IRS Suspends COLI Settlement Program

October 11, 2002 ( - After winning three court battles in cases involving corporate owned life insurance (COLI) cases, the Internal Revenue Service (IRS) has backed away from plans to settle future litigation over the issue.

In a written announcement about the policy change, the IRS said it and the US Department of Justice would “vigorously defend or prosecute all future COLI litigation” after allowing a 45-day period for the change to take effect.

In August 2001, the IRS said it would allow companies who had purchased broad-based COLI plans after June 1986 to settle if they agreed to concede 80% of the COLI interest deductions.


The IRS announcement said it had a change of heart after federal appeals courts in three COLI cases had denied the interest deductions after ruling that the COLI plans lacked economic substance.

In one of the cases, appeals judges also upheld the IRS’ move to penalize the company for understanding its income as a result of taking the COLI deductions.

The IRS said it had sent letters to companies with COLI plans, which stated that the firms had to submit a written offer to settle within 45 days from the letter’s date. The letters contain instructions about how companies interested in settling can do so, the IRS said.  

The COLI issue, which involves companies taking out life insurance policies on certain employees, has been a controversial one in recent months because, among other things, the policies generate tax-free income for the firms buying them.