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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1698
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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We purchased a viatical for a teminally ill patient. We purchased

Customer Question

We purchased a viatical for a teminally ill patient. We purchased it for 13,725 and paid various premiums until 2008 when we received 21,000 from the death benefit. Is the viatical taxable?
Submitted: 4 years ago.
Category: Tax
Expert:  Anne replied 4 years ago.
Hi Mickey and/or Marsha

Thank you for using justanswer. Was this terminally ill person your dependent? Any relation to you? I need a little more information so that I can get a clearer picture of your situation.

Did you receive a 1099LTC and if so, whose name and SS# XXXXX on it? If it was in the deceased person's name and SS# XXXXX was the $ amount included on their final tax return?

Once I get a clearer picture, I'll be in a better position to help you.
Customer: replied 4 years ago.

We received a 1099-Misc with my husband's SS# the amount in line 3. We purchased the viatical in 2001 and the person died in 2008. The terminally ill person was not our dependent. I faxed the IRS information showing that showing that the the viatical was assigned to us through the New York Life Insurance Co and naming us the beneficiary. I also faxed billings we recieved during the time we had the viatical. I am disputing that we have to claim the 21,000 with the IRS and I received yesterday a reply that said life insurance proceeds paid to you because of the death of the insure person are not taxabe unless the policy was turned over to me for a price. It said to refer to Publication 525 concerning Life Insurance proceeds. I called the IRS to see what I needed to do next and the agent said that I needed to explain what I think I owe. I am still unclear I owe anything. We purchased the life insurance policy from a teminally ill patient for 13,725.00 and we had admin fees of 240.00 and 175.76, shortfall int 3.89, shortfall reinbursements of 372.85. Should I subtract all of that from the 21070 and claim that as interest? Or since it is a life insurance policy in our name, do I not have to claim any of this?

The letter we received from Roberto Martinez, Reciever of Mutual Benefits Corp. states "that they have enclosed Internal Revenue Service From 1099-MISC correspoinding to the death benefit proceeds that we received during 2008 from the policy referenced on the form. It states that the 1099-MISC does not include funds withheld from your death benefit check that represented reimbursement or premiums and /or administrative fees due to receivership."

 

Expert:  BK-CPA replied 4 years ago.

Thought I'd help a little, but opt out for the original expert to clarify for you:

 

Here is Section 101 of the tax code:

 

http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000101----000-.html

 

 

§ 101. Certain death benefits

How Current is This?

 

(a) Proceeds of life insurance contracts payable by reason of death

(1) General rule

Except as otherwise provided in paragraph (2), subsection (d), subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.

(2) Transfer for valuable consideration

In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee. The preceding sentence shall not apply in the case of such a transfer-

(A) if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor, or

(B) if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer.

The term "other amounts" in the first sentence of this paragraph includes interest paid or accrued by the transferee on indebtedness with respect to such contract or any interest therein if such interest paid or accrued is not allowable as a deduction by reason of section 264 (a)(4).

.....

 

....

 

 

(g) Treatment of certain accelerated death benefits

(1) In general

For purposes of this section, the following amounts shall be treated as an amount paid by reason of the death of an insured:

(A) Any amount received under a life insurance contract on the life of an insured who is a terminally ill individual.

(B) Any amount received under a life insurance contract on the life of an insured who is a chronically ill individual.

(2) Treatment of viatical settlements

(A) In general

If any portion of the death benefit under a life insurance contract on the life of an insured described in paragraph (1) is sold or assigned to a viatical settlement provider, the amount paid for the sale or assignment of such portion shall be treated as an amount paid under the life insurance contract by reason of the death of such insured.

(B) Viatical settlement provider

(i) In general The term "viatical settlement provider" means any person regularly engaged in the trade or business of purchasing, or taking assignments of, life insurance contracts on the lives of insureds described in paragraph (1) if-

(I) such person is licensed for such purposes (with respect to insureds described in the same subparagraph of paragraph (1) as the insured) in the State in which the insured resides, or

(II) in the case of an insured who resides in a State not requiring the licensing of such persons for such purposes with respect to such insured, such person meets the requirements of clause (ii) or (iii), whichever applies to such insured.

(ii) Terminally ill insureds A person meets the requirements of this clause with respect to an insured who is a terminally ill individual if such person-

(I) meets the requirements of sections 8 and 9 of the Viatical Settlements Model Act of the National Association of Insurance Commissioners, and

(II) meets the requirements of the Model Regulations of the National Association of Insurance Commissioners (relating to standards for evaluation of reasonable payments) in determining amounts paid by such person in connection with such purchases or assignments.

(iii) Chronically ill insureds A person meets the requirements of this clause with respect to an insured who is a chronically ill individual if such person-

(I) meets requirements similar to the requirements referred to in clause (ii)(I), and

(II) meets the standards (if any) of the National Association of Insurance Commissioners for evaluating the reasonableness of amounts paid by such person in connection with such purchases or assignments with respect to chronically ill individuals.

(3) Special rules for chronically ill insureds

In the case of an insured who is a chronically ill individual-

(A) In general

Paragraphs (1) and (2) shall not apply to any payment received for any period unless-

(i) such payment is for costs incurred by the payee (not compensated for by insurance or otherwise) for qualified long-term care services provided for the insured for such period, and

(ii) the terms of the contract giving rise to such payment satisfy-

(I) the requirements of section 7702B (b)(1)(B), and

(II) the requirements (if any) applicable under subparagraph (B).

For purposes of the preceding sentence, the rule of section 7702B (b)(2)(B) shall apply.

(B) Other requirements

The requirements applicable under this subparagraph are-

(i) those requirements of section 7702B (g) and section 4980C which the Secretary specifies as applying to such a purchase, assignment, or other arrangement,

(ii) standards adopted by the National Association of Insurance Commissioners which specifically apply to chronically ill individuals (and, if such standards are adopted, the analogous requirements specified under clause (i) shall cease to apply), and

(iii) standards adopted by the State in which the policyholder resides (and if such standards are adopted, the analogous requirements specified under clause (i) and (subject to section 4980C (f)) standards under clause (ii), shall cease to apply).

(C) Per diem payments

A payment shall not fail to be described in subparagraph (A) by reason of being made on a per diem or other periodic basis without regard to the expenses incurred during the period to which the payment relates.

(D) Limitation on exclusion for periodic payments

For limitation on amount of periodic payments which are treated as described in paragraph (1), see section 7702B (d).

(4) Definitions

For purposes of this subsection-

(A) Terminally ill individual

The term "terminally ill individual" means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification.

(B) Chronically ill individual

The term "chronically ill individual" has the meaning given such term by section 7702B (c)(2); except that such term shall not include a terminally ill individual.

(C) Qualified long-term care services

The term "qualified long-term care services" has the meaning given such term by section 7702B (c).

(D) Physician

The term "physician" has the meaning given to such term by section 1861(r)(1) of the Social Security Act (42 U.S.C. 1395x (r)(1)).

(5) Exception for business-related policies

This subsection shall not apply in the case of any amount paid to any taxpayer other than the insured if such taxpayer has an insurable interest with respect to the life of the insured by reason of the insured being a director, officer, or employee of the taxpayer or by reason of the insured being financially interested in any trade or business carried on by the taxpayer.

 

Expert:  Anne replied 4 years ago.
Hi

My colleague threw a lot of information at you, and I hope the details and terminology doesn't confuse you, because the income you received is at least partially taxable, and here's why:

Insurance proceeds that you pay the premiums on for yourself or your family members are not taxable to you. There is what is known as an "insurable interest" since you would be responsible for the medical bills for your family, and that is the insurable interest that those proceeds are paid for.

However, in this case, since you didn't answer that the insured was related to you, meaning you would not have had a legal responsibility to pay any of the actual medical bills then you have entered into what is known as the "transfer-for-value"

Under the transfer-for-value rule, if a policy (or any interest in a policy) is transferred for a valuable consideration, the death proceeds will generally be excluded from income only to the extent of the consideration paid by the transferee, plus the net premiums paid by the transferee after the transfer (Sec. 101(a)(2)). The balance of the proceeds will be taxable as ordinary income. In other words, a policy that becomes subject to the transfer-for-value rule loses the income tax exemption ordinarily permitted for life insurance proceeds, except to the extent the transferee develops basis in the policy.

 

You will need to answer the CP2000 letter in the following manner:

 

Find the page that has the following options on it:

 

1-I agree with all of the changes

2- i agree with some of the changes and have included my reasons why

3-I agree with none of the changes and have included my reasons why

 

you will mark box 2. You may net out the cost of the premiums (plus any other consideration you paid for the viatical) and the net amount left is what you will need to pay tax on.

 

I strongly suggest that you take this letter to a CPA, Enrolled Agent, or other tax professional that is familiar with these letters, since there are also pages that have 3 columns on them showing what was originally reported, what should have been reported, and a middle column showing the changes.

 

This page must also be dealt with, and this is where you will need someone with experience to give the IRS the correct figures. You don't want to have them to an amendment, only to correct the letter.

 

Please see below: (you will need the copy & paste the below link into your web browser. This is the site I quoted from because I felt it had the clearest explanation in what I call "layman's terms" My colleague already provided you the IRS code section (101)

 

http://www.allbusiness.com/legal/laws-government-regulations/370255-1.html

 

I'm sure this is not exactly the answer you were hoping for, but hopefully, it gives you some clarity.

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1698
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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