Lustig Presents Company-Owned Life Insurance Today at BC

Eric A. Lustig (New England) presents From Dilbert to Murder-Mystery: The Strange Case of Company-Owned Life Insurance at Boston College today as part of its Tax Policy Workshop Series.  Here is part of the Introduction:

COLI plans have generated litigation in three different arenas. First, the use of COLI plans as a tax shelter has been challenged on two fronts. The first attack is through recent legislation restricting the tax benefits derived by owning COLI policies. In addition, the IRS has been largely successful in challenging interest deductions taken by COLI plan holders. Courts have generally upheld the IRS’s disallowance based on the common law doctrine of substantial economic effect and sham doctrine.

The second arena of litigation involves legal actions by the estates of employees or former employees insured under COLI plans. In these actions, the estates challenge whether the employer has an insurable interest and have had some success in their actions against the employers.

In the third forum, at least one COLI policy owner has sued the insurance companies and consultants that marketed the programs in an attempt to rescind the transaction. This action is still pending and adds another dimension to the controversy.

This article examines the three forums of controversy particularly in light of use COLI plans as a corporate tax shelter. This examination is all the more important because these three arenas of litigation have provided a relatively rare opportunity to peer into the generally secretive world of corporate tax shelters. In addition, insurance tax shelters such as COLI have proven to be quite resilient and newer versions are examined. The article concludes by considering whether COLI is a symptom or the underlying problem. Specifically the article questions whether legislative efforts to curtail COLI are misplaced and reconsiders the broader question of whether the tax benefits for life insurance are justified for corporate owners.