In Machacek v. Commissioner, the Sixth Circuit concluded that when a shareholder receives economic benefits from a split-dollar arrangement, the regulation requires that those benefits must be treated as a distribution of property to the shareholder.
In Machacek, the taxpayers’ S corporation provided the taxpayer with a life insurance policy and paid the $100,000 annual premium in 2005. The S corporation deducted the $100,000 premium and, as a result, the $100,000 amount was not included in the taxpayers’ individual income tax return. The taxpayers also did not include as income the economic benefits flowing from the increase in value of the life insurance policy.
The issue in front of the Sixth Circuit was the tax treatment of the economic benefits flowing to the taxpayer-husband as a result of the S corporation’s payment of the premium.
The Tax Court held that the taxpayers must include the economic benefits in their individual income.
The Sixth Circuit reversed, finding that the Tax Court erred in failing to note that the economic benefits must be treated as a distribution of property by the S corporation to the shareholders—notwithstanding that the economic benefits flowed from a compensatory split-dollar arrangement.
The Sixth Circuit stated that Treas. Reg. Section 1.301-1(q)(1)(i) controls and noted that was not aware of any case discussion the regulation in any context.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.