Whether taxpayers underreported their income; The “split-dollar” regulation (Treasury Regulation § 1.61-22); The “compensatory provision” (§ 1.61-22(b)(2)(i)–(ii)); Whether the trust owning the life insurance policy was a “Death Benefit Trust” (DBT); Whether the taxpayer-company “owned” the policy insurance contract; Treating an employer as the owner of the policy contract; § 1.61-22(c)(1)(iii)(C); Internal Revenue Code (IRC) § 419(e)(1); “Current access” & “future rights” (§ 1.61-22(d)(4)(ii)); Whether the split-dollar regulation contravened the IRC; Loper Bright Enters v Raimondo; § 162(a); Machacek v Commissioner

The court held that under the “split-dollar regulation,” plaintiff-McGowan “was required to ‘take into account the full value of all economic benefits’ from the Plan when calculating his gross income” and his Company (the other plaintiff) “was prohibited from deducting” its payments to a DBT that were used to pay the premiums on a life insurance policy covering McGowan. He was a dentist in his dental practice (the Company). The Plan “involved the Company compensating [him] with life insurance in a structure intended” to minimize tax burdens. It operated through a Benefits Trust Agreement that established two subtrusts, including the DBT. The IRS “concluded that McGowan should have recognized the Policy’s accumulation of cash value as taxable income each tax year, and that the Company should not have been taking deductions for its annual contributions to the DBT.” It assessed additional taxes and penalties to both. They paid them and then sued. The district court granted the government summary judgment. The case primarily concerned the split dollar regulation, Treasury Regulation § 1.61-22. “In the employment context, split-dollar agreements involve an employer contracting with an employee to pay some or all of the premiums on the employee’s life insurance[.] ” This case specifically involved the regulation’s “compensatory provision.” If the Plan here met the terms of this provision, “the split-dollar regulation requires McGowan to recognize the full value of the Plan’s economic benefits (minus any consideration he paid to the Company for those benefits) and prohibits the Company from taking deductions for its premiums paid.” The court rejected plaintiffs’ arguments that the regulation should not apply because the DBT owned the life insurance policy, not the Company. It held that the DBT constituted a “welfare benefit fund,” and thus the employer was treated as the owner of the policy. It also rejected plaintiffs’ argument that a zoo’s possible receipt of the cash value of the policy negated the premise that McGowan delegated the relevant beneficiary. Among other things, the zoo had “an interest in the Policy’s cash value, not its death benefit, the relevant consideration under subclause (C)(1).” Further, as to the death benefit, “McGowan designated his wife as the recipient . . . .” As to the fact that the tax periods occurred before vesting, “the regulation expressly defines ‘current access’ in a somewhat counterintuitive manner to include ‘future right[s][.]’” The court also found no merit in plaintiffs’ argument that the district court should have applied the current Loper Bright standard. They did not “preserve this interpretive question” and the court found that “the statutory authority behind the split-dollar regulation is readily apparent.” Affirmed.