Rev. Rul. 70-148

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 7997, C.B. IX-1, 210 (1930).

The question presented is whether for income tax purposes insurance premiums paid by the taxpayer under the circumstances described below are deductible as a business expense pursuant to section 162 of the Internal Revenue Code of 1954 or treated as a payment pursuant to section 264 of the Code.

The taxpayer, a domestic corporation, and an insurance company entered into a blanket insurance contract for the taxpayers' employees. Under the terms of the contract insurance policies were issued to the individual employees and the entire amount of the premiums were paid by the taxpayer. The master contract under which the individual policies were issued contained the following conditions:

Premiums: The premium for each policy issued shall be paid by the employer annually in advance. The premium to be charged on any policy accepted at standard rates shall be the premium as published by the company on the date of issuance of the new policy for the age attained by the insured at that time. Substandard cases requiring an extra premium will be rated individually.

The employer shall furnish the company with a signed application for insurance in accordance with the schedule on page 1, from each of his employees who has completed 1/30 months of service at the date of this agreement, from all other employees as soon as they complete 3 months of service, and from each employee who becomes entitled to an increase in the amount of his insurance.

The employer shall renew from year to year the policies of insurance on all employees who are retained in service.

Failure to comply with the above conditions will terminate this agreement.

Insurability: The company will consider evidence of insurability when presented on Form No. ____. No evidence of insurability will be required for an increase in the amount of insurance on any employee who remains continuously in the service of the employer, provided such increase is made in accordance with the provisions outlined in the "Schedule of Insurance" on page 1 of this agreement.

Assignment of the policies: The employer shall require from each insured employee the execution of an assignment in favor of the employer on forms provided by the company for that purpose.

Termination of employment: Upon termination of employment of an insured employee the employer shall elect one of the following options:

(1) Surrender the policy issued to such insured employee and receive in exchange therefor the cash value of said policy as provided therein.

(2) Execute a release of assignment, if the policy is to be given to insured employee.

The amounts for which the individual employees were insured under these policies varied according to the length of time the employee had been in the service of the taxpayer. The policies afforded the employees death benefits payable to their dependents in the event they died while in the service of their employer, disability protection in the event they became disabled through sickness or accident, and an annuity in the event they reached the age of 65 and retire. The beneficiaries were designated by the insured and, immediately after the policies were issued, joined with the insured in assigning the policies to the taxpayer, as provided under the terms and conditions of the master contract. The assignment thus executed reads as follows:

For one dollar and other valuable considerations, receipt of which is hereby acknowledged, we hereby assign, transfer, and set over to the __________, a corporation of __________, and designated as the employer of the insured, all out right, title, and interest in and to the annexed policy No. __, issued by the X Company, upon the life of __________ with the right to such assignee to surrender the policy or to exercise any and all options, rights and privileges in said contract given to the insured or beneficiary without their consent, provided, however, that in the event of the death or disability of the insured or the maturity of the policy while the insured is in the service of the __________ and while the policy is in force the said assignee shall receive the proceeds or any benefits or income in, trust for the insured or beneficiary, whichever may be entitled to the same under the terms of the policy, but payment to the assignee hereunder shall relieve the X Company of all further liability and it shall not be required to see to the application of the proceeds of the policy by the said assignee as trustee. [Emphasis added.]

Although the policies were written under the general rules of group insurance, they cannot be classified as such in all particulars. Although group insurance policies are usually one-year renewable term policies, without cash or loan value, and without paid-up or annuity provisions, the policies in the instant case included such provisions. The assignment requested by the taxpayer and noted in the master contract was to enable the taxpayer to carry out his general plan of providing valuable insurance for its employees and to prevent the employees from borrowing on the cash surrender or loan value.

Section 264(a)(1) of the Code provides that no deduction shall be allowed for premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.

The controlling question is whether the taxpayer is directly or indirectly a beneficiary under these policies.

In the instant case, the master contract with the accompanying papers, executed contemporaneously with the execution of the policies and as part of the contract, are to be construed and considered with it in arriving at a proper solution of the question. The taxpayer is a beneficiary by assignment of the policies, inasmuch as it alone is entitled to receive the payments thereunder from the insurance company, and is indirectly a beneficiary, to the extent that it may terminate the policies at will without the consent of the employees and receive the cash surrender values. The master contract and assignment expressly reserves to the taxpayer this exclusive right to terminate the policy. In the event of a receivership, the receiver could surrender the policies and add the proceeds thus acquired to the assets for the benefit of creditors. Therefore, the taxpayer is an indirect beneficiary under the policies within the meaning of section 264(a)(1) of the Code.

Accordingly, it is held that the premiums paid on the insurance policies in the instant case are not deductible as a business expense pursuant to section 162 of the Code but are payments within the purview of section 264(a)(1) of the Code.

G.C.M. 7997 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.