The U.S. Tax Court today issued an opinion in “test cases” concluding that certain welfare benefit plans were in fact split-dollar life insurance arrangements. Thus, the Tax Court held that the corporate employers could not deduct their payments to the plans, and that the shareholder / employees must recognize income from participating in the plans.
The case is: Our Country Home Enterprises, Inc. v. Commissioner, 145 T.C. No. 1 (July 13, 2015)
The Tax Court upheld accuracy-related penalty assessments.
The parties in approximately 40 other cases pending before the Tax Court have agreed to be bound by these test cases.
The following brief summary is based on an initial, quick read of the Tax Court’s opinion, as it was issued late this afternoon.
The subject welfare benefit plan consisted of separate plans that each participating employer customized to apply to its employees alone. The plans paid death, medical, and disability benefits with respect to a participating employee to the extent that his or her participating employer selected these benefit options.
Each employer selected the general provisions, the participation requirements, and the vesting schedule applicable to its plan.
Each employee designated a beneficiary to whom the plan would pay the benefits with respect to that employee. The death benefit that the plan agreed to pay, as to a participating employee, was the face amount of a life insurance policy that the plan purchased on the employee’s life. The employer effectively paid the premiums on the insurance policy through its payments to the plan, and the life insurance policy usually had a cash value component that increased annually.
The plan’s payment of any non-death benefit as to an employee generally was limited to the cash value of the insurance policy on the life of that employee. An employer could terminate its participation in the plan and cause each of its employees to be fully vested in his or her life insurance policy (including its cash value).
A participating employee, upon retiring, could take his or her insurance policy in satisfaction of any post-retirement death benefit payable as to the employee.
The entities involved in the test cases were three corporations, each wholly owned by a single individual, and an S corporation owned equally by three other individuals. Each of the five individuals was employed by the corporation owned by that person. Two of the corporations participated in a plan and caused the plan to purchase insurance on the lives of their shareholder / employees. The other corporation participated in the plan, but but did not cause the plan to purchase insurance on an employee’s life.
The Tax Court held that the life insurance policies that were issued on the lives of the four shareholder / employees incident to their corporations’ participation in the plan were part of a split-dollar life insurance arrangement.
Accordingly, the Tax Court found that the four shareholder / employees with insurance on their lives realized income (compensation for one corporation’s shareholder and guaranteed payments for another corporation’s shareholders) as to the split-dollar life insurance arrangements in amounts as ascertained under Reg. section 1.61-22.
The court, however, concluded that the economic benefit provisions in the regulations were not applicable to that one corporation in the test cases that did not cause the plan to purchase life insurance. Still, that corporation’s owner realized dividend income to the extent of the payments that it made to the plan.
The Tax Court also concluded:
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