Rev. Rul. 82-85

ISSUE

What are the estate tax consequences when proceeds of a life insurance policy on a decedent's life are payable to a wholly owned corporation of the decedent and then to the decedent's estate pursuant to a stock redemption agreement?

FACTS

D was the sole shareholder of X Corporation. At the request of D, the Board of Directors caused X Corporation to obtain and pay the premiums on a life insurance policy on D's life. The face value of the policy was 50x dollars. D and X Corporation agreed that the insurance proceeds would be used to redeem that portion of D's stock equal in value to the insurance proceeds. The stock would be redeemed at a price determined by a formula contained in the agreement. Pursuant to this agreement X Corporation was irrevocably designated as beneficiary of the life insurance policy and had all incidents of ownership in the policy. D died in 1980.

X Corporation received the 50x dollars in insurance proceeds, and pursuant to the agreement used all of the proceeds to redeem forty percent of its shares.

LAW AND ANALYSIS

Section 2033 of the Internal Revenue Code provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of death. Section 20.2031-2(f) of the Estate Tax Regulations provides that, in valuing a decedent's closely held corporate stock, consideration shall be given to the proceeds of life insurance policies payable to or for the benefit of the company.

Section 2042(1) of the Code and section 20.2042-1(b)(1) of the regulations provide for the inclusion in the gross estate of the proceeds of insurance on the decedent's life receivable by or for the benefit of the decedent's estate.

In the instant case, since the redemption of part of the estate's stock in exchange for the payment of the insurance proceeds to the estate did not alter the estate's 100% ownership of X Corporation, X Corporation could be viewed as a mere conduit for payment of the insurance proceeds to the estate. Under this view, the insurance proceeds would be includible in D's gross estate under section 2042(1) of the Code.

However, the Estate Tax Regulations consider the designation of X Corporation as beneficiary to be significant for purposes of determining whether the proceeds of the life insurance policy owned by X Corporation should be included in the gross estate of its sole shareholder under section 2042 of the Code. See section 20.2042-1(c)(6) of the regulations, which provides that a corporation's incidents of ownership are not attributed to the sole or controlling stockholder, if the proceeds are payable to the corporation. Rather, this regulation provides that in such situations the life insurance proceeds should be considered in determining the value of the decedent's stock that will be included in the gross estate under section 2033.

Estate of Huntsmen v. Commissioner, 66 T.C. 861 (1976), acq., 1977-1 C.B. 1, presented a factual situation similar to this ruling. There, life insurance proceeds payable to two corporations were paid over pursuant to a redemption agreement to the estate of the sole stockholder of the two corporations. The Tax Court in Huntsman included the life insurance proceeds as a corporate asset in determining the value of the corporation's stock under section 2031 of the Code and section 20.2031-2(f) of the regulations.

HOLDING

The proceeds of the life insurance policy on the decedent's life should be reflected in the valuation of decedent's X Corporation stock, which is included in decedent's gross estate under section 2033 of the Code. The insurance proceeds are not separately included in the decedent's gross estate under section 2042.