A dentist forgot to renew his life insurance policy on time. Cost him $115,227 in unexpected taxes.
The Sixth Circuit Court just affirmed that split-dollar life insurance arrangements aren’t just complex financial tools—they’re tax landmines with strict deadlines. Miss a renewal by even one day? The IRS treats your policy’s entire cash value as taxable income.
If you’re a business owner using life insurance for estate planning or executive compensation, this November 2025 ruling matters. The court sided with the IRS on every major point: premium deductions denied, cash value increases taxed annually, and renewal deadlines treated as absolute.
Here’s what happened, why it matters, and how to avoid becoming the next cautionary tale.
What Went Wrong: The 5-Year Deadline That Cost $115K
Dr. McGowan and his dental corporation set up a split-dollar life insurance plan in 2011. The structure looked smart on paper:
- The corporation paid $50,000 annual premiums and claimed them as business deductions, building cash value inside the policy over time.
- McGowan reported only $12,778 yearly as taxable income through something called a Restricted Premium Trust (RPT)—significantly less than the actual premium paid.
- Every 5 years, they had three renewal options: Keep the arrangement going, transfer the policy to McGowan personally, or surrender it and donate proceeds to the Toledo Zoo.
- The catch? Missing the renewal deadline triggered automatic ownership transfer to McGowan.
In 2016, someone dropped the ball. No renewal happened before the deadline.
The policy ownership shifted directly to McGowan. The IRS immediately treated the accumulated cash value—minus the small amounts already reported—as taxable income. Total bill: $115,227.
The Sixth Circuit said: You knew the rules. You missed the deadline. Pay up.
Why Split-Dollar Arrangements Attract IRS Scrutiny
Split-dollar life insurance lets two parties—usually an employer and employee—share policy costs and benefits. Sounds reasonable. The IRS sees it differently.
The problem? These arrangements can disguise compensation as insurance benefits, allowing businesses to claim deductions while employees defer income recognition. The IRS has specific regulations to prevent this.
The Sixth Circuit affirmed three key IRS positions:
| Tax Treatment | Taxpayer Claimed | Court Ruled |
|---|---|---|
| Corporate Premium Deductions | $50,000 annual business expense | Nondeductible (personal benefit) |
| Annual Income Recognition | Only $12,778 via RPT contributions | Should include cash value increases |
| Ownership Transfer Tax | Argued favorable treatment | $115,227 fully taxable in 2016 |
According to the IRS, when an employer pays life insurance premiums for an employee’s benefit, those payments represent compensation—not deductible business expenses. The Sixth Circuit agreed completely.
The Renewal Deadline Nobody Takes Seriously Enough
Most split-dollar arrangements include renewal provisions. Typically every 3-5 years, parties must formally decide to continue, modify, or terminate the agreement.
These aren’t suggestions. They’re contractual triggers with tax consequences.
What happens if you miss the deadline?
- Automatic ownership transfer to the individual (usually the employee or policy owner), ending corporate involvement and triggering immediate tax recognition of accumulated benefits.
- Loss of future tax planning flexibility, as the arrangement terminates per the original agreement’s default provisions.
- Potential estate planning disruption if the policy was structured for specific wealth transfer purposes that now can’t be achieved.
- The IRS treats this as if you received a massive one-time bonus equal to the policy’s cash value.
In McGowan’s case, the 2016 deadline passed. The policy automatically transferred to him personally. The IRS calculated: Cash value built up from 2011-2016, minus the small annual amounts already taxed, equals $115,227 in taxable income for that year alone.
No do-overs. No extensions. The court record doesn’t even indicate whether the missed deadline was intentional or administrative error—it simply didn’t matter for tax purposes.
Should Business Owners Still Use Split-Dollar Insurance?
This ruling doesn’t kill split-dollar arrangements. It does require extreme administrative discipline.
Split-dollar life insurance still works for:
- Executive compensation packages where the benefit is clearly documented as taxable income and reported properly each year, not treated as hidden compensation.
- Family wealth transfers with proper legal structure and consistent renewal compliance, especially when the arrangement is used to transfer policy ownership at predetermined intervals.
- Business succession planning when paired with buy-sell agreements and careful tax planning, allowing key employees to eventually own policies while businesses recover costs.
You need three things to avoid McGowan’s fate:
- Calendar systems with multiple alerts 90 days, 60 days, and 30 days before each renewal deadline, assigned to different responsible parties to prevent single-point failure.
- Annual tax compliance review with a CPA familiar with split-dollar regulations, ensuring all income is reported correctly and deductions align with IRS rules.
- Written documentation of every decision, renewal, and payment, creating an audit trail that demonstrates intentional compliance rather than accidental benefit receipt.
The National Association of Insurance Commissioners recommends treating split-dollar arrangements as complex financial instruments requiring professional oversight—not set-it-and-forget-it insurance policies.
3 Red Flags Your Split-Dollar Arrangement Needs Review
Have a split-dollar policy through your business? Check for these warning signs:
1. Nobody’s tracking renewal dates. If your accountant, lawyer, and insurance agent all assume someone else is handling it, you’re headed for trouble. Assign one person primary responsibility with documented backup procedures.
2. Premium deductions on corporate returns. If your business is deducting 100% of split-dollar premiums as ordinary business expenses, expect IRS pushback. The Sixth Circuit ruling makes clear these are nondeductible when the employee receives personal benefits.
3. Minimal annual income reporting. If you’re reporting far less taxable income than the premiums being paid (like McGowan’s $12,778 vs. $50,000), your tax structure may not withstand audit scrutiny under current regulations.
The court record shows McGowan’s arrangement was designed to minimize current taxes by deferring income recognition. That strategy failed when tested in federal court.
Frequently Asked Questions
What exactly is split-dollar life insurance?
Split-dollar life insurance is an arrangement where two parties (typically employer and employee) share the costs and benefits of a life insurance policy. The employer usually pays premiums, while the employee receives death benefit protection. The IRS regulates these heavily because they can disguise compensation as insurance benefits. Under IRS rules, the employer’s premium payments are generally nondeductible, and the employee must recognize annual income based on the policy’s economic benefit—not just the small portion they might contribute directly.
Can my corporation deduct life insurance premiums for me?
Generally no, especially in split-dollar arrangements. The Sixth Circuit ruling confirms that when a corporation pays life insurance premiums where the employee or their beneficiaries receive the primary benefit, those premiums are nondeductible business expenses. The IRS treats them as compensation to the employee, not ordinary business costs. There are narrow exceptions for group term life insurance up to certain limits, but split-dollar arrangements typically don’t qualify.
What happens if I miss a split-dollar renewal deadline?
You face immediate tax consequences. In the McGowan case, missing the 5-year renewal triggered automatic policy ownership transfer and $115,227 in taxable income in a single year. The IRS calculates this as the policy’s accumulated cash value minus any amounts you’ve already paid tax on. There’s no grace period or ability to retroactively renew. The tax hit happens in the year of transfer, potentially pushing you into higher tax brackets and affecting other income-based calculations like Medicare premiums or phaseouts.
Should I cancel my split-dollar arrangement after this ruling?
Not necessarily. The Sixth Circuit ruling doesn’t ban split-dollar arrangements—it clarifies their tax treatment and emphasizes compliance requirements. If you can maintain strict administrative discipline, properly report all taxable income, and meet renewal deadlines, these arrangements still serve legitimate business and estate planning purposes. However, consult with a tax professional familiar with the updated judicial interpretation. Some arrangements may need restructuring to align with the court’s emphasis on proper income recognition and deduction denial.
How do I know if my policy is properly structured?
Have a qualified tax attorney or CPA review your arrangement against current IRS regulations on split-dollar life insurance (Notice 2002-8 and related guidance). Key indicators of proper structure include: annual reporting of economic benefit as taxable income, no corporate deductions for premiums paid, documented renewal tracking systems, and written agreements clearly defining each party’s rights. If your setup promises significant tax savings with minimal current income recognition, it likely needs restructuring after this ruling.
Bottom Line: Administrative Excellence Isn’t Optional
The Sixth Circuit’s November 2025 ruling sends a clear message about split-dollar life insurance: Structure matters. Timing matters. Documentation matters.
Dr. McGowan’s dental practice claimed $50,000 annual deductions and reported minimal personal income for years. When the renewal deadline passed in 2016, the entire tax strategy collapsed. One missed deadline created a $115,227 tax liability.
If you’re using split-dollar arrangements:
- Set up redundant deadline tracking systems immediately
- Review all tax reporting with professionals who know the latest rules
- Document every decision and payment meticulously
- Accept that premium deductions probably won’t survive IRS scrutiny
Split-dollar life insurance still works for business succession and estate planning. But it requires the kind of administrative precision most small businesses struggle to maintain.
The price of a missed deadline just went up. Officially.