In a Revenue Ruling, the IRS has found that an S Corporation’s accumulated adjustments account (AAA) is not increased by insurance proceeds received by the corporation for the death of an employee if such proceeds are not taxable. Conversely, the administrative court also ruled that such accounts are not reduced by premiums paid on a life insurance policy by the company.
In the set of facts considered by the IRS, an S Corp bought life insurance on one of its highly paid executives. The company is the beneficiary and pays the premiums. In this situation, the IRS has ruled that the payment of the premiums does not reduce the company’s AAA and that any of the proceeds received by the company will be excludable from income and, thus, not increase the AAA.
This ruling is helpful in that it provides companies with some guidance regarding their accumulated adjustments accounts. Such life insurance polices purchased by a company on one of its integral employees is not uncommon and commonly referred to as a “key-man policy.” This Revenue Ruling may help some executives determine whether such a policy is appropriate for their company.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors