The Internal Revenue Service has issued advice on how a life settlement investor should handle interest costs when computing earnings and profits.
The IRS gives the guidance in IRS Revenue Ruling 09-25.
The IRS considers the situation of a life settlement company that pays $100 for a paid-up life insurance policy with a $500 death benefit. The company pays for the policy using a loan that carries an interest rate of 7%. The interest on the loan and the initial purchase price are the policy buyer’s only costs in connection with the contract.
When computing taxable earnings on the policy, Internal Revenue Code Section 264(a)(4) appears to disallow the policy buyer from deducting the interest costs from gains on the policy, officials write.