Tax Facts

293 / Where a life insurance policy is assigned to an employer in restitution of funds embezzled by an insured, are proceeds tax-exempt to the employer?

No.

The employer does not receive the proceeds as life insurance payable by reason of the insured’s death but as a restitution of embezzled funds. Consequently, the income tax exclusion under IRC Section 101(a) does not apply. If the employer has claimed a loss deduction, the employer must report the proceeds as a recovery of a previously deducted embezzlement loss.1

1. Tennessee Foundry & Mach. Co. v. Commissioner, 399 F.2d 156 (6th Cir. 1968).

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