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Thank you for the link to the naifa analysis. Your quote is correct only insofar as it pertains to sale proceeds from B's resale of the policy to C. The I.R.S. clearly states that the policy was a capital asset in the hands of B, the secondary purchaser of the policy.
"Section 1222(3) defines long-term capital gain as gain from the sale or exchange of a capital asset held for more than one year if and to the extent such gain is taken into account in computing gross income. Section 1221(a) provides that the term "capital asset" means property held by the taxpayer (whether or not connected with a trade or business), but does not include items described in § 1221(a)(1)-(8). The life insurance contract in B's hands was not property described in § 1221(a)(1)-(8), and was thus a capital asset in B's hands."
So what? The very next sentence in the Ruling reads -
"Neither the surrender of a life insurance or annuity contract nor the receipt of a death benefit from the issuer under the terms of the contract produces a capital gain. Accordingly, the $71,000 income recognized by B upon the receipt of death benefits under the contract is ordinary income."
While the Revenue Ruling addresses B's sale of the policy to tertiary purchaser C, it most certainly does not address the proper treatment of the death benefits to be received by C. Capital asset or no, it remains unclear to me that those death benefits can be presumptively treated as capital gains.
Now IANAL, most definitely not a Tax Lawyer, and I've been wrong before. But I'd like a far more definitive answer to this question. And no, I'm not demanding it of you, I'm just sayin'.
