A New Model for Identifying Basis in Life Insurance Policies: Implementation and Deference

Abstract

The life insurance marketplace has changed significantly. Many insureds who once held their policy until death or surrendered it to the issuing company during life now instead sell it to a third-party investor. As a result, the computation of a policy's tax basis has become increasingly important. Yet, surprisingly, the Code fails to provide a methodology for making this determination. The IRS has endorsed one approach in its published guidance but has failed to adhere to it in its private letter rulings. This paper calls for a new model. After suggesting legislation, the paper explores alternative implementation strategies against the backdrop of deference jurisprudence. It concludes that, absent legislation, the IRS should withdraw its published guidance and incorporate the proposed model in regulations.

Keywords: Deference, Premium Financing, Tax Basis Identification