ITB 11-12 IRS Issues Guidance on Tax-Free Exchanges of Life Insurance Contracts

In Revenue Ruling 2011-09, the IRS addressed whether life insurance contracts received in tax-free exchanges must be re-tested under the pro rata interest expense disallowance rule of Section 264(f)(1). The Service concluded that when a tax-free exchange of life insurance contracts occurs, the new contract must be tested to determine if it qualifies for the pro rata interest disallowance rule under Section 264(f)(1).