What Are the Notice 2016-73 Reporting Requirements?

The Internal Revenue Service (IRS) focuses on transactions it considers to have the potential for tax avoidance. The agency identifies certain arrangements as “listed transactions,” which imposes reporting obligations on participants and their advisors. One such arrangement involves the use of cash value life insurance policies held in trust to provide benefits to business owners and employees, a structure the IRS targeted in Notice 2007-83.

However, Notice 2007-83 was invalidated by federal courts. In 2022, a U.S. Court of Appeals ruled that the IRS had failed to follow required notice-and-comment procedures. This ruling was extended nationwide in 2023, setting aside the notice for all taxpayers. As a result, the transactions described in Notice 2007-83 are no longer classified as “listed transactions,” and the mandatory reporting requirements have been eliminated.

The Transaction Identified in the Notice

The arrangement identified in Notice 2007-83 involves trust arrangements that claim to be welfare benefit funds. These trusts purchase cash value life insurance policies, which combine a death benefit with a savings component. The structure was promoted to owners of closely held businesses to provide tax-favored benefits to themselves and key employees by having an employer make contributions to the trust to pay policy premiums.

A feature of these arrangements is the characterization of the employer’s contributions. Promoters claim the employer can deduct the full amount of contributions as ordinary and necessary business expenses for providing employee benefits. The funds are not paid directly to the employee but are routed through the trust to fund the insurance policies.

Simultaneously, participants—often the business owners themselves—are told they will receive benefits on a tax-favored basis. The structure is designed so participants can access the cash value of the policies through tax-free withdrawals or loans. In some variations, policies are distributed or sold to participants for an amount less than the cash value, providing a tax-free transfer of wealth.

For example, a small business might establish a trust presented as a multi-employer welfare benefit plan and make annual contributions of $50,000, which it deducts on its tax return. The trust uses these funds to pay premiums on a cash value policy on the owner’s life. After several years, the owner can access the accumulated cash surrender value without reporting it as income. The IRS contends these transactions do not comply with the requirements for welfare benefit funds.

The notice targets arrangements where cash value is disproportionately allocated to business owners or key executives, while a broad group of employees receives term life insurance. The IRS views this as a vehicle for distributing corporate earnings in a disguised manner. The agency may challenge these transactions by recharacterizing them as split-dollar life insurance or deferred compensation plans, which would result in less favorable tax consequences.

Previous Reporting Requirements

Before its invalidation, Notice 2007-83 required participants to file Form 8886, Reportable Transaction Disclosure Statement, to report their involvement. Material advisors—such as accountants, attorneys, or financial planners who assisted with the transaction for a fee—had a separate obligation to file Form 8918, Material Advisor Disclosure Statement. Following court decisions that set aside the notice, these specific reporting requirements and any penalties for non-compliance are void. However, the IRS may still challenge the underlying tax benefits claimed in these arrangements on other grounds.