Rev. Rul. 2009-13 and Rev. Rul. 200914 apply § 1016 (prior to its amendment

by the TCJA) to determine the adjusted basis of life insurance contracts under §§ 1011 and 1012 in several factual situations.

In Situation 2 of Rev. Rul. 2009-13, A, an individual, entered into a life insurance contract with cash value on January 1 of Year 1. Under the contract, A was the insured, and the named beneficiary was a member of A’s family. On June 15 of Year 8, A sold the contract to B, an unrelated person who would suffer no economic loss upon A’s death, for $80,000. Prior to the sale of the contract, A had paid $64,000 in premiums. The cost of insurance charges collected by the issuer was $10,000 as of the date of the sale. Situation 2 of Rev. Rul. 2009-13 provides that if a taxpayer holds a life insurance contract for purposes of insurance protection, it is necessary to reduce the taxpayer’s basis in the contract by that portion of the premium paid for the contract that was expended for the provision of insurance before the sale in order to measure the taxpayer’s gain upon the sale of the contract. Therefore, Situation 2 of Rev. Rul. 2009-13 provides that A must reduce A’s basis in the contract by the cost of insurance. As a result, A’s

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adjusted basis as of the date of the sale was $54,000 ($64,000 premiums paid less $10,000 expended as cost of insurance). Because A sold the contract for $80,000, Rev. Rul. 2009-13 holds with respect to Situation 2 that A must recognize $26,000 of income on the sale of the contract ($80,000 amount realized less $54,000 adjusted basis of the contract).

In Situation 3 of Rev. Rul. 2009-13, the contract was a level premium fifteen-year term life insurance contract without cash surrender value. The monthly premium for the term life insurance contract was $500, A held the contract for 89.5 months, and A paid premiums totaling $45,000 as of the date of the sale. A sold the contract for $20,000 to B, an unrelated person who would suffer no economic loss upon A’s death. Situation 3 of Rev. Rul. 200913 provides that A must reduce A’s basis in the contract by the cost of insurance, which is presumed to equal the monthly premiums under the contract. A’s adjusted basis in the contract as of the date of the sale was therefore $250 ($45,000 total premiums paid less $44,750 cost of insurance protection). Because A sold the contract for $20,000, Rev. Rul. 2009-13 holds with respect to Situation 3 that A must recognize $19,750 of income on the sale of the term life insurance contract ($20,000 amount realized on the sale less $250 adjusted basis of the contract).

In Situation 2 of Rev. Rul. 2009-14, the facts are the same as in Situation 3 of Rev. Rul. 2009-13, except that B purchased the contract for $20,000 from A and then, at the end of the following year, sold the contract to C, a person unrelated to either A or B, for $30,000. Before selling the contract, B paid a total of $9,000 in premiums. In Situation 2 of Rev. Rul. 2009-14, B, unlike A in Situation 3 of Rev. Rul. 2009-13, was not required to reduce B’s basis by the cost of insurance because B was wholly unrelated to the insured, did not purchase the life insurance contract for protection against economic loss upon the insured’s death, purchased the contract solely with a view to profit, and enjoyed no insurance protection from the contract. B’s cost basis was $29,000, the sum of what B paid for the contract and the premiums B paid to keep the contract in force ($20,000 pur

chase price plus $9,000 in premiums). B’s adjusted basis was $29,000 ($29,000 cost basis with no adjustment for cost of insurance), and B recognized $1,000 of income on the sale of the contract to C ($30,000 amount realized on sale less $29,000 adjusted basis of the contract).

The analysis and holdings relating to A’s adjusted basis in the contract in Situations 2 and 3 in Rev. Rul. 2009-13 and the analysis relating to B’s adjusted basis in the contract in Situation 2 in Rev. Rul. 2009-14 are inconsistent with the language of § 1016(a)(1)(B), added to the Code by the TCJA. Under § 1016(a) (1)(B), the cost basis of a life insurance contract is not reduced by the cost of insurance, regardless of why the contract is purchased. Rev. Rul. 2009-13 and Rev. Rul. 2009-14 are therefore modified to the extent they are inconsistent with the rule set forth in § 1016(a)(1)(B).

In Situations 2 and 3 in Rev. Rul. 200913, under § 1016(a)(1)(B), as added by the TCJA, A is not required to reduce A’s basis in the contract by the cost of insurance. Accordingly, in Situation 2 of Rev. Rul. 2009-13, A’s adjusted basis in the contract equals the premiums paid. A must recognize $16,000 of income on the sale of the contract ($80,000 amount realized on sale less $64,000 adjusted basis). In Situation 3 of Rev. Rul. 2009-13, A’s adjusted basis in the contract equals the premiums paid. A will recognize a $25,000 loss on the sale of the contract ($20,000 amount realized on the sale less $45,000 adjusted basis). A will not be permitted to deduct the loss unless the loss is incurred under § 165(c) (1) or (2).

In Situation 2 of Rev. Rul. 2009-14, B is not required to reduce B’s basis in the contract by the cost of insurance because B was wholly unrelated to the insured, did not purchase the life insurance contract for protection against economic loss upon the insured’s death, purchased the contract solely with a view to profit, and enjoyed no insurance protection from the contract. Under § 1016(a)(1)(B), as added by the TCJA, B is not required to reduce B’s basis in the contract by the cost of insurance, regardless of why the insurance contract is purchased. Accordingly, the outcome for B in Situation 2 of