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Taxpayer wins big on insurance valuation at Levin’s estate

On February 28, the Tax Court issued its long-awaited decision Marion Levin’s estate c. commissioner (158 TC No. 2), the latest in an ongoing saga of Internal Revenue Service challenges in intergenerational split-dollar cases. The outcome of the case was that $6.5 million receivables ($6.5 million refers to the premiums paid. The amount paid upfront premiums for two different policies with a total face value of approximately $17.25 million) was reduced to $2,282,195. Was given a discount of – 65% off! The parties determined that the receivable could have a value of $2,282,195—if the taxpayer prevails on the IRS’s changes to Internal Revenue Code Sections 2036, 2038 and 2703.

background

what happened here levin,

  • First, Marion created an irrevocable life insurance trust (ILIT) to own two life insurance policies. The ILIT was signed by Marion’s children and a business associate, all actually lawyers, and a trust company as an independent trustee.
  • ILIT also had an investment committee in the form of a single individual, the same business associate who signed ILIT with the children. The court observed that this committee had a fiduciary duty to prudently direct the investments of ILIT.
  • To pay an upfront premium of $6.5 million to buy the two insurance policies, ILIT took most of the borrowing through a split-dollar agreement.
  • Under split-dollar agreements:

    • ILIT agreed to buy the policies.
    • Marion also had a revocable trust, which agreed to pay premiums on policies (borrowed money to pay premiums).
    • ILIT agreed to hand over the policies to the Revocable Trust as collateral.
    • ILIT has agreed to pay the revocable trust for its investments – the greater of: (1) the premium paid, or (2) the cash surrender value (CSV) of the policy either on the death of the insured or upon termination date, if the arrangement was terminated before maturity.

  • In the end, only the ILIT was empowered to terminate the arrangements and surrender the policies. This Court has considered this last point to be particularly important.

Issues before the Tax Court

The preceding steps all took place in late 2008. After Marion’s death, on Jan. On September 22, 2009, the IRS challenged his estate tax return and eventually issued a notice of shortfall in excess of $3 million, along with a penalty based on the difference between the value of the receivable estate tax return and the receivables of $6.5 million. . Following the terms, the Tax Court had to decide the receivable split-dollar value in the property and what the penalties should be if any depreciation was found. To do this, the court had to decide:

  • Does Treasury Regulations Section 1.61-22 govern estate tax consequences here? and if not:
  • What was the nature of the decedent’s ownership interest, as created by the split-dollar transaction?
  • Does IRC Section 2036 or 2038 require the CSV of policies to be included in the Gross Assets?
  • Do IRC Section 2703 and its Valuation Rules apply to property interest in property and, if so, how does this affect the value of the interest?

tax court ruling

The court’s ruling provides a clean-up for the property, leaving it without significant deficiencies and no penalty.

  1. The court said that Trees. Registration Section 1.61-22 only governs the gift tax consequences of the transaction and does not help the IRS with the estate tax issue.
  2. On the issue of which assets were transferred, the court held that the assets “cannot be a life-insurance policy at issue, as these policies are always owned by an insurance trust.” However, the transferred property may also not be receivable as the property was first revocable trust and then property.
  3. So which rights remain intact? The court found that Marion retained the split-dollar receivable, nothing more. The court also found that holding this receivable did not give Marion the right to a CSV of policies—only the right to wait until policies expire or maturity and then collect the $6.5 million, or CSV.

other case specific

On this last point, the Court found a very important difference between levin aside and Cahill And Morissette on the other:

  • In property of Morissette C. ComereThe Donor and the Sister may mutually agree to terminate the Agreement.
  • In property of CahillThe agreement can be terminated only by written agreement of the donor and can be done by acting unanimously.
  • In contrast, in levinILIT, by its Investment Committee, was the sole authority. to end the arrangement.

The court noted that “without any contractual right to terminate the policies, we cannot say that Levine had any right or authority over their cash-surrender values.”

Ability to surrender policies

The IRS also argued that Marion stood on both sides of these transactions and could therefore open the arrangements at will. In fact the lawyers took over the revocable trust, the court agreed. However, ILIT had an independent trustee, and the trustee was directed by the Investment Committee – one of the trustees of the revocable trust. The court found that the sole member of the investment committee had a fiduciary duty to the beneficiaries of ILIT (which included Marion’s grandchildren) that would have prevented him from surrendering the policies.

Therefore, the ability to surrender policies to their CSV cannot be described as an authority maintained by Marion, and the IRS’s efforts to get Section 2036 to include the policies in the property failed. Their arguments for inclusion under Section 2038 failed for the same reasons.

Section 2703 Not Applicable

Ultimately, the IRS argued that the split-dollar arrangement was a way of restricting Marion’s right to control the $6.5 million in cash paid for policies and, thus, to reduce its value. By disregarding this restriction according to the valuation rules of Section 2703, the IRS also came to its preferred value without any exemptions.

The court held that the reference to “any property” in section 2703 refers to the property of a property and not to the property of any other entity. and because in the property levin Have Receivables – Not Policies – Section 2703 does not help the IRS. Because there were no restrictions on the split-dollar receivable (Marion could sell it or do anything he could with it), there were no restrictions to disregard.

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