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Locke Lord QuickStudy: Important IRS Private Letter Ruling on Bank-Owned Life Insurance Policies
1/11/2012
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Important IRS Private Letter Ruling on Bank-Owned Life Insurance Policies
The Internal Revenue Service recently released to the public a private letter ruling (PLR) 201152014 addressing the application of Internal Revenue Code sections 264(f) and 101(j) to a transaction involving bank-owned life insurance policies (BOLI) contributed to a limited liability company (LLC). Locke Lord represented the taxpayers in obtaining this ruling. (Note: A PLR can only be relied on by the specific taxpayer(s) to whom the PLR was issued).
PLR 201152014 is an important statement by the IRS on how sections 264(f) and 101(j) apply to transfers of BOLI. In very general terms, section 264(f) can operate to deny an interest deduction to a taxpayer to the extent the taxpayer holds life insurance policies with unborrowed cash values. However, there is an exception for policies covering individuals who are employees of the taxpayer at the time a policy was issued. Section 101(j), in turn, provides that death benefits on employer-owned life insurance policies can be taxable unless certain notice and consent requirements related to the insureds are met.
The Transaction
The facts of the PLR involved two banks forming a LLC, which is taxable as a partnership. The banks transferred to the LLC a pool of life insurance policies covering their respective current and former employees. The banks were the original owners and beneficiaries under the policies. One bank receives a greater than 50 percent interest in the LLC (Bank A) and the other bank receives a less than 50 percent interest in the LLC (Bank B). The LLC will manage the policies for the banks, including exchanging policies for new life insurance policies in section 1035 exchanges. PLR 201152014 addresses how sections 264(f) and 101(j) apply with respect to the policies held by the LLC.
The Key Rulings
One key holding of PLR 201152014 is that Bank B is not aggregated with the LLC in applying section 264(f). Thus, interest expense incurred by Bank B in its business is not subject to disallowance under section 264(f) by virtue of the fact that Bank B is a member in a LLC, which holds life insurance policies with unborrowed cash values. This accords Bank B with greater flexibility in managing its BOLI holdings via the LLC than it has on its own.
A second key holding of PLR 201152014 is that the policies held by the LLC covering employees of Bank B are not employer-owned life insurance subject to section 101(j). Thus, for example, the notice and consent requirements of section 101(j) would not apply to new policies obtained by the partnership on Bank B’s employees.
PLR 201152014 also ruled on several other important issues under sections 264(f) and 101(j).
Take-Away
PLR 201152014 sets forth reasonable interpretations of sections 264(f) and 101(j) that should greatly assist Bank A and Bank B in managing their BOLI holdings. The basic lesson to be drawn from PLR 201152014 is that by utilizing a LLC, a bank may be able to manage its BOLI holdings in ways that it could not do on its own as a practical matter, given the constraints of sections 264(f) and 101(j).
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the author:
Kirk Van Brunt | T: 202-220-6959 | kvbrunt@lockelord.com