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TAX MATTERS

policies because those were owned by the Supervisory penalty
committee.” The investment committee
approval must only
consisted of one person: Bob Larson insurance trust, and Larson was the only
(Levine’s longtime friend and business person with the power to terminate those precede assessment, not
partner). policies. However, she had to wait for the
first formal notice
The insurance trust then bought two deaths of both Nancy and her husband or
last-to-die insurance policies on the lives the termination of the policies in order to The Ninth Circuit overturned a Tax
of Nancy and her husband. Levine’s receive the cash surrender value.
revocable trust paid the premiums on The IRS argued that at her death, Court decision and disagreed with
those policies, which totaled $6.5 million. under Sec. 2036, Levine retained the the precedent it was based on.
The insurance trust owned the life insur- right to income, or the right to designate
By Alistair M. Nevius, J.D.
ance policies. who would possess the income, from
Under the split-dollar arrangement, the split-dollar arrangement, and under
when the last surviving insured died or Sec. 2038 she maintained the power to
the insurance policies were terminated, alter, amend, revoke, or terminate the
the insurance trust was required to pay enjoyment of aspects of the split-dollar
Levine’s revocable trust the greater of arrangement. Thus, she was the owner
the premiums paid or the cash surrender of the policies at her death, and the cash
value of the policies (the split-dollar surrender value of the policies should be
receivable). Only Larson, as the insur- included in her estate.
ance trust’s sole investment committee In the alternative, the IRS argued that
member, had the power to terminate the the restrictions in the split-dollar arrange- The Ninth Circuit, in a 2–1 decision,
policies before both insureds died. ment should be disregarded under the held that the IRS had properly obtained
Levine’s estate tax return included the special valuation rules provided in Sec. written managerial approval of a penalty
value of the split-dollar receivable, which 2703 and, as a consequence, the estate imposed on the taxpayer, reversing a Tax
it claimed was approximately $2 million. was required to include in its taxable Court decision.
The IRS, noting the shift in money from value the full cash surrender values of Facts: The taxpayer, a C corporation,
the revocable trust to purchase insurance the policies. participated in a purported welfare
policies benefiting the insurance trust, Holding: The Tax Court held that, at benefit plan that was a listed transaction,
opened an audit of the return. the time of her death, Levine only held and it failed to disclose that participa-
The IRS determined that rather than the right to the split-dollar receivable tion to the IRS, as required by Sec.
including the value of the receivable, and that Secs. 2036(a)(2) and 2038 did 6011, on its fiscal 2008 Form 1120, U.S.
the estate should have included the not require inclusion of the policies’ Corporation Income Tax Return. When
$6.2 million cash surrender value of the cash surrender values because Levine the IRS examined the taxpayer’s 2008
life insurance policies purchased by the “did not have any right, whether by return, the revenue agent issued a 30-day
insurance trust. The IRS issued a notice herself or in conjunction with anyone letter to the taxpayer, which proposed
of deficiency to the estate for just over else, to terminate the policies because to assert a penalty under Sec. 6707A for
$3 million, plus penalties. The estate only the irrevocable trust had that right.” failing to disclose a reportable transac-
challenged the IRS’s determination in Therefore, the estate was only required tion. The 30-day letter was the first for-
Tax Court. to include the value of the split-dollar mal communication to the taxpayer of
Issues: The Tax Court had to receivable, which the IRS and the estate the IRS’s determination to assess a Sec.
determine whether, as a result of the had stipulated to be $2.3 million. 6707A penalty. Some three months after
split-dollar life insurance arrangements, The court held that Sec. 2703 does the 30-day letter was sent, the revenue
Levine’s estate was required to include not apply to this case because the only agent’s immediate supervisor approved
the value of the split-dollar receivable or property interest Levine had at the time the penalty assertion and signed a Form
the current cash surrender value of the of her death was the receivable, and there 300, Civil Penalty Approval Form.
policies owned by the insurance trust. were no restrictions on that. After Appeals sustained the penalty
The estate argued that the only asset ■ Estate of Levine, 158 T.C. No. 2 proposal, the taxpayer filed a Tax Court
from the arrangement owned by Levine’s (2022). petition, challenging the IRS’s notice
revocable trust at the time of her death of determination for failing to comply
was the split-dollar receivable. Accord- — Hannah Pitstick is a writer with the with the written supervisory approval
ing to the estate, Levine had no interest Association of International Certified requirement of Sec. 6751(b)(1). Under
or ownership over the life insurance Professional Accountants. Sec. 6751(b)(1), the IRS generally

46 | Journal of Accountancy June 2022