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Basis in a Life Insurance Contract: The Janus Face of Revenue Ruling 2009-13  

Author:  Todd D. Keator, J.D..

Source: Volume 27, Number 03, Spring 2010 , pp.5-30(26)

Journal of Taxation of Investments

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When a taxpayer sells a life insurance contract insuring his own life, the taxpayer must recognize gain or loss equal to the difference between his amount realized and adjusted basis in the contract. Surprisingly, few authorities exist regarding computation of adjusted basis in a life insurance contract. Prior to the promulgation of Revenue Ruling 2009 -13, most taxpayers and their advisors took the straightforward view that a taxpayer’s basis in a life insurance contract equaled total premiums paid to the insurer, less tax-free receipts under the contract. In Revenue Ruling 2009-13, however, the Internal Revenue Service has asserted that basis should be further reduced for “cost-of-insurance charges” inherent in the premium payments. This basis reduction rule generally will increase gain realized upon the sale of a life insurance contract. This article discusses why the basis reduction rule is incorrect as a matter of law.


Affiliations:  1: Thompson & Knight LLP.

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