# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

DRC
146 T.C. No. 11

UNITED STATES TAX COURT

ESTATE OF CLARA M. MORRISSETTE, DECEASED, KENNETH
MORRISSETTE, DONALD J. MORRISSETTE, AND ARTHUR E.
MORRISSETTE, PERSONAL REPRESENTATIVES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4415-14.

Filed April 13, 2016.

In 2006 D's revocable trust, T, entered into two split-dollar life
insurance arrangements with three distinct trusts. T then contributed
a total of $29.9 million to the trusts in order to fund the purchase of
life insurance policies on each of D's three sons. The split-dollar life
insurance arrangements provided that T would receive the greater of
the cash surrender value of the respective policy or the aggregate
premium payments on that policy upon termination of the split-dollar
life insurance arrangement or the death of the insured.
R determined that the $29.9 million contribution was a gift for
tax year 2006. R determined a gift tax deficiency against E, the estate
of D, of $13,800,179 and an I.R.C. sec. 6662 penalty of $2,760,036.
E moved for partial summary judgment under Rule 121 on the narrow
issue of whether the split-dollar life insurance arrangements are
governed by the economic benefit regime under sec. 1.61-22, Income
Tax Regs.

SERVED Apr 13 2016

-2Ijeld: Because the only economic benefit conferred upon the
trusts was current life insurance protection, the economic benefit
regime applies.

James Egbert McNair III and Kelley C. Miller, for petitioners.
Warren P. Simonsen and Rachel L. Rollins, for respondent.

OPINION
GOEKE, Judge: This matter is before us on a motion for partial summary
judgment under Rule 121(a)¹ filed by the Estate of Clara M. Morrissette (estate).
The issue for decision is whether, for valuation purposes, the split-dollar life
insurance arrangements at issue are governed by the economic benefit regime set
forth in section 1.61-22, Income Tax Regs.2

¹Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2We are not deciding whether the estate's valuation of the receivables (the
portion of the cash value of each policy the CMM Trust was entitled to receive) in
the gross estate is correct.

-3Decedent, Clara M. Morrissette, lived in Virginia at the time of her death on
September 25, 2009. Personal representatives of the estate lived in Virginia when
the petition was filed.
Background

Mrs. Morrissette and her late husband, Arthur E. Morrissette, were married
in 1933. Mr. Morrissette and Mrs. Morrissette had three children, Arthur E.

Morrissette, Jr. (Arthur), Donald J Morrissette (Donald), and Kenneth Morrissette
(Kenneth) (collectively, Morrissette brothers).
In 1943 Mr. Morrissette started a moving company called Ace Van &
Storage in Washington, D.C. From 1954 until 2002 the Morrissette family
incorporated or purchased a total of 10 companies in addition to Ace Van &
Storage (collectively, Interstate Group). All companies in the Interstate Group
were brother-sister corporations with identical ownership.
Effective January 1, 2009, all shareholders of each company in the Interstate
Group contributed their stock in those companies to Interstate Group Holdings,
Inc. (IGH), in exchange for IGH stock. After the exchange IGH remained an S
corporation while the remaining Interstate Group companies became qualified
subchapter S subsidiaries of IGH.

-4Buy-Sell Arrangement

Mrs. Morrissette established a revocable trust, the Clara M. Morrissette
Trust (CMM Trust), on August 24, 1994, appointed herself as the initial trustee,

and contributed all of her stock in each company in the Interstate Group to the
CMM Trust. In September 2006 the Morrissette brothers became successor
cotrustees of the CMM Trust to assist Mrs. Morrissette, who at that time had
attained 93 years of age and who required assistance in managing her financial
affairs.
Arthur, Donald, and Kenneth petitioned the Circuit Court of Fairfax County,

Virginia (Fairfax court) for appointment of a conservator for Mrs. Morrissette's
estate and asked the conservator to transfer additional assets to the CMM Trust.
On August 18, 2006, the court found Mrs. Morrissette to be permanently

incapacitated and appointed Cathleen A. Hatfield, an employee of the Interstate
Group, to serve as the conservator. The Fairfax court granted Ms. Hatfield broad
authority to act on Mrs. Morrissette's behalf. The conservatorship expired on

October 20, 2006.
Mrs. Morrissette, through Ms. Hatfield, established three perpetual trusts in
2006: (i) the Arthur E. Morrissette, Jr. Dynasty Trust for the benefit of Arthur and

his family (Arthur Dynasty Trust), (ii) the Kenneth Morrissette Dynasty Trust for

-5the benefit of Kenneth and his family (Kenneth Dynasty Trust), and (iii) the
Donald J. Morrissette Dynasty Trust for the benefit of Donald and his family
(Donald Dynasty Trust) (collectively, Dynasty Trusts).

On September 19, 2006, the CMM Trust was amended (2006 amendment)
to permit the trustee to "(i) pay premiums on life insurance policies acquired to
fund the buy-sell provisions of the * * * [Interstate Group's] business succession
plan, and (ii) make loans, enter into split-dollar life insurance agreements or make
other arrangements". Additionally, the 2006 Amendment authorized the trustee to
transfer each receivable from the split-dollar life insurance arrangement when paid
by each Dynasty Trust back to the Dynasty Trust owing the receivable or directly
back to each son.
On September 21, 2006, the Dynasty Trusts, the Morrissette brothers, the
CMM Trust, and all other trusts holding an interest in the Interstate Group entered

into a shareholders agreement. The shareholders agreement provided that upon
the death of Arthur, Donald, or Kenneth, his surviving siblings and their
respective Dynasty Trusts would purchase the Interstate Group stock held by or
for the benefit of the deceased sibling.3
3For example, if Arthur were the first to die, the Donald Dynasty Trust and
the Kenneth Dynasty Trust would purchase equal amounts of all of the stock held
(continued...)

-6To provide the Dynasty Trusts with the resources to purchase the Interstate
Group stock held by or on behalf of a decedent, each Dynasty Trust purchased two
universal life insurance policies, one on the life of each other brother. On October
4, 2006, (i) the Arthur Dynasty Trust purchased two universal life insurance
policies, one on the life of Donald and one on the life of Kenneth; (ii) the Donald
Dynasty Trust purchased two universal life insurance policies, one on the life of
Arthur and one on the life of Kenneth; and (iii) the Kenneth Dynasty Trust
purchased two universal life insurance policies, one on the life of Arthur and one
on the life of Donald (each a policy, and collectively, policies).
Split-Dollar Life Insurance Arrangements

To fund the purchase of the policies, each Dynasty Trust and the CMM
Trust entered into two split-dollar life insurance arrangements (each a split-dollar
life insurance arrangement, and collectively, split-dollar life insurance
arrangements) on October 31, 2006, to set forth the rights of the respective parties
with respect to the policies. The CMM Trust contributed (i) $9.96 million to the
Arthur Dynasty Trust, (ii) $9.98 million to the Donald Dynasty Trust, and (iii)

$9.96 million to the Kenneth Dynasty Trust. The Dynasty Trusts then used that

3(...continued)
directly or indirectly by Arthur.

-7money to pay a lump-sum premium on each policy to maintain that policy for the
insured's projected life expectancy.
Under the split-dollar life insurance arrangements, upon the death of the
insured the CMM Trust would receive a portion of the death benefit from the
respective policy insuring the life of the deceased equal to the greater of (i) the
cash surrender value (CSV) of that policy, or (ii) the aggregate premium payments
on that policy (each a receivable, and collectively, receivables). Each Dynasty
Trust would receive the balance of the death benefit under the policy it owns on
the life of the deceased, which would be available to fund the purchase of the
stock owned by or for the benefit of the deceased. If a split-dollar life insurance
arrangement terminates for any reason during the lifetime of the insured, the CMM
Trust would have the unqualified right to receive the greater of (i) the total amount
of the premiums paid or (ii) the CSV of the policy, and the Dynasty Trust would
not receive anything from the policy.
Each split-dollar life insurance arrangement includes the following recital:
"WHEREAS, the parties intend that this Agreement be taxed under the economic
benefit regime of the Split-Dollar Final Regulations, and that the only economic
benefit provided to the [Dynasty] Trust[s] under this arrangement is current life
insurance protection."

-8Additionally, the Dynasty Trusts executed collateral assignments of the
policies to the CMM Trust to secure payment of the amounts owed to the CMM
Trust. Neither the Dynasty Trusts nor the CMM Trust retained the right to borrow
against a policy.
Insurance Policies
The life insurance policies acquired by the Dynasty Trusts were universal
life insurance policies, a form of permanent life insurance providing the owner
with flexibility in making premium payments. Under the policies, the owner may
pay premiums in a lump-sum, over a limited number of years, over an extended
number of years, or over the life of the insured. The owner can determine the
amount of premiums she prefers to pay at the inception of the contract and may
change the amount she pays in the future from time to time. Additionally, the
owner may stop paying premiums if she experiences financial difficulties or for
any other reason and may resume paying premiums at a later date if desired.
The Arthur Dynasty Trust used the $9.96 million it received from the CMM
Trust to pay a $4.99 million lump-sum premium payment on the life of Kenneth
and used the remaining $4.97 million to pay a lump-sum premium payment on the

life of Donald. The Kenneth Dynasty Trust likewise paid a $4.99 million lumpsum premium payment on the life of Arthur and a $4.97 million lump-sum

-9premium payment on the life of Donald. The Donald Dynasty Trust paid two
lump-sum premium payments of $4.99 million, one on the life of Arthur and the

other on the life of Kenneth.
Tax Reporting

From 2006 to 2009 Mrs. Morrissette reported gifts to the Dynasty Trusts as
determined using the economic benefit regime set forth under section 1.61-22,
Income Tax Regs. The amount of each gift reported was the cost of the current
life insurance protection as determined using Table 20014 issued by the Internal
Revenue Service (IRS), less the amount of each premium paid by the respective
Dynasty Trust. Mrs. Morrissette reported the following gifts:
Net economic
Premiums paid by benefit reported as
Dynasty Trusts
gifts

Yeg

Gross economic
benefit

2006

$64,249

---

$64,249

2007

430,542

$256,127

174,415

2008

461,406

269,832

191,574

2009

487,329

280,910

206,419

4Table 2001 is a premium rate table taxpayers may use to determine the
value of current life insurance protection on a single life provided under a splitdollar life insurance arrangement.

-10After Mrs. Morrissette passed away, the estate retained Valuation Services,
Inc. (VSI), to value the receivables includible in the gross estate as of the date of
her death (valuation date). On October 5, 2010, VSI issued its opinion as to the
value of the receivables as of the valuation date. VSI also issued supplemental
reports dated October 5, 2010, for values as of October 30, 2009. The estate relied
on VSI's appraisal to report on the estate tax return the total value of the
receivables of $7,479,000 includible in the gross estate.
Procedural Facts
On December 5, 2013, respondent issued two notices of deficiency to the
estate.5 One notice of deficiency was for gift tax liability for tax year 2006 and
determined a deficiency of $13,800,179 and a section 6662 penalty of $2,760,036.
In the notice respondent determined that the estates had failed to report total gifts
of $29.9 million, the total amount of the policy premiums paid for the six splitdollar life insurance policies in 2006. On March 5, 2014, the estate timely filed a
petition for redetermination of the adjustments in both notices.

5The notice of deficiency for the estate's estate tax liability includes an
adjustment of $32,060,070 from the $7,479,000 total value of receivables as
originally reported by the estate. The estate tax notice of deficiency alternatively
characterizes the split-dollar life insurance arrangements as loans under sec.
1.7872-15(a)(2)(i), Income Tax Regs., but does not calculate adjustments under
that regulation.

-11On January 2, 2015, the estate moved for partial summary judgment under

Rule 121 on the issue of whether the split-dollar life insurance arrangements
should be governed under the economic benefit regime set forth in section 1.6122, Income Tax Regs.
Discussion
I.

Summary Judgment

The purpose of summary judgment is to expedite litigation and avoid costly,
time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90
T.C. 678, 681 (1988). Under Rule 121(b), the Court may grant summary judgment

when there is no genuine dispute as to any material fact and a decision may be
rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary
judgment, we construe factual materials and inferences drawn from them in the
light most favorable to the nonmoving party. Id. However, the nonmoving party
may not rest upon mere allegations or denials but instead must set forth specific
facts showing that there is a genuine dispute for trial. Rule 121(d); see Sundstrand
Corp. v. Commissioner, 98 T.C. at 520.
Respondent contends that there are genuine issues of material fact still in
dispute which would render summary judgment with respect to the split-dollar life

-12insurance arrangements at issue in this case inappropriate. The parties agree that
the CMM Trust provided $29.9 million to the Dynasty Trusts to purchase the
policies and that the Dynasty Trusts are the named owners of the policies.
Respondent, however, argues that the estate's motion should be denied on the
basis that the issue as to whether the CMM Trust provided the Dynasty Trusts with
an economic benefit other than the cost of current life insurance protection, as
defined under section 1.61-22(d)(3), Income Tax Regs., is a material issue of fact.
We disagree. The question in this case of whether any additional economic
benefit was provided other than current life insurance protection is purely legal.
II.

Split-Dollar Life Insurance Arrangements in General

The IRS issued final regulations in September 2003 that govern all splitdollar life insurance arrangements entered into or materially modified after
September 17, 2003 (final regulations). The final regulations define a split-dollar
life insurance arrangement as an arrangement between an owner and a nonowner
of a life insurance contract in which: (i) either party to the arrangement pays,
directly or indirectly, all or a portion of the premiums on the life insurance
contract; and (ii) the party paying for the premiums is entitled to recover all or any
portion of those premiums, and such recovery is to be made from, or is secured by,
the proceeds of the life insurance contract. Id. para. (b)(1).

-13The split-dollar life insurance arrangements at issue are governed by the
final regulations because they are split-dollar life insurance arrangements entered
into after September 17, 2003, and they are between the CMM Trust and the
Dynasty Trusts. The CMM Trust has paid a portion of the premiums on the
policies; it is entitled to recover, at a minimum, all of those premiums paid, and
this recovery is to be made from, or is secured by, the proceeds of the policies.
The final regulations provide two mutually exclusive regimes for taxing
split-dollar life insurance arrangements entered into (or materially modified) after
September 17, 2003, either the economic benefit regime or the loan regime. I_d.
subpara. (3)(i); see Our Country Home Enters., Inc. v. Commissioner, 145 T.C. __,

__ (slip op. at 29) (July 13, 2015).
The determination of which regime applies to a split-dollar life insurance
arrangement depends on which party owns, or is deemed to own, the life insurance
policy subject to the arrangement. Generally, the person named as the owner in
the insurance contract is treated as the owner of the contract. Sec. 1.61-22(c)(1),
Income Tax Regs. A nonowner is any person other than the owner who has any
direct or indirect interest in the contract. Id. subpara. (2). Under this general rule,
the Dynasty Trusts would be considered the owners of the policies and the loan
regime would apply.

-14As an exception to the general rule, the final regulations include a special
ownership rule that provides that if the only economic benefit provided under the
split-dollar life insurance arrangement to the donee is current life insurance
protection, then the donor will be the deemed owner of the life insurance contract,
irrespective of actual policy ownership, and the economic benefit regime will
apply. Id. subpara. (1)(ii)(A)(2). If, on the other hand, the donee receives any
additional economic benefit, other than current life insurance protection, then the
donee will be considered the owner and the loan regime will apply. Id.
Thus, the key question in this case that determines which party owns, or is
deemed to own, a life insurance policy is whether the lump-sum payment of
premiums made on the policies indirectly by the CMM Trust generated any
additional economic benefit other than current life insurance protection to the
Dynasty Trusts. If there is no additional economic benefit to the Dynasty Trusts,
then the CMM Trust will be the deemed owner of the policies by way of the
special ownership rule and the split-dollar life insurance arrangements will be
governed by the economic benefit regime. If any additional economic benefit is
conferred, then the Dynasty Trusts will own the policies and the loan regime will

apply.

-15As a threshold matter, the preamble to the final regulations includes an
example that is structured identically to the split-dollar life insurance
arrangements at issue. The preamble distinguishes between a donor, or the
donor's estate, who is entitled to receive an amount equal to the greater of the
aggregate premiums paid by the donor or the CSV of the contract and a donor, or
the donor's estate, who is entitled to receive the lesser of those two values. T.D.
9092, sec. 5, Gift Tax Treatment of Split-Dollar Life Insurance Arrangements,
2003-2 C.B. 1055, 1062. In the former situation, the donor makes a gift to the
donee equal to the cost of the current life insurance protection provided less any
premium amount paid by the donee. R In the latter situation, the value of the
donor's gift of economic benefits equals the cost of current life insurance
protection provided, the amount of policy cash value to which the trust has current
access, and the value of any other economic benefits, less the amount of premiums
paid by the donee. R Thus, it follows that where a donor is to receive the greater
of the aggregate premiums paid or the CSV of the contract, the possibility of the
donee receiving an additional economic benefit is foreclosed.
We are aware that the Court has previously been unpersuaded by a preamble
to regulations. M Allen v. Commissioner, 118 T.C. 1, 17 n.12 (2002) ("In
addition to the obvious fact that these documents also are not items of legislative

-16history, these documents are afforded little weight in this Court." (citing Dobin v.

Commissioner, 73 T.C. 1121, 1127 n.9 (1980))). We are not bound by the
preamble, but because it is an agency's interpretation of its statute, we apply the
standard enunciated by the Supreme Court in Skidmore v. Swift & Co., 323 U.S.
134, 140 (1944). Therefore, the Commissioner is entitled to at least the lowest
level of deference in interpreting his own regulations and their statutes. h

United States v. Mead Corp., 533 U.S. 218, 221 (2001); ADVO, Inc. v.

Commissioner, 141 T.C. 298, 322 (2013); Armco, Inc. v. Commissioner, 87 T.C.
865, 868 (1986) (explaining how a preamble is drafted and that it is a statement of
intent that represents the institutional viewpoint). Here, however, the preamble is
consistent with the estate's interpretation of the statute and contrary to
respondent's position. While we find the logic of the preamble sound, to be
thorough we will articulate why, under the final regulations, the economic benefit
regime applies.
III.

Economic Benefit Regime
For a split-dollar life insurance arrangement to be taxed under the economic

benefit regime, the owner or deemed owner will be treated as providing an annual
benefit to the nonowner in an amount equal to the value of the economic benefits
provided under the arrangement, reduced by any consideration the nonowner pays

-17for the benefits. Sec. 1.61-22(d)(1), Income Tax Regs. The value of the economic
benefits provided to the nonowner for a taxable year under the arrangement is
equal to the sum of (i) the cost of current life insurance protection, (ii) the amount
of cash value to which the nonowner has current access during the year, and (iii)
any economic benefits not otherwise described that are provided to the nonowner.
Il subpara. (2).
The cost of the current life insurance protection takes into account the life
insurance premium factors that the Commissioner publishes for this purpose. See
4 subpara. (3)(ii). The amount of the current life insurance protection is the
death benefit of the life insurance contract (including paid-up additions) reduced
by the sum of the amount payable to the owner plus the portion of the cash value
taxable to (or paid for by) the nonowner. See 4 subdiv. (i). The amount of the
insurance policy cash value is determined disregarding surrender charges or other
similar charges or reductions and including insurance policy cash value
attributable to paid-up additions. See 4 subpara. (4)(i).
To determine whether any additional economic benefit was conferred by the
CMM Trust to the Dynasty Trusts, the relevant inquiry is whether the Dynasty
Trusts had current access to the cash values of their respective policies under the

-18split-dollar life insurance arrangements or whether any other economic benefit was
provided.
A.

Current Access

The final regulations provide that the nonowner has current access to any
portion of the policy cash value to which the nonowner (i) has a current or future
right and (ii) that currently is directly or indirectly accessible by the nonowner,
inaccessible to the owner, or inaccessible to the owner's general creditors. Id.
subdiv. (ii). If the Dynasty Trusts have current access to any portion of the policy
cash value, then the special ownership rule will not apply, the Dynasty Trusts will
be considered the owners of their respective policies under the general ownership
rule, and the split-dollar life insurance arrangements will be governed by the loan
regime.
For the Dynasty Trusts to have current access under the final regulations,
the Dynasty Trusts must first have a current or future right to any portion of the
policy cash value. The split-dollar life insurance arrangements are structured so
that upon the termination of a split-dollar life insurance arrangement during the
lifetime of the insured, 100% of the CSV (including CSV attributable to premiums

paid by the Dynasty Trusts) would be paid to the CMM Trust. Additionally, if a
split-dollar life insurance arrangement were to terminate as a result of the death of

-19the insured, the Dynasty Trusts would be entitled to receive only that portion of
the death benefit of the policy in excess of the receivable payable to the CMM
Trust. Accordingly, under the split-dollar life insurance arrangements the Dynasty
Trusts had no current or future right to any portion of the policy cash value, and
thus, no current access under the regulations.
Respondent argues that the Dynasty Trusts had a direct or indirect right in
the cash values of the insurance policies by virtue of the terms of the 2006
Amendment to the CMM Trust. Under that amendment, the CMM Trust's interest

in the cash values of the policies would pass to the Dynasty Trusts or directly to
Mrs. Morrissette's sons or their heirs upon her death. However, because the CMM
Trust was a revocable trust with respect to Mrs. Morrissette, she retained an
absolute right to alter the CMM Trust throughout her lifetime. Accordingly, the
Dynasty Trusts did not have a legally enforceable right to the cash values of the
policies during the lifetime of the grantor. Furthermore, the split-dollar life
insurance arrangements did not require the CMM Trust to distribute the

receivables to the Dynasty Trusts. Rather, Mrs. Morrissette retained the right to
receipt of the receivables.
The final regulations specifically provide that a nonowner must have a
current or future right to cash value under the arrangements:

-20In the case of a split-dollar life insurance arrangement subject to the
rules of paragraphs (d) through (g) of this section, economic benefits
are treated as being provided to the non-owner of the life insurance
contract. The non-owner (and the owner for gift and employment tax
purposes) must take into account the full value of all economic
benefits described in paragraph (d)(2) of this section * * *
Sec. 1.61-22(d)(1), Income Tax Regs. When the final regulations state that "[t]he
value of the economic benefits provided to a non-owner for a taxable year under
the arrangement equals * * * [t]he amount of policy cash value to which the nonowner has current access within the meaning of paragraph (d)(4)(ii) of this
section", the regulations are referring to the split-dollar life insurance
arrangement. Id. subpara. (2) (emphasis added). The 2006 Amendment to the
CMM Trust is not part of the split-dollar life insurance arrangements between the
CMM Trust and the Dynasty Trusts.
Under each split-dollar life insurance arrangement, upon the death of the
insured, the CMM Trust would be entitled to receive a portion of the death benefit
of the policies insuring the life of the deceased equal to the greater of (i) the CSV
of the applicable policies or (ii) the aggregate premium payments made with
respect to the applicable policies. The CMM Trust obtained the receivables as a
result of entering into the split-dollar life insurance arrangements. Thus, it was
appropriate to execute the 2006 amendment to provide for the disposition of these

-21assets. Importantly, the split-dollar life insurance arrangement do not address the
disposition of the receivables by the CMM Trust and did not require or permit the
receivables be distributed to the Dynasty Trusts. Thus, the Dynasty Trusts did not
have a direct or indirect right in the cash values of the policies by virtue of the
terms of the 2006 amendment.
B.

Any Other Economic Benefit

Respondent argues that the circumstances referenced in Notice 2002-59,
2002-2 C.B. 481, apply to the split-dollar life insurance arrangements at issue
prohibiting the use of the economic benefit regime. Notice 2002-59, sec. 3.01,

2002-2 C.B. at 482, states:
Treasury and the Service understand that, under certain split-dollar
life insurance arrangements (some of which are referred to as
"reverse" split-dollar), one party holding a right to current life
insurance protection uses inappropriately high current term insurance
rates, prepayment of premiums, or other techniques to confer policy
benefits other than current life insurance protection on another party.
The use of such techniques by any party to understate the value of
these other policy benefits distorts the income, employment, or gift
tax consequences of the arrangement and does not conform to, and is
not permitted by, any published guidance.
Notice 2002-59, supra, is mainly focused on reverse split-dollar life
insurance arrangements. Under a typical reverse split-dollar life insurance
arrangement, an irrevocable life insurance trust (ILIT) purchases a large life

-22insurance policy, and the insured and the ILIT enters into a split-dollar life
msurance arrangement. Under this arrangement, the insured is entitled to the

policy's death benefit and in return pays the ILIT the greater of the actual cost of
one-year term insurance or the P.S. 58 rate.6 This arrangement is the opposite of
the typical split-dollar life insurance arrangement and thus is referred to as
"reverse split-dollar". Because life insurance costs have decreased substantially
since the P.S. 58 rates were set by the IRS, the insured's payment of economic
benefits using the P.S. 58 rates would be substantially greater than the actual
mortality charges incurred by the ILIT. With a large policy, the insured could
transfer significant sums to the ILIT and, on the basis of older IRS rulings, incur
little or no gift tax costs. In the most abusive cases, the insured would prepay the
P.S. 58 economic benefit amounts for several years. After a few years, the parties
usually terminate the arrangement. The ILIT, flush with cash from the excess
payments from the insured, either maintains the policy or cashes it out.

6The "P.S. 58" rates are the one-year premium rates set forth in Rev. Rul.
55-747, 1995-2 C.B. 228, used to determine the value of current life insurance
protection provided under a split-dollar life insurance arrangement. Notice 200110, 2001-1 C.B. 459, revoked Rev. Rul. 55-747, supra, and provided "Table 2001"
as the premium rate table to determine the value of current life insurance
protection. The premium rates set forth in Table 2001 are materially lower than
the P.S. 58 rates at all ages.

-23Notice 2002-59, supra, explains that a party to a split-dollar life insurance
arrangement can use the Table 2001 rates or the insurer's lower premium rates to
value the current life insurance protection only if the protection is conferred as an
economic benefit by one party to another. In other words, the party to a splitdollar life insurance arrangement who is entitled to current life insurance
protection cannot use Table 2001 or the insurer's published premium rates to
determine the value of the policy benefits he or she should pay to the other party.
The split-dollar life insurance arrangements between the CMM Trust and
the Dynasty Trusts bear no resemblance to the transactions Notice 2002-59, supra,
is prohibiting. Mrs. Morrissette, who was 94 at the time she set into motion these
arrangements, wanted the Interstate Group to remain in her family. To that end,
she caused the CMM Trust to pay a lump-sum premium, through the Dynasty
Trusts, on the life insurance policies held on the lives of her sons, the proceeds of
which would be employed to purchase the stock held by each of her sons upon his
death. Unlike the reverse split-dollar life insurance arrangements described in the
notice, the receivables the CMM Trust obtained in exchange for its advances
provided the CMM Trust sole access to the CSV of the policies.
Additionally, respondent argues that the "prepaid premiums" pay not only
for current insurance protection, but also for future protection, which is a benefit

-24other than current life insurance protection and requires that the arrangement be

taxed under the loan regime. This position relies on Notice 2002-59, supra, for the
proposition that prepayment of future premiums (by paying a single premium)
confers policy benefits other than current life insurance protection. This assertion,
however, assumes that the Dynasty Trusts would otherwise be required to pay the
premiums. Under the split-dollar life insurance arrangements, the Dynasty Trusts
are not required, but are permitted, to pay any portion of the policies' premiums.
The split-dollar life insurance arrangements were structured such that the CMM
Trust was obligated to pay all the premiums. Thus, under the split-dollar life
insurance arrangements, regardless of how the CMM Trust elected to pay the
premiums (whether in one lump sum or over any number of installments), the

CMM Trust would not relieve the Dynasty Trusts of any obligation to pay
premiums because the Dynasty Trusts were not required to pay any premiums.
IV.

Conclusion
Because the Dynasty Trusts received no additional economic benefit beyond

that of current life insurance protection, the CMM Trust is the deemed owner of
the life insurance contract by way of the special ownership rule under section
1.61-22, Income Tax Regs. Thus the economic benefit regime under section 1.61-

-2522, Income Tax Regs., and not the loan regime of section 1.7872-15, Income Tax
Regs., applies to the split-dollar life insurance arrangements.
In reaching our holdings herein, we have considered all arguments the
parties made, and, to the extent not mentioned above, we conclude they are moot,
irrelevant, or without merit.

To reflect the foregoing,

An appropriate order will be
issued granting petitioners' motion
for partial summary judgment.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A505763e9baa98ca4. Public record. Not legal advice.