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3. The arrangement is not part of a terminate the enjoyment of aspects of mutually agree to terminate the arrange-
group term life insurance plan (un- the split-dollar arrangement; and ments. Absent a contractual right to
less the plan provides permanent ■ Even if the full values of the life terminate the life insurance policies, the
benefits).4 insurance policies were not includible court could not conclude that Levine
The Tax Court concluded that the in Levine’s estate under Sec. 2036 had any possession or rights to their
split-dollar arrangement at issue met or Sec. 2038, the restrictions in the cash-surrender values.
these requirements. Noting that the final split-dollar arrangement should be The Tax Court rejected the IRS’s
regulations create two distinct regula- disregarded and the estate should contention that Levine retained control
tory regimes (the economic-benefit include the policies’ full cash- under the principles of contract law even
regime and the loan regime) to govern surrender values in its taxable value though only the insurance trust had the
the income and gift tax consequences under Sec. 2703. express power to terminate the deal and
of split-dollar arrangements according Secs. 2036 and 2038: The Tax pay income to the estate because, the
to who owns the life insurance policy, Court determined that life insurance IRS argued, she could allow her estate to
the court concluded that the insurance policies could not constitute the “prop- modify the terms of the arrangements.
trust owned the policies, and the loan- erty” at issue in this case because the For the property at issue to be included
regime rules would apply. However, an insurance trust had always been their in the estate under the broad language of
exception to the general rule provides owner. It further determined that the Sec. 2036(a)(2), the court stated, the de-
that the donor is treated as the owner receivable also could not constitute cedent’s power was required to be in the
of the contract if the only right or eco- the property, noting that the property arrangement and not speculative under
nomic benefit the donee receives under was essentially retained, as opposed to general principles of law. The court
a split-dollar life insurance arrangement transferred, because it had belonged to also rejected the IRS’s contention that
is an interest in current life insurance the revocable trust and now belonged to Levine, through her attorneys-in-fact,
protection. Noting that Sec. 2042 (re- the estate. Ultimately, the court found stood on both sides of these transac-
garding the inclusion of life insurance in that Levine made a voluntary inter vivos tions and, therefore, could unwind the
the estate of a decedent) applies to life transfer within the meaning of Secs. split-dollar transactions. Because the
insurance policies only on a decedent’s 2036(a) and 2038 when she (via the insurance trust owned the life insurance
own life, not split-dollar arrangements revocable trust) transferred $6.5 million policies and the trustee was the South
on the lives of others, the court found to the insurance trust. Dakota Trust, which was directed by
that neither Sec. 2042 nor its regulations The Tax Court further analyzed the the investment committee with Larson
were part of the requisite analysis in transaction in light of its previous rul- as its only member, the court concluded
this case. ings in similar arrangements. The court that the only person on both sides of the
The IRS argued that the transaction determined that Levine’s transfer of transaction was Larson.
at issue was a scheme to reduce Levine’s $6.5 million gave her the right to the In considering each of Larson’s
estate tax liability and, if it was a sale, greater of a refund of the $6.5 million or roles and how to apply Secs. 2036(a)
was not a bona fide transaction because the cash-surrender values of the policies and 2038, the Tax Court found that
it lacked a legitimate business purpose. after both Nancy and Larry died or the Larson could not surrender the life
The estate should have reported the policies were canceled. Distinguishing insurance policies in his capacity as
cash-surrender values of the policies these facts from those at issue in Estate attorney-in-fact and did not retain any
rather than the value of the receivable, of Cahill 5 and Estate of Morrissette right to possession or enjoyment of
the IRS asserted, reasoning that: (Morrissette II),6 the court stressed that, the transferred property. Additionally,
■ Under Sec. 2036, Levine retained in the current case, the split-dollar ar- the court rejected the IRS’s contention
the right to income, or the right rangements between the revocable trust that Larson retained control because he
to designate who would possess and the insurance trust provided that could, in his capacity as the sole member
the income, from the split-dollar only the insurance trust had the right to of the investment committee, designate
arrangement; terminate the split-dollar arrangement. who would possess or enjoy the cash-
■ Under Sec. 2038, she maintained In Cahill and Morrissette II, the donor, in surrender value of the properties by
the power to alter, amend, revoke, or conjunction with a second party, could either surrendering them or terminating

4. Regs. Sec. 1.61-22(b)(1). 6. Estate of Morrissette, T.C. Memo. 2021-60.
5. Estate of Cahill, T.C. Memo. 2018-84.

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