State Treasurer Steven Grossman, citing insurance technicality, says he could face half-million dollar tax obligation

A bungled consolidation of his life insurance policies could result in State Treasurer Steven Grossman having a “tax obligation’’ in excess of a half-million dollars, according to a letter he sent to the State Ethics Commission in May.

Grossman, a Democratic candidate for governor, wrote that in 2009, before he was elected treasurer, the life insurance policies he held were aggregated into one policy through a tax-free exchange.

Grossman wrote that he “recently’’ became aware that information used to restructure his life insurance was “not accurate and that calculations utilizing this inaccurate information created a situation that potentially results in a considerable financial impact on me through a substantial tax obligation that may exceed $500,000.’’


In a telephone interview Thursday, Grossman repeatedly said that he neither owes current state or federal taxes related to his life insurance policy nor back taxes related to it.

Grossman said he had outstanding loans on some life insurance policies that were consolidated into a single loan on the new life insurance policy in 2009. And he said he would owe taxes related to the life insurance policy only if he paid back that loan.

“There are zero taxes currently owed,’’ he said. “The only time at which I would have a tax obligation if I choose to pay back the loan.’’ He said he did not know the current value of the loan.

Grossman said that when he consildated his plans into one, the insurer issuing his policy had accepted his plan as having a certain cost-basis.

“Three years later they said, ‘whoops, sorry, we made a mistake,’’’ he said.

Grossman’s personal attorney, Joel B. Sherman, said the insurer’s corrected cost-basis of Grossman’s life insurance plan was now “significantly lower,’’ exposing him to a potential tax obligation were he to repay the loan.

“Very simply, a policy has a cost-basis to it — it’s the value inside the policy. And when a loan against the policy exceeds that cost-basis, then there would be tax due,’’ Sherman said. He said that tax would only be due when the loan is repaid.


“Under the tax law, when that payment exceeds the cost-basis, then a taxable event occurs,’’ Sherman said.

Grossman said he and his attorneys are in a discussions with his current life insurance company about the issue.

“My feeling is: make us whole, take care of the customer,’’ Grossman said.

Outside tax experts cautioned that Grossman’s insurance situation appeared quite complicated and that it would be impossible to analyze it without all the data about his old insurance policies and his new one. But, they said, it was plausible that he could owe no taxes unless he paid the loan.

“Overall, while the matter is complex and while we don’t have all the information,’’ said Boston tax attorney Morris N. Robinson, “it is well within the realm of possibliy that Mr. Grossman is correct and that…he doesn’t have to pay any current taxes.’’

The letter was first reported on by Republican newspaper.

Grossman said in the letter there is a potential for a legal dispute with various entities, including Lincoln National Life Insurance Company, which is not the company that issued his current life insurance plan.

In the letter, he wrote that before he was aware of his life insurance issues, he signed off on a matter involving Lincoln National Life Insurance Company in his capacity as treasurer.

Grossman wrote he was disclosing the information to “dispel any appearance of a potential conflict of interest’’ that might be created because of the potential for a legal dispute in which he was involved with a party that had a seperate relationship with the Treasury.


A spokesman for Lincoln National Life Insurance Company declined to comment.

In response to the Globe’s request, both the State Ethics Commission and the Treasurer’s office provided a copy of the letter, dated May 31, 2013.

Grossman is one of several candidates currently running for the Democratic nomination in the 2014 governor’s race.

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