Rev. Rul. 55-713

Advice has been requested as to whether the portion of insurance premiums paid by an employer, to the extent of the cash surrender value, under an insurance policy covering the life of an employee, constitutes additional income to the employee.

In the instant case, Y corporation entered into a contract with B to render services as its president for a period of 5 years in consideration of an annual salary together with stipulations for the payment of certain specified amounts in the event of his disability and upon his death to his designated beneficiaries. In order to protect itself against contingent liabilities resulting from the above agreement, Y corporation purchased as sole owner and beneficiary several policies of ordinary life insurance on the life of B in the amount of its total liability under the contract. Pursuant to a supplemental agreement, it was provided that B had the option to assist in the payment of premiums on one or more of the policies in return for a partial control over the distribution of death benefits thereunder. Under the agreement, the gross premium less the amount of any dividends would be paid in part by Y corporation to the extent of the increase in cash surrender value for any taxable year and the balance would be paid by B. Both the Y corporation and B would each have separate ownership rights during his lifetime with the right of B to designate the beneficiary under the policies for that part of the proceeds equal to the excess of the face amount payable under each policy over the cash surrender value. The Y corporation would continue to be the beneficiary under the policies to the extent of the cash surrender value which would be available for general corporate purposes. Upon termination of B's employment, Y corporation agrees, upon B's election, to (1) sell its ownership interest in the life insurance contracts to B for an amount equal to the larger of the gross premiums it has paid or the guaranteed cash values in its portion of the policies; or, (2) assign to B all of its ownership interest in such policies except an amount equal to the guaranteed cash surrender value at the date of the assignment, provided, however, if B defaults on any future premiums the corporation may reassert its rights to ownership. B elected to share the cost of the life insurance policies.

Generally, for tax purposes premiums paid by an employer on the ordinary type of life insurance policy on the life of its employee who is permitted to designate the beneficiary under the policy constitutes taxable income to the employee. O. D. 627, C. B. 3, 104 (1920); G. C. M. 8432, C. B. IX-2, 114 (1930). Likewise, it has been held that it makes no difference whether the insured employee is entitled to designate the beneficiary under the policy the proceeds of which inure directly to the benefit of the employee's beneficiary or his estate. G. C. M. 16069, C. B. XV-1, 84 (1936).

In the instant case, the substance of the insurance arrangement between the parties is in all essential respects the same as if Y corporation makes annual loans without interest, of a sum of money equal to the annual increases in the cash surrender value of the policies of insurance taken out on the life of B. The mere making available of money does not result in realized income to the payee or a deduction to the payor.

In view of the foregoing, it is held that:

1. No realization of taxable income by B will result upon the payment of the portion of the premiums by Y, and Y will receive no deduction for such payment.

2. The portion of the proceeds of the policies payable upon the death of B to the Y corporation and to the designated beneficiary of B would not be included in the gross income of the Y corporation or of B's beneficiary under the provisions of section 101(a) of the Internal Revenue Code of 1954 or section 22(b)(1) of the Internal Revenue Code of 1939