Rev. Rul. 59-195

Advice has been requested as to the manner of computing the value of an insurance policy acquired under the circumstances described below.

In the instant case, a corporation purchased an insurance policy on the life of one of its employees. The corporation designated itself as the beneficiary under the policy and paid the premiums thereon for several years.

During the taxable year under consideration, the corporation sold the aforementioned insurance policy, on which further premiums were to be paid, to the insured employee for the cash surrender value of the policy at the date of sale. By purchasing the policy, the insured employee acquired the right to designate a beneficiary of his own choosing.

The specific issue in this case is whether the case surrender value is a proper basis of valuation of this type of insurance policy in computing taxable gain to the employee on the purchase transaction.

In Charles Cutler Parsons v. Commissioner , 16 T.C. 256, the Tax Court of the United States concluded that the taxpayer, by exchanging one type of insurance contract for another, received property having a value in excess of the cash surrender value. The court held that, for the purpose of computing the taxable gain, the fair market value of a single premium life insurance policy issued on the date the transaction took place was its cost, rather than its cash surrender value.

This basis of valuation was also prescribed by the Supreme Court of the United States for gift tax purposes where gifts of single premium life insurance contracts were made at the time of their purchase. See Florence Guggenheim v. Martha E. Rasquin , 312 U.S. 254, Ct.D. 1487, C.B. 1941-1, 445.

In a case involving gifts of paid-up life insurance contracts long after their purchase, so that the original single premium purchase price no longer represented their value, the Supreme Court of the United States held that the cost of replacement of the policy at the then attained age of the insured is the best available criterion of the value of the policies at the date of the gift. See United States v. Joseph T. Ryerson et al , 312 U.S. 260, Ct. D. 1488, C.B. 1941-1, 447.

Based on the foregoing court decisions, the computation of the value of the policy, in the instant case, at the date of purchase would be relatively simple if it were a single premium or paid-up policy. However, the instant case involves an insurance policy on which further premiums are to be paid by the taxpayer. With respect to the valuation of insurance contracts which have been in force for some time and on which further premiums are to be paid, for Federal gift tax purposes, section 25.2512-6 of the Gift Tax Regulations provides, in part, as follows:

* * * The value of a life insurance contract * * * issued by a company regularly engaged in the selling of contracts of that character is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts. As valuation of an insurance policy through sale of comparable contracts is not readily ascertainable when the gift is of a contract which has been in force for some time and on which further premium payments are to be made, the value may be approximated by adding to the interpolated terminal reserve at the date of the gift the proportionate part of the gross premium last paid before the date of the gift which covers the period extending beyond that date. If, however, because of the unusual nature of the contract such approximation is not reasonably close to the full value, this method may not be used. * * *

It is the position of the Internal Revenue Service that, in order to avoid the possible inconsistency of two different valuations of the same insurance contract for Federal income tax and for Federal gift tax purposes, the method of valuation prescribed by section 25.2512-6 of the Gift Tax Regulations should be followed for Federal income tax purposes in situations similar to the instant case.

Accordingly, it is held that where an employer purchases and pays the premiums on an insurance policy on the life of one of its employees and subsequently sells such policy, on which further premiums must be paid, to the employee, the value of the policy, for computing taxable gain to the employee in the year of purchase, is its interpolated terminal reserve value at the date of the sale, plus the proportionate part of any premium paid by the employer prior to the date of the sale which is applicable to a period subsequent to the date of the sale.

Amounts paid by the Veterans Administration for services rendered by psychology trainees at Veterans Administration hospitals. See Rev. Rul. 59-118, page 41.