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"><br /> <br /> No.<br /> <br /> The premiums are not income to a stockholder even though the stockholder has the right to designate the beneficiary, provided 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><br /> <br /> Likewise, premiums are not taxable income to an insured stockholder when a trustee is named beneficiary, provided the trustee is obligated to use the proceeds to purchase the insured’s stock for 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">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"><br /> <br /> No.<br /> <br /> The premium payments are in the nature of capital expenditures. That is, they are amounts paid to acquire a capital asset.<a href="#_ftn1" name="_ftnref1">¹</a> Furthermore, IRC Section 264 denies a deduction for the payment of premiums on a life insurance policy if the taxpayer is directly or indirectly a beneficiary under the life insurance policy, whether or not the death benefit is used to fund a buy/sell obligation.<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. 70-117, 1970-1 CB 30; <em>Whitaker v. Commissioner</em>, 34 TC 106 (1960).<br /> <br /> </div>

<div class="Section1"><br /> <br /> An IRC Section 162 bonus plan or an executive bonus plan is a nonqualified employee benefit arrangement in which an employer pays a compensation bonus to a selected employee who then uses the bonus payment to pay premiums on a life insurance policy insuring his or her life. (Often, as a convenience, the employer will pay the bonus directly to the insurer on behalf of the employee. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="269">269</a>.) The policy is owned personally by the employee.<br /> <br /> A compensation bonus generally is deductible to a corporate employer if an employee&rsquo;s total compensation is a reasonable amount.<a href="#_ftn1" name="_ftnref1">¹</a> Whether used to pay policy premiums or not ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="269">269</a>), a compensation bonus is includable in gross income to an employee.<a href="#_ftn2" name="_ftnref2">²</a> At death, policy death proceeds are received by an employee&rsquo;s beneficiary income tax-free ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="63">63</a>).<a href="#_ftn3" name="_ftnref3">³</a> Any policy withdrawals, surrenders, or loans made by an employee are taxed as they would be if the employee had purchased the policy without the benefit of the bonus arrangement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="10">10</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="13">13</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="30">30</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; IRC &sect; 162(a)(1), Treas. Reg. &sect; 1.162-9.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 61(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 101(a)(1).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Since a transfer of a policy subject to a nonrecourse loan discharges the transferor of obligations under the loan, the transferor is treated as receiving an amount equal to the discharged obligations.<a href="#_ftn1" name="_ftnref1">¹</a> Thus, there may be a transfer for value when a life insurance contract is transferred that is subject to a policy loan. Nonetheless, where the value of a policy exceeded the outstanding loan, a transfer was ruled in part a gift and within one of the exceptions to the transfer for value rule because the basis of the policy in the hands of the transferee was determinable in part by reference to the basis of the policy in the hands of the transferor ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="279">279</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> In Letter Ruling 8951056, the IRS found that the gratuitous transfer of a policy subject to a nonrecourse loan was held part gift, part sale. Because the transferor&rsquo;s basis was greater than the amount of the loan, the basis of the policy in the hands of the transferee was the basis in the hands of the transferor at the time of transfer and thus the transfer fell within the same exception to the transfer for value rule.<a href="#_ftn3" name="_ftnref3">³</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; Treas. Reg. &sect; 1.1001-2(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 69-187, 1969-1 CB 45.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>But see</em> Let. Rul. 8628007.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> No.<br /> <br /> This is true regardless of who is named 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> Whether insurance is purchased as a key person policy or to finance the purchase of an insured&rsquo;s partnership interest, the premium paying partner will benefit from the policy.<a href="#_ftn2" name="_ftnref2">²</a> For insurance purchased by a partnership on the life of an employee who is not a partner, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="262">262</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="263">263</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; IRC &sect; 264(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.264-1.<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>