Is there a difference in taxable amount if a plan surrenders a life in

[John A]

Is the following correct:

If a plan borrows an amount equal to the cash value of a participant's life insurance policy minus the accumulated P.S. 58 costs, and then distributes (transfers the ownership of) the policy to the participant, the amount of the P.S. 58 costs is treated as a non-taxable (or after-tax) distribution, while the distribution of the borrowed cash to the participant is treated as a taxable distribution (or as an eligible rollover distribution).

However, if a plan surrenders the policy for the cash surrender value, and then distributes this cash to the participant, the entire amount is taxable (and an eligible rollover distribution) - there is no basis for the P.S. 58 costs.

I'm looking at Private Letter Ruling 8539066, and trying to figure out what it means to "convert the whole life insurance policies to their cash surrender value," and what event triggers the loss of tax basis in P.S. 58 costs. Is the P.S. 58 tax basis lost anytime the ownership of the policy is not transferred to the participant?