Life Insurance Surrender - On a 1099 MISC

[acagwinsc]

My client received a 1099-MISC with $50,000 in box 3 (Other Income).  Here are the facts:

1.  The 1099 was from his fathers company

2.  The company had purchased a life insurance policy on him years ago

3.  His father is still alive, the company just determined they no longer needed the policy

4.  The policy was for $150K and had earned $60K.  The company kept the $60K and split the $150K between my client and his siblings (their father is well off and didn't need the money)

Is this total amount taxable and reported as "Other Income" on his 1040?

[IRonMaN]

That sounds like a pretty good place for it.

[BobKamman]

It looks a lot like "assignment of income" to me.  The company should pay the tax, not your client.  Then if it's a constructive dividend to the father, he should file a gift tax return also.  

[IRonMaN]

I was a little curious what they coded that expense to 😀

[acagwinsc]

So would I report that anywhere?  My client is keeping the money, so I don't believe a gift tax return would be necessary.

[acagwinsc]

I'm a little curious about alot with them after this!

[IRonMaN]

I'm guessing you aren't going to convince dad to change anything so I think you can stick with plan A.

[acagwinsc]

The father is almost 100 years old and not in charge of his own affairs, so it adds a tricky level.  

[BobKamman]

It's the father (or his conservator) who should be filing the gift tax return.

For me, life is too short to waste time being complicit in tax-evasion schemes.  Of course, I'm trying to cut back on clients.  But I bet you're good enough to find a better one, without putting up with these shenanigans.

[linette]

I think if you don't report it your client will receive a notice for reporting deficiency when IRS system doesn't find the income on the return.  (Can't match)

At that point you could send back stating that you don't think this is income and explain where it came from.

However, if you do that I think that IRS then looks to the company and we get to the question you have asked, "what expense was reported".

Based on the way the 1099 Misc is completed with box 3 I think that other income is appropriate.

These are the things that make our hair turn grey!

Seems fishy!  But do we know that?  

If we just report what the form says and assume it is correct are we immune from responsibility if this is wrong?

What structure does the business report using?  Is it possible this should be dividend?  Lots of questions not really any answers as your client is the recipient.  Depending on what the client knows I think you have to make a decision to report or hand it back to the client and have them ask questions knowing the answer he may get is "Just report it!"

[BobKamman]

Was the son ever employed by the company?  This sounds like "key person life insurance" (f/k/a "key man") and it also sounds like a whole-life policy that pays out at a certain age whether the insured is living or not.  If the company was the owner and beneficiary, the taxable amount (proceeds in excess of premiums) would be taxed to it.  They can't escape taxation simply by writing a check to the owner's kids.  

[acagwinsc]

I think you are dead on there!  Thanks for the input!