Tax Facts

296 / If an employee or stockholder sells a life insurance policy to the corporation for its cash surrender value, does the employee or stockholder realize a taxable gain?

Yes, if the cash surrender value is greater than the employee or stockholder’s net premium cost. The gain is ordinary income, not capital gain.1 Normally, there is no deductible loss where a policy is sold for adequate consideration ( Q 62). If the policy sold is subject to a nonrecourse loan, the amount realized on the sale includes the amount of the loan ( Q 280).2

1.     Gallun v. Commissioner, 327 F.2d 809 (7th Cir. 1964).

2.     Treas. Reg. § 1.1001-2(a).

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