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corporation) pays all or part of the policy as much. He nevertheless argued that found that Sec. 301 clearly applies only
premiums and is entitled to recover all corporation/shareholder distribution to distributions by a corporation to a
or a portion of those premiums from the treatment was appropriate, relying on shareholder with respect to its stock.30
proceeds of the contract.25 recent Sixth Circuit precedent. That Thus, the Tax Court ruled that the word
The tax consequences to the parties appellate court ruled in Machacek26 that “shareholder” in Regs. Sec. 1.301-1(m)
of a split-dollar arrangement depend on under Regs. Sec. 1.301-1(m)(1)(i) (for- (1)(i) means “shareholder in his capacity
which of two mutually exclusive regimes merly Regs. Sec. 1.301-1(q)(1)(i) dur- as such.” Consequently, the court con-
applies — an economic benefit regime ing the tax years at issue) corporation/ cluded that Sec. 301 (and Sec. 1368(b))
or a loan regime. Because in this case shareholder treatment was appropriate did not apply to the arrangement. Hav-
the S corporation was the owner of the — even though it is black letter law that ing concluded what did not apply to the
policy, the economic benefit regime Sec. 301 (and therefore Sec. 1368 for S arrangement, the Tax Court next had to
applies. Thus, the owner of the policy corporations) applies only to sharehold- decide what did apply.
(here, the S corporation) is treated as ers in their capacity as shareholders and Under Sec. 1372, an S corporation
providing economic benefits to the not to shareholders in their capacity as is treated as a partnership, and a 2%
nonowner (here, De Los Santos), and employees.27 shareholder31 is treated as a partner of
these benefits must be accounted for The Sixth Circuit opined that the the partnership for purposes of apply-
consistently by both parties. The value of cross-reference in Regs. Sec. 1.301-1(m) ing income tax provisions that relate to
the benefits, reduced by any payments by (1)(i) includes any split-dollar amount, employee fringe benefits. The economic
the nonowner to the owner, is treated as whether compensatory or corporation/ benefits that the taxpayer received under
provided by the owner to the nonowner. shareholder. The court recognized that the compensatory split-dollar life in-
The tax consequences of the provi- the regulations associated with Sec. 301 surance arrangement, pursuant to Tax
sion of economic benefits, in turn, generally deem that section28 to apply Court precedent, are “employee fringe
depend on the relationship between the only if the distribution were paid to the benefits” for purposes of Sec. 1372.32
owner and the nonowner. In this regard shareholder in his or her capacity as And those benefits are therefore taxed
the relationship generally can be either such.29 Notwithstanding this, the court as guaranteed payments (ordinary
compensatory or corporation/share- concluded that the specific rule of Regs. income) under Sec. 707(c). However,
holder (Sec. 1368(b) distribution). If Sec. 1.301-1(m)(1)(i) regarding the these guaranteed payments are treated as
compensatory, there would be ordinary benefit of split-dollar life insurance must self-employment income only where, as
compensation income. If a Sec. 1368(b) override any general rule, such as Regs. here, the entity is engaged in a trade or
distribution, there would only be return Sec. 1.301-1(d). business.33
of capital to the extent of outside basis, The issue with the Sixth Circuit’s To conclude, the Tax Court treated
any excess being capital gain. reasoning, as the Tax Court emphatically De Los Santos as receiving split-dollar
From the facts of the case, the split- pointed out, is that it failed to consider benefits as a guaranteed payment. He
dollar arrangement was clearly compen- that the statute prevails over the regula- therefore recognized ordinary income.34
satory; even De Los Santos conceded tions where there is a conflict. The court In contrast, the Sixth Circuit would have

25. Regs. Sec. 1.61-22(b)(1). Certain compensatory and certain corporation/ 422 F.2d 198 (5th Cir.1970). Interestingly, an appeal of De Los Santos
shareholder relationships, as described later, are automatically split- would lie to the Fifth Circuit, the affirming court of Haber.
dollar (Regs. Sec. 1.61-22(b)(2)). 31. A 2% shareholder generally is defined to include any person who owns
26. Machacek, 906 F.3d 429 (6th Cir. 2018), rev’g and remanding T.C. more than 2% of the S corporation’s stock (Sec. 1372(b)).
Memo. 2016-55. The IRS nonacquiesced in the Sixth Circuit’s opinion 32. Our Country Home Enterprises, 145 T.C. 1, 51 (2015). See also Hurst,
(AOD 2021-02). 124 T.C. 16 (2005).
27. Sec. 301(a). 33. Regs. Sec. 1.1402(a)-1(b).
28. And therefore Sec. 1368 in the Subchapter S context (Sec. 1368(a) and 34. The S corporation is generally allowed no deduction for premiums paid
Regs. Sec. 1.1368-1(a)). or benefits transferred to the taxpayer,
29. Regs. Secs. 1.301-1(a) and (d). unless there is a transfer of ownership of the contract (Regs. Secs.
30. In particular, there is nothing in Sec. 301 that alludes to compensation. 1.61-22(f)(2)(ii) and 1.83-6(a)(5)(i)).
See Haber, 52 T.C. 255, 267-8 (1969), aff’d per curiam,

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