315 / What is the tax treatment of life insurance purchased to fund a partnership business purchase agreement?

Premiums are not deductible whether paid by individual partners or by a partnership ( Q 274).¹ Assuming the requirements for employer-owned life insurance are met and there has not been a violation of the transfer for value rule, death proceeds are exempt from income tax whether received by partners or the partnership ( Q 8776).²

The basis to partners of their partnership interests is increased by proceeds received by the partnership.³

Similarly, under a cross-purchase plan, each partner’s basis for the partnership interest will be increased by the amount the partner pays for the partner’s share of a deceased partner’s interest.⁴