Premium kickbacks from insurance agent were taxable to insureds.

The Wentzes took part in an illegal arrangement with an insurance agent under which they would receive free life insurance for one year. As part of the scheme, the couple agreed to apply for whole life insurance. Once the Wentzes had been approved and had paid the first-year premiums, the agent would return the entire amount to them.

Under his agreement with the insurer, the agent received a commission of about 115% of the first-year premium on any policy he sold. The agent kept the difference between this commission and the kickback to the Wentzes, or 15% of the premiums.

The Wentzes let the policies lapse after the first year by not paying the premiums. They took part in this transaction several times over succeeding years.

The Wentzes did report taxable income from the transactions, but not enough. They only declared income equal to the cost of one-year term life policies--substantially less than the first year's premiums for whole life insurance. The IRS claimed the entire first-year premiums had to be included in the Wentzes' income for the affected tax years.

Result: For the IRS. The Wentzes realized income when they received free whole life coverage for one year. They had to report as taxable income the amounts of the kickbacks they received--the first-year premiums for the whole life policies.

* Wentz, 105 TC No. 1.