General Rules Of 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"><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 /> 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">Business life insurance is life insurance owned by a business, regardless of whether the business is a sole proprietorship, partnership, or corporation. The insurance can have a number of different purposes. For example, the insurance can be used to insure the life of a key employee, whose death could have a considerable negative impact on the business. The insurance could be purchased as part 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.</div>

<div class="Section1"><br /> <br /> Premiums generally are not taxable to an insured if the insurance is purchased for the benefit of the business and the insured has no interest in the policy. 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 a beneficiary of the employee, there generally is some taxable income to the employee ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="269">269</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="271">271</a>). There are exceptions to this general rule in the case of group life insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="246">246</a>) and qualified pension and profit sharing plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3943">3943</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>Casale v. Commissioner</em>, 247 F.2d 440 (2d Cir. 1957); <em>U.S. v. Leuschner</em>, 14 AFTR 2d 5599, 336 F. 2d 246 (9th Cir 1964) <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></div><br />

<div class="Section1"><br /> <br /> No.<br /> <br /> The premium payments are not related to the taxpayer’s trade or business. The business of the corporation is not the stockholder’s business.<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>Cappon v. Commissioner</em>, 28 BTA 357 (1933).<br /> <br /> </div>

<div class="Section1">The Pension Protection Act of 2006 (“PPA 2006”) imposes new reporting requirements on all employers owning one or more employer-owned life insurance contracts. Final reporting regulations were issued in November 2008.<a href="#_ftn1" name="_ftnref1">¹</a> In addition, the IRS released Notice 2009-48 on certain issues that may arise when dealing with employer-owned life insurance contracts with respect to the IRC Section 101(j) notice and consent requirements and IRC Section 6039I’s information reporting requirements, both of which were enacted under PPA 2006. The Q&amp;A guidance was effective June 15, 2009, but the IRS announced that it would not challenge a taxpayer who made a good faith effort to comply with IRC Section 101(j) based on a reasonable interpretation of the provision before that date.<a href="#_ftn2" name="_ftnref2">²</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 § 6039I; T.D. 9431, 73 Fed. Reg. 65981 (Nov. 6, 2008).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Notice 2009-48, 2009-24 IRB 1085.<br /> <br /> </div>

<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>