Rev. Rul. 83-147
1983-2 C.B. 158.
Internal Revenue Service
LIFE INSURANCE PROCEEDS; POLICY OWNED BY PARTNERSHIP
Published: October 3, 1983
26 CFR 20.2042-1: Proceeds of life insurance
Life insurance proceeds; policy owned by partnership. Proceeds of a life
insurance policy owned by a partnership, but payable other than to or for
the benefit of the partnership, are includible in the deceased insured
partner's gross estate.
For purposes of section 2042(2) of the Internal Revenue Code, when a
partnership owns a life insurance policy on a partner's life and the
proceeds are payable other than to or for the benefit of the partnership,
is the insured partner deemed to have possessed incidents of ownership in
the policy, so that the value of the proceeds is includible in the insured
partner's gross estate?
C, D, and E are general partners in the XYZ partnership. C, D, and E
each have a 33 1/3 percent interest in the profits and capital of XYZ. On
May 15, 1974, the XYZ partnership applied for and obtained a whole life
insurance policy on the life of D.A, D 's child, was designated as
beneficiary. The premium payments were made by the XYZ partnership in
partial satisfaction of D 's distributive share of partnership income.
On September 21, 1981, D died and the face amount of the policy was paid
to A. On the date of death, D did not possess, in an individual capacity,
any incidents of ownership in the policy. All incidents of ownership were
held by the partnership.
The question presented is whether any incidents of ownership in the
policy are considered as being possessed by D by virtue of D 's position as
a partner in XYZ.
LAW AND ANALYSIS
Under section 2042(2) of the Code, the gross estate includes the proceeds
of life insurance on the decedent's life receivable by beneficiaries other
than the decedent's estate under policies in which the decedent possessed
at death any incidents of ownership that can be exercised either alone or
in conjunction with any other person.
Section 20.2042-1(c)(2) of the Estate Tax Regulations provides that the
term "incidents of ownership" is not limited in its meaning to ownership
of the policy in the legal sense. Generally, the term has reference to the
right of the insured or the insured's estate to the economic benefits of
the policy. Thus, it includes the power to change the beneficiary, to
surrender or cancel the policy, to assign the policy, to revoke an
assignment, to pledge the policy for a loan, or to obtain from the insurer
a loan against the cash surrender value of the policy.
For purposes of section 2042(2) of the Code, a partnership is generally
regarded as an aggregate of its individual partners. Any incidents of
ownership in a life insurance policy held by the partnership are
effectively held by the partners as individuals. Thus, a partner insured
under such a policy possesses incidents of ownership that are exercisable
in conjunction with the other partners. See R. Stephens G. Maxfield &
S. Lind, Federal Estate and Gift Taxation, para. 4.14[b] (4th ed. 1978).
In Estate of Knipp v. Commissioner, 25 T.C. 153 (1955), acq. in result,
1959-1 C.B. 4, aff'd on another issue 244 F.2d 436 (4th Cir.), cert.
denied, 355 U.S. 827 (1957), a partnership held 10 policies on the
decedent-partner's life, at his death. The insurance proceeds were payable
to the partnership. The court stated at page 168, "the acquisition of the
insurance appears to have been nothing more than the purchase of a
partnership asset in the ordinary course of business." The court found
that the decedent, in his individual capacity, had no incidents of
ownership in the policies, and held that the insurance proceeds were not
includible in the gross estate under the predecessor to section 2042(2) of
the Code. The Service acquiesces in the result of Estate of Knipp on the
basis that in that case the insurance proceeds were paid to the partnership
and inclusion of the proceeds under the predecessor of section 2042 would
have resulted in the unwarranted double taxation of a substantial portion
of the proceeds, because the decedent's proportionate share of the proceeds
of the policy were included in the value of the decedent's partnership
interest. See also section 20.2042-1(c)(6) of the regulations (which
adopts a similar rule with regard to life insurance proceeds paid to or for
the benefit of a corporation). Although the Service continues to agree with
the result in Estate of Knipp, it does not agree with any implication
therein that incidents of ownership possessed by a partnership should not
be attributed to an insured partner when the policy proceeds are paid other
than to or for the benefit of the partnership.
In this case, on D 's death the XYZ partnership owned a life insurance
policy on D 's life. Unlike the facts in Estate of Knipp, the insurance
proceeds were not payable to or for the benefit of the partnership, but
rather, to a third party for a purpose unrelated to partnership activities.
In such a situation, the incidents of ownership in the policy are held by
D in conjunction with the other partners. Thus, the value of the proceeds
is includible in D 's gross estate under section 2042(2) of the Code.
For purposes of section 2042(2) of the Code, when a partnership owns a
life insurance policy on a partner's life and the proceeds are payable
other than to or for the benefit of the partnership, the insured partner
possesses incidents of ownership in the policy in conjunction with the
other partners, so that the value of the proceeds is includible in the
insured partner's gross estate.
However, see Rev. Rul. 83-148, this page, this Bulletin, for the
treatment of partnership group-term life insurance.
Rev. Rul. 83-147, 1983-2 C.B. 158.