sale of key man life insurance from c corp. to key man, tax

C corp. purchased key man life insurance for its executive who recently retired. The C corp. plans to sell the policy to the retired executive. What will be the tax implications for both c corp. and the executive?

My current understanding is as follows:
To C corp.:
If the key man is an employee. the gain of the sale (FMV-cost basis) is treated as compensation and deductible
If the key man is an shareholder and the transfer of the policy is treated as dividend, c corp. won't be able to deduct

To key man:
If the key man is an employee. the FMV of the policy is treated as taxable income of the keyman. If the keyman paid anything for the policy, the amount reduces the taxable income.
If the key man is an shareholder and the transfer of the policy is treated as dividend, he includes the FMV of the policy as dividend income to the extent of c corp's earnings and profits.

Is this right?
Also, how to decide if the sales of the policy to a shareholder-employee is compensation or dividend?
And if treated as dividend, will it be qualified dividend?

Thank you!

It would be helpful if you were to clarify. You mention sale, but never mention price relative to FMV.

Whether it is compensation or a dividend depends on the facts and circumstances, including intent. We're talking about planning, so you have choice as to how to set it up.

It would be helpful if you were to clarify. You mention sale, but never mention price relative to FMV.

Whether it is compensation or a dividend depends on the facts and circumstances, including intent. We're talking about planning, so you have choice as to how to set it up.

Thank you for prompt response.
It is still in the initial stage and price has not been decided.
And how to set it up as compensation or dividend? Thanks again

It's all in how you paper it and report it. Just say what you want it to be. The big difference is that if it's a dividend it would be disproportionate.

Long way to go here in facts and analysis, but in the meantime, why would it matter that it's disproportionate?

Disproportionate distributions with respect to stock of the same class creates rights in the other stockholders which should be addressed at the planning stage.

Agree. I meant why would it matter tax-wise.

Can anyone verify if my understanding is correct regarding the tax treatment from c corp side and keyman side?
example 1:
FMV=$20
cost basis=$15
proceeds=$0

if treated as compensation
c corp:
taxable income20-15=5 (can be ordinary income, capital gain or both depending on if there is cash surrender value)
deduct $20 as business expense.
keyman:
taxable compensation=$20 ordinary income

if treated as dividend
c corp:
taxable income=20-15=5 (can be ordinary income, capital gain or both depending on if there is cash surrender value)
c corp. can not deduct.
keyman:
taxable dividend=$20 qualified dividend rate (to the extent of the c corp's earnings and profits)

example 2:
FMV=$20
cost basis=$15
sale proceeds=$20

c corp:
taxable income20-15=5 (can be ordinary income, capital gain or both depending on if there is cash surrender value)
deduct $0.
keyman:
taxable income=$0

Thank you!

I think that's basically correct.

BTW, "interpolated terminal reserve" is usually the FMV for Federal tax purposes.

I think that's basically correct.

BTW, "interpolated terminal reserve" is usually the FMV for Federal tax purposes.

Thank you!