8767 / When a corporation owns a life insurance policy insuring the life of a key employee, are the premiums paid by the corporation taxable to the key employee?

No.¹ In Casale v. Comm., the insured was president of the corporation and owned 98 percent of its stock. The corporation was both owner and beneficiary of a retirement income contract on the insured’s life, which the corporation had purchased to hedge its obligation to the insured under a deferred compensation agreement. The Tax Court required the insured to include premiums paid by the corporation in his income. The Second Circuit reversed the Tax Court opinion, however, on the grounds that the corporation’s separate entity could not be ignored and that the insured had received no current economic benefit that would constitute taxable income.

However, see Goldsmith v. U.S., where the taxpayer, an independent contractor, was required
to include the death and disability insurance features of a deferred compensation agreement in his income based on the court’s finding that (a) those features conferred a current economic benefit on the taxpayer and (b) the current economic benefit of the insurance components were capable of valuation.²

The IRS, however, has agreed to follow the Second Circuit’s decision as precedent in dealing with similar cases.³

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1. Casale v. Commissioner, 247 F.2d 440 (2d Cir. 1957); Rev. Rul. 59-184, 1959-1 CB 65.

2. 41 AFTR 2d 978 (Ct. Cl. 1978).