130 / Can a creditor deduct premiums paid on life insurance purchased on the life of the creditor’s debtor?

Based on the reasoning of the cases cited in Q 132, it appears unlikely that the creditor can secure a nonbusiness expense deduction. Moreover, when proceeds are receivable as tax-exempt life insurance proceeds, it would appear that IRC Section 265(a)(1) prohibits that deduction of premiums ( Q 8794).If the debtor is directly or indirectly a beneficiary under the policy, IRC Section 264(a)(1) prohibits the deduction ( Q 262). The IRS has allowed a business expense deduction for premiums paid by a taxpayer in the business of selling property for one-year term insurance purchased on the lives of installment purchasers where no separate charge was made for the insurance and where the death proceeds (payable to the seller) were in the amount of the unpaid balance of the purchase price. Proceeds receivable by the seller were treated as collections on the purchase price, not as life insurance proceeds excludable under IRC Section 101(a).¹

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1. Rev. Rul. 7054, 1970-1 CB 31.

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