Ind 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 /> As the name suggests, business life insurance is life insurance that is owned by a business, regardless of whether the business is organized as a sole proprietorship, partnership, or corporation. The insurance can serve a number of different purposes.<br /> <br /> For example, business life insurance is often used to insure the life of a key employee, in order to mitigate the negative impact that the employee’s death would have on the business. Business life insurance is also commonly used in the context 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.<br /> <br /> </div>

<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 /> <p class="PA">As the name suggests, business life insurance is life insurance that is owned by a business, regardless of whether the business is organized as a sole proprietorship, partnership, or corporation. The insurance can serve a number of different purposes.</p><br /> <p class="PA">For example, business life insurance is often used to insure the life of a key employee, in order to mitigate the negative impact that the employee&rsquo;s death would have on the business. Business life insurance is also commonly used in the context 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.</p><br /> <br /> </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">No. This is true regardless of who is named as policy 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> The premium paying partner will derive a benefit from the policy even if the insurance is purchased as a key person policy or to finance the purchase of an insured&rsquo;s partnership interest.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> The general rules governing the deductibility of life insurance premiums (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8765">8765</a>) apply in the case of insurance purchased by a partnership on the life of an employee who is not a partner.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 264(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.264-1.<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">No. This is true regardless of who is beneficiary under the policy. In the case of a sole proprietorship, premium payments are treated as nondeductible personal expenses because a sole proprietor and the business are considered one and the same for tax purposes.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The general rules governing the deductibility of life insurance premiums (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8765">8765</a>) apply in the case of insurance purchased by a sole proprietor on the life of an employee.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 262(a); Treas. Reg. &sect; 1.262-1(b)(1).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> No.<br /> <br /> A buy-sell agreement is not necessarily based on the fair market value of the business. A buy-sell agreement is simply an agreement between friendly parties to address the smooth transition of ownership due to a business owner’s termination of employment, death, or sale of the individual’s business interest.<a href="#_ftn1" name="_ftnref1">¹</a> The IRS is much more likely to respect a buy-sell valuation as fair market value when the agreement is between unrelated parties.<br /> <br /> An agreement restricting lifetime sale may be considered with all other pertinent factors, however, and may tend to lower the value of a close corporation or other business interest.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> On the other hand, failure to exercise rights under a buy-sell agreement could result in a taxable gift.<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>.     Effect of Purchase Price, Buy-Sell Agreements, and Key Person Insurance on Valuation, Gunnar J. Gitlin (Business Valuations in Divorce Cases – 2012), p. 63.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Spitzer v. Commissioner</em>, 153 F.2d 967 (8th Cir. 1946); <em>Est. of James v. Commissioner</em>, 148 F.2d 236 (2d Cir. 1945); <em>Commissioner v. McCann</em>, 146 F.2d 385 (2d Cir. 1944), <em>nonacq</em>. 1943 CB 36; <em>Krauss v. U.S.</em>, 140 F.2d 510 (5th Cir. 1944); <em>Kline v. Commissioner</em>, 130 F.2d 742 (3d Cir. 1942); Rev. Rul. 189, 1953-2 CB 294.<br /> <br /> </div>