Discussion:Rev Rul 2008-42--S corps and officers' life insurance...

Here is a link to Rev Rul 2008-42 http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl3b/1/doc

I think this is a better link.

Always wanting to avoid loans to shareholders where possible, I would comment that the about cited premiums are a personal expense of the shareholder and should be:

1. Added to the salary as a taxable fringe, or, 2. Treated as a distribution, or, 3. Treated as a non-deductible expense. This being my least favored choice, but sometimes the only choice. 4. Treated as an advance to the shareholder, or as a reduction in a loan from the shareholder.

As to AAA:

"The AAA is generally decreased by the items of loss or deduction described in § 1366(a)(1)(A), any nonseparately computed loss determined under § 1366(a)(1)(B), and any nondeductible expense not properly chargeable to a capital account other than expenses related to tax-exempt income."

It would be a nondeductible expense for sure.

    (1) CANNOT EXCEED SHAREHOLDER'S BASIS IN STOCK AND DEBT 
 
    The aggregate amount of losses and deductions taken into account by a 
    shareholder under subsection (a) for any taxable year shall not 
    exceed the sum of-- 
 
         (A) the adjusted basis of the shareholder's stock in the S 
         corporation (determined with regard to paragraphs (1) and (2)(A) 
         of section 1367(a) for the taxable year), and 
 
         (B) the shareholder's adjusted basis of any indebtedness of the 
         S corporation to the shareholder (determined without regard to 
         any adjustment under paragraph (2) of section 1367(b) for the 
         taxable year). 
 
    (2) INDEFINITE CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS 
 
         (A) IN GENERAL 
 
         Except as provided in subparagraph (B), any loss or deduction 
         which is disallowed for any taxable year by reason of paragraph 
         (1) shall be treated as incurred by the corporation in the 
         succeeding taxable year with respect to that shareholder. 

Note: My comment is that the nondeductible item in excess of AAA would be treated the same as a suspended loss (loss in excess of basis) and would be carried forwarded until there was sufficient basis to absorb the item. Assuming insufficient basis in the first place.

Also, see post under Sub S Losses taken in excess of basis for the IRS reasoning, which, I believe the IRS would apply to this item.

When I said "It would be a nondeductible expense for sure," you needed to see were my tongue was, heck, it's a personal expense treat it like any other personal expense paid by the corporation. I suggest to you that if you treat it as an adjustment to AAA (a nondeductible item) the proceeds from the life insurance policy may become taxable.