by John Darer CLU ChFC CSSC
The Washington Report, a publication of the Association of Advanced Life Underwriting (AALU) reports of a decision that will be of interested to law firms who use life insurance as part of buy/sell succession planning.
The Tax Court had held in Dyer v Commissioner, T.C. Summary Opinion 2008-23, that income received by the taxpayer's law firm, upon the lapse of a life insurance policy which insured the taxpayer, was not taxable to him or his wife because they were not owners, and did not receive income from, or any benefits of the policy.
The life insurer did not have any contact with the taxpayers. The tax payers did not take any distribution from the policy.
The law firm had purchased a Northwestern Mutual life insurance policy on it's former partners life in 1978 with his wife named his wife as beneficiary. An oral agreement among the partners that they would insure each other to cover the contingency of a partner's premature demise. If such an event occurred the proceeds from the aforementioned life insurance would be deemed to have satisfied to the partnership obligation to the spouse for the deceased partner's share.
The policy was a form of cash value life insurance. After 5 years of premium payment the firm had financed the premiums through premium and/or policy loans which together with the interest on those loans exceeded the cost basis in the policy. The law firm let the policy lapse January 19, 2003. At the time of the lapse, $18,173.23 was the amount of taxable income in question.
CIRCULAR 230 NOTICE: THE ABOVE ADVICE WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, BY YOU FOR THE PURPOSES OF AVOIDING ANY PENALTY THAT MAY BE IMPOSED BY THE INTERNAL REVENUE SERVICE.
THE ABOVE ADVICE WAS NOT WRITTEN TO SUPPORT THE PROMOTIONS OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED BY THE WRITTEN ADVICE, AND, BASED ON THE PARTICULAR CIRCUMSTANCES, YOU SHOULD SEEK ADVICE FROM AN INDEPENDENT TAX ADVISOR
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