Business Life Insurance

<div class="Section1"><br /> <br /> With respect to the tax consequences to a corporation under an annuity or on living proceeds from endowment and life insurance contracts, the same rules that are applicable to personal insurance and endowment contracts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="10">10</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="62">62</a>) apply.<a href="#_ftn1" name="_ftnref1">¹</a> The same rules that apply to increases in the cash value of policies for personal insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8">8</a>) also apply to business-owned insurance.<br /> <br /> To the extent that contributions are made after February 28, 1986 to a deferred annuity contract held by a corporation or other entity that is not a natural person, the contract is not treated for tax purposes as an annuity contract. Income on the contract is treated as ordinary income received or accrued by the owner during the taxable year.<a href="#_ftn2" name="_ftnref2">²</a> Thus, if payments received in a year plus amounts received in prior years plus the net surrender value at the end of the year, if any, exceed premiums paid in the year and in prior years plus amounts included in income in prior years, the excess amount is includable in income. The rule and exceptions are discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="513">513</a>.<br /> <br /> To the extent an annuity contract is not subject to this rule, payments received under the contract will be subject to the rules applicable to personal annuity contracts.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 11(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 72(u).<br /> <br /> </div></div><br />

<div class="Section1">Normally, no taxable gain will result to a deceased&rsquo;s estate if stock is sold to surviving individual shareholders at its full market value under a standard buy-sell agreement. At the stockholder&rsquo;s death, the stockholder&rsquo;s estate receives a new tax basis in the stockholder&rsquo;s stock equal to its fair market value at the time of death or an alternate valuation date.<a href="#_ftn1" name="_ftnref1">¹</a> Because the sale price under a properly designed buy-sell agreement usually is accepted as the fair market value of the stock, the basis and sale price normally will be the same ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="322">322</a>). Consequently, there should be no capital gain. Since individuals, rather than the corporation, purchase the stock, the payment cannot be regarded as a dividend ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="300">300</a>). However, if the parties to the buy-sell agreement are related, additional caution should be taken to determine that the sale price under the buy-sell agreement is reasonable.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 1014.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Under the 2017 tax reform legislation, the exceptions to the transfer for value rule do not apply if the policy was transferred in a transaction that qualifies as a reportable policy sale. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a> for details.<br /> <br /> There is danger that proceeds may be considered taxable income from a wagering contract instead of tax-exempt life insurance proceeds.<a href="#_ftn1" name="_ftnref1">¹</a> If there is an insurable interest when a policy is taken out, the contract will not be considered a wagering contract, even if an insurable interest is not present at death.<a href="#_ftn2" name="_ftnref2">²</a> Insurable interest is determined by the laws of the various states. Consequently, if there is an insurable interest under applicable state law, death proceeds should qualify as life insurance proceeds under IRC Section 101(a).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Atlantic Oil Co. v. Patterson</em>, 331 F.2d 516 (5th Cir. 1964).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Ducros v. Commissioner</em>, 272 F.2d 49 (6th Cir. 1959).<br /> <br /> </div></div><br />

<div class="Section1">Yes, if the cash surrender value is greater than the employee or stockholder&rsquo;s net premium cost. The gain is ordinary income, not capital gain.<a href="#_ftn1" name="_ftnref1">¹</a> Normally, there is no deductible loss where a policy is sold for adequate consideration ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="62">62</a>). If the policy sold is subject to a nonrecourse loan, the amount realized on the sale includes the amount of the loan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="280">280</a>).<a href="#_ftn2" name="_ftnref2">²</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Gallun v. Commissioner</em>, 327 F.2d 809 (7th Cir. 1964).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.1001-2(a).<br /> <br /> </div></div><br />

<div class="Section1">Each stockholder’s pro rata share of any gain received by an S corporation, such as gain on endowment maturity or from sale or surrender of a life insurance policy, will be included in a stockholder’s gross income and will increase the basis in the stock.<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 §§ 1366(a)(1), 1367(a)(1)(A).<br /> <br /> </div>

<div class="Section1"><br /> <br /> No.<br /> <br /> 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.<a href="#_ftn1" name="_ftnref1">¹</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>Tennessee Foundry &amp; Mach. Co. v. Commissioner</em>, 399 F.2d 156 (6th Cir. 1968).<br /> <br /> </div>

<div class="Section1"><br /> <br /> No.<br /> <br /> A surviving stockholder will not be treated as having received a constructive dividend merely because the percentage of interest in a corporation is increased by a redemption.<a href="#_ftn1" name="_ftnref1">¹</a> A redemption may result in a constructive dividend to a survivor if the survivor had an obligation to purchase the stock, for example, under a cross-purchase agreement, and redemption by the corporation satisfies that personal obligation.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A survivor does not realize taxable income from a redemption unless his or her obligation to purchase stock was primary and unconditional. Thus, there is no constructive dividend if a survivor has assigned his or her obligation to the corporation before conditions for performance of the contract arose, if the buyout contract contained a provision permitting the stockholder to call on the corporation to buy the stock, or if the survivor could have elected not to buy the stock.<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>Holsey v. Commissioner</em>, 258 F.2d 865 (3d Cir. 1958); Rev. Rul. 58-614, 1958-2 CB 920; Rev. Rul. 59-286, 1959-2 CB 103.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Smith v. Commissioner</em>, 70 TC 651 (1978).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     <em>Pulliam v. Commissioner</em>, TC Memo 1984-470; Rev. Rul. 69-608, 1969-2 CB 42.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes.<br /> <br /> This is the result whether payments are of a guaranteed amount or a share of partnership profits for a certain number of years.<a href="#_ftn1" name="_ftnref1">¹</a> The value of guaranteed payments is their present value at date of death. The value of a share in future partnership profits is based on past profits referred to as the valuation date.<a href="#_ftn2" name="_ftnref2">²</a> The payments are income in respect of a decedent.<a href="#_ftn3" name="_ftnref3">³</a> Consequently, a beneficiary will be entitled to an income tax deduction for any estate tax attributable to including the value of payments in a decedent’s gross estate.<a href="#_ftn4" name="_ftnref4">⁴</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>.     Rev. Rul. 66-20, 1966-1 CB 214; Rev. Rul. 71-507, 1971-2 CB 331; <em>Est. of Riegelman v. Commissioner</em>, 253 F.2d 315 (2d Cir. 1958); <em>McClennen v. Commissioner</em>, 131 F.2d 165 (1st Cir. 1942); <em>Est. of Beal v. Commissioner</em>, 47 TC 269 (1966); <em>Winkle v. U.S.</em>, 160 F. Supp. 348 (W.D. Pa. 1958).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Est. of Hull v. Commissioner</em>, 38 TC 512 (1962).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     IRC §§ 691, 753, 736(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     IRC § 691(c).<br /> <br /> </div>

<div class="Section1"><br /> <br /> No. An estate typically realizes no capital gain as a result of a redemption. Where a redemption is a capital transaction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="300">300</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="303">303</a>), an estate has no tax liability unless the price paid by the corporation exceeds the new tax basis of the stock redeemed.<br /> <br /> When a stockholder dies, his or her stock receives a new basis equal to its fair market value at date of death or at an alternate valuation date.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> As sale price under a proper stock redemption agreement generally is accepted as the fair market value of shares ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="322">322</a>), the sale price should equal the estate&rsquo;s basis and no gain or loss should be realized by an estate.<br /> <br /> For decedents dying in 2010, modified carryover basis rules in IRC Section 1022 may apply, so stock may not receive a full basis step-up.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect; 1014(a)(1), 1014(a)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> No.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In <em>Casale</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 president’s life, which the corporation had purchased to hedge its obligation to the insured under a deferred compensation agreement. The Tax Court held that premiums paid by the corporation were taxable income to the insured. The Second Circuit reversed, 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. The IRS has agreed to follow the Second Circuit’s decision as precedent in dealing with similar cases.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> However, see <em>Goldsmith v. United States.</em><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>.     Rev. Rul. 59-184, supra. <em>See also Lacey v. Commissioner</em>, 41 TC 329 (1963), <em>acq</em>., 1964-2 CB 6.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     <em>Goldsmith v U.S.</em>, 78-1 USTC ¶ 9312 (Ct. Cl. 1978).<br /> <br /> </div>