The Fifth Circuit Court of Appeals, in Ramsay v. Commissioner of Internal Revenue, has upheld the Tax Court’s determination that the value of employer-paid group term life insurance was taxable compensation for an employee despite his claim that he neither requested nor wanted the coverage.
In general terms, Internal Revenue Code Section 79(a) provides that an employee’s gross income includes the value of group term life insurance provided under a policy carried by his or her employer, to the extent that the coverage exceeds $50,000, minus any amounts paid by the employee towards the cost of coverage.
The employee’s 2011 federal tax return reflected $891 in imputed income from a life insurance policy provided by his employer. However, the employee’s 2011 return did not report various capital gains and dividends that he had received that year, and it also reflected an overpayment, which he requested be applied to his 2012 return. The IRS subsequently sent the employee a notice of deficiency regarding the capital gains and dividends, and the employee responded by filing a petition with the Tax Court.
In 2015, the employee filed an amended tax return for 2011 that recognized (as income) the previously unreported capital gains and dividends, but removed the $891 in life insurance premiums that he had previously reported as income on his original 2011 return. The employee asserted that the $891 should not have been included in his 2011 taxable income because he neither requested nor wanted the life insurance coverage. The employee also alleged that he had previously persuaded the IRS that the imputed income from the same insurance policy that was reported on his 2010 Form W-2 was properly excluded from his tax return for that year. Finally, the employee claimed that the IRS should have accepted his amended return with the $891 in imputed income omitted.
The Tax Court held that the value of employer-paid group term life insurance was taxable to the employee despite his claim that he never wanted the life insurance because he had not overcome the applicability of three well-established rules.
First, the Tax Court observed that the employee’s reporting the $891 cost for the insurance as income on his original 2011 return constituted an admission that must be overcome by cogent evidence. Here, although the employee claimed that he had notified his employer in 2011 that he did not want the coverage, the policy was nonetheless in effect and provided a taxable benefit to the employee. Accordingly, the Tax Court concluded that the employee had not provided evidence sufficient to overcome the admission made on his original 2011 return.
Next, in addressing the employee’s argument concerning his 2010 tax year filing, the Tax Court explained that each tax year stands alone, so that the acceptance of a position by the IRS for one year is not controlling for other years.
The Tax Court concluded by observing that the IRS was not required to accept and process the employee’s amended return on which he deleted the $891 in imputed income, noting that “the acceptance or rejection of an amended return is solely within the discretion of the Commissioner.” The employee proceeded to appeal the Tax Court’s finding to the Fifth Circuit Court of Appeals.
The Fifth Circuit agreed with the Tax Court’s findings and rationale for the matter and upheld its determination. Specifically, the Fifth Circuit noted that: (i) the matter arose because the employee had filed an amended return after the IRS sent him the notice of deficiency; (ii) the employee’s reporting of the $891 constituted an admission that required cogent evidence to overcome; and (iii) the employee had not provided cogent evidence to overcome this admission.