CSV life insurance tax loss ??

[artp]

How do you handle this situation ?

Facts:

Total cash value $17,913.26

Surrender Value $ 16,294.86

Premiums Paid $ 25,431.28

Cost Basis $ 27,673.00

The above info was sent by the insurance company to my client. There were no loans on the policy and no interest credited. Would the $ 11,378.14 (cost basis less surrender value) be a deductible loss for tax puposes ? Where to take on the return ? I thought I had seen some discussion that there are two possible ways this might be handled. First, the more conservative approach was to put in on Sch A subject to 2% limit. A more aggressive approach was to take it as a ordinary loss. I would appreciate feedback from this Board. Need to get this resolved to file his return.

Thanks,

Art

[jlewis]

See Revenue Ruling 2009-13

[artp]

See Revenue Ruling 2009-13

I did look at the ruling you cited, but it appears to only deal with gain situations, not losses. Is there something I am not aware of here ?

Art

[kcjenkins]

You treat it the same way as shown in Revenue Ruling 2009-13, whether it ends up as a gain or a loss.

[Bees Knees]

You treat it the same way as shown in Revenue Ruling 2009-13, whether it ends up as a gain or a loss.

I disagree.

Page 7 of Rev. Rul. 2009-13 says:

In Century Wood Preserving Co. v. Commissioner, 69 F.2d 967 (3d Cir. 1934), a corporate taxpayer paid $98,242 of premiums on life insurance contracts over a period of several years to insure the lives of its officers. The taxpayer then sold the contracts to the officers for their cash surrender value of $57,646, claiming a loss for the difference between the total premiums paid and the amount for which it sold the contracts. The court held that the taxpayer did not have a loss, because it did not have a basis equal to the full amount of the premiums paid:

The Rev. Rul. explained that a life insurance contract is made up of two parts: 1) an investment, 2) the cost of life insurance itself.

If the premiums are greater than the cash value of the life insurance contract, the difference is considered the cost of the insurance itself. The cost of life insurance is non-deductible. Thus, there can be no deductible loss on an insurance contract.

If this were an annuity contract, that would be a different story.

[artp]

I disagree.

Page 7 of Rev. Rul. 2009-13 says:

The Rev. Rul. explained that a life insurance contract is made up of two parts: 1) an investment, 2) the cost of life insurance itself.

If the premiums are greater than the cash value of the life insurance contract, the difference is considered the cost of the insurance itself. The cost of life insurance is non-deductible. Thus, there can be no deductible loss on an insurance contract.

If this were an annuity contract, that would be a different story.

So if in my original example there was an annuity within the insurance contract with the same amounts as state from the insurance company there would be a deductible loss ?

Art

[Bees Knees]

So if in my original example there was an annuity within the insurance contract with the same amounts as state from the insurance company there would be a deductible loss ?

Art

Some annuities guarantee principal, so there is no possibility of sustaining a loss. For nonqualified annuities (those that are not part of a qualified retirement plan) that do not guarantee principal, a loss is deductible as an ordinary loss only if the annuity is a refund annuity (Rev. Rul. 61-201). The unrecovered basis in a nonrefundable annuity is not deductible (Rev. Rul. 72-193).

A loss on a nonqualified refund annuity is deductible in the same manner as losses sustained on lump-sum distributions from qualified retirement plans. Thus, if a lump-sum distribution representing the total amount in a refundable annuity is less than the unrecovered cost basis in the annuity, the difference is deductible as a miscellaneous itemized deduction subject to the 2% AGI limitation.