Business loan life insurance

Client is an S corp that took out a business loan requiring a life insurance policy on the owner to be purchased by the company and payable to the bank. My initial reaction was that this would qualify as a employer owned life insurance policy subject to consent rules and 8925 reporting as the company would benefit from the policy indirectly by having its debt paid. However, agent claims that those rules do not apply to this policy and there are no consent documents.

Dose the payment of benefits to the bank change the reporting requirements or tax treatment of any eventual proceeds?

Who owns the policy? What do you mean by "payable to the bank"? Is the bank the beneficiary? How much does the bank collect if the owner dies and the payment by the insurance company exceeds the balance due on the loan?

The corporation owns the policy, but the benefits were assigned to the bank. I believe that the amount paid is not to exceed the amount of the loan balance.

Dose the payment of benefits to the bank change the reporting requirements or tax treatment of any eventual proceeds?. Near as I can tell, the existing regs. and those proposed in March of this year both provide similarly to each other.

Existing:

(4) For the purposes of section 101(a)(2) and subparagraphs (1) and (3) of this paragraph, a “transfer for a valuable consideration” is any absolute transfer for value of a right to receive all or a part of the proceeds of a life insurance policy. Thus, the creation, for value, of an enforceable contractual right to receive all or a part of the proceeds of a policy may constitute a transfer for a valuable consideration of the policy or an interest therein. On the other hand, the pledging or assignment of a policy as collateral security is not a transfer for a valuable consideration of such policy or an interest therein, and section 101 is inapplicable to any amounts received by the pledgee or assignee.

2019 proposed:

(2) Transfer of an interest in a life insurance contract . For purposes of this section and section 6050Y, the term transfer of an interest in a life insurance contract means the transfer of any interest in the life insurance contract, including any transfer of title to, possession of, or legal or beneficial ownership of the life insurance contract itself. The creation of an enforceable right to receive all or a part of the proceeds of a life insurance contract constitutes the transfer of an interest in the life insurance contract. The following events are not a transfer of an interest in a life insurance contract: the revocable designation of a beneficiary of the policy proceeds (until the designation becomes irrevocable other than by reason of the death of the insured); the pledging or assignment of a policy as collateral security; and the issuance of a life insurance contract to a policyholder, other than the issuance of a policy in an exchange pursuant to section 1035.

Here's a brief JofA article on the proposed regs. https://www.journalofaccountancy.com/ne ... 20861.html.

And here's the new 1099LS form and instructions. https://www.irs.gov/forms-pubs/about-form-1099-ls

I can't say much more than that.