Need Tax Advice for 1956

May 1, 2018 1:36 PM

I had the opportunity to read some 60-year-old payroll files from a company that has been out of business for many years. Top managment in 1956 was being paid a salary plus monthly payments of $2000 for the premiums on whole life insurance policies. Was the additional $24000 a year taxed as ordinary income at the time, or was this an end run around the confiscatory income taxe rates of the period?
posted by Raybun to Work & Money (7 answers total)

Can you tell from the payroll files whether the $2000 was paid to the execs, or could it have been paid to the insurance company?
If this was "key man" insurance, the beneficiary of each policy would have been the company, and the premiums would have been paid directly to the insurance company and would have been a valid business expense of the company.
(I can't say whether key man insurance in 1956 would have been whole life, term life or something else.)
posted by JimN2TAW at 2:59 PM on May 1, 2018

Response by poster: There was no mention of key man coverage. This was for a whole life policy that the person for whom the premium was paid was able to make very low interest loans to himself. I do not recall any mention of the employer being the beneficiary of the policy.
posted by Raybun at 4:55 PM on May 1, 2018

I know nothing about what was done in 1956, but as recently as, say, 2005, a company I worked for sold a "employee benefit plan" based on using life insurance just as you suggest. I worked in a different part of the company and I don't know the full details on tax ramifications but obviously it worked out to the insurer's benefit.
posted by SemiSalt at 5:39 PM on May 1, 2018

I can't answer the question directly, but I have been told that the tax code of the day was so riddled with exemptions that, while nominal marginal rates were much higher than today, effective tax rates were about the same.
posted by grobstein at 5:54 PM on May 1, 2018

Sounds like a question for the Tax History Project; you can contact them here.
posted by Mr.Know-it-some at 6:35 PM on May 1, 2018 [1 favorite]

It was very common for companies to do this ( buy insurance on employees with the company the beneficiary )as a tax avoidance measure. I believe the loopholes were closed in the 80s.
posted by JPD at 7:25 PM on May 1, 2018 [1 favorite]

Assuming this was a split dollar policy, it wouldn't have been taxable, instead being characterized as a loan to the employee to be repaid on death (see Rev Rul 55-713). The IRS changed that treatment in the mid-60s, at which point a portion became taxable under the economic benefit doctrine. As JPD notes, the IRS ultimately made all of it taxable a few decades later.
posted by jpe at 8:53 PM on May 1, 2018 [2 favorites]