Common use of Illustrations Clause in Contracts

Illustrations. The provisions of subdivision (ii) of this subparagraph may be illustrated by the following ex- amples: Example 1. A, a calendar year taxpayer using the cash receipts and disbursements method of accounting, on January 1, 1964, purchases from a life insurance company a Example 2. The facts are the same as in Ex- ample 1, except that on January 1, 1964, A pays the first annual premium and deposits an amount equal to the second and third an- nual premiums, all such amounts initially being paid or deposited by means other than borrowing. On January 1, 1965, A deposits an amount equal to the fourth, fifth, and sixth annual premiums, and borrows $4,400 pursu- ant to a plan referred to in paragraph (a) of this section. Such borrowing is considered attributable to the premiums paid for the policy years 1965 and 1964. On January 1, 1966, A deposits an amount equal to the seventh, eighth, and ninth annual premiums, and bor- rows $6,600 pursuant to such plan. Such bor- rowing is considered attributable to the pre- mium paid for the policy year 1966 and depos- ited for the policy years 1967 and 1968. No de- duction is allowed for interest paid by A on the $11,000 indebtedness during 1966. More- over, the interest deduction will be dis- allowed for the taxable year 1965. However, if this contract is treated as a single premium contract under § 1.264–2 (by reason of deposit with the insurer of an amount for payment of a substantial number of future premiums), the deduction for interest on indebtedness incurred or continued to purchase or carry the contract would be denied without ref- erence to this section.

Illustrations. The provisions of subdivision (ii) of this subparagraph may be illustrated by the following ex- amples: Example 1. A, a calendar year taxpayer using the cash receipts and disbursements method of accounting, on January 1, 1964, purchases from a life insurance company a policy in the amount of $100,000 with an an- xxxx xxxxx premium of $2,200. For the first four policy years, A initially pays the annual premium by means other than borrowing. On January 1, 1968, pursuant to a plan referred to in paragraph (a) of this section, A borrows Example 2. The facts are the same as in Ex- ample 1, except that on January 1, 1964, A pays the first annual premium and deposits an amount equal to the second and third an- nual premiums, all such amounts initially being paid or deposited by means other than borrowing. On January 1, 1965, A deposits an amount equal to the fourth, fifth, and sixth annual premiums, and borrows $4,400 pursu- ant to a plan referred to in paragraph (a) of this section. Such borrowing is considered attributable to the premiums paid for the policy years 1965 and 1964. On January 1, 1966, A deposits an amount equal to the seventh, eighth, and ninth annual premiums, and bor- rows $6,600 pursuant to such plan. Such bor- rowing is considered attributable to the pre- mium paid for the policy year 1966 and depos- ited for the policy years 1967 and 1968. No de- duction is allowed for interest paid by A on the $11,000 indebtedness during 1966. More- over, the interest deduction will be dis- allowed for the taxable year 1965. However, if this contract is treated as a single premium contract under § 1.264–2 (by reason of deposit with the insurer of an amount for payment of a substantial number of future premiums), the deduction for interest on indebtedness incurred or continued to purchase or carry the contract would be denied without ref- erence to this section.