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Section 72. - Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
(Also § 1001, 1011, 1012, 1221, and 1234A.)
Primary sale of life insurance contract; tax treatment of a sale or surrender. This ruling provides guidance to policyholders who surrender or sell their life insurance contracts.
ISSUE
What is the amount and character of A 's income recognized upon the surrender or sale of the life insurance contracts described in the situations below?
FACTS
Situation I
On January 1 of Year 1, A, an individual, entered into a "life insurance contract" (as defined in § 7702 of the Internal Revenue Code (Code)) with cash value. Under the contract, A was the insured, and the named beneficiary was a member of A 's family. A had the right to change the beneficiary, take out a policy loan, or surrender the contract for its cash surrender value. The contract in A 's hands was not property described in § 1221(a)(l)-(8).
On June 15 of Year 8, A surrendered the contract for its $78,000 cash surrender value, which reflected the subtraction of $10,000 of "cost-of-insurance" charges collected by the issuer for periods ending on or before the surrender of the contract. Through that date, A had paid premiums totaling $64,000 with regard to the life insurance contract. A had neither received any distributions under the contract nor borrowed against the contract's cash surrender value.
A determines taxable income using the cash method of accounting and files income tax returns on a calendar year basis. As of June 15 of Year 8, A was not a terminally ill individual, nor a chronically ill individual, within the meaning of § 101(g)(4).
Situation 2
The facts are the same as in Situation 1, except that on June 15 of Year 8, A sold the life insurance contract for $80,000 to B, a person unrelated to A and who would suffer no economic loss upon A's death.
Situation 3
The facts are the same as in Situation 1, except that the contract was a level premium fifteen-year term life insurance contract without cash surrender value. The monthly premium for the contract was $500. Through June 15 of Year 8, A paid premiums totaling $45,000 with regard to the contract. On...