Split-dollar arrangement distributions; benefits under compensatory arrangement taxable as ordinary income

Split-dollar arrangement distributions

The U.S. Tax Court today released a “reviewed opinion” holding that economic benefits received by the taxpayer-husband under a split-dollar arrangement were not “distributions” under section 301, but were benefits received under a compensatory arrangement and as such were taxable as “compensation for services” under section 61(a)(1) as ordinary income.


The case is: De Los Santos v. Commissioner, 156 T.C. No. 9 (April 12, 2021). Read the Tax Court opinion [PDF 102 KB] (that does not include any separate concurring or dissenting opinions)


The Tax Court summarized the facts in this case, as follows:

  • The taxpayer-husband (a medical doctor) during 2011 and 2012 was the sole shareholder of an S corporation that employed him and his wife.
  • The S corporation adopted an employee welfare benefit plan that provided benefits to the husband, the wife, and four other employees.
  • The taxpayers received these benefits in their capacity as employees.
  • The benefit plan afforded life insurance protection to the taxpayers and was found in a prior Tax Court memorandum opinion to constitute a compensatory “split-dollar” life insurance arrangement. Thus, the taxpayers were taxable on the economic benefits they realized by participating in the plan.
  • In the notice of deficiency, the IRS determined that these economic benefits from the plan were taxable to the taxpayers as ordinary compensation income.
  • The taxpayers in the instant action filed a motion for partial summary judgment contending that, because the taxpayer-husband was a shareholder of the S corporation, the economic benefits he realized were taxable to him as a distribution under section 301.
  • The taxpayers further claimed that the economic benefits received by a shareholder pursuant to a split-dollar life insurance arrangement constitute a distribution under section 301—regardless of whether the taxpayer receives the benefits in his capacity as an employee or as a shareholder. In support of this position, the taxpayers looked to the decision of the Sixth Circuit in Machacek v. Commissioner, 906 F.3d 429 (6th Cir. 2018), rev’g and remanding T.C. Memo. 2016-55.

The Tax Court held that given that the compensatory split-dollar life insurance arrangement afforded benefits to the taxpayer-husband in his capacity as an employee of the S corporation, the benefits were not characterized as a distribution “by a corporation to a shareholder with respect to its stock.”

The court further held that for purposes of taxing employee fringe benefits, the taxpayer-husband was to be treated as a partner of a partnership, and the economic benefits that he realized were therefore taxable under section 707(c) as “guaranteed payments” and thus as ordinary income.

The purpose of this TaxNewsFlash is to provide text of the opinion. 

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