added subsec. (c). EFFECTIVE DATE OF 1964 AMENDMENT Section 215(c) of Pub. L. 88-272 provided that: "The amendments made by this section [to this section] shall apply with respect to amounts paid or accrued in taxable years beginning after December 31, 1963." CROSS REFERENCES Interest paid deductible, see section 163 of this title. § 265. Expenses and interest relating to tax-exempt income No deduction shall be allowed for- (1) Expenses Any amount otherwise allowable as a deduc- tion which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (wheth- er or not any amount of such interest is re- ceived or accrued) wholly exempt from the taxes imposed by this subtitle. (2) Interest Interest on indebtedness incurred or contin- ued to purchase or carry obligations the in- terest on which is wholly exempt from the taxes imposed by this subtitle. In applying the preceding sentence to a financial institu- tion (other than a bank) which is a face- amount certificate company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 and following) and which is sub- ject to the banking laws of the State in which such institution is incorporated, interest on face-amount certificates (as defined in section 2(a)(15) of such Act) issued by such institu- tion, and interest on amounts received for the purchase of such certificates to be issued by such institution, shall not be considered as in- terest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes im- posed by this subtitle, to the extent that the average amount of such obligations held by such institution during the taxable year (as determined under regulations prescribed by the Secretary) does not exceed 15 percent of the average of the total assets held by such institution during the taxable year (as so de- termined). 71-999 0 - 78 - 16 (Vol. 7) Page 213 § 265