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DEAD PEASANTS INSURANCE: IRS ALLOWS RUN, RETAINS 3-1 LEAD
April 03, 2003
A district court in Michigan yesterday ruled in favor of Dow Chemical. The ruling is the first taxpayer court victory in the so called "dead peasants" life insurance issue. The court ruled that the insurance arrangement covering over 4,000 Dow employees was not a sham.
The tax benefit sought by Dow -- now eliminated by legislation -- was the ability to borrow to pay insurance premiums on policies generating an internal cash-value buildup. If the taxpayer can deduct the interest on the borrowing, they come out ahead because the offsetting cash-value build-up is tax-free. The large pool of insureds eliminates most mortality risk on the policies.
The Eastern District of Michigan ruled that the arrangement wasn't a sham, though some cash withdrawals from the policy were shams. In upholding the arrangement, the court departed from the opinions of the Tax Court and two Circuit Courts of Appeal.
According to Tax Analysts, all but 5 of approximately 35 "dead peasants" cases under audit have been settled on IRS terms. The IRS is likely to appeal the District Court's ruling in Dow.
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