An LLC wishes to purchase a modified endowment contract(MEC). The
purchase will be Key Man insurance to insure the lives of 1 and/or 2
members of the LLC.
The premium to fund the MEC will be borrowed from a Bank.
At some point in the contract, the LLC will take a withdrawal from the
cash value of the MEC and pay off the Bank.
1. Is there an income tax, penalty tax, or any tax owed by the LLC
when a withdrawal is made from the MEC to pay off the Bank?
Please cite reliable sources.

Thanks, 
torodbull

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Clarification of Question by torodbull-ga on 09 Feb 2004 11:13 PST

...and is the death benefit income tax free to the LLC?

torodbull,
 After obtaining some information from another researcher who may have
some further insight into this matter, I have asked the editors to
remove my answer. The information I received from the sources I
mentioned is somewhat in doubt. Therefore, I will leave it to be
re-answered with some references that another researcher will supply.