July 7, 2014
Authored by: Kathy Sherby and Stephanie Moll
Frequently, taxpayers are surprised by the fact that the ownership or receipt of a life insurance policy can result in taxable income, as was the case in Gluckman v. Commissioner.
In Gluckman v. Comm’r, No. 13-761 (2d Cir. Nov 22, 2013), the taxpayers argued that the distribution of the life insurance policies to them on their employer’s withdrawal from a non-qualified plan should not be subject to tax at all. The Gluckmans argued that the policies should not result in taxable income to them, even though (1) they were employees and majority shareholders of Fownes Brothers and Co., Inc. (“Fownes”), (2) they caused Fownes to withdraw from the welfare benefit plan that was not a tax exempt plan, and (3) on such withdrawal the Gluckmans executed change of ownership forms under which they named the successor owner as beneficiaries.
Despite notice that indicated that there was no option to avoid taxation, the Gluckmans did not include as income in TY 2003 the value of the underlying life insurance policies, including only the economic benefit of the life insurance policies. The Court rejected the Gluckmans’ argument that the policies were subject to a substantial risk of forfeiture. When Fownes withdrew from the plan, the Gluckmans were provided with change of ownership and beneficiary forms giving them the ability to name themselves or anyone they wanted as the owner and beneficiary of the underlying policies. Just because the Gluckmans chose to transfer the policies into a new non-qualified plan does not negate the fact that the Gluckmans had control of the disposition of the policies during the tax year, and, consequently were subject to income tax on the value of such assets.