Business Life Insurance

<div class="Section1"><br /> <br /> As the name suggests, business life insurance is life insurance that is owned by a business, regardless of whether the business is organized as a sole proprietorship, partnership, or corporation. The insurance can serve a number of different purposes.<br /> <br /> For example, business life insurance is often used to insure the life of a key employee, in order to mitigate the negative impact that the employee’s death would have on the business. Business life insurance is also commonly used in the context of a buy-sell agreement, where the business is obligated to purchase the ownership interest of an owner who dies. The insurance also could be used to fund a non-qualified retirement package for a single employee or a number of employees.<br /> <br /> </div>

<div class="Section1">No. This is true regardless of who is named as policy beneficiary. Premiums paid for any life insurance, or endowment or annuity contract, are not deductible if a taxpayer is directly or indirectly a beneficiary under the policy or contract.<a href="#_ftn1" name="_ftnref1">¹</a> The premium paying partner will derive a benefit from the policy even if the insurance is purchased as a key person policy or to finance the purchase of an insured&rsquo;s partnership interest.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> The general rules governing the deductibility of life insurance premiums (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8765">8765</a>) apply in the case of insurance purchased by a partnership on the life of an employee who is not a partner.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 264(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.264-1.<br /> <br /> </div></div><br />

<div class="Section1">No. This is true regardless of who is beneficiary under the policy. In the case of a sole proprietorship, premium payments are treated as nondeductible personal expenses because a sole proprietor and the business are considered one and the same for tax purposes.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The general rules governing the deductibility of life insurance premiums (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8765">8765</a>) apply in the case of insurance purchased by a sole proprietor on the life of an employee.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 262(a); Treas. Reg. &sect; 1.262-1(b)(1).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> IRC Section 79 allows an employer to provide up to $50,000 of tax-free group-term life insurance coverage to each of its employees.<a href="#_ftn1" name="_ftnref1">¹</a> More specifically, the employee may exclude the value of the group-term life insurance that does not exceed the sum of (a) $50,000 and (b) any amount paid by the employee toward the purchase of the insurance.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Group-term life insurance that is excludable under Section 79 can also be offered through a cafeteria plan (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8897">8897</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8783">8783</a> for a discussion of how it is determined whether the value of the insurance exceeds the $50,000 limit and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8784">8784</a> for a discussion of situations in which the $50,000 limit may not apply. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8785">8785</a> for the nondiscrimination requirements applicable to Section 79 plans.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 79(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 79(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prop. Treas. Reg. &sect; 1.125-1(k).<br /> <br /> </div></div><br />

<div class="Section1">No. Even if the stockholder has the right to designate the policy beneficiary, the premiums are not income to the stockholder, provided that the beneficiary’s right to receive the proceeds is conditioned on the transfer of stock to the corporation.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Similarly, premiums are not taxable income to an insured stockholder when a trustee is named beneficiary, provided that the trustee is obligated to use the proceeds to purchase the insured’s stock for transfer to the corporation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  <em>Sanders v. Fox</em>, 253 F.2d 855 (10th Cir. 1958); <em>Prunier v. Commissioner</em>, 248 F.2d 818 (1st Cir. 1957); Rev. Rul. 59-184, 1959-1 CB 65.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 70-117, 1970-1 CB 30.<br /> <br /> </div>

<div class="Section1"><br /> <div class="Section1"><br /> <br /> If the life insurance policy at issue is purchased for the benefit of the business and the insured has no ownership interest in the policy, the premiums generally are not taxable to the insured. Thus, premiums paid on key person life insurance, where an employer is both owner and beneficiary of the policy, are not taxable to the insured employee.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If life insurance premiums are paid by an employer on a policy insuring the life of an employee and the proceeds are payable to the employee’s beneficiary, some taxable income to the employee generally results.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  <em>Casale v. Commissioner</em>, 247 F.2d 440 (2d Cir. 1957); <em>Lacey v. Commissioner</em>, 41 TC 329 (1963), <em>acq</em>. 1964-2 CB 6; Rev. Rul. 59-184, 1959-1 CB 65.<br /> <br /> </div><br /> </div>

<div class="Section1">No, because of the general rule that premiums paid on any life insurance policy, or endowment or annuity contract, are not deductible if a taxpayer is directly or indirectly a beneficiary under the policy or contract.<a href="#_ftn1" name="_ftnref1">¹</a> When a policy is purchased as key person insurance or to finance the purchase of an insured’s partnership interest, the insured’s estate and, therefore, the insured, will benefit from the policy.</div><br /> <div class="Section1"><br /> <br /> Even if a partner takes out insurance on the partner’s own life and irrevocably designates a copartner as beneficiary to induce the copartner to leave the copartner’s investment in the firm, the insured partner is <em>indirectly</em> a beneficiary under the policy, and so the premiums cannot be deducted.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 264(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.264-1.<br /> <br /> </div>

<div class="Section1">No. The premiums are nondeductible because they either are personal expenses or expenses allocable to tax-exempt income (the death proceeds).<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 262(a), 265(a)(1); <em><em>see</em> Whitaker v. Commissioner</em>, 34 TC 106 (1960).<br /> <br /> </div>

<div class="Section1">Life insurance premiums generally are not deductible if the premium payer has any interest in the policy or proceeds.</div><br /> <div class="Section1"><br /> <br /> Under IRC Section 264(a)(1), no deduction is allowed for premiums paid on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract. Where Section 264(a)(1) applies, the premiums are not deductible even though they otherwise would be deductible as ordinary and necessary business expenses.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The rule under Section 264(a)(1) is an all or nothing rule, meaning that the entire premium will be nondeductible even though a premium payer has a right to receive only a portion of the proceeds. The deduction cannot be divided, and will either be allowed or disallowed in its entirety.<a href="#_ftn2" name="_ftnref2">²</a> The rule under Section 264(a)(1) applies regardless of the form of insurance, so it makes no difference whether premiums are paid on term, ordinary life, or endowment policies.<br /> <br /> Section 264(a)(1) clearly prohibits the deduction for premiums paid where a taxpayer is the premium payer and is also designated as the policy beneficiary. For example, premiums paid on key person insurance, where an employer normally is both owner (and premium payer) and beneficiary of a policy, are nondeductible under IRC Section 264(a)(1).<br /> <br /> The deduction is also denied under Section 264(a)(1) where a premium payer is only indirectly a beneficiary under a policy. Thus, the deduction will be denied where a taxpayer, even though not a named beneficiary, has some beneficial interest in a policy, such as the right to change the beneficiary, to make loans, to surrender the policy for cash, or to draw against proceeds held in trust for the insured’s spouse.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> An employer is permitted to deduct premiums paid on insurance covering the life of an employee if the employer is not directly or indirectly a beneficiary under the policy and the premiums represent additional reasonable compensation for services rendered by the employee. Thus, if an employer has no ownership rights or beneficial interest in a policy and proceeds are payable to an employee’s estate or personal beneficiary, the employer may ordinarily deduct the premiums as additional compensation paid to the employee.<a href="#_ftn4" name="_ftnref4">⁴</a> The deduction will not be denied merely because an employer may derive some indirect benefit, such as from the increased efficiency of the employee.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.264-1(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 66-203, 1966-2 CB 104.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Rev. Rul. 70-148, 1970-1 CB 60; Rev. Rul. 66-203, supra.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 162(a); Treas. Reg. § 1.162-7.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  Treas. Reg. § 1.264-1(b).<br /> <br /> </div>

<div class="Section1">No.<a href="#_ftn1" name="_ftnref1">¹</a> In <em>Casale v. Comm.</em>, 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.</div><br /> <div class="Section1"><br /> <br /> However, <em><em>see</em> Goldsmith v. U.S.</em>, where the taxpayer, an independent contractor, was required<br /> 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.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS, however, has agreed to follow the Second Circuit’s decision as precedent in dealing with similar cases.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  <em>Casale v. Commissioner</em>, 247 F.2d 440 (2d Cir. 1957); Rev. Rul. 59-184, 1959-1 CB 65.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  41 AFTR 2d 978 (Ct. Cl. 1978).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Rev. Rul. 59-184, supra. <em><em>See also</em> U.S. v. Leuschner</em>, 11 AFTR 2d 782 (S.D. Cal. 1962); <em>Lacey v. Commissioner</em>, 41 TC 329 (1963), <em>acq</em>., 1964-2 CB 6.<br /> <br /> </div>