February 2011

Jay Weill wins significant Tax Court case

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Jay Weill, tax attorney at Sideman & Bancroft, wins significant Tax Court case regarding the taxability of distributions of life insurance policies from a nonqualified employee-benefit plan that had surrender charges in excess of their stated value.

In Schwab v. Commissioner, the tax court addressed the fair market value of life insurance policies distributed to Michael Schwab and Kathryn Kleinman, shareholders of Angels & Cowboys, Inc., after their employer’s employee benefit trust was dissolved. The court determined that the “amount actually distributed” was the fair market value of the policies received, including any applicable surrender charges.

Schwab and Kleinman, on the advice of their accountant, had purchased variable universal life insurance policies through their business, held in a multiple-employer welfare benefit trust. These policies, a mix of life insurance and investment vehicles, carried surrender charges, which were central to the dispute. The IRS had challenged the value of the policies, but the court ruled that surrender charges may be factored into the fair market valuation.

The decision reaffirmed the tax court’s earlier rulings that both the value of distributed insurance policies and associated charges can be part of determining taxable distributions.

See Michael Schwab v. Commissioner, 136 T.C. No. 6