The IRS has been putting forth effort to convince the U.S. Tax Court to agree upon the treatment of intra-family life insurance agreements. The tax code prevision, Section 2703, addresses certain transfer restrictions that are contained in buy-sell agreements. When passing family businesses on to the next generation, split-dollar life insurance arrangements are commonly used, but under the tax code provision, the value of the property transferred would decrease.
In buy-sell agreements, the Section 2703 requires that certain transfer restrictions on property are not considered if the transfer to its heirs are below-market value. A significant amount of split-dollar arrangements would be negatively effected by a ruling for the IRS. Similar to the dispute with the estate of Clara Morrissette, where the tax court ruled what constitutes a gift in the context of a split-dollar life insurance policy.
“The IRS is being very creative. It's a misdirection. It's the asset that is being valued. The IRS didn't like the result on the economic benefit arrangement at issue in last year's decision, so it's trying to come up with something else," Tax Partner Joshua Husbands said.
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