Document Type

Article

Publication Title

Florida Tax Review

Publication Date

2006

Abstract

In order to compute the gain or loss on the sale or disposition of an asset, a taxpayer is required to determine the investment's basis. While ordinarily straightforward, at least as a theoretical matter, making this determination can be particularly problematic in the case of a life insurance policy. Since so many taxpayers own life insurance policies, it is somewhat puzzling that the basis calculation principles in this context are not more fully developed. ....

The aim of this paper is to consider these tax basis principles in both descriptive and normative terms. To this end, we have organized the paper into sections. In Section II we explore general tax basis rules and, in particular, the tax basis principles applicable to life insurance. In Section III we argue in favor of what we call the policy-investment theory. In Section IV, we illustrate the application of this theory and call for a Code amendment that would eliminate the inequity under current law that treats policy surrenders more tax favorably than policy sales. In the absence of such an amendment, in Section V we focus on implementation through a different route, suggesting that the IRS withdraw a taxpayer-friendly revenue ruling and that it promulgate a new regulation; we also examine recent developments in deference jurisprudence and the Tax Court's resistance to the Supreme Court's administrative law precedents. In Section VI, we discuss the changing nature of life insurance and emergence of a new premium financing technique. In Section VII, we offer our conclusions.

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