Vanderbilt Law Review


William J. Bowe

First Page



Until recently life insurance has represented the most impenetrable stronghold of the professional tax avoider and his advisors. As a vehicle for the transmission of wealth to future generations with minimum tax levies, it stood unrivaled. During a policyholder's life the value of his policy for gift tax purposes was and is measured by replacement cost.' Under applicable regulations during the thirties, when insurance was transferred by way of inter vivos gift the tremendous increase in value of the policy that came with death escaped gift tax, income tax, and estate tax. But since 1941 the situation has been reversed so that it may be fairly said from the standpoint of tax avoidance that life insurance is now in the doghouse.

It is the object of this paper to trace the history of the impact of federal taxation on life insurance and the efforts of the Treasury "to keep apace with the fertility of invention" of taxpayers. It might as appropriately have been entitled "A Study in the Consequence of Tax Avoidance." This is not to say that tax avoidance is in any sense improper. The legal right of a taxpayer to decrease the amount of what would otherwise be his taxes or altogether to avoid them by means which the law permits, is hornbook law. He need not adopt the most expensive tax method of procedure. Rather than sell securities held for exactly six months and incur a tax on the whole profit, he may delay the sale for one additional day and suffer income tax on only half of his profits. Rather than pay a debt with a $20.00 check where a tax is imposed on all checks of $20.00 or more, he may pay the same debt by drawing two checks each in the amount of $10.00. The difficulty with drawing a line, as Mr. Justice Holmes has pointed out, is that the taxpayer may come as close to the line as he will so long as he does not cross it.

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