Internal Revenue Service
Revenue Ruling
TaxLinks.com
smRev. Rul. 68-5
1968-1 C.B. 99
Sec. 264
IRS Headnote
Where one of the conditions of a Small Business Administration (SBA) loan is that there be an assignment of life insurance from the taxpayer corporation to the SBA, on the lives of its officers, the corporation is considered an indirect beneficiary of the policies under section 264(a)(1) of the Internal Revenue Code of 1954 and the premiums paid by it on the policies are not deductible.
Sol. Op. 136, C.B. I-1, 197 (1922), superseded.
Full Text
Rev. Rul. 68-5
Advice has been requested as to whether premiums paid for life insurance policies are deductible under the circumstances described below.
A corporation was granted a loan by the Small Business Administration (SBA). One of the conditions of obtaining the loan was that there be an assignment of life insurance from the corporation to the SBA, on the life of each of its corporate officers, in the amount of 50 x dollars each. Ten-year life policies were taken out on each officer as required under the loan agreement. The beneficiary under these policies was the SBA to the extent of its interests with the balance, if any, to the estate of the insured. The corporation has paid the premiums on these policies and the question presented is whether they may be deducted as ordinary and necessary business expenses.
Section 264 of the Internal Revenue Code of 1954 expressly denied a deduction for certain life insurance premiums. It reads, in part, as follows:
(a) GENERAL RULE.-No deduction shall be allowed for.-(1) 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 . Emphasis added
As previously held under identical language of prior law in Solicitor's Opinion 136, C.B. I-1, 197 (1922), a corporate or individual taxpayer who takes out a policy of life insurance in favor of a lender in order to procure a loan is not entitled to deduct the premiums paid on such policy if, in the event of payment of the proceeds, such proceeds will be applied in satisfaction of the obligation of the taxpayer.
In Edward E. Rieck v. Heiner , 25 F.2d 453 (1928), T.D. 4161, C.B. VII-1, 200 (1928), certiorari denied 277 U.S. 608 (1928), it was held that the taxpayer was `directly or indirectly' benefited from premium payments when life insurance policies were taken out by him on his own life and made payable to a creditor on the insistence of the creditor that it be used as collateral to secure a loan.
In the present case, (1) the subject life insurance policies enabled the taxpayer corporation to secure the loan, and (2) upon the death of any of the corporate officers the policy proceeds would be used to liquidate any obligations remaining on the loan. Therefore, the corporation is an indirect beneficiary under the policies within the meaning of section 264(a)(1) of the Code and the regulations thereunder.
Accordingly, the premiums paid by the corporation on the policies are not deductible.
Solicitor's Opinion 136 is hereby superseded, since the position set forth therein is incorporated in this Revenue Ruling.