Discussion:New Code Section 101(j) on COLI
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Discussion Forum Index --> Tax Questions --> New Code Section 101(j) on COLI
| 29 November 2006 | |
| Anyone have any input on how company owned life insurance (COLI) can be structured with the new code section that was part of the recently signed Pension Protection Act? I have always went with the scenario that if company owned policy, company paid premiums (not deductible for tax purposes of course), and company was beneficiary there was not tax problem. Same for policy if part of cross-purchase whereby each owner owns policy on other owners, pays premiums and is beneficiary. I have a client receiving info from an insurance company that indicates a COLI can now name the insured's spouse as a beneficiary and/or pay the proceeds over at death to the spouse as a buy-out of the insured's interest and there will be no taxable income to the spouse. Luckily for me I dropped my CCH subscription this past August and now cannot access the latest IRC regs (guess I'll have to renew the subscription!) but from what I've read in some books from CCH from the PPA signed in August it appears the insurance company is accurate. I am not worried about the notification requirements of the new section - just how the insurance contract can be structured and (I am assuming) that still no deduction of premiums? Thanks for any input. | |
| November 29, 2006 | |
| Joe:
Although the Pension Protection Act of 2006 has not yet been imported to TaxAlmanac's copy of the Internal Revenue Code, it's on its way. In the meantime, you can go to our Pension Protection Act of 2006 page, which includes links to the legislative text. I'm also working to update TaxAlmanac's copy of the Treasury Regulations, which should include the regulations that you're looking for. In the meantime, have you checked the Electronic Code of Federal Regulations for what you're looking for? In addition, the new regulations should have been included in the Internal Revenue Bulletins. I'm still working on getting all of those imported, but see the two links at the bottom of that page to find all of the content on the IRS website. I hope this helps!
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| 29 November 2006 | |
| This is a rather nasty change in the law, Joe. It requires a review of all Corporate owned life insurance policies including those set up as cross-purchase. There seems to be enough wiggle room to avoid the silly consequences (A policy owned by the wife on the life of her 100% shareholder husband becomes a company owned policy through attribution) but this is a major seminar issue. Ed Zollars' Take | |
| 29 November 2006 | |
| Thank you to both Tim & Dennis for their reference and input. Am I still correct in my understanding that life insurance & disability insurance premiums should NOT be deducted for tax purposes on the company books? My clients insurance agent is encouraging him to deduct the premiums for business purposes due to this "new COLI section" but I still see nothing in the new section that would provide for a business deducting such premiums without making the entire proceeds taxable when received. | |
| 29 November 2006 | |
| Any amount paid to a Sec. 267(c)(4) family member or any amount used to buy an equity interest in the policyholder from the insured is exempt from the application of 101(j). However, I don't think I would go so far as to say that the spouse can receive the proceeds of cross-purchase or redemption agreement on a tax-free basis. | |
| 29 November 2006 | |
| The unanswered question, however, is does the change in taxability of proceeds in conjunction with the apparent absence of a direct requirement to capitalize the cost in effect open the door for deduction of premiums? Personally I wait for further analysis. | |
| 29 November 2006 | |
| I agree with Dennis that the deductibility issue is unanswered - and until further analyses are provided I will go with the prior conservative approach of not allowing clients to deduct premiums for tax purposes due to the potential large negative consequences. Thanks to Riley2 for your input also but I have to disagree - the Sec 267(c)(4) does allow an exemption to the taxability issue of the proceeds for family members but does not exempt the policy from the application of 101(j) - especially the notification requirements. And the exception to heirs/spouses does specifically state that the proceeds are not taxable - even if the company is the beneficiary and pays out the proceeds to the spouse. I will recommend to my client to have an iron-clad buy-sell agreement spelling out that the proceeds are to be handled in such a way as an added safety measure. Thanks again. | |
| 30 November 2006 | |
| I was not referring to the proceeds of the policy. To clarify, if a cross-purchase agreement is funded by cross-insurance, the buy-out paid to the widow by the beneficiary of the life insurance policy is not exempt under 101. She may have a stepped-up basis in the stock which mitigates the tax effect of the buy-out, but the gain is nevertheless taxable.
Also, I see nothing in the Committee Reports for the Pension Protection Act of 2006 that would suggest that Congress has any intent to repeal Internal Revenue Code § 264(a) [denial of deduction for life insurance premiums when taxpayer is a direct or indirect beneficiary]. Thus, I see no reason to change your advice on deductibility of life insurance premiums. Disability premiums should continue to be deductible. | |
| 30 November 2006 | |
| The issue here is not the deductibility of premiums, but rather the Notice and Consent provision and the reporting requirement (§6039I).
The exceptions found in §101(j)(2)(A) and (B) do not treat domestic partners favorably and leave open the problem of policies includable by attribution that existed prior to involvement with the company. | |
| 30 November 2006 | |
| I appreciate all the input. I tend to think I do an excellent job for my clients but am often humbled by the various questions I see posted here. I assume there will be further clarification on this issue. Insurance companies are promoting that even in cross purchase situations that the proceeds from cross purchase policies will be non-taxable to heirs. They are basing this on the language of the law that seems to make such cross purchase policies actually qualify as COLI. As long as other criteria are met then death benefits are not taxable - according to the insurance companies. I am uncertain at this time. It is hard for me to fathom that the IRS would change and make something (buy out agreements to heirs) nontaxable that to my knowledge has always been taxable as Riley2 noted above. I'll encourage clients to specifically make policies company owned as opposed to cross purchase. Thanks again for input. | |
| 15 March 2007 | |
| We have several COLI policies issued after August 17 but applied for well before it. These insured employees were aware of the notice & consent elements, but there is no documentation to indicate this. I know that the only solution devised at this time is to completely replace the policies (these could not be reissued without new paperwork because of application dates). However, do you think having the insureds sign a form noting that prior to issue they were informed of these three notice & consent elements would serve this purpose?
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