252. If a taxpayer in the course of his or her business purchases a policy on the life of a person who is not his or her employee, may the taxpayer deduct the premiums?Nuco Employeercline212014-07-29T17:15:00Z2014-07-29T17:15:00Z35523153Summit Business Media267369814Site Map/Life Insurance/Business Continuation/Premiums/Deduction of Premiums Denied for Reasons Other Than Section 264(a)(1) 2005-01-24T00:00:00ZTaxFactsDefaultArticle113150061-00-TF1.xml61.00;#2003;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1If a taxpayer, in the course of his business, purchases a policy on the life of a person who is not his employee may he deduct the premiums?106000.000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-15T00:27:16Z252. If a taxpayer in the course of business purchases a policy on the life of a person who is not an employee, may the taxpayer deduct the premiums?In most instances, the disallowance of a deduction for business life insurance premiums will be by reason of the taxpayer being a direct or indirect beneficiary of the policy under IRC Section 264(a)(1).The deduction ordinarily will be barred on other grounds if the premium payer has an interest in the policy. Thus, the deduction may be denied for any of the following reasons: (1) the premiums are not ordinary and necessary business expenses within the meaning of IRC Section 162(a); (2)the premiums are expenses incurred to obtain tax-exempt income, namely, the death proceeds, and consequently are nondeductible under IRC Section 265(a)(1); or (3) the premiums constitute capital expenditures. The cases and rulings below illustrate denial of the deduction for reasons other than IRC Section 264(a)(1).A corporation paid premiums on insurance on the lives of two stockholders to fund an entity purchase agreement. The proceeds were payable to the trustee who was to administer the plan. In holding that the premiums were nondeductible, the IRS did not rely on IRC Section 264, but held that payment of the premiums was a capital expenditure for acquisition of stock.Rev. Rul. 70-117, 1970-1 CB 30.Premiums paid by a manager of persons in the entertainment field on an insurance policy covering the life of one of the entertainers are not deductible where the manager is the beneficiary under the policy. The premiums are not ordinary and necessary business expenses within the meaning of IRC Section 162.Rev. Rul. 55-714, 1955-2 CB 51.Premiums paid on insurance covering the lives of individuals acting as the taxpayer’s sales agents are not deductible where the taxpayer is the beneficiary. The premiums are in the nature of a capital investment and are not ordinary and necessary business expenses.Merrimac Hat Corp. v. Comm., 29 BTA 690 (1934).Under a conditional sales contract for the sale of a sole proprietorship, the purchaser was required to carry insurance on the life of the seller. The purchaser, who was the beneficiary, agreed to use the proceeds to pay the balance of the purchase price in the event of the seller’s death. It was held that the premiums were not deductible because they were in the nature of a capital investment.Whitaker v. Comm., 34 TC 106 (1960).Planning Point: If a business is purchasing insurance on the life of someone who is neither a key employee nor a shareholder, the existence of an insurable interest should be verified. Because of recent instances of “investor owned life insurance” and “stranger owned life insurance,” life insurance companies and courts have become more focused on insurable interest. The taxpayer purchased a contingent remainderman’s interests in a trust. The taxpayer also purchased insurance on the lives of the remaindermen to protect the taxpayer’s investment in the event the remaindermen failed to survive the life tenant. The taxpayer claimed a deduction for his premium payments. The Tax Court held that the premiums were not deductible expenses but were expenses incurred for obtaining tax-exempt income. Consequently, they were nondeductible by reason of the predecessor to IRC Section 265(a)(1).Jones v. Comm., 25 TC 4 (1955), aff’d, 231 F.2d 655 (3rd Cir. 1956).Planning Point: Promoters often market “deductible” life insurance programs to business owners. Before purchasing life insurance under a purported tax deductible arrangement, the business owner should consult a qualified tax advisor. As a general rule, the premiums on life insurance are not a deductible business expense. Furthermore, purported tax deductible life insurance arrangements could be deemed to be “listed transactions” or “substantially similar to listed transactions”.