Interpolated Terminal Reserve

(1) Rev. Rul. 59-195 — Interpolated Terminal Reserve. Rev. Rul. 59-195, 1959-1 C.B. 18, addressed the determination of the fair market value of a policy in a situation in which an employer sold to an employee a life insurance contract on which premiums were still due. The revenue ruling held that, for purposes of computing the employee’s taxable gain in the year of the purchase, the value of the contract should be determined using the approach of § 25.2512-6 of the Gift Tax Regulations. Under that regulation, the value of a life insurance contract that has been in force for some time and on which further premium payments are to be made is not its cash surrender value, but, rather, the interpolated terminal reserve as of the date of sale plus the proportionate part of any employer-paid unearned premiums. Section 25.2512-6 also provides that if “because of the unusual nature of the contract such approximation is not reasonably close to the full value, this method may not be used.” Thus, this method is appropriate only where the reserve reflects the value of all of the relevant features of the policy.