Morrissette: Tax Court Clarifies Treatment of Split-dollar Life Insurance Arrangements

In April 2016, the Tax Court entered a summary judgment on Estate of Clara M. Morrissette v. Commissioner of Internal Revenue. The case centered on two split-dollar life insurance arrangements entered into by the decedent’s revocable trust and three distinct trusts in 2006. The revocable trust contributed $29.9 million to the trusts. The trusts used these funds to purchase life insurance policies covering the decedent’s three sons. In 2013, the IRS issued a notice of deficiency against the estate in the amount of $13,800,179 plus a penalty of $2,760,036. 1 The IRS characterized the $29.9 million contribution as a taxable gift, and classified the split-dollar life insurance arrangements as loans.2 The estate challenged this classification, arguing that the arrangements should be governed by the so-called “economic benefit” regime.3 The Tax Court agreed with the estate, issuing a partial summary judgment under Rule 121(a) of the Tax Court Rules of Practice and Procedure that the economic benefit regime applies to the split-dollar arrangements in this case.