Tax Court Nailed Taxpayer’s Insurance Plan: Morrissette Case And What It Means
Introduction to Morrissette
The recent Tax Court decision in the Estate of Morrissette v. Commission, T.C. Memo 2021-60 (May 13, 2021) put the kibosh on a complex insurance tax plan and handed the IRS a victory.
The case has been nicknamed in the tax planning community as “Morrissette II” since it follows a case for the same taxpayer, Estate of Morrissette v. Commissioner, 146 T.C. 171 (2016) (which we can now call Morrissette I) which address, favorably, different tax issues. And you didn’t know that tax cases got nicknames! Morrissette II involves the viability of an economic benefit split-dollar transaction that endeavored to substantially reduce the size of the taxpayer’s estate. While the Tax Court ruled favorably for the taxpayer (and against the IRS) on several tax issues which we’ll explore, the bottom line was not only a costly tax increase to the taxpayer, but the taxpayer got zapped with a 40% penalty for a gross valuation misstatement. Section 6662(h).
In Morrissette I the Tax Court ruled favorably on certain income and gift tax consequences of the initial premium transfer in the insurance plan (the advances to pay insurance premiums). The Morrissette I Court, however, did not address the critical question of determining the value of the taxpayer’s interest (repayment right) in the split-dollar life insurance plan. Taxpayers have taken, based on independent appraisals, significant discounts in valuing the decedent’s interest in an intergenerational split dollar (“IGSD”) plan. It remains to be seen how much impact Morrissette II will have on discounts taxpayers take in other situations.
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