[link|http://www.chron.com/cs/CDA/story.hts/business/1373629|today's followup]

April 19, 2002, 1:31AM

Green wants IRS to probe secret policies on workers
By L.M. SIXEL
Copyright 2002 Houston Chronicle
U.S. Rep. Gene Green, D-Houston, called on the Internal Revenue Service on Thursday to investigate the possible abuse of so-called "dead peasant" life insurance.

Corporate-owned life insurance -- known as "dead peasant" life insurance in the insurance industry because it is taken out on mid- and low-level employees -- caught Green's attention after being contacted by the Houston Chronicle.

The policies are typically taken out without the knowledge of the workers or their families, and when the employee dies, the company reaps the benefit.

Moreover, the companies write them off their federal taxes as a business expense.

Green called upon IRS Commissioner Charles Rossotti to undertake a detailed analysis of whether companies that write them off as a business expense are really using them as an elaborate tax dodge.

In a prepared statement, Green cited two cases the IRS has brought against CM Holdings (the parent company of Camelot Music) and American Electric Power in which federal judges found that they improperly deducted premiums from their federal income taxes for the corporate-owned life insurance, or COLI.

In the case of CM Holdings, a federal judge in Delaware ruled that the company's deductions were a "sham for tax purposes." The judge further disallowed the company's interest deductions of $13.8 million and penalized the company for substantial understatement, according to Green's statement.

Green said he also plans to introduce a bill in Congress that would force companies to reveal to employees when they take out corporate life insurance policies and the amount of each.

COLIs are different from "key man" insurance, which insures the top executives of a company.

It's impossible to determine how many companies have secretly insured their employees' lives, but one insurance company representative estimated one-fourth of the Fortune 500 firms have taken out the policies.

The legal staff of the Texas Department of Insurance is also taking a look at the use of COLIs in Texas to determine whether there has been a possible violation of the Texas Insurance Code, spokesman Lee Jones said.

The agency is examining the "insurable interest" issue.

In Texas, only those with an "insurable interest" can take out a life insurance policy on someone. That includes a spouse or child, a creditor or "one having a reasonable expectation of pecuniary benefit or advantage from the continued life of another."

In March, U.S. District Judge Nancy Atlas ruled that Wal-Mart has no "insurable interest" in the 350,000 insurance policies it took out on the lives of its employees, and that it's not entitled to the insurance proceeds. She ruled that the death benefits belong to the estates of the deceased workers.

Congress eliminated the tax deduction of COLIs in 1996 but didn't indicate how it would treat tax deductions taken before then, said Bob Espey, a lawyer who specializes in insurance with McClanahan & Clearman in Houston.

He is representing the estates of employees from Wal-Mart as well as workers at Camelot Music who discovered their lives are secretly insured.

But the IRS has elected to treat the deductions as "sham transactions," Espey said.

A lawyer for Camelot did not return a call for comment.