BIR Ruling No. 081-83

May 10, 1983 BIR RULING NO. 081-83 Gentlemen : This refers to your letter dated September 15, 1982 stating that Caltex Philippines (Inc.) and Philippine Geothermal, Inc. are contemplating to take individual life insurance coverage for their respective keymen with the companies as the applicants and payor of the premiums; that the beneficiary or beneficiaries of the policy will be the immediate family of the keymen designated by them; and that the distribution of the benefits shall be contingent upon continued employment with the company. cdti Based on the following, you posed the following questions: "1. Are the premiums paid by the company considered as ordinary and necessary expenses and therefore, deductible for income tax purposes? "2. Are the premiums paid by the company considered as taxable income of the keymen or not? "3. How will death proceeds be considered for income tax and estate tax purposes? "4. If something in the future and because of meritorious services of the keymen, the company decided to give the cash surrender value of the policy to the beneficiary of the keymen, how will the amount be treated for income tax purposes?" In reply, I have the honor to inform you as follows: 1. Under Section 31(a)(4) of the Tax Code, as amended, where a corporation takes out insurance on the life of a key officer, designating as beneficiary thereby the family of the insured, the premiums paid can be claimed by the corporation as deductible business expense from its gross income as long as the members of the key officer's family are not so situated or so related with the corporation as would make it an indirect beneficiary of the proceeds of the insurance. 2. The premium payments made by the corporation constitute additional salary or compensation to the key officer and must therefore be declared by him as part of his taxable compensation income under Section 28(a) and (b) in relation to Section 21(a) both of the Tax Code, as amended. 3. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, shall not be included in gross compensation income or gross income, as the case may be, and shall be exempt from taxation. However, if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income, or gross compensation income. [Sections 28(c)(2) and 29(c)(1) of the Tax Code, as amended] Moreover, Section 100(e) of the Tax Code, as amended, provides that proceeds of life insurance form part of the gross estate of the decedent to the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. 4. The cash surrender value of the policy if given to a person e.g., beneficiary, other than the insured keyman/employee who has already paid income tax thereon as aforestated in our answer to question No. 2, shall be taxable income to the recipient. aisadc Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner Bureau of Internal Revenue