Rev. Rul. 61-134

The Internal Revenue Service will not follow the decision of the United States Court of Appeals for the Sixth Circuit in Francis H. W. and Phyllis A. ducros v. Commissioner , 272 Fed.(2d) 49 (1959).

In the Ducros case, a closely held corporation caused insurance to be taken out on the life of a corporate officer with the intention of distributing the proceeds to various shareholders by making them beneficiaries. The corporation paid all the premiums and had all the incidents of ownership.

The Service contended that the proceeds were a taxable dividend flowing from the corporation to the beneficiary-stockholders.

The beneficiary-stockholders in Ducros contended the amounts were excludable from gross income as the proceeds of a life insurance contract paid by reason of the insured's death.

The court held that, under local law, there was a valid life insurance contract and that the insurance proceeds were never an asset of, nor distributed by, the corporation and, therefore, the proceeds did not constitute a taxable dividend.

In so holding, the court distinguished Edwin L. Cummings et al. v. Commissioner , 73 Fed.(2d) 477, Ct. D. 952, C.B. XIV-1, 209 (1935), where the insurance proceeds were paid to the corporation which, in turn, distributed the proceeds to the stockholders, and Delia B. Golden v. Commissioner , 113 Fed.(2d) 590 (1940), where, although the insurance proceeds were paid to a trust as agent of the corporation for distribution to stockholders, the corporation retained valuable incidents of ownership.

It is the position of the Service that life insurance proceeds paid to shareholders of a corporation are taxable as dividends in cases where the corporation uses its earnings to pay the insurance premiums and has all the incidents of ownership including the right to name itself beneficiary, even though the corporation does not name itself beneficiary and, therefore, is not entitled to, and does not in fact, receive the proceeds.

Although review by the Supreme Court of the United States was not requested in the Ducros case, the decision will not be followed as a precedent in the disposition of similar cases, and the Service will maintain its position pending further developments on the issue.

¹ Based on Technical Information Release 321, dated June 9, 1961.