Tax Court Accepted Discounted Valuation in Estat Insurance Dispute

The Estate of Clara M. Morrissette petitioned the U.S. Tax Court to challenge the Internal Revenue Service’s determination of a $13.8 million estate tax deficiency. The dispute centered on the valuation of three split-dollar life insurance agreements involving survivorship policies on the lives of Morrissette’s sons. The agreements were executed through irrevocable life insurance trusts (ILITs) and a family-owned corporation, Jayar, Inc.

In 2006, Morrissette’s three sons—Arthur, Kenneth, and Paul—each created an ILIT to purchase life insurance on the lives of the other two brothers. Jayar paid the policy premiums under split-dollar agreements providing that the corporation would be repaid the greater of the premiums paid or the cash surrender value upon termination of the arrangement. The ILITs pledged the policies as collateral for Jayar’s advances.

Morrissette died in 2009, and the estate reported the split-dollar receivables on her estate tax return with a discounted value, citing restrictions in the agreements and limited marketability. The IRS determined that the receivables should be valued at the full cash surrender value of the policies, resulting in a significant increase in the taxable estate.

Tax Court’s analysis of valuation approach

The Tax Court considered whether the arrangements were governed by the economic benefit regime or the loan regime under Treasury Regulations. It concluded that the arrangements fell under the economic benefit regime because the ILITs, not Jayar, were treated as policy owners, and Jayar’s rights were limited to receiving repayment upon termination.

The court also evaluated whether the split-dollar agreements should be valued under the fair market value standard as applied to private receivables. Expert testimony addressed the likelihood of the agreements terminating before the deaths of the insureds and the impact of restrictions on transferability. The estate’s expert applied a discount to reflect the delayed repayment and marketability limitations, while the IRS’s expert valued the receivables at full cash surrender value.

The court found that the estate’s valuation approach better reflected the agreements’ actual terms and economic realities. It accepted that repayment would likely occur many years in the future and that a willing buyer would discount the receivables for time value and lack of marketability. Accordingly, the court determined that the fair market value of the receivables was substantially less than the cash surrender value.

Final outcome

The Tax Court rejected the IRS’s $13.8 million deficiency determination and accepted the estate’s discounted valuation of the split-dollar receivables, reducing the taxable estate.

Help with estate and succession planning tax disputes

If your estate is facing IRS challenges over life insurance arrangements, asset valuation, or tax liability, Whitcomb, Selinsky PC handles estate tax disputes, valuation issues, and succession planning strategies. Reach out to schedule a consultation and learn how our team can assist with your case.