Information Reporting for Certain Life Insurance Contract Transactions and Modifications to the Transfer for Valuable Consideration Rules
| Published date | 31 October 2019 |
| Citation | 84 FR 58460 |
| Record Number | 2019-23559 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 84 Issue 211 (Thursday, October 31, 2019)
[Federal Register Volume 84, Number 211 (Thursday, October 31, 2019)]
[Rules and Regulations]
[Pages 58460-58489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23559]
[[Page 58459]]
Vol. 84
Thursday,
No. 211
October 31, 2019
Part IIDepartment of the Treasury-----------------------------------------------------------------------Internal Revenue Service-----------------------------------------------------------------------26 CFR Part 1Information Reporting for Certain Life Insurance Contract Transactions
and Modifications to the Transfer for Valuable Consideration Rules;
Final Rule
Federal Register / Vol. 84 , No. 211 / Thursday, October 31, 2019 /
Rules and Regulations
[[Page 58460]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9879]
RIN 1545-BO49
Information Reporting for Certain Life Insurance Contract
Transactions and Modifications to the Transfer for Valuable
Consideration Rules
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations providing guidance on
new information reporting obligations under section 6050Y related to
reportable policy sales of life insurance contracts and payments of
reportable death benefits. The final regulations also provide guidance
on the amount of death benefits excluded from gross income under
section 101 following a reportable policy sale. The final regulations
affect parties involved in certain life insurance contract
transactions, including reportable policy sales, transfers of life
insurance contracts to foreign persons, and payments of reportable
death benefits.
DATES:
Effective Date: These regulations are effective October 31, 2019.
Applicability Date: For dates of applicability, see Sec. Sec.
1.101-6 and 1.6050Y-1(b).
FOR FURTHER INFORMATION CONTACT: Kathryn M. Sneade, (202) 317-6995 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1 under sections
101 and 6050Y of the Internal Revenue Code (Code). These amendments
(final regulations) implement legislative changes to sections 101 and
6050Y of the Code by sections 13520 and 13522 of Public Law 115-97 (131
Stat. 2054, 2149, 2151), commonly referred to as the Tax Cuts and Jobs
Act (TCJA). The final regulations under section 101 amend final
regulations under section 101 published in the Federal Register on
November 26, 1960 (25 FR 11402), as subsequently amended on December
24, 1964 (29 FR 18356), September 27, 1982 (47 FR 42337), and July 26,
2007 (72 FR 41159) (existing regulations).
Section 13520 of the TCJA added section 6050Y to chapter 61
(Information and Returns) of subtitle F of the Code (chapter 61).
Section 6050Y imposes information reporting obligations related to
certain life insurance contract transactions, including reportable
policy sales and payments of reportable death benefits. Section 6050Y
provides that each of the returns required by section 6050Y is to be
made ``at such time and in such manner as the Secretary shall
prescribe.'' The final regulations under section 6050Y implement
section 6050Y by specifying the manner in which and time at which the
information reporting obligations must be satisfied. The final
regulations also provide definitions and rules that govern the
application of the information reporting obligations.
Section 13522 of the TCJA amended section 101. New section
101(a)(3) defines the term ``reportable policy sale'' and provides
rules for determining the amount of death benefits excluded from gross
income following a reportable policy sale. The final regulations under
section 101 provide definitions applicable under sections 101 and 6050Y
and guidance for determining the amount of death benefits excluded from
gross income following a reportable policy sale.
Notice 2018-41, 2018-20 I.R.B. 584, described sections 13520 and
13522 of the TCJA and the regulations the Department of the Treasury
(Treasury Department) and the IRS expected to propose under section
6050Y, requested comments on the definition of ``reportable policy
sale'' set forth in section 101(a)(3)(B), among other things, and
identified the need for regulations providing guidance on the
application of section 101(a) following the addition of section
101(a)(3) to the Code. The Treasury Department and the IRS received
comments in response to the notice and considered these comments in
developing the proposed regulations.
The Treasury Department and the IRS published proposed regulations
under sections 101 and 6050Y (REG-103083-18) in the Federal Register
(84 FR 11009) on March 25, 2019 (proposed regulations). The Treasury
Department and the IRS received public comments on the proposed
regulations and held a public hearing on June 5, 2019.
After consideration of all of the comments on the proposed
regulations, the proposed regulations are adopted as amended by this
Treasury decision.
Summary of Comments and Explanation of Revisions
This section discusses the public comments received on the proposed
regulations and explains the revisions adopted by the final regulations
in response to those comments.
1. Comments and Changes Relating to Applicability Dates
A. Applicability Date for Section 6050Y Regulations
Section 1.6050Y-1 of the proposed regulations provides that the
rules in Sec. 1.6050Y-1 through 1.6050Y-4 of the proposed regulations
apply to reportable policy sales made and reportable death benefits
paid after December 31, 2017, and provides transition relief with
respect to reporting required on reportable policy sales and payments
of reportable death benefits occurring after December 31, 2017, and
before the date final regulations under section 6050Y are published in
the Federal Register.
One commenter recommended that reporting obligations under section
6050Y (as well as application of the rules under section 101 relating
to section 6050Y) be delayed until 60 days after the date the final
regulations are published in the Federal Register. Informal comments
also were received requesting transition relief (such as delayed
reporting) or permanent relief with respect to the reporting
obligations under section 6050Y for reportable policy sales and
payments of reportable death benefits occurring after December 31,
2017, and before January 1, 2019 (such as waiving the reporting
obligations for this period). One commenter requested that at least an
additional 30 days be added to the 90-day relief period provided in
Sec. 1.6050Y-1(b)(2) and (3) of the proposed regulations for filing
returns and furnishing statements required under section 6050Y(b) and
(c) and Sec. 1.6050Y-3 and 1.6050Y-4 of the proposed regulations, to
give issuers at least 60 days to complete their reporting after the 60-
day extension period provided to acquirers of an interest in a life
insurance contract under Sec. 1.6050Y-1(b)(1) of the proposed
regulations. The commenter asserted that issuers require significantly
more time than the 30 days effectively provided to complete Forms 1099-
SB, ``Seller's Investment in Life Insurance Contract,'' and 1099-R
``Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.'', and to add new forms (such as
Form 1099-SB) to their systems. The commenter stated that issuers must
identify policies that are subject to reporting once the Forms 1099-LS,
``Reportable Life Insurance Sale,'' are received as well as enhance
systems to track these policies over their life and transmit data
between various systems in order to accurately report under sections
6050Y(b) and (c).
[[Page 58461]]
In response to these comments, and to give acquirers and issuers
ample time to develop and implement reporting systems, the final
regulations provide that the rules in Sec. Sec. 1.6050Y-1 through
1.6050Y-4 of the final regulations apply to reportable policy sales
made and reportable death benefits paid after December 31, 2018. See
Sec. 1.6050Y-1(b) of the final regulations. As a result, no reporting
is required under section 6050Y for reportable policy sales made and
reportable death benefits paid after December 31, 2017, and before
January 1, 2019.
Section 1.6050Y-1(a)(12) of the final regulations defines
``reportable death benefits'' as ``amounts paid by reason of the death
of the insured under a life insurance contract that are attributable to
an interest in the contract that was transferred in a reportable policy
sale.'' Accordingly, because the definition of ``reportable policy
sale'' under Sec. 1.6050Y-1(a)(14) of the final regulations applies
only to transfers of interests in life insurance contracts made after
December 31, 2018, death benefits are ``reportable death benefits''
under Sec. 1.6050Y-1(a)(12) of the final regulations and are subject
to the reporting requirements of Sec. 1.6050Y-4 of the final
regulations only if the death benefits are paid by reason of the death
of the insured under a life insurance contract transferred after
December 31, 2018, in a reportable policy sale.
The final regulations also provide transition relief as set forth
in the proposed regulations with two modifications. First, the
transition relief applies with respect to reportable policy sales made
and reportable death benefits paid after December 31, 2018, and on or
before October 31, 2019. Second, as requested by one of the commenters,
Sec. 1.6050Y-1(b)(3), (4), and (5) of the final regulations provide
issuers with at least 120 days after the final regulations are
published in the Federal Register to file returns and furnish
statements under section 6050Y(b) and (c) and Sec. Sec. 1.6050Y-3 and
1.6050Y-4 of the final regulations. These features of the final
regulations are intended to give acquirers and issuers ample time to
develop and implement reporting systems.
Noting that 250 or more information returns of a single taxpayer
must be filed electronically, one commenter requested waivers from
electronic filing for 2018 and 2019 issuer reporting under section
6050Y(b) and (c). The Treasury Department and the IRS have determined
not to provide the requested waiver in the final regulations under
section 6050Y because procedures already exist for any person required
to file 250 or more returns during the calendar year to request a
waiver from the requirement to file electronically by showing hardship.
See Sec. 301.6011-2(c).
B. Applicability Date for Section 101 Regulations
Section 1.101-6(b) of the proposed regulations provides that, for
purposes of section 6050Y, Sec. 1.101-1(b), (c), (d), (e), (f), and
(g) apply to reportable policy sales made after December 31, 2017, and
to reportable death benefits paid after December 31, 2017. Section
1.101-6(b) of the proposed regulations further provides that, for any
other purpose, Sec. 1.101-1(b), (c), (d), (e), (f), and (g) apply to
transfers of life insurance contracts, or interests therein, made after
the date the Treasury decision adopting the proposed regulations as
final regulations is published in the Federal Register.
Several commenters requested clarification regarding the
applicability dates set forth in Sec. 1.101-6(b) of the proposed
regulations. Two of these commenters requested that the Treasury
Department and the IRS clarify that the rules issued with respect to
section 101(a)(3) apply to all transfers of life insurance contracts,
or interests therein, made after December 31, 2017, or alternatively,
that the Treasury Department and the IRS allow taxpayers to rely upon
the rules in Sec. 1.101-1 of the proposed regulations for transactions
undertaken after December 31, 2017, and before the date that the
Treasury Department adopts final rules. Another commenter recommended
that application of the rules under section 101 (as well as the
reporting obligations under section 6050Y) be delayed until 60 days
after the date the final regulations are published in the Federal
Register, but suggested that language should be included in the
preamble to the final regulations to provide that taxpayers may rely on
the proposed regulations for the period prior to the effective date of
the final regulations.
Because the final regulations provide that the reporting
obligations under section 6050Y apply to reportable policy sales and
payments of reportable death benefits occurring after December 31,
2018, for purposes of determining whether a transfer of an interest in
a life insurance contract is a reportable policy sale or a payment of
death benefits is a payment of reportable death benefits subject to the
reporting requirements of section 6050Y and Sec. Sec. 1.6050Y-1
through 1.6050Y-4 of the final regulations, the definitions and rules
set forth in Sec. 1.101-1(b) through (g) of the final regulations
apply to reportable policy sales made after December 31, 2018, and to
reportable death benefits paid after December 31, 2018. See Sec. Sec.
1.101-6(b) and 1.6050Y-1(b) of the final regulations.
The final regulations provide that, for other purposes,
specifically for purposes of determining the amount of the proceeds of
life insurance contracts payable by reason of death excluded from gross
income under section 101, Sec. 1.101-1(b) through (g) of the final
regulations apply to amounts paid by reason of the death of the insured
under a life insurance contract, or interest therein, transferred after
October 31, 2019. However, under section 7805(b)(7), a taxpayer may
apply the rules set forth in Sec. 1.101-1(b) through (g) of the final
regulations, in their entirety, with respect to all amounts paid by
reason of the death of the insured under a life insurance contract, or
interest therein, transferred after December 31, 2017, and on or before
October 31, 2019.
2. Comments and Changes Relating to Sec. 1.101-1(b) of the Proposed
Regulations
Generally, amounts received under a life insurance contract that
are paid by reason of the death of the insured are excluded from gross
income for Federal income tax purposes under section 101(a)(1).
However, if a life insurance contract or interest therein is sold or
otherwise transferred for valuable consideration, the ``transfer for
value rule'' set forth in section 101(a)(2) limits the excludable
portion of the amount received by reason of the death of the insured to
the sum of the consideration paid for the contract or interest therein
and any premiums and other amounts subsequently paid by the transferee
with respect to the contract or interest therein. Section 101(a)(2)(A)
and (B) provide two exceptions to this transfer for value rule. One
exception (the ``certain person exception'') applies to transfers to
the insured, a partner of the insured, a partnership in which the
insured is a partner, or a corporation in which the insured is a
shareholder or officer (``certain persons''). See section 101(a)(2)(B).
The other exception (the ``carryover basis exception'') applies if the
transferee's basis for determining gain or loss in the life insurance
contract or interest therein is determined in whole or in part by
reference to the transferor's basis in the contract or interest
therein. See section 101(a)(2)(A). Under section 101(a)(3), which was
added by section 13522 of the TCJA, neither of these exceptions to the
transfer for value rule apply in the case of a transfer of a life
insurance contract, or any interest therein, that is a reportable
policy sale.
[[Page 58462]]
Section 1.101-1(b)(1)(i) of the proposed regulations provides the
general transfer for value rule set forth in section 101(a)(2). Section
1.101-1(b)(1)(ii) of the proposed regulations sets forth the exceptions
from this general rule for transfers for valuable consideration that
are not reportable policy sales (the certain person exception and
carryover basis exception provided in section 101(a)(2)). Section
1.101-1(b)(2) of the proposed regulations provides rules regarding
gratuitous transfers of interests in life insurance contracts, as well
as transfers of only a part of an interest in a life insurance contract
and bargain sales of an interest in a life insurance contract (that is,
transfers that are in part gratuitous and in part transfers for
valuable consideration). This section of this Summary of Comments and
Explanation of Revisions discusses comments received on Sec. 1.101-
1(b) of the proposed regulations.
A. Transfers to Certain Persons
One commenter on the proposed regulations described a life
insurance policy subject to the section 101(a)(2) transfer for value
rule as ``tainted,'' in that death benefits paid under the policy are
no longer fully excluded from income under section 101(a)(1). The
commenter asked that the final regulations provide for removal of the
``taint'' by a transfer to the insured, as was permitted before the
TCJA, and asked for clarification regarding whether a transfer of a
policy to the insured must be a sale for fair market value to remove
the ``taint'' of a transfer for valuable consideration. The commenter
suggested that mistakes happen, including the mistake of not seeking
tax advice from a professional who knows the section 101 rules, and
that taxpayers should be able to take corrective measures to remove
this ``taint.'' The commenter noted that the insured may no longer have
a business or other need for the current transferee to own the policy
and may wish to hold the policy to protect the insured's family, or the
insured may regret selling the policy and wish to buy the policy back
after the policy was transferred in a reportable policy sale. The
commenter pointed out that Sec. 1.101-1(b)(3)(ii) of the existing
regulations (not yet revised to reflect TCJA changes to section 101)
currently provides such a corrective measure, allowing the ``taint'' to
be removed by a transfer of the policy to certain persons. However,
Sec. 1.101-1(b)(1)(ii)(B)(2) of the proposed regulations makes this
corrective measure unavailable to the extent that the transfer to those
certain persons was preceded by a transfer of the policy for valuable
consideration in a reportable policy sale. The commenter also noted
that Sec. 1.101-1(b)(3)(ii) of the existing regulations does not
require the corrective transfer to be a sale for fair market value, and
that Sec. 1.101-1(b)(1)(ii)(B)(1) of the proposed regulations does not
impose such a requirement. The commenter suggested that Example 1,
Example 2, and Example 3 in Sec. 1.101-1(g)(1), (2), and (3) of the
proposed regulations, read together, however, appear to require that
the transfer to the insured be a sale for fair market value to clear
the ``taint'' of a prior transfer for valuable consideration. The
commenter asked for clarification on this point. The commenter
suggested that the transfer to the insured be available as a corrective
measure even if that transfer was preceded by a reportable policy sale,
and, to prevent any possible abuse, that the insured be required to pay
fair market value if the policy previously had been transferred in a
reportable policy sale.
Section 1.101-1(b)(1)(ii)(B)(1) of the proposed regulations does
not explicitly require that the valuable consideration for a transfer
of an interest in a life insurance contract be equal to the interest's
fair market value, but, in the case of a bargain sale, the rules
implementing the provisions of section 101 are applied separately to
the sale and gift portions of the transferred interest. Under Sec.
1.101-1(b)(2)(iii) of the proposed regulations, part of the transfer in
a bargain sale is treated as a gratuitous transfer subject to Sec.
1.101-1(b)(2)(i) of the proposed regulations. Example 1, Example 2, and
Example 3 in Sec. 1.101-1(g)(1), (2), and (3) of the proposed
regulations are intended to illustrate the application of the rules
implementing the changes made by the TCJA. For the sake of simplicity,
the consideration in these examples equals fair market value, so the
bargain sale rules do not apply. The final regulations include an
example that illustrates the application of the bargain sale rules. See
Example 7 in Sec. 1.101-1(g)(7) of the final regulations.
In response to the comments received, the final regulations provide
for a fresh start with respect to an interest gratuitously transferred
to the insured, provided the interest has not previously been
transferred for value in a reportable policy sale. See Sec. 1.101-
1(b)(2)(i) of the final regulations. Example 2 in Sec. 1.101-1(g)(2)
of the final regulations illustrates the application of this rule. The
final regulations also provide for a fresh start with respect to an
interest (or portion thereof) that is transferred to the insured
following a reportable policy sale of the interest for valuable
consideration, but only to the extent that the insured pays fair market
value for the interest and only with respect to the interest (or
relevant portion thereof) transferred to the insured that is not
subsequently transferred in a transfer for valuable consideration or in
a reportable policy sale. See Sec. 1.101-1(b)(1)(ii)(B)(3) of the
final regulations. The application of this rule is illustrated in
revised Example 6, new Example 7, new Example 8, and new Example 9 in
Sec. 1.101-1(g)(6), (g)(7), (g)(8), and (g)(9) of the final
regulations.
B. Gratuitous Transfers
Under Sec. 1.101-1(b)(2)(i) of the proposed regulations, the
amount of the policy proceeds attributable to a gratuitously
transferred interest in a life insurance policy that is excludable from
gross income under section 101(a)(1) is limited to the sum of the
amount attributable to the gratuitously transferred interest that would
have been excludable by the transferor if the transfer had not
occurred, and the premiums and other amounts subsequently paid by the
transferee with respect to the interest. Unlike the existing
regulations, the proposed regulations do not provide a special rule for
a gratuitous transfer made by or to certain persons.\1\ As explained in
the preamble to the proposed regulations, such a rule is not required
by section 101(a), and a special rule for these transfers could be
subject to abuse. See 84 FR 11009, 11017.
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\1\ Under Sec. 1.101-1(b)(2) of the existing regulations, in
the case of a gratuitous transfer, by assignment or otherwise, of a
life insurance policy or any interest therein, the amount of the
proceeds attributable to such policy or interest that is excludable
from the transferee's gross income under section 101(a) is, as a
general rule, limited to the sum of the amount which would have been
excludable by the transferor if no such transfer had taken place and
any premiums and other amounts subsequently paid by the transferee
with respect to the interest. However, if the gratuitous transfer in
question is made by or to the insured, a partner of the insured, a
partnership in which the insured is a partner, or a corporation in
which the insured is a shareholder or officer, the entire amount of
the proceeds attributable to the policy or interest transferred is
excludable from the transferee's gross income.
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Section 1.101-1(b)(2)(i) of the proposed regulations applies to any
gratuitous transfer of an interest in a life insurance contract,
``including a reportable policy sale that is not for valuable
consideration.'' One commenter requested that this language be deleted,
asserting that including gratuitous transfers within the definition of
reportable policy sales is
[[Page 58463]]
not consistent with section 101.\2\ The commenter noted that the title
of section 101(a)(3) is ``Exception to valuable consideration rules for
commercial transactions,'' which the commenter asserted makes clear
that a reportable policy sale can occur only if there has been a
transfer for valuable consideration. The commenter further asserted
that the provisions of section 101(a)(3)(A) and (B) limit the relevance
of reportable policy sales to those situations in which a taxpayer
needs to determine whether one of the section 101(a)(2) exceptions
applies and, because those exceptions are never relevant for gratuitous
transfers, reportable policy sales are never relevant for gratuitous
transfers.
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\2\ The commenter also asserted that this language creates
unnecessary and confusing reporting requirements under section 6050Y
for gift transfers and is inconsistent with the statutory language,
which, according to the commenter, indicates that a reportable
policy sale must be a transfer for value. The commenter's concerns
about reporting are discussed in section 10.A of this Summary of
Comments and Explanation of Revisions.
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The TCJA added section 101(a)(3)(A) to provide that the two pre-
existing exceptions to the transfer for value rules no longer apply if
the transfer is a reportable policy sale. Section 101(a)(3)(B) defines
a reportable policy sale as any acquisition of an interest in a life
insurance contract in the absence of the described relationship between
the acquirer and insured. Although the availability of exceptions from
the transfer for value rules is not directly relevant to a gratuitous
transfer standing alone, the acquisition of an interest in a contract
by an acquirer that does not have the described relationship with the
insured, including a gratuitous transfer, may affect the exclusion of
the policy proceeds from gross income under section 101(a) and the
regulations thereunder if there are subsequent transfers. Consistent
with the statutory language, the definition of a reportable policy sale
in the final regulations does not exclude gratuitous transfers.
3. Comments and Changes Relating to Sec. 1.101-1(c) of the Proposed
Regulations
Under section 101(a)(3)(B) and Sec. 1.101-1(c)(1) of the proposed
regulations, a reportable policy sale is, as a general matter, any
direct or indirect acquisition of an interest in a life insurance
contract if the acquirer has, at the time of the acquisition, no
substantial family, business, or financial relationship with the
insured apart from the acquirer's interest in the life insurance
contract. Exceptions to the definition of reportable policy sale for
transfers between certain related entities are provided in Sec. 1.101-
1(c)(2)(i) and (ii) of the proposed regulations. Section 1.101-
1(c)(2)(iii) of the proposed regulations sets forth exceptions from the
definition of reportable policy sales for certain indirect
acquisitions. This section of this Summary of Comments and Explanation
of Revisions discusses comments received on Sec. 1.101-1(c) of the
proposed regulations.
A. Pre-TCJA Acquisitions
Two commenters on the proposed regulations requested clarification
regarding the application of Sec. 1.101-1(c)(2)(iii)(A) with respect
to the indirect acquisition of an interest in a life insurance contract
if the entity that directly holds the interest acquired the interest
before January 1, 2018 (that is, before the existence of any reporting
requirements under section 6050Y(a)). Both commenters recommended that
an exception from the definition of reportable policy sale be provided
with respect to the indirect acquisition of an interest in a life
insurance contract by a person if the partnership, trust, or other
entity that directly holds the interest in the life insurance contract
acquired the interest before January 1, 2018. One commenter recommended
that, if the requested exception is not provided, the partnership,
trust, or other entity in which the investment interest is purchased
should be permitted to undertake the applicable reporting, instead of
requiring the investor to navigate the complexities of the reporting
requirements. This commenter also suggested that, if the requested
exception is provided, the partnership, trust, or other entity could
file an information return with the IRS for its portfolio of policies
acquired prior to January 1, 2018, as a transition solution. However,
the other commenter suggested that the partnership, trust, or other
entity may not have tracked or retained information sufficient to
satisfy the reporting requirements under section 6050Y with respect to
interests acquired before January 1, 2018.
In response to these comments, Sec. 1.101-1(c)(2)(iii)(A) of the
final regulations provides an exception from the definition of
reportable policy sale with respect to the indirect acquisition of an
interest in a life insurance contract by a person if a partnership,
trust, or other entity in which an ownership interest is being acquired
directly or indirectly holds the interest in the life insurance
contract and acquired that interest before January 1, 2019, or acquired
that interest in a reportable policy sale reported in compliance with
section 6050Y(a) and Sec. 1.6050Y-2.\3\
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\3\ As discussed in section 1.A of this Summary of Comments and
Explanation of Revisions, the final regulations provide that the
reporting obligations under section 6050Y apply to reportable policy
sales and payments of reportable death benefits occurring after
December 31, 2018. See Sec. 1.6050Y-1(b) of the final regulations.
Section 3.B of this Summary of Comments and Explanation of Revisions
describes changes adopted in Sec. 1.101-1(c)(2)(iii)(A) of the
final regulations in response to other comments requesting expanded
indirect acquisition exceptions.
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B. Additional Requests for Expanded Indirect Acquisition Exceptions
One commenter on the proposed regulations identified the existence
of a possible technical issue with Sec. 1.101-1(c)(2)(iii)(A) of the
proposed regulations, which provides an exception from reportable
policy sale status for certain indirect acquisitions. The commenter
noted that, under this provision, the indirect acquisition of an
interest in a life insurance contract is not a reportable policy sale
if the partnership, trust, or other entity that directly holds the
interest in the life insurance contract acquired the interest in a
reportable policy sale that was reported in compliance with section
6050Y(a) and the regulations thereunder. The commenter described a fact
pattern in which legal title to a life insurance contract is held by a
nominee (for example, a securities intermediary) on behalf of a
partnership, trust, or other entity (for example, an investment fund).
The commenter concluded that, in this fact pattern, the exception in
Sec. 1.101-1(c)(2)(iii)(A) of the proposed regulations cannot apply to
an investor in the partnership, trust, or other entity because the
investor's ownership interest is in the partnership, trust, or other
entity (which does not hold a direct interest in the life insurance
contract), not in the nominee (which directly holds the legal interest
in the life insurance contract). The commenter also recommended that
Sec. 1.101-1(c)(2)(iii)(A) be revised to clarify that the exception
applies if reporting under section 6050Y is done by either the legal
owner of the life insurance contract (such as a securities intermediary
holding legal title as a nominee) or the beneficial owner of the life
insurance policy that controls the life insurance contract under a
securities account agreement (such as an investment fund).
In the fact pattern described in the comment letter, the
partnership, trust, or other entity in which the investor acquires an
ownership interest holds an interest in the life insurance contract. An
interest in a life insurance contract is not limited to legal ownership
of the
[[Page 58464]]
contract. Instead, any person that acquires an enforceable right to
receive all or a part of the proceeds of the life insurance contract or
acquires the right to any other economic benefits of the policy as
described in Sec. 20.2042-1(c)(2) acquires an interest in the life
insurance contract under Sec. 1.101-1(e)(1) of the proposed
regulations.
The partnership, trust, or other entity described by the commenter
presumably would hold such an interest directly, even though legal
title to the life insurance contract is held by a nominee or other
intermediary. By acquiring an interest in the partnership, trust, or
other entity, the investor indirectly would acquire a beneficial
interest in the life insurance contract. The exception in Sec. 1.101-
1(c)(2)(iii)(A) of the proposed regulations would apply to this
indirect acquisition if the partnership, trust, or other entity
reported its acquisition of the beneficial interest in the contract in
compliance with section 6050Y(a). The commenter's recommended revision
to Sec. 1.101-1(c)(2)(iii)(A) of the proposed regulations therefore is
not adopted in the final regulations.
The commenter also proposed that Sec. 1.101-1(c)(2)(iii)(A) of the
proposed regulations be modified to apply if ``the partnership, trust,
or other entity that directly or indirectly holds the interest in the
life insurance contract acquired that interest in a reportable policy
sale reported in compliance with section 6050Y(a) and Sec. 1.6050Y-
2.'' This change is adopted in the final regulations, which also
clarify that the partnership, trust, or other entity must be a
partnership, trust, or other entity in which an ownership interest is
being acquired. As modified, the exception applies to the indirect
acquisition of an interest in a life insurance contract by a person
acquiring an ownership interest in a partnership, trust, or other
entity that holds the interest in the life insurance contract,
regardless of whether the person's ownership interest in the
partnership, trust, or other entity that reported its acquisition of
the interest in the life insurance contract is direct or indirect and
regardless of whether that partnership, trust, or other entity acquired
its interest in a direct or indirect acquisition, provided the
partnership, trust, or other entity acquired its interest in a
reportable policy sale reported in compliance with section 6050Y(a) and
Sec. 1.6050Y-2 or, as discussed in section 3.A of this Summary of
Comments and Explanation, acquired its interest before January 1, 2019.
One commenter on the proposed regulations reiterated its previous
request, made in comments on Notice 2018-41, that an exception from the
reporting requirements of section 6050Y be provided with respect to an
indirect acquisition of an interest in a life insurance contract by any
investor that acquires a 5 percent or less economic and voting interest
in an investment vehicle that holds, directly or indirectly, life
insurance policies, with the added proviso that the investor must not
be an officer or director of the investment vehicle. Section 1.101-
1(c)(2)(iii)(B) of the proposed regulations provides that the indirect
acquisition of an interest in a life insurance contract is not a
reportable policy sale if the acquirer and his or her family members
own, in the aggregate, 5 percent or less of the partnership, trust, or
other entity that directly holds the interest in the life insurance
contract, but this exception applies only if, immediately before the
acquisition, no more than 50 percent of the gross value of the assets
of the partnership, trust, or other entity that directly holds the
interest in the life insurance contract consists of life insurance
contracts.
The final regulations do not adopt the proposed change because, if
more than 50 percent of an entity's asset value is life insurance
contracts, investment in life insurance contracts is likely the
entity's primary business activity, and it is reasonable to expect even
small investors to be able to determine the primary activity of the
business they are investing in, regardless of whether they are also
officers or directors of the entity. In addition, any investor that
does not qualify for the exception set forth in Sec. 1.101-
1(c)(2)(iii)(B) of the final regulations because more than 50 percent
of the gross value of the assets of the partnership, trust, or other
entity that directly holds the interest in the life insurance contract
consists of life insurance contracts may still qualify for the
exception set forth in Sec. 1.101-1(c)(2)(iii)(A) of the final
regulations if a partnership, trust, or other entity that directly or
indirectly holds the interest in the life insurance contract acquired
the interest before January 1, 2019, or acquired that interest in a
reportable policy sale reported in compliance with section 6050Y(a) and
Sec. 1.6050Y-2.
Separately, Sec. 1.101-1(c)(2)(iii)(B) of the final regulations
clarifies that, if the partnership, trust, or other entity in which the
acquirer is directly acquiring an ownership interest indirectly holds
an interest in one or more life insurance contracts, (i) the assets of
the partnership, trust, or other entity in which the ownership interest
is being acquired are tested to determine whether more than 50 percent
of the gross value of the assets of that partnership, trust, or other
entity consists of life insurance contracts, and (ii) the ownership
interest in that partnership, trust, or other entity held by the
acquirer and his or her family members after the acquisition is tested
to determine whether they hold more than a 5 percent ownership interest
in the entity. The assets of the partnership, trust, or other entity
that directly holds the interest in the life insurance contract and the
interest in that partnership, trust, or other entity held by the
acquirer and his or her family member are tested only if the acquirer
is directly acquiring an ownership interest in that partnership, trust,
or other entity.
4. Comments and Changes Relating to Sec. 1.101-1(e) of the Proposed
Regulations
Section 1.101-1(e) of the proposed regulations defines the terms
used to determine whether there has been an acquisition of an interest
in a life insurance contract. This section of this Summary of Comments
and Explanation of Revisions discusses comments that generally relate
to the definitions in Sec. 1.101-1(e) of the proposed regulations.
A. Interest in a Life Insurance Contract
Under Sec. 1.101-1(e)(1) of the proposed regulations, an
``interest in a life insurance contract'' is generally defined as the
interest held by any person that has taken title to or possession of
the life insurance contract, in whole or part, for state law purposes,
and the interest held by any person that has an enforceable right to
receive all or a part of the proceeds of the life insurance contract or
to any other economic benefits of the policy as described in Sec.
20.2042-1(c)(2). Section 1.101-1(e)(2) of the proposed regulations
provides that the term ``transfer of an interest in a life insurance
contract'' means the transfer of any interest in the life insurance
contract, including any transfer of title to, possession of, or legal
or beneficial ownership of the life insurance contract itself. Under
Sec. 1.101-1(e)(3) of the proposed regulations, the acquisition of an
interest in a life insurance contract may be direct or indirect, as
described in Sec. 1.101-1(e)(3)(i) (defining ``direct acquisition of
an interest in a life insurance contract'') and (ii) (defining
``indirect acquisition of an interest in a life insurance contract'').
One commenter on the proposed regulations suggested that, in a life
settlement transaction in which a securities intermediary holds legal
title to the acquired life insurance contract as nominee for the new
beneficial owner of the life insurance contract pursuant to a
[[Page 58465]]
securities account agreement, the new beneficial owner does not acquire
an interest in the life insurance contract under Sec. 1.101-1(e)(3) of
the proposed regulations, even though the new beneficial owner controls
and enjoys all of the benefits of the life insurance policy, because
the new beneficial owner neither acquires legal title to the life
insurance policy nor holds an ownership interest in the securities
intermediary holding legal title. However, under the proposed
regulations, the new beneficial owner acquires an interest in the life
insurance contract because it acquires control of all of the benefits
of the life insurance policy. Any person that acquires an enforceable
right to receive all or a part of the proceeds of the life insurance
contract or to any other economic benefits of the policy as described
in Sec. 20.2042-1(c)(2) acquires an interest in the life insurance
contract under Sec. 1.101-1(e)(1) of the proposed regulations. In the
situation described in the comment, after the life settlement
transaction, there are two persons who have an interest in the life
insurance contract at issue: The legal title holder and the new
beneficial owner. Example 16 of Sec. 1.101-1(g)(16) of the final
regulations illustrates a reportable policy sale in which one acquirer
acquires legal title and another acquires beneficial ownership.
B. Section 1035 Exchanges
Section 1.101-1(e)(2) of the proposed regulations provides that the
issuance of a life insurance contract to a policyholder, other than the
issuance of a policy in an exchange pursuant to section 1035, is not a
transfer of an interest in a life insurance contract. The preamble to
the proposed regulations requests comments on whether the proposed
regulations should include additional provisions regarding the
treatment of section 1035 exchanges of life insurance contracts. See 84
FR 11009, 11019.
One commenter on the proposed regulations recommended that no
additional provisions be added to the proposed regulations for this
circumstance. The commenter stated that the acquirer of a life
insurance contract in a reportable policy sale would be unlikely to
meet the requirements for an insurable interest in the insured and,
consequently, would not be able to make a section 1035 exchange. In
support of this position, the commenter explained that, in order for an
exchange of policies to qualify as a section 1035 exchange, the owner
of the new contract must be the same person who owned the old contract
at the time of the exchange. The commenter also stated that an insurer
can issue a new policy only when that new policy will meet state
insurance laws requiring an insurable interest in the insured, and an
insurable interest is generally based on a close familial relationship
with the insured or a lawful and substantial financial interest in the
continued life of the insured.
Another commenter recommended that the statement in Sec. 1.101-
1(e)(2) of the proposed regulations regarding section 1035 exchanges be
deleted or amended to eliminate any suggestion that such transactions,
by themselves, can lead to reportable policy sales. The commenter
indicated that the statement suggests that the mere issuance of a new
life insurance policy in a section 1035 exchange could (or perhaps
would) give rise to a reportable policy sale and asserted that such
treatment is unnecessary and would be inappropriate.
In support of this position, the commenter explained that,
mechanically, a section 1035 exchange typically involves the assignment
by the policyholder of the existing policy to the carrier, followed by
the surrender of the policy and the application of the cash proceeds as
a premium under a new policy issued to the same owner on the same
insured's life. The commenter remarked that, although the new carrier
acquires an interest in the old policy, that interest is immediately
extinguished. The commenter also remarked that treating the exchange as
a reportable policy sale is not necessary to serve any information
collection purpose in the case of an exchange involving a new,
different carrier, because the exchange must be reported to the IRS and
the policyholder on a Form 1099-R. Additionally, the commenter
suggested that, even if an exchange were viewed as potentially meeting
the definition of a reportable policy sale, the new carrier should be
viewed as having a substantial business or financial relationship with
the insured, considering that the carrier just issued a new policy on
that individual's life.
The commenter suggested that, if there are specific transactions
involving section 1035 exchanges that fall outside the normal situation
described by the commenter, and the Treasury Department and the IRS
determine that such atypical scenarios might give rise to reportable
policy sales, the scope of any provision addressing those transactions
should be limited to those particular transactions, so that doubt will
not be cast on everyday policy exchanges.
The reference in Sec. 1.101-1(e)(2) of the proposed regulations to
section 1035 exchanges was not intended to imply that the transfer of a
policy to an insurance company in a section 1035 exchange would be a
reportable policy sale. In response to the comments received on section
1035 exchanges, Sec. 1.101-1(c)(2)(iv) of the final regulations
provides that the acquisition of a life insurance contract by an
insurance company in an exchange pursuant to section 1035 (such as the
acquisition that would result from the assignment by the policyholder
of the existing policy to the insurance company in exchange for the
issuance of a new life insurance contract) is not a reportable policy
sale.
The concern prompting the reference in Sec. 1.101-1(e)(2) of the
proposed regulations to section 1035 exchanges related to the
possibility that a policy transferred in a reportable policy sale
subsequently could be exchanged for a new policy in an exchange
pursuant to section 1035 and that, absent the reference in Sec. 1.101-
1(e)(2), the death benefits paid under the new policy might not be
reported under section 6050Y(c). Under the final regulations, which
adopt Sec. 1.101-1(e)(2) of the proposed regulations as proposed, the
issuance of a new life insurance contract to a policyholder in an
exchange pursuant to section 1035 is a transfer of an interest in a
life insurance contract (the newly issued life insurance contract) to
the policyholder, which results in a direct acquisition of an interest
in a life insurance contract (the newly issued life insurance contract)
by the policyholder. See Sec. 1.101-1(e)(2) and (3)(i) of the final
regulations. The tax treatment of the newly issued life insurance
contract under section 101 is not affected by the tax treatment of the
policy for which it was exchanged. However, if the policyholder's
acquisition of the newly issued contract constitutes a reportable
policy sale, the rules generally applicable to reportable policy sales
under section 101 and the regulations thereunder apply to determine the
effect of the reportable policy sale on the tax treatment of the newly
issued policy under section 101, and the rules generally applicable to
reportable policy sales under section 6050Y and the regulations
thereunder apply to determine whether section 6050Y reporting is
required with respect to the reportable policy sale. The final
regulations provide that the acquisition of a newly issued life
insurance contract by a policyholder in an exchange pursuant to section
1035 is not a reportable policy sale, if the
[[Page 58466]]
policyholder has a substantial family, business, or financial
relationship with the insured, apart from its interest in the life
insurance contract, at the time of the exchange. See Sec. 1.101-
1(c)(2)(v) of the final regulations. If no such relationship exists at
the time of the section 1035 exchange, the exchange is a reportable
policy sale under Sec. 1.101-1(c)(1) of the final regulations. The
Treasury Department and the IRS have determined that no exception from
the definition of reportable policy sale should apply in this
situation. Based on comments received, this situation should rarely
arise due to state law insurable interest requirements.
Should this situation arise, however, the policyholder, as an
acquirer, must furnish the statement to the issuer required by section
6050Y(a)(2) and Sec. 1.6050Y-2(d)(2) of the final regulations (the
reportable policy sale statement or ``RPSS''). See Sec. 1.6050Y-
2(f)(3) of the final regulations. In this case, the statement must be
furnished to the issuer that issues the new life insurance contract.
See Sec. 1.6050Y-1(8)(ii) of the final regulations. However, the
policyholder is not required to file the information return required by
section 6050Y(a)(1) and Sec. 1.6050Y-2(a) of the final regulations.
See Sec. 1.6050Y-2(f)(3). Also, because the policyholder is not only
the acquirer, but is also the reportable policy sale payment recipient
and the seller with respect to the reportable policy sale, the
policyholder is not required to furnish the statement generally
required to be furnished to the reportable policy sale payment
recipient under Sec. 1.6050Y-2(d)(1) of the final regulations. See
Sec. 1.6050Y-1(a)(15), (16), and (18) of the final regulations; Sec.
1.6050Y-2(f)(3) of the final regulations. Additionally, although the
issuer that issues the new life insurance contract receives an RPSS, it
is not required to file a return or furnish a statement to the seller
under section 6050Y(b) and Sec. 1.6050Y-3 because the seller does not
need the information that would be provided on the statement to
properly report a section 1035 exchange. See Sec. 1.6050Y-3(f)(3) of
the final regulations. However, if the issuer makes a payment of
reportable death benefits under the newly issued life insurance
contract, the issuer must report that payment under section 6050Y(c)
and Sec. 1.6050Y-4 of the final regulations, unless an exception under
Sec. 1.6050Y-4 applies.
C. Ordinary Course Trade or Business Acquisitions
Several commenters on Notice 2018-41 suggested that acquisitions of
life insurance contracts, or interests therein, in ordinary course
business transactions in which one trade or business acquires another
trade or business that owns life insurance on the lives of former
employees or directors should not be reportable policy sales. The
proposed regulations include provisions that exclude certain of these
transactions from the definition of reportable policy sales. These
provisions include the definition of substantial business relationship
in Sec. 1.101-1(d)(2) of the proposed regulations, the special rule
for indirect acquisitions in Sec. 1.101-1(d)(4)(i) of the proposed
regulations, and the definition of the term ``indirect acquisition of
an interest in a life insurance contract'' in Sec. 1.101-1(e)(3)(ii)
of the proposed regulations.
Two commenters on the proposed regulations suggested that ordinary
course business transactions (such as mergers or acquisitions)
involving businesses that own life insurance contracts were not
intended by Congress to fall within the meaning of a reportable policy
sale and noted that the rules describing a reportable policy sale in
the proposed regulations are very helpful in confirming that narrow
intent. Another commenter stated that, although the legislative history
does not elaborate on the intent of section 101(a)(3)(A) (which limits
the carryover basis exception to transfers for value that fall outside
the definition of reportable policy sale in section 101(a)(3)(B)), it
is widely understood to be aimed at ensuring enforcement of the
transfer for value rule with respect to newer forms of speculative
transfers involving life insurance policies, rather than imposing new
restrictions on legitimate business uses of life insurance. The
commenter asserted that the preamble to the proposed regulations
implicitly acknowledges this by stating that some provisions are meant
to ensure that ``certain ordinary course business transactions'' will
not be treated as reportable policy sales. In response to these
comments supporting the ordinary course exclusions from the definition
of reportable policy sales in the proposed regulations, those
provisions are retained in the final regulations.
One commenter on the proposed regulations requested that the
proposed regulations be revised to provide that any transfer of an
interest in a life insurance contract as part of a tax-free
reorganization conducted in the ordinary course of business is eligible
for an exception to being treated as a reportable policy sale under
section 101(a)(3)(B), regardless of whether the target survives the
reorganization transaction. In this regard, the commenter recommended
revising Sec. 1.101-1(e)(3)(ii) of the proposed regulations, which
defines the term ``indirect acquisition of an interest in a life
insurance contract,'' to specifically cover all transactions involving
the acquisition of a C corporation that qualify for tax-free
reorganization treatment unless, immediately prior to the acquisition,
more than 50 percent of the gross value of the assets of the C
corporation consists of life insurance contracts. The commenter also
recommended adding an example to illustrate this point. The commenter
concluded that Sec. 1.101-1(e)(3)(ii) of the proposed regulations
applies in the case of acquisition transactions in which the corporate
existence of the target survives the acquisition (for instance, a
taxable stock sale with no section 338 election, a reverse subsidiary
merger structured to qualify as a tax-free reorganization under section
368(a)(2)(E), or a tax-free reorganization under section 368(a)(1)(B))
and appears not to apply in the case of acquisition transactions in
which the target corporation is merged with and into the acquiring
corporation and the target's separate corporate existence is terminated
as of the merger date (for instance, a tax-free reorganization under
section 368(a)(1)(A), (C), or (D) or section 368(a)(2)(D)).
Under Sec. 1.101-1(e)(3)(ii) of the proposed regulations, an
indirect acquisition of an interest in a life insurance contract occurs
when a person (acquirer) becomes a beneficial owner of a partnership,
trust, or other entity that holds (whether directly or indirectly) the
interest in the life insurance contract. However, for this purpose, the
term ``other entity'' does not include a C corporation, unless more
than 50 percent of the gross value of the assets of the C corporation
consists of life insurance contracts immediately before the indirect
acquisition. Accordingly, the acquisition of ownership of a C
corporation that owns an interest in a life insurance contract is not
an indirect acquisition of such an interest, and therefore is not a
reportable policy sale, if no more than 50 percent of the gross value
of the assets of the C corporation consists of life insurance
contracts. The commenter thus is correct that Sec. 1.101-1(e)(3)(ii)
of the proposed regulations applies only in the case of indirect
acquisitions of life insurance contracts (which include a tax-free
reorganization in which the corporate existence of the target that
holds an interest in a life insurance contract survives the
acquisition), and not direct acquisitions
[[Page 58467]]
of life insurance contracts (which include a tax-free reorganization in
which the separate corporate existence of a target that holds an
interest in a life insurance contract is terminated).
The commenter asserted that this disparate treatment (between
policies transferred directly in tax-free asset reorganizations and
indirectly in stock reorganizations) is inappropriate and not warranted
as a matter of good tax policy. The commenter further asserted that all
tax-free reorganizations should be eligible for an exception similar to
the exception provided in Sec. 1.101-1(e)(3)(ii) of the proposed
regulations. The commenter noted that the proposed regulations provide
certain exceptions that could apply to tax-free mergers in which the
target goes out of existence and the surviving corporation continues to
hold the life insurance contract, but asserted that having to determine
in these types of tax-free mergers whether a particular exception
applies on a contract-by-contract basis is unduly complex and a trap
for the unwary. The commenter further asserted that this burdensome
exercise does not appear to serve the purpose of the change in the
statute, which is to address abusive transactions and a failure to
report income when appropriate.
The final regulations do not adopt the commenter's recommendation
regarding amendments to Sec. 1.101-1(e)(3)(ii). The exception in Sec.
1.101-1(e)(3)(ii) of the proposed regulations is not targeted to
acquisitions of C corporation stock in tax-free reorganizations, but
instead is a relatively broad exception that applies to the acquisition
of any interest in a C corporation, provided that no more than 50
percent of the C corporation's gross asset value consists of life
insurance contracts. This exception is one of a number of exceptions in
the proposed regulations intended to provide relief for indirect
acquisitions in which acquisition of the underlying life insurance
contract interest likely was not a significant motivating factor for
the acquisition. The final regulations preserve the different results
for stock and asset reorganizations because there are significant
differences between these two types of reorganizations, and the
Treasury Department and the IRS have concluded that those distinctions
justify different treatment for purposes of sections 101 and 6050Y. In
addition, no exception is provided in the final regulations that
excludes reorganizations from the definition of a reportable policy
sale. Rather, there are exclusions based on the application of the
definitions of substantial relationships as mandated by the statute and
exceptions for certain indirect acquisitions that may produce different
results in different types of reorganizations.
One reason for treating indirect and direct acquisitions of life
insurance contract interests differently is that an acquirer of an
interest in an entity may have limited ability to determine what types
of assets an entity owns, or to obtain from the entity information
necessary to report on the entity's assets. Thus, for example, the
proposed regulations provide a reportable policy sale exception for the
acquisition of a small (five percent or less) interest in any entity,
unless more than 50 percent of the entity's gross asset value consists
of life insurance contracts. See Sec. 1.101-1(c)(2)(iii)(B) of the
proposed regulations. In addition, in the case of a C corporation, a
corporate level income tax applies to corporate earnings in addition to
income tax on distributions at the shareholder level. As a result, C
corporations are not frequently used as vehicles for investing in life
insurance contracts covering insureds with respect to which the
corporation does not have a substantial business, financial, or family
relationship at the time the contract is issued. For this reason, the
proposed regulations provide a more generous exception for acquisitions
of interests in a C corporation, provided that no more than 50 percent
of the C corporation's gross asset value consists of life insurance
contracts, as determined under Sec. 1.101-1(f)(4) of the proposed
regulations. See Sec. 1.101-1(e)(3)(ii) of the proposed
regulations.\4\
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\4\ Section 1.101-1(f)(4) of the final regulations clarifies
that the gross value of assets means, with respect to any entity,
the fair market value of the entity's assets, including assets
beneficially owned by the entity under Sec. 1.101-1(f)(1) of the
final regulations as a beneficial owner of a partnership, trust, or
other entity. Accordingly, the 50 percent test in Sec. 1.101-
1(e)(3)(ii) of the final regulations applies to a C corporation's
assets and the assets held by any partnership, trust, or other
entity beneficially owned by the C corporation.
---------------------------------------------------------------------------
After the TCJA amendments to section 101, the fact that the
transfer of a life insurance contract occurs in a carryover basis
transaction qualifying under section 101(a)(2)(A) (such as a tax-free
reorganization) is no longer sufficient to avoid the limit on the
amount of life insurance policy proceeds that are excludable from gross
income under the section 101(a)(1) transfer for value rule. Rather,
Congress provided that the carryover basis exception in section
101(a)(2)(A) does not apply unless the transferee also has a
substantial family, business, or financial relationship with the
insured. Under the proposed regulations, in the case of life insurance
contracts transferred in an asset reorganization, the surviving
corporation could, for example, establish that a substantial business
relationship exists by determining that the life insurance policies
transferred in the reorganization cover insureds who are key persons
of, or materially participate in, an active trade or business of the
acquirer as owners, employees, or contractors. See Sec. 1.101-
1(d)(2)(i) of the proposed regulations. The surviving corporation could
also establish that a substantial business relationship exists by
determining that the life insurance contracts cover insureds who either
(i) are officers, directors or employees of the business being acquired
immediately before the acquisition or (ii) previously were directors,
highly compensated employees or highly compensated individuals within
the meaning of section 101(j)(2)(A)(ii) and the surviving corporation
will have ongoing financial obligations with respect to these
individuals after the acquisition (such as retirement obligations). See
Sec. 1.101-1(d)(2)(ii) of the proposed regulations. Corporations must
track this data annually for purposes of section 101(j) corporate owned
life insurance (COLI) reporting obligations and related recordkeeping,
so it should not be overly burdensome to obtain this information.
Additionally, in an asset reorganization, it would in any case be
necessary to review the life insurance contracts directly acquired on a
contract-by-contract basis in order to update insurance contract
ownership and beneficiary information with the relevant insurance
company.
It is possible that an asset acquisition could result in the loss
of the complete exclusion of death benefits from income with respect to
some COLI policies that cover insureds who are not employed by the
target immediately before the acquisition or employed by the acquirer
after the acquisition and with respect to whom the acquirer has no
ongoing obligations to pay retirement or other benefits. However, the
Treasury Department and the IRS have not identified any clear policy
reason why that tax benefit should carry over when ownership of the
insurance policy is transferred. The indirect transfer exceptions in
the proposed regulations that could permit COLI benefits to be retained
with respect to some policies covering no-longer-connected officers,
directors, and employees apply only when ownership of the insurance
policy is not transferred, such as in a stock reorganization. These
exceptions reflect a weighing by the Treasury Department and the IRS of
information collection
[[Page 58468]]
burdens versus potential for abuse in indirect acquisition scenarios.
The commenter also recommended modifying the language in Example 8
of Sec. 1.101-1(g)(8) of the proposed regulations to clarify that the
example is intended only to illustrate application of the rule under
Sec. 1.101-1(d) of the proposed regulations and is not intended to
imply that, without the insured's current employment by the acquired
corporation, the transaction would be treated as a reportable policy
sale. Example 8 of Sec. 1.101-1(g)(8) of the proposed regulations
describes a tax-free reorganization in which a corporation transfers to
an acquiring corporation its active trade or business and a life
insurance policy on the life of a current employee that was acquired
from the employee. The example concludes that, because the insured was
an employee of the target corporation at the time of the tax-free
reorganization, and the acquiring corporation carries on the acquired
trade or business, the transfer in the tax-free reorganization is not a
reportable policy sale because the acquirer has a substantial business
relationship with the insured under Sec. 1.101-1(d)(2)(ii) of the
proposed regulations. The commenter observed that the example suggests
that the transfer of the policy as part of the tax-free reorganization
described in the example would not have qualified for an exception from
being treated as a reportable policy sale under the proposed
regulations absent the existence of the substantial business
relationship. The commenter's understanding of the example is correct.
The substantial business relationship is necessary for the tax-free
reorganization in the example to avoid being treated as a reportable
policy sale. As discussed in this section of this Summary of Comments
and Explanation of Revisions, the Treasury Department and the IRS have
not adopted the commenter's recommendation regarding amendments to
Sec. 1.101-1(e)(3)(ii), and therefore have not revised the example in
the final regulations.
This commenter also recommended a related change to Sec. 1.101-
1(d)(4)(i) of the proposed regulations. Under Sec. 1.101-1(d)(4)(i) of
the proposed regulations, an indirect acquirer is deemed to have a
substantial business or financial relationship with the insured if the
direct holder of the interest in the life insurance contract has a
substantial business or financial relationship with the insured
immediately before and after the date the indirect acquirer acquires
its interest. Section 1.101-1(d)(4)(i) of the proposed regulations
provides relief for acquirers who do not hold their interest in the
relevant life insurance contracts directly, when the direct holder of
those interests has a substantial business or financial relationship
with the insured before and after the acquisition. The Department of
Treasury and the IRS have determined that it is not appropriate to
treat an indirect acquisition of an interest in a life insurance
contract as a reportable policy sale when the direct owner of the
interest in the life insurance contract does not change and the direct
owner has a substantial family, business, or financial relationship
with the insured. The commenter recommended modification of Sec.
1.101-1(d)(4)(i) of the proposed regulations to eliminate what the
commenter describes as disparate treatment that arises depending on the
type of merger transaction the acquirer undertakes or whether after the
merger the insured remains with the company or retains the right to
retirement or other post-employment benefits.
First, the commenter observed that, in a tax-free merger in which
the target goes out of existence, the direct holder of the life
insurance contract no longer exists, and therefore would no longer have
any relationship with the insured. Accordingly, the acquirer cannot be
deemed to have a substantial business or financial relationship with
the insured under Sec. 1.101-1(d)(4)(i) of the proposed regulations.
However, in a tax-free merger in which the target does not survive,
Sec. 1.101-1(d)(4)(i) of the proposed regulations would not apply
because the acquirer would own the insurance contract directly. An
acquirer that holds its interest in the relevant life insurance
contract directly must determine whether it has a substantial family,
business, or financial relationship with the insured under Sec. 1.101-
1(d) of the proposed regulations at the time of the acquisition.
Second, the commenter suggested that there are situations in which
the insured's employment with the target company is terminated as a
result of a merger or acquisition, and the insured has no continuing
relationship with the surviving company that retains the life insurance
contract. The commenter observed that, in such cases, the ``after the
date of the acquisition'' prong of Sec. 1.101-1(d)(4)(i) of the
proposed regulations cannot be satisfied. The commenter recommended
modifying Sec. 1.101-1(d)(4)(i) of the proposed regulations to provide
that the acquirer of an interest in a life insurance contract in a tax-
free merger is deemed to have a substantial business or financial
relationship with the insured if the target has a substantial business
or financial relationship with the insured immediately prior to the
merger, provided the acquirer does not otherwise transfer any interest
in the life insurance contract in a transaction treated as a reportable
policy sale. The commenter also recommended that the rule specifically
state that the fact that the surviving company continues to hold, after
the merger, the contract on the life of an individual with whom the
target had a substantial financial or business relationship is the
determinative factor under this modified rule.
The proposed modification is not adopted because, although Sec.
1.101-1(d)(4)(i) of the proposed regulations generally would not apply
to the situations referenced by the commenter, the proposed regulations
already include exceptions that may apply in the situations referenced
by the commenter. In a tax-free merger in which the target does not
survive, Sec. 1.101-1(d)(4)(i) of the proposed regulations would not
apply because the acquirer would have a direct acquisition of any
interest in a life insurance contract acquired from the target.
However, the acquirer does not have a reportable policy sale if the
acquirer has a substantial family, business, or financial relationship
with the insured. Under Sec. 1.101-1(d)(2)(ii) of the proposed
regulations, the surviving company has a substantial business
relationship with the insured, and therefore has not acquired its
interest in the life insurance contract on the insured's life in a
reportable policy sale, if: (1) The insured is an employee within the
meaning of section 101(j)(5)(A) of the acquired trade or business
immediately preceding the acquisition, and (2) the surviving company
either carries on the acquired trade or business or uses a significant
portion of the acquired business assets in an active trade or business
that does not include investing in interests in life insurance
contracts. Accordingly, the proposed regulations already include a rule
similar to the one requested by the commenter that is applicable to
direct acquisitions of interests in life insurance contracts (such as
acquisitions resulting from tax-free mergers in which the target does
not survive).
5. Comments and Changes Relating to Sec. 1.101-1(d) of the Proposed
Regulations
Section 1.101-1(d) of the proposed regulations defines the terms
substantial family relationship, substantial business relationship, and
substantial financial relationship, and provides special rules for
applying these definitions. This section of this Summary of Comments
[[Page 58469]]
and Explanation of Revisions discusses comments that generally relate
to the definitions and special rules in Sec. 1.101-1(d) of the
proposed regulations.
A. Beneficial Owners With a Combination of Substantial Relationships
Under Sec. 1.101-1(d)(1) of the proposed regulations, a
substantial family relationship exists between the insured and a
partnership, trust, or other entity if all of the beneficial owners of
that partnership, trust, or other entity have a substantial family
relationship with the insured. A partnership, trust, or other entity
may itself have a substantial business or financial relationship with
the insured under Sec. 1.101-1(d)(2) or (3) of the proposed
regulations.
One commenter on the proposed regulations recommended that a
transfer to a trust, partnership, or other entity not be a reportable
policy sale within the meaning of section 101(a)(3) if all of the
beneficial owners of the trust, partnership, or other entity have a
substantial family, business, or financial relationship with the
insured. The Treasury Department and the IRS have determined it would
be appropriate to expand the definition of substantial family,
business, or financial relationship to include the relationship between
the insured and a trust, partnership, or other entity, every beneficial
owner of which has a substantial family, business, or financial
relationship with the insured. Accordingly, Sec. 1.101-1(d)(4)(iii) of
the final regulations provides this expanded definition.
The commenter also suggested that the definition of ``family
member'' under Sec. 1.101-1(f)(3) should include charities to which
the insured has given substantial financial support or significant
volunteer support. Another commenter suggested that a trust with
beneficiaries that include both individual family members and a charity
with a substantial financial relationship to the insured should qualify
as a ``family member.'' Under Sec. 1.101-1(d)(3)(iii) of the proposed
regulations, a substantial financial relationship exists between the
insured and acquirer if the acquirer is an organization described in
sections 170(c), 2055(a), and 2522(a) that previously received
financial support in a substantial amount or significant volunteer
support from the insured. Under either of the approaches suggested by
the commenters, the acquisition of an interest in a life insurance
contract by a trust with beneficiaries that include both individuals
who are family members of the insured and a charity described in Sec.
1.101-1(d)(3)(iii) of the proposed regulations would not be a
reportable policy sale. The Treasury Department and the IRS agree that
the existence of a trust beneficiary that is a charity described in
Sec. 1.101-1(d)(3)(iii) of the proposed regulations should not cause a
transfer to that trust to be a reportable policy sale. However, rather
than expanding the definition of ``family member'' under Sec. 1.101-
1(f)(3) of the proposed regulations as suggested by the commenters, the
Treasury Department and the IRS have adopted a more direct and
expansive approach to address the commenters' concerns by adding a new
rule in the final regulations providing that any combination of the
described substantial relationships between a trust's beneficiaries and
the insured is sufficient to qualify the transfer to that trust for the
reportable policy sale exclusion. See Sec. 1.101-1(d)(4)(iii) of the
final regulations. As a result, under the final regulations, there is
no need to also expressly treat a trust established and maintained for
the primary benefit of the insured or one or more of the insured's
family members as a family member of the insured. Therefore, the final
regulations do not include such a trust in the definition of family
member.
B. Substantial Financial Relationships With Charities
Under Sec. 1.101-1(d)(3)(iii) of the proposed regulations, the
acquirer of an interest in a life insurance contract has a substantial
financial relationship with the insured if the acquirer is an
organization described in sections 170(c), 2055(a), and 2522(a) that
previously received financial support in a substantial amount or
significant volunteer support from the insured. One commenter on the
proposed regulations suggested that this provision be expanded to
include any other such organization with which the insured has
substantial personal ties, such as the donor or a family member having
benefitted from the charitable organization's services in some manner.
The commenter stated that it is not uncommon for a donor to both (i)
contribute very modestly, if at all, to a charity during life because
the donor is concerned about having sufficient retirement income, and
(ii) want to benefit the charity when the donor no longer needs to
preserve retirement income sources. The commenter also stated that
donors often benefit charities through either a split interest trust
described in section 170(f)(2) or a bargain sale described in Sec.
1.1011-2.
The Treasury Department and IRS have not adopted this suggestion in
the final regulations because it would be challenging to determine when
personal ties with a charity are substantial enough to constitute a
substantial financial relationship with the insured, in the absence of
a significant donation of time or property. Also, there generally will
be little detriment to a charity as a result of an acquisition (whether
gratuitous or for value) of an interest in a life insurance contract in
a reportable policy sale. Nevertheless, as discussed later in this
section, the final regulations provide that the category of charities
considered to have a substantial financial relationship with an insured
may be expanded in the future in guidance published in the Internal
Revenue Bulletin.
Treating a gratuitous transfer of an interest in a life insurance
contract (or the part of the transfer that is gratuitous, in the case
of a bargain sale) as a reportable policy sale does not affect the
amount of proceeds excludable by the gratuitous transferee. Section
1.101-1(b)(2)(i) of the final regulations applies to all gratuitous
transfers of interests in life insurance contracts and generally
provides that the transferee in a gratuitous transfer of an interest in
a life insurance contract steps into the shoes of the transferor and
may exclude death benefits paid under the contract from gross income to
the same extent that the transferor would have been able to exclude the
benefits, in addition to the premiums and other amounts paid by the
transferee. Furthermore, treatment of a gratuitous transfer as a
reportable policy sale does not result in reporting obligations for the
gratuitous transferee because the gratuitous transferor is not a
reportable policy sale payment recipient. See Sec. Sec. 1.6050Y-
1(a)(16) and 1.6050Y-2(a) of the final regulations.
Even if a charity purchased some or all of its interest in a life
insurance contract for valuable consideration, a charity generally is
not subject to Federal income tax on its income (including insurance
policy proceeds) unless the income arises from an unrelated trade or
business. Thus, the charity's obligation in case of a purchase
generally would be limited to acquirer reporting under Sec. 1.6050Y-2,
which merely requires providing on Form 1099-LS information that should
be readily available to the charity. This reporting provides important
information regarding the sale to reportable policy sale payment
recipients and the IRS.
In response to the commenter's concerns, however, the final
regulations provide that the IRS may publish
[[Page 58470]]
guidance in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of
this chapter) describing other situations in which a substantial
financial relationship exists between the insured and an acquirer that
is an organization described in sections 170(c), 2055(a), and 2522(a).
See Sec. 1.101-1(d)(3)(iii) of the final regulations.
C. Substantial Financial Relationships and BOLI Pooling Transactions
One commenter on the proposed regulations requested confirmation
that a reportable policy sale will not arise when a life insurance
policy is involved in a transaction that pools bank-owned life
insurance (BOLI). The commenter explained that businesses, such as
banks, commonly promise certain pre-and post-retirement benefits to
their employees, such as retiree health care benefits, which can result
in substantial liabilities for the businesses that must be reflected on
their financial statements. The commenter described BOLI as permanent,
cash value life insurance coverage on the lives of a bank's officers,
directors, and employees purchased by the bank to fund such obligations
informally and to establish assets on its financial statements to
offset liabilities for the promised benefits. The commenter stated that
BOLI owners typically hold the policies until the death benefits become
payable and use the benefits to fund the costs of the employee benefits
or to recover such costs after the fact. The commenter described BOLI
pooling transactions as transactions that pool the BOLI policies of
multiple banks for the continued purpose of funding each bank's
employee benefits, but in a more effective, centralized way. The
commenter described the initial step of a BOLI pooling transaction as
the transfer by multiple unrelated banks of their pre-existing BOLI
policies to a partnership, in return for which each bank receives a
partnership interest proportional to the value of its contributed
policies. The commenter explained that the partnership holds and
manages the contributed policies and distributes death benefits among
the bank-partners pro rata based on their respective partnership
interests, which is expected to help normalize cash flows from the
policies.
The commenter asserted that BOLI pooling transactions are ordinary
course business transactions that should not be treated as reportable
policy sales because they are not speculative and can be distinguished
from sales of policies to third parties because the intent and result
is to pool the policies among all the original policyholders for the
continued purpose of funding their employee benefit liabilities. The
commenter noted that the IRS has issued private letter rulings that
confirm, directly or indirectly, that the carryover basis exception to
the transfer for value rule in section 101(a)(2) applies to a bank's
contribution of BOLI policies to the partnership in a BOLI pooling
transaction, thereby preserving the tax-free character of the death
benefits when paid to the partnership. These rulings pre-date the
addition of section 101(a)(3) to the Code. The reportable policy sale
rules of section 101(a)(3) are in addition to the carryover basis
exception of section 101(a)(2). As a result, policy transfers are
ineligible for the carryover basis exception if no substantial family,
business, or financial relationship exists between the acquirer of an
interest in a life insurance contract and the insured under that
contract at the time of the acquisition.
The commenter asserted that the proposed regulations support the
requested treatment of BOLI pooling transactions because a substantial
financial relationship exists between the acquirer and insured. A
substantial financial relationship exists under Sec. 1.101-1(d)(3)(ii)
of the proposed regulations if the acquirer maintains the life
insurance contract on the life of the insured to provide funds to
purchase assets or satisfy liabilities following the death of the
insured. The commenter asserted that this provision applies in BOLI
pooling transactions with respect to both the bank and the partnership
as follows: (1) The partnership has a direct acquisition of life
insurance policies, which it maintains to satisfy liabilities following
the death of the insured, namely, the employee benefit liabilities of
the bank-partners for which they originally purchased the policies; (2)
the bank has an indirect acquisition of life insurance policies
contributed by other banks to the partnership; and (3) the bank
maintains its indirect interest in those policies to continue funding
the same employee benefit liabilities. The commenter recommended
clarification of the regulations to confirm this treatment, either by
adding additional language to the definition of substantial financial
relationship, or by adding an example that applies that provision to
the BOLI pooling transaction. Alternatively, the commenter suggested a
separate exception to the reportable policy sale definition.
The final regulations do not adopt the commenter's requested
changes because the changes would be inconsistent with the statute. The
proposed regulations do not support, and were not intended to support,
the requested treatment of BOLI pooling transactions.
First, the partnership described by the commenter does not have a
substantial family, business, or financial relationship with the
insureds under the proposed regulations. Specifically, it does not have
a substantial financial relationship with any insured under Sec.
1.101-1(d)(3)(ii) of the proposed regulations because it does not
maintain the life insurance contract on the life of the insured to
provide funds for the partnership to purchase assets or satisfy
liabilities following the insured's death. As described by the
commenter, the partnership maintains the life insurance contracts to
provide its partners, the banks, with funds to satisfy the banks'
employee benefit liabilities. Accordingly, the partnership's
acquisition of the life insurance contracts in the circumstances
described is a reportable policy sale that must be reported under
section 6050Y and Sec. 1.6050Y-2 of the proposed regulations.
Second, the definition of a substantial financial relationship in
Sec. 1.101-1(d)(3)(ii) of the proposed regulations was not intended to
cover relationships as tenuous as those existing between the indirect
acquirers (the banks) and the insureds in the BOLI pooling transactions
described by the commenter. Section 1.101-1(d)(3)(ii) of the proposed
regulations was intended to cover situations in which the life
insurance contract is held to provide funds to purchase assets or
satisfy liabilities, when the need for the asset purchases or liability
payments results from the insured's death. In the situation described
by the commenter, a bank does not have this kind of relationship with
the insureds under life insurance contracts contributed to the
partnership by other banks. However, in the circumstances described,
because the partnership acquires the life insurance contracts in a
reportable policy sale that must be reported under section 6050Y(a) and
Sec. 1.6050Y-2 of the proposed regulations, the bank's indirect
acquisition of the life insurance contracts is not a reportable policy
sale, provided the partnership complies with the reporting
requirements. See Sec. 1.101-1(c)(2)(iii)(A) of the proposed
regulations.
D. Substantial Financial Relationships Under Sec. 1.101-1(d)(3)(ii)
A substantial financial relationship exists under Sec. 1.101-
1(d)(3)(ii) of the proposed regulations if the acquirer maintains the
life insurance contract on the life of the insured to provide funds to
purchase assets or satisfy liabilities
[[Page 58471]]
following the death of the insured. As described in section 5.C of this
Summary of Comments and Explanation of Revisions, this definition was
intended to apply in situations in which the life insurance contract is
held to provide funds to purchase assets or satisfy liabilities
following the death of the insured, when the need for the asset
purchases or liability payments results from the insured's death.
Accordingly, Sec. 1.101-1(d)(3)(ii) of the final regulations revises
the definition to provide that a substantial financial relationship
exists between the acquirer and insured if the acquirer maintains the
life insurance contract on the life of the insured to provide funds to
purchase assets of or to satisfy liabilities of the insured or the
insured's estate, heirs, legatees, or other successors in interest, or
to satisfy other liabilities arising upon or by reason of the death of
the insured.
6. Comments and Changes Relating to Sec. 1.101-1(a) of the Proposed
Regulations
The proposed regulations would remove the second sentence of Sec.
1.101-1(a)(1) of the existing regulations, which states: ``Death
benefit payments having the characteristics of life insurance proceeds
payable by reason of death under contracts, such as workmen's
compensation insurance contracts, endowment contracts, or accident and
health insurance contracts, are covered by this provision.'' As noted
in the preamble to the proposed regulations, this update reflects the
addition of section 7702 to the Code in 1984. See 84 FR 11015.
One commenter stated that it is important that no changes be made
with respect to the second sentence because the benefits described
therein were written into older policies, some of which are still in
effect, and changing the rules would negatively impact policyholders
who have long relied on the appropriate exclusion of these death
benefits from income. The commenter further stated that there is a
longstanding and extensive body of court decisions and IRS rulings that
establish the conditions under which such benefits qualify for
treatment as life insurance proceeds.
In response to these comments, the final regulations revise, rather
than remove, the second sentence of Sec. 1.101-1(a)(1) of the existing
regulations to clarify that the sentence only applies to contracts
issued on or before December 31, 1984, the effective date of section
7702.
7. Comments and Changes Relating to Sec. 1.6050Y-1 of the Proposed
Regulations
Section 1.6050Y-1(a) of the proposed regulations provides
definitions for terms used in Sec. Sec. 1.6050Y-1 through -4 of the
proposed regulations. This section of this Summary of Comments and
Explanation of Revisions discusses comments received that generally
relate to Sec. 1.6050Y-1(a) of the proposed regulations.
A. Definition of Issuer
Section 6050Y(d)(3) defines issuer to mean any life insurance
company that bears the risk with respect to a life insurance contract
on the date any return or statement is required to be made under
section 6050Y. The definition of issuer under the proposed regulations
depends on the context in which the term is used. In general, the term
``issuer'' means, on any date, with respect to any interest in a life
insurance contract, any person that bears any part of the risk with
respect to the life insurance contract on that date and any person
responsible on that date for administering the contract, including
collecting premiums and paying death benefits. See Sec. 1.6050Y-
1(a)(8)(i) of the proposed regulations. For instance, if a reinsurer
reinsures on an indemnity basis all or a portion of the risks that the
original issuer (and continuing contract administrator) might otherwise
have incurred with respect to a life insurance contract, both the
reinsurer and the original issuer of the contract are issuers of the
life insurance contract.
One commenter noted that this definition of issuer in the proposed
regulations appears to be a reversal of position from a statement in
Notice 2018-41 that, according to the commenter, appropriately proposed
to exclude a ``reinsurer in an indemnity contract covering all or a
portion of the risks that the original issuer (and continuing contract
administrator) might otherwise have incurred with respect to a life
insurance contract.'' In Notice 2018-41, the Treasury Department and
the IRS announced the intent to limit the information reporting
obligations imposed under Sec. 6050Y(b) to the life insurance company
that is responsible for administering the contract, including paying
death benefits under the life insurance contract to reduce the burden
on reporting life insurance companies and prevent duplicative
reporting. Notice 2018-41 indicated that, under the proposed
regulations, the reporting obligations would not apply, for instance,
to a reinsurer in an indemnity contract covering all or a portion of
the risks that the original issuer (and continuing contract
administrator) might otherwise have incurred with respect to a life
insurance contract.
Under the proposed regulations, although the definition of issuer
is broad enough that information reporting obligations could apply to a
reinsurer, reporting obligations in practice will generally be limited
to the life insurance company that is responsible for administering the
life insurance contract, or its designee. The proposed regulations
facilitate this result by providing relief for an issuer that is
subject to reporting obligations, but is not responsible for
administering the contract. For purposes of information reporting by
the acquirer under section 6050Y(a) and Sec. 1.6050Y-2 of the proposed
regulations, the ``6050Y(a) issuer'' to which the acquirer must furnish
an RPSS is the issuer responsible for administering the life insurance
contract, including collecting premiums and paying death benefits under
the contract, on the date of the reportable policy sale. See Sec.
1.6050Y-1(a)(8)(ii) of the proposed regulations. For purposes of
information reporting by the issuer under section 6050Y(b) and Sec.
1.6050Y-3 of the proposed regulations, reporting is required by any
``6050Y(b) issuer'' that receives an RPSS or notice of a transfer to a
foreign person, or its designee. See Sec. 1.6050Y-1(a)(8)(iii)(A) and
(B) of the proposed regulations. Accordingly, with respect to
reportable policy sales, 6050Y(b) issuers responsible for reporting
under section 6050Y(b) and Sec. 1.6050Y-3 of the proposed regulations
will generally be issuers responsible for administering the life
insurance contracts. No other issuer should receive an RPSS. Also, with
respect to a transfer to a foreign person, if any issuer other than the
issuer responsible for administering the life insurance contract
receives notice of the transfer, it will not be considered a 6050Y(b)
issuer if it provides the 6050Y(b) issuer responsible for administering
the life insurance contract with notice of the transfer and any
available information necessary to accomplish reporting under section
6050Y(b) and Sec. 1.6050Y-3 of the proposed regulations. See Sec.
1.6050Y-1(a)(8)(iii)(B) of the proposed regulations. The final
regulations clarify that an issuer other than the issuer responsible
for administering the life insurance contract will not be considered a
6050Y(b) issuer if it received notice of a transfer to a foreign person
from the issuer responsible for administering the life insurance
contract. See Sec. 1.6050Y-1(a)(8)(iii)(B) of
[[Page 58472]]
the final regulations. Additionally, a 6050Y(b) issuer's reporting
obligation is deemed satisfied if the information required by section
6050Y(b) and Sec. 1.6050Y-3 of the final regulations is timely
reported by any other 6050Y(b) issuer. See Sec. 1.6050Y-3(b) of the
final regulations.
The commenter recommended that the definition of issuer expressly
exclude a reinsurer in an indemnity contract covering all or a portion
of the risks that the original issuer (or its continuing contract
administrator) might otherwise have incurred with respect to a life
insurance contract. The commenter stated that in most instances of
indemnity reinsurance transactions, the original insurer continues to
administer the life insurance contracts, some or all of the underlying
risks of which the reinsurer may have assumed, or alternatively, the
parties select a third-party contract administrator who assumes such a
role, which includes managing ownership changes and other functions
relating to contract administration and interfacing with policyholders.
The commenter asserted that if the approach in the proposed regulations
is due to any presumption that a reinsurer in an indemnity reinsurance
transaction may be or may become privy to any information relating to
transfers to domestic or foreign persons, such presumptions are
misplaced.
The final regulations do not adopt the commenter's proposal because
a reinsurer in an indemnity contract bears risk with respect to the
life insurance contracts reinsured, and is therefore an issuer under
section 6050Y(d). It is thus not appropriate to completely exclude an
indemnity reinsurer from the possibility of being an issuer for
reporting purposes. However, the definition of 6050Y(b) issuer under
the proposed and final regulations is narrower than the definition of
issuer in section 6050Y(d) and, consistent with the intent expressed in
Notice 2018-41 to limit the information reporting obligations imposed
under section 6050Y(b) to the life insurance company that is
responsible for administering the contract, will generally exclude a
reinsurer in an indemnity contract from reporting obligations, as the
commenter acknowledges. Furthermore, Sec. 1.6050Y-1(a)(8)(iii)(B) of
the final regulations provides any reinsurer in an indemnity contract
that is not the issuer responsible for administering the life insurance
contract, but nonetheless falls within the definition of 6050Y(b)
issuer, with a mechanism to avoid that designation (by providing notice
and relevant information to the 6050Y(b) issuer responsible for
administering the contract).
B. Definition of Notice of a Transfer to a Foreign Person
Section 6050Y(b) and Sec. 1.6050Y-3 of the proposed regulations
generally require reporting by an issuer upon notice of a transfer of a
life insurance contract to a foreign person. The proposed regulations
define ``notice of a transfer to a foreign person'' to mean any notice
of a transfer of a life insurance contract (that is, a transfer of
title to, possession of, or legal ownership of the life insurance
contract) received by a 6050Y(b) issuer. See Sec. 1.6050Y-1(a)(10) of
the proposed regulations. The proposed regulations further provide that
notice of a transfer to a foreign person includes information provided
for nontax purposes, such as a change of address notice for purposes of
sending statements or for other purposes, and information relating to
loans, premiums, or death benefits with respect to the contract, unless
the 6050Y(b) issuer knows that no transfer of the contract has occurred
or knows the transferee is a United States person. Id. For this
purpose, a 6050Y(b) issuer may rely on a Form W-9, ``Request for
Taxpayer Identification Number and Certification'' or a valid
substitute form that meets the requirements of Sec. 1.1441-1(d)(2)
(substituting ``6050Y(b) issuer'' for ``withholding agent''), that
indicates the transferee is a United States person. Id.
One commenter expressed appreciation that the proposed regulations
exclude from the definition of notice of a transfer to a foreign person
situations in which the issuer knows that no transfer has occurred or
that the transferee is a United States person. The commenter requested
that the definition be modified so that the obligation for an issuer to
report under section 6050Y(b) and Sec. 1.6050Y-3 of the proposed
regulations is not triggered unless the issuer receives notice of a
transfer of a life insurance contract to a foreign person that includes
foreign indicia. Such foreign indicia may include information provided
for nontax purposes such as a change of address notice to a foreign
residence or mailing address for purposes of sending statements or for
other purposes. The commenter noted that section 6050Y(b) requires
issuers to identify transfers to foreign persons to capture transfers
that may escape section 6050Y(a)(2) reporting in the event that a
foreign acquirer does not comply with section 6050Y(a)(2) and suggested
that the foreign indicia requirement furthers this purpose by allowing
an issuer to identify a foreign acquirer as foreign based on
information the acquirer provides to the issuer. This recommendation is
adopted in Sec. 1.6050Y-1(a)(10) of the final regulations.
C. Definition of Estimate of Investment in the Contract
Informal comments were received regarding the definition of the
term ``estimate of investment in the contract'' in the proposed
regulations. The commenter asked whether the estimate of investment in
the contract with respect to a person includes any amount paid by the
person for the life insurance contract or interest therein other than
premiums (such as, for example, the amount paid for the contract or
interest therein in a transfer for value) and whether information about
any other payments must be provided to issuers and payors reporting the
estimate of investment in the contract. The definition in Sec.
1.6050Y-1(a)(7)(ii) of the proposed regulations, which is adopted
without modification by the final regulations, provides that the
estimate of investment in the contract is the aggregate amount of
premiums paid for the contract by that person before that date, less
the aggregate amount received under the contract by that person before
that date to the extent such information is known to or can reasonably
be estimated by the issuer or payor. Accordingly, the only amounts paid
by a person that are included in the estimate of investment in the
contract with respect to that person are the premiums paid for the
contract by that person. Issuers and payors of reportable death
benefits do not need information about other amounts paid for a life
insurance contract or interest therein to determine the estimate of
investment in the contract. Under section 6050Y(a)(2)(B) and Sec.
1.6050Y-2(d)(2)(i)(A) of the final regulations, an acquirer is not
required to provide an issuer with the amount of any reportable policy
sale payment when fulfilling its reporting obligations under section
6050Y(a).
D. Definition of Reportable Policy Sale Payments
Under section 6050Y(a) and Sec. 1.6050Y-2(a) of the proposed
regulations, as a general matter, every person that is an acquirer in a
reportable policy sale during any calendar year must file a separate
information return with the IRS for each reportable policy sale payment
recipient, including any seller that is a reportable policy sale
payment recipient. A reportable policy sale payment recipient is
defined in
[[Page 58473]]
Sec. 1.6050Y-1(a)(16) of the proposed regulations as any person that
receives a reportable policy sale payment in a reportable policy sale,
as well as any broker or other intermediary that retains a portion of
the cash or other consideration transferred in a reportable policy
sale. Under section 6050Y(d)(1), the term ``payment'' means, with
respect to any reportable policy sale, the amount of cash and the fair
market value of any consideration transferred in the sale. A reportable
policy sale payment is defined by Sec. 1.6050Y-1(a)(15) of the
proposed regulations as the total amount of cash and the fair market
value of any other consideration transferred, or to be transferred in a
reportable policy sale, including any amount of a reportable policy
sale payment recipient's debt assumed by the acquirer in a reportable
policy sale. The final regulations clarify that consideration in this
case means consideration reducible to a money value, which is the
standard used in Sec. 1.101-1(f)(5) of the proposed and final
regulations for determining whether a transfer of an interest in a life
insurance contract is a transfer for valuable consideration. See Sec.
1.6050Y-1(a)(15) of the final regulations.
The preamble to the proposed regulations requested information
about the types and timing of payments made by acquirers in reportable
policy sales, including the types of ancillary costs and expenses paid
in reportable policy sales, the recipients of those payments, and
existing reporting requirements applicable to those payments. See 84 FR
11009, 11019. One commenter on the proposed regulations described
ancillary payments made by an acquirer in connection with the
acquisition of a life insurance policy as including escrow agent fees
and expenses, fees and expenses of securities intermediaries, fees paid
to companies that assist the acquirer in evaluating a life insurance
policy, fees for policy services, origination fees, fees to life
expectancy report providers, miscellaneous other administrative costs
such as mailing and courier charges, and legal fees. The commenter
asserted that these are all normal and customary transaction costs paid
by the acquirer in the ordinary course of its business in connection
with the routine process of acquiring a life insurance policy and that
the aggregate of such costs in each transaction is relatively small in
contrast to the aggregate amount of the consideration paid to the
seller of the policy and the seller's broker, if any. The commenter
stated that these minor costs and expenses are primarily administrative
in nature, and the IRS is already receiving information regarding the
payment of fees in connection with existing reporting required under
section 6041. The commenter recommended that such ancillary costs be
specifically excluded from the definition of reportable policy sale
payments.
Another commenter also recommended excluding ancillary fees from
the definition of reportable policy sale payments. Alternatively, the
commenter suggested that recipients of such ancillary fees could be
excluded from the definition of reportable policy sale payment
recipients. The commenter stated that the sale of a single life
insurance contract from the insured individual to a purchaser on the
secondary market may involve several transfers and implicate several
potential recipients of a reportable policy sale payment, as that term
is defined by the proposed regulations. The commenter described the
parties that commonly receive ancillary fees in connection with the
sale of a life insurance contract as including securities
intermediaries, escrow agents (including separate sub-escrow agents),
policy servicers, and other service providers. The commenter asserted
that these ancillary fees already should be otherwise reported to the
IRS under other provisions of the Code and Treasury Regulations and
that including these fees as reportable policy sale payments adds a
significant administrative burden to acquirers given the multitude of
potential reportable policy sale payment recipients.
The definition of ``payment'' in section 6050Y(d)(4) is broad, and
the legislative history does not suggest that this term was intended to
exclude any payment made in a reportable policy sale, such as the
ancillary fees described by the commenters. Accordingly, the
recommendations to exclude ancillary fees from the definition of
reportable policy sale payments or exclude recipients of ancillary fees
from the definition of reportable policy sale payment recipients are
not adopted. However, after consideration of these comments, the
Treasury Department and the IRS have determined that an acquirer that
reports a reportable policy sale payment made to a person other than
the seller under section 6041 or section 6041A will be deemed to have
satisfied its reporting requirements under section 6050Y(a) and Sec.
1.6050Y-2 of the final regulations with respect to that payment. See
Sec. 1.6050Y-2(f)(2) of the final regulations. The Treasury Department
and the IRS have also determined to exclude from the definition of
reportable policy sale payment recipient any person, other than the
seller, that receives aggregate payments of less than $600 with respect
to that reportable policy sale. See Sec. 1.6050Y-1(a)(16)(ii) of the
final regulations.
8. Comments and Changes Relating to Sec. 1.6050Y-2 of the Proposed
Regulations
Section 6050Y(a) requires reporting of payments made by an acquirer
in a reportable policy sale. Section 1.6050Y-2(a) of the proposed
regulations sets forth the requirement of information reporting
applicable to acquirers in reportable policy sales under section
6050Y(a)(1) and describes the information that must be reported. This
section of this Summary of Comments and Explanation of Revisions
discusses comments that generally relate to Sec. 1.6050Y-2 of the
proposed regulations.
A. Requests To Limit the Definition of Acquirer or Expand Unified
Reporting Option
Under Sec. 1.6050Y-1(a)(1) of the proposed regulations, an
``acquirer'' is any person that acquires an interest in a life
insurance contract (through a direct or indirect acquisition of the
interest) in a reportable policy sale. Section 1.6050Y-1(a)(6) of the
proposed regulations adopts by cross-reference the definition of
``interest in a life insurance contract'' set forth in Sec. 1.101-1(e)
of the proposed regulations. Section 6050Y(a) imposes reporting
requirements on an acquirer in a reportable policy sale.
One commenter on Notice 2018-41 recommended that the definition of
acquirer be limited to any person who acquires a direct or indirect
economic interest in a life insurance contract and not include any
person who acquires title to a life insurance contract as an agent or
intermediary for another person and whose sole economic interest in the
life insurance contract is security for the payment of a fee to act as
an agent or intermediary. For this purpose, the commenter noted, a
partnership or a trust (other than a grantor trust) would not be
treated as an agent or intermediary. The commenter observed that, in
many transactions that will be treated as reportable policy sales,
title to the life insurance contract is held in the name of a
securities intermediary, but beneficial ownership of the policy is held
by an investor. The commenter asserted that, although the securities
intermediary may, in a given case, have a portion of the information
required to be reported by section 6050Y, burdening the securities
intermediary with a
[[Page 58474]]
reporting obligation is beyond the scope of its duties.
Commenting on the proposed regulations, this commenter again
recommended that securities intermediaries should not be deemed to be
acquirers in life settlement transactions because they are not likely
to know, among other things, the purchase price paid to the seller,
fees paid to a life settlement broker, or ancillary fees paid in
connection with the acquisition of a policy. The commenter suggested
that, if securities intermediaries are deemed acquirers, the
regulations could instead provide for elective, substitute reporting by
the beneficial owner of the life insurance policy under a securities
account agreement. In other words, for a transaction in which a
securities intermediary is involved, either the securities intermediary
as the legal title holder or the beneficial owner of the life insurance
policy under the securities account agreement could be responsible for
the reporting required by section 6050Y(a) and Sec. 1.6050Y-2 of the
proposed regulations.
In response to these comments, Sec. 1.6050Y-2(b) of the final
regulations expands the situations in which acquirers may use unified
reporting. Under Sec. 1.6050Y-2(b) of the proposed regulations, the
reporting requirement in Sec. 1.6050Y-2(a) of the proposed regulations
applies to each acquirer in a series of prearranged transfers of an
interest in a life insurance contract. However, Sec. 1.6050Y-2(b) of
the proposed regulations provides for ``unified reporting.'' In a
series of prearranged transfers, an acquirer's reporting obligation is
deemed satisfied if the information required by Sec. 1.6050Y-2(a) of
the proposed regulations with respect to that acquirer is timely
reported on behalf of that acquirer in a manner that is consistent with
forms, instructions, and other IRS guidance by one or more other
acquirers or by a third party information reporting contractor. One
commenter expressed support for the concept set forth in Sec. 1.6050Y-
2(b) of the proposed regulations that authorizes but does not mandate
unified reporting in certain situations. The final regulations retain
this approach of authorizing, but not mandating, unified reporting in
certain situations. Additionally, in response to comments requesting
elective, substitute reporting by the beneficial owner of the life
insurance policy under a securities account agreement for a securities
intermediary with reporting obligations, the final regulations expand
the applicability of this provision to include acquirers in
simultaneous transfers, as well as acquirers in a series of prearranged
transfers.
Another commenter recommended that the definition of acquirer be
narrowed to include only those acquirers that will ultimately hold
beneficial ownership of a life insurance contract after a transfer,
thus excluding transitory interest holders from the definition of
acquirer. The commenter stated that, under a plain reading of Sec.
1.101-1(e)(1) of the proposed regulations, beneficial owners as well as
nominees and any other person that holds legal title to any part of a
beneficial interest in any life insurance contract for any amount of
time during the course of the transaction would be subject to the
acquirer reporting requirements of the proposed regulations. The
commenter suggested that the definition may be over-inclusive given the
realities of the life settlement industry including, for instance, the
fact that service providers and their respective securities
intermediaries may transitorily hold legal title to a life insurance
contract during the course of a transaction. Acknowledging that the
proposed regulations provide a unified reporting option, the commenter
objected to each such transitory legal title holder being subject to
the reporting requirements described in Sec. 1.6050Y-2 of the proposed
regulations, despite likely not having access to all the information
required to sufficiently discharge its reporting obligations. This
recommendation is not adopted in the final regulations because the
option of unified reporting is available in the situations described by
the commenter and it should be feasible, as part of the acquisition
transaction, to assign section 6050Y reporting responsibilities to a
party with the information needed to satisfy the reporting requirements
described in Sec. 1.6050Y-2 of the final regulations.
B. Request To Reduce or Eliminate Reporting on Tertiary Market
Transactions
One commenter asked that the Treasury Department and the IRS
consider whether reporting requirements imposed under section 6050Y are
appropriate to transactions in the tertiary market (that is, with
respect to sales of life insurance contract interests between
investors, after the contract has been purchased from the original
policyholder). The commenter asserted that the parties (that is, the
acquirers and sellers) involved in tertiary transactions in the life
settlement industry are already highly regulated, and the reporting
requirements under section 6050Y are unduly cumbersome given that the
tax information sought by the IRS is already included in such parties'
audited financial statements. This request to eliminate or reduce
reporting obligations under section 6050Y with respect to tertiary
market transactions is not adopted in the final regulations. Section
6050Y requires reporting with respect to reportable policy sales. That
term is broadly defined by section 101(a)(3) as the acquisition of an
interest in a life insurance contract, directly or indirectly, if the
acquirer has no substantial family, business, or financial relationship
with the insured apart from the acquirer's interest in such life
insurance contract. Tertiary market transactions generally fall within
this definition, and therefore are required to be reported.
This commenter also suggested that in the tertiary market,
beneficial ownership of a life insurance policy may be transferred
between different beneficial owners under separate securities account
agreements with the same securities intermediary, without any ownership
or beneficiary changes on the books and records of the issuer, so the
securities intermediary might be both the seller and the acquirer of
the policy interest for purposes of section 6050Y reporting. However,
even though the securities intermediary does not transfer its interest
in the life insurance contract as the legal title holder in the
transfer described, the previous beneficial owner transfers its
interest to the new beneficial owner. Under the final regulations, as
under the proposed regulations, the new beneficial owner is the
acquirer of an interest in the life insurance contract under Sec.
1.101-1(e)(3)(i) and Sec. 1.6050Y-1(a)(1) and (3), and the previous
beneficial owner is the seller under Sec. 1.6050Y-1(a)(18)(i), which
defines ``seller'' to include any person that holds an interest in a
life insurance contract and transfers that interest, or any part of
that interest, to an acquirer in a reportable policy sale.
C. Request To Allow Good Faith Effort Reporting
One commenter on the proposed regulations observed that a situation
could arise in which a person acquires a non-controlling interest in an
entity that holds direct interests in life insurance contracts, and
such entity has neither the obligation nor the willingness to provide
the indirect acquirer with information necessary for the indirect
acquirer to determine whether it is subject to the reporting
requirements or to satisfy any reporting obligations. The commenter
suggested
[[Page 58475]]
that this problem is exacerbated when there are tiers of entities
between the indirect acquirer and the entity holding direct interests
in life insurance contracts. The commenter recommended that an indirect
acquirer be considered to have complied with the reporting requirements
of section 6050Y(a) and Sec. 1.6050Y-2 of the proposed regulations if
it demonstrates that it has in good faith requested information
required to comply with the reporting requirements from the relevant
entity or entities and was unable to obtain such information by
providing to the IRS: (i) The information it does have, (ii) a
statement of its efforts to collect any missing data, and (iii) the
identifying information on the entity through which it acquired an
indirect interest in a life insurance contract or contracts.
Sections 1.6050Y-2(g)(1) and (2) cross-reference section 6724(a)
and Sec. 301.6724-1 for the waiver of a penalty for failure to file
timely a correct information return or furnish a correct statement
under section 6050Y and Sec. 1.6050Y-2 if the failure is due to
reasonable cause and is not due to willful neglect. The penalty may be
waived if the filer establishes there are significant mitigating
factors with respect to the failure (such as the fact that the filer
had not previously had this filing obligation, or has a history of
complying with information reporting obligations), or that the failure
was due to events beyond the filer's control. Events beyond the filer's
control may include the actions of a third party who has information
needed by the filer. The filer must show that the failure was due to
the failure of another person, who is required to provide information
to the filer that is necessary for the filer to comply with information
reporting requirements, to provide information or to provide correct
information. In addition, a filer seeking a waiver based on reasonable
cause must establish that it acted in a responsible manner both before
and after the failure. The filer must exercise reasonable care in
determining its filing obligations, including requesting extensions to
prevent failures, preventing impediments to failures, and rectifying
failures when discovered. These penalty relief procedures are available
to acquirers and may apply to acquirers in the situation described by
the commenter. Accordingly, the final regulations do not adopt the
change suggested by the commenter.
9. Comments Relating to Sec. 1.6050Y-3 of the Proposed Regulations
Section 6050Y(b) imposes reporting requirements on an issuer of a
life insurance contract upon the receipt of a written statement
furnished by an acquirer under section 6050Y(a)(2), or upon any notice
of the transfer of a life insurance contract to a foreign person.
Section 1.6050Y-3 of the proposed regulations sets forth the
requirement of information reporting applicable to issuers under
section 6050Y(b) and describes the information that must be reported.
This section of this Summary of Comments and Explanation of Revisions
discusses comments that generally relate to Sec. 1.6050Y-3 of the
proposed regulations.
Section 1.6050Y-3(d)(1) of the proposed regulations requires an
issuer to furnish a statement to a seller. Section 1.6050Y-3(d)(2) of
the proposed regulations provides that such statement generally must be
furnished on or before February 15 of the year following the calendar
year in which the reportable policy sale or transfer to a foreign
person occurred. This due date was adopted in response to comments on
Notice 2018-41. The proposed regulations also provide that if a
6050Y(b) issuer does not receive notice of a transfer to a foreign
person until after January 31 of the calendar year following the year
in which the transfer occurred, the statement generally must be
furnished by the date thirty days after the date notice is received.
See Sec. 1.6050Y-3(d)(2) of the proposed regulations.
One commenter expressed appreciation regarding the adoption of the
February 15 due date and the relief provided to 6050Y(b) issuers that
do not receive notice of a transfer to a foreign person until after
January 31 of the calendar year following the year in which the
transfer occurred. The commenter asked that a similar thirty-day period
be provided if the 6050Y(b) issuer does not receive an RPSS until after
January 31 of the calendar year following the year in which the
reportable policy sale occurred. If a 6050Y(b) issuer that receives an
RPSS after the January 31 due date and before the February 15 due date
is unable to furnish the required statement to the seller by the
February 15 due date because of this delay, the 6050Y(b) issuer
generally may request, before the February 15 due date, an extension of
time to furnish the statement, pursuant to IRS procedures. For example,
procedures for requesting such an extension are currently described in
the ``General Instructions for Certain Information Returns.''
Additionally, the late furnishing of an RPSS by an acquirer to a
6050Y(a) issuer would generally constitute an event beyond the issuer's
control for purposes of determining whether the issuer is eligible for
penalty relief for failure, as a 6050Y(b) issuer, to timely furnish a
statement to the seller named in the RPSS. See Sec. Sec. 1.6050Y-
3(g)(2), 301.6722-1, and 301.6724-1. Therefore, the Treasury Department
and the IRS have determined not to adopt this recommendation.
10. Comments and Changes Relating to Sec. 1.6050Y-4 of the Proposed
Regulations
Section 6050Y(c) imposes reporting requirements on every person who
makes a payment of reportable death benefits during any taxable year.
Section 1.6050Y-4 of the proposed regulations sets forth the
requirement of information reporting applicable to payors of reportable
death benefits under section 6050Y(c) and describes the information
that must be reported. This section of this Summary of Comments and
Explanation of Revisions discusses comments that generally relate to
Sec. 1.6050Y-4 of the proposed regulations.
A. Gratuitous Transfers
As discussed in section 2.B of this Summary of Comments and
Explanation of Revisions, one commenter requested an exception from the
definition of reportable policy sale for any gratuitous transfer of an
interest in a life insurance contract. The commenter asserted that
treating gratuitous transfers as reportable policy sales creates
unnecessary and confusing reporting requirements under section 6050Y
for gift transfers. The change requested by the commenter is not
adopted in the final regulations because the reporting required under
section 6050Y for gift transfers is limited under the proposed and
final regulations. However, in response to these comments, the
reporting required under section 6050Y for gift transfers is further
limited by the addition of Sec. 1.6050Y-4(e)(3) of the final
regulations, which provides that a payor of reportable death benefits
is not required to file an information return under Sec. 1.6050Y-4(a)
of the final regulations with respect to the reportable death benefits
if the payor never received, and has no knowledge of any issuer having
received, a related RPSS.
The commenter asserted that the reporting requirements under
section 6050Y will result in an acquirer having to send a Form 1099-LS
for transfers that are mere gifts, and that this will be
[[Page 58476]]
confusing to the parties involved, making it appear that the transfer
will have taxable consequences to both the donor, who will receive a
Form 1099-SB and the gift recipient, who will receive a Form 1099-R
(when a death benefit is paid).
However, with respect to a gratuitous transfer, there is no
requirement to provide a Form 1099-SB to the donor. Section 1.6050Y-
2(a) of the proposed regulations requires the acquirer (the gratuitous
transferee in a gratuitous transfer) to undertake reporting with
respect to any reportable policy sale payment recipient, including any
seller that is a reportable policy sale payment recipient. A gratuitous
transferor will not receive any reportable policy sale payment and
therefore will not be a reportable policy sale payment recipient.
Accordingly, a gratuitous transferee will not be required to file a
Form 1099-LS with respect to the gratuitous transferor, to furnish a
statement to the gratuitous transferor, or to furnish an RPSS to the
issuer. See Sec. 1.6050Y-2(a) and (d) of the proposed regulations.
Because a gratuitous transferee is not required to furnish an RPSS to
the issuer, the issuer should not be required to file a Form 1099-SB or
furnish a statement to the ``seller'' (in this case, the gratuitous
transferor) as a result of a gratuitous transfer. See Sec. 1.6050Y-
3(a) of the proposed regulations.
Because amounts paid by reason of the death of the insured under a
life insurance contract that are attributable to an interest in the
contract that was transferred in a reportable policy sale are
reportable death benefits under Sec. 1.6050Y-1(a)(12) of the proposed
regulations, the proposed regulations technically would require
reporting under section 6050Y(c) when death benefits are paid with
respect to an interest in a life insurance contract that was
transferred in a gratuitous reportable policy sale. See 1.6050Y-4(a)
and (c). The issuer therefore could be required under the proposed
regulations to provide the gratuitous transferee with a statement (for
instance, a copy of the Form 1099-R) if the gratuitous transferee is
the reportable death benefits payment recipient. See 1.6050Y-4(c). The
commenter asserted that this would confuse the Form 1099-R recipient,
who now possesses a Form 1099-R reporting a gross distribution amount
that indicates a possible taxable distribution when none exists. The
commenter also asserted that inclusion of the estimate of investment in
the contract on the Form 1099-R will further confuse the gift recipient
because it would indicate to a taxpayer that they have a taxable gain
based on the difference between the gross distribution amount and the
basis amount reported on the form.
However, the distribution to the gift recipient may be taxable.
Under Sec. 1.101-1(b)(2)(i) of the proposed regulations, the amount of
the proceeds attributable to the interest that is excludable from gross
income under section 101(a)(1) is limited to the sum of the amount of
the proceeds attributable to the gratuitously transferred interest that
would have been excludable by the transferor if the transfer had not
occurred, and the premiums and other amounts subsequently paid by the
transferee with respect to the interest. Thus, for example, if an
interest in a life insurance contract was transferred for value in a
reportable policy sale, and then transferred again as a gift, the death
benefit exclusion would be limited to the consideration paid in the
reportable policy sale, plus subsequent premiums paid.
As a practical matter, however, if the only reportable policy sale
of an interest in a life insurance contract is a gratuitous reportable
policy sale, and the issuer does not receive an RPSS, the issuer would
not know that the death benefits are attributable to an interest in a
life insurance contract transferred in a reportable policy sale, and
thus would not be on notice to do the reporting technically required
under Sec. 1.6050Y-4(a) and (c) of the proposed regulations.
Accordingly, in response to these comments, Sec. 1.6050Y-4(e)(3) of
the final regulations provides that a payor of reportable death
benefits is not required to file an information return under Sec.
1.6050Y-4(a) of the final regulations with respect to the reportable
death benefits if the payor never received, and has no knowledge of any
issuer having received, a related RPSS.
B. Other Comments Relating to Sec. 1.6050Y-4
Section 1.6050Y-4(a)(4) of the proposed regulations requires that
``the gross amount of payments made to the reportable death benefits
payment recipient during the taxable year'' be reported by the payor.
One commenter requested that ``payments made'' be replaced by
``reportable death benefits paid'' to clarify that ``gross amount of
payments'' are death benefit payments. The commenter asserted that the
broader term ``payments made'' could be confused to include items such
as interest paid on delayed claims, which is reportable on Form 1099-
INT, ``Interest Income,'' or a payment to the policy owner resulting
from a partial surrender in the same year as the insured's death. This
recommendation is adopted in the final regulations.
Section 1.6050Y-4(d) of the proposed regulations requires a payor
of reportable death benefits that files a return or furnishes a
statement reporting the payment of the reportable death benefits to
file a corrected return or furnish a corrected statement after
receiving notice of rescission of the reportable policy sale. The
commenter indicated that, if a payor has already paid the death benefit
pursuant to the change in ownership, the payor may not be contractually
required, or may not attempt to, reclaim such benefit after a
rescission. The commenter asserted that payors of death benefits
generally do not file corrected Forms 1099-R in similar instances
because the payment was, in fact, made to the initial recipient. The
commenter recommended that Sec. 1.6050Y-4(d) of the proposed
regulations be modified to provide that the payor is required to
correct the Form 1099-R only if the reportable death benefit payment
was returned to the payor. In response to this comment, Sec. 1.6050Y-
4(d) of the final regulations requires a payor of reportable death
benefits that files a return or furnishes a statement reporting the
payment of the reportable death benefits to file a corrected return or
furnish a corrected statement within 15 days after recovering any
portion of the reportable death benefits payment from the reportable
death benefits payment recipient as the result of the rescission of a
reportable policy sale.
The commenter also requested that the final regulations clarify
that the reportable death benefits paid to a foreign person should be
reported on Form 1042-S, ``Foreign Person's U.S. Source Income Subject
to Withholding,'' instead of on Form 1099-R. Under Sec. 1.6050Y-
4(e)(1) of the proposed regulations, a payor generally is not required
to report reportable death benefits paid to a foreign person on Form
1099-R if the payor obtains documentation in accordance with Sec.
1.1441-1(e)(1)(ii) upon which the payor may rely to treat the
reportable death benefits payment recipient as a foreign beneficial
owner of the reportable death benefits. However, this exception does
not apply if a 6050Y(b) issuer obtains a Form W-8ECI, ``Certificate of
Foreign Person's Claim that Income is Effectively Connected with the
Conduct of a Trade or Business in the United States.'' Accordingly, if
the payment of reportable death benefits to a foreign beneficial owner
is income effectively connected with the foreign person's trade or
business in the United
[[Page 58477]]
States, the payor may be required to report the payment on both the
Form 1042-S in accordance with Sec. 1.1461-1(c) and the Form 1099-R in
accordance with Sec. 1.6050Y-4 of the proposed regulations. In
response to this comment, therefore, Sec. 1.6050Y-4(e)(1) of the final
regulations does not include the limitation on the use of the exception
for reportable death benefits that are income effectively connected
with the conduct of a trade or business in the United States, but
instead references other due diligence or reporting requirements that
may apply to a payor that relies on the exception, including reporting
requirements under Sec. 1.1461-1(c). As a result, the final
regulations do not require reportable death benefits paid to a foreign
person that must be reported on Form 1042-S to also be reported on Form
1099-R.
11. Comments and Changes Relating to Penalties
Sections 1.6050Y-2(g), 1.6050Y-3(g), and 1.6050Y-4(f) of the
proposed regulations cross-reference sections 6721 and 6722 and the
regulations thereunder for provisions relating to the penalties
provided for failure to file timely a correct information return or
furnish timely a correct information return required under section
6050Y and Sec. Sec. 1.6050Y-2, 1.6050Y-3, or 1.6050Y-4 of the proposed
regulations. Sections 1.6050Y-2(g), 1.6050Y-3(g), and 1.6050Y-4(f) of
the proposed regulations also cross-reference Sec. 301.6724-1 for the
waiver of a penalty if the failure is due to reasonable cause and is
not due to willful neglect.
One commenter asked for permanent penalty relief for issuers unable
to meet the filing due date for reasons beyond the control of the
issuer. The commenter stated that such relief is available under
section 6724(a), which allows for waivers for reasonable cause for
reporting failures. The commenter suggested that the requested relief
could be accomplished through guidance that designates late receipt of
a Form 1099-LS (serving as an RPSS) as establishing reasonable cause
for purposes of section 6724. To identify reports eligible for such
relief, the commenter suggested that a check box could be added to Form
1099-SB for ``late receipt of Form 1099-LS,'' thereby avoiding the
inefficiencies and costs associated with waiver and abatement
procedures. The commenter did not provide any reason to anticipate that
many acquirers will fail to timely furnish statements to 6050Y(a)
issuers as required by section 6050Y(a) and Sec. 1.6050Y-2(d)(2).
Accordingly, the Treasury Department and the IRS have determined that
the normal penalty relief procedures, as described in section 9 of this
Summary of Comments and Explanation of Revisions, should be sufficient
and have not adopted the commenter's recommendation.
Applicability Dates
Section 1 of this Summary of Comments and Explanation of Revisions
describes the applicability dates for Sec. 1.101-1(b) through (g) of
the final regulations and Sec. Sec. 1.6050Y-1 through 1.6050Y-4 of the
final regulations.
As described in section 1 of this Summary of Comments and
Explanation of Revisions, the final regulations provide transition
relief as set forth in Sec. 1.6050Y-1(b) of the proposed regulations,
with some modifications. For reportable policy sales and payments of
reportable death benefits occurring after December 31, 2018, and on or
before October 31, 2019, Sec. 1.6050Y-1(b) of the final regulations
provides transition relief as follows:
(1) Statements required to be furnished to issuers under section
6050Y(a)(2) and Sec. 1.6050Y-2(d)(2)(i) must be furnished by the later
of the applicable deadline set forth in Sec. 1.6050Y-2(d)(2)(ii) or
December 30, 2019.
(2) Statements required to be furnished to reportable policy sale
payment recipients under section 6050Y(a)(2) and Sec. 1.6050Y-
2(d)(1)(i) must be furnished by the later of the applicable deadline
set forth in Sec. 1.6050Y-2(d)(1)(ii) or February 28, 2020.
(3) Statements required to be furnished to sellers under section
6050Y(b)(2) and Sec. 1.6050Y-3(d)(1) must be furnished by the later of
the applicable deadline set forth in Sec. 1.6050Y-3(d)(2) or February
28, 2020.
(4) Statements required to be furnished to reportable death
benefits payment recipients under section 6050Y(c)(2) and Sec.
1.6050Y-4(c)(1) must be furnished by the later of the applicable
deadline set forth in Sec. 1.6050Y-4(c)(2) or February 28, 2020.
(5) Returns required to be filed under section 6050Y(a)(1) and
Sec. 1.6050Y-2(a), section 6050Y(b)(1) and Sec. 1.6050Y-3(a), and
section 6050Y(c)(1) and Sec. 1.6050Y-4 must be filed by the later of
the applicable deadline set forth in Sec. 1.6050Y-2(c), Sec. 1.6050Y-
3(c), and Sec. 1.6050Y-4(b) or February 28, 2020.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
Paperwork Reduction Act
The collection of information contained in the final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under OMB Control Numbers 1545-0119, 1545-1621, and 1545-2281.
In general, the collection of information in the final regulations is
required under section 6050Y of the Code: (1) The requirement under
Sec. 1.6050Y-2 of the final regulations for an acquirer to report
certain information about payments made in reportable policy sales is
required under section 6050Y(a); (2) the requirement under Sec.
1.6050Y-3 of the final regulations for an issuer to report certain
information about transferors of life insurance contracts is required
under section 6050Y(b); and (3) the requirement under Sec. 1.6050Y-4
of the final regulations for a payor to report certain information
about payments of reportable death benefits is required under section
6050Y(c). Section 1.6050Y-3(a)(3) of the final regulations also
requires the issuer to report to the seller and the IRS the amount the
seller would have received if the seller had surrendered the life
insurance contract on the date of the reportable policy sale. This
information is necessary to allow the seller and the IRS to determine
the character (capital or ordinary) of all or a portion of the seller's
taxable income from the sale of the life insurance contract. Section
1.6050Y-3(f)(1) of the final regulations contains reporting exceptions
for certain foreign beneficial owners. To determine qualification for
these reporting exceptions, Sec. 1.6050Y-3(f)(1) of the final
regulations requires that certain foreign beneficial owners provide a
Form W-8ECI to the 6050Y(b) issuer. This information is necessary to
document whether the reporting exception in Sec. 1.6050Y-3(f)(1) of
the final regulations applies in a particular situation.
For purposes of the Paperwork Reduction Act, the burden associated
with the collection of information contained in section 6050Y(a) and
Sec. 1.6050Y-2 of the final regulations is reflected in the IRS Form
1099-LS (OMB control number 1545-2281). For purposes of the Paperwork
Reduction Act, the burden associated with the collection of information
contained in section 6050Y(b) and Sec. 1.6050Y-3 of the final
regulations is reflected in the IRS Form 1099-SB (OMB control number
1545-2281). For purposes of the Paperwork Reduction Act, the burden
[[Page 58478]]
associated with the collection of information contained in section
6050Y(c) and Sec. 1.6050Y-4 of the final regulations is reflected in
the IRS Form 1099-R (OMB Control Number 1545-0119). For purposes of the
Paperwork Reduction Act, the burden associated with the collection of
information contained in Sec. 1.6050Y-3(f)(1) of the final regulations
will be reflected in the IRS Form W-8ECI (OMB Control Number 1545-
1621), when the burden is revised to reflect the additional collection
of information in Sec. 1.6050Y-3(f)(1) of the final regulations.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget. Books
and records relating to a collection of information must be retained as
long as their contents may become material in the administration of any
internal revenue law. Generally, tax returns and tax return information
are confidential, as required by 26 U.S.C. 6103.
Regulatory Flexibility Act
It is hereby certified that this rule will not have a significant
economic impact on a substantial number of small entities pursuant to
the Regulatory Flexibility Act (5 U.S.C. chapter 6). Section 13520 of
the TCJA added section 6050Y to chapter 61 (Information and Returns) of
the Code. Section 6050Y imposes information reporting obligations
related to certain life insurance contract transactions, including
reportable policy sales and payments of reportable death benefits.
Section 6050Y provides that each of the returns required by section
6050Y is to be made ``at such time and in such manner as the Secretary
shall prescribe.'' The final regulations under section 6050Y implement
section 6050Y by specifying the manner in which and time at which the
information reporting obligations must be satisfied. Because the
regulations are limited in scope to time and manner of information
reporting and definitional information, the economic impact of the
regulations is expected to be minimal. In addition, the IRS and
Treasury expect that the reporting burden will fall primarily on
financial and insurance firms with annual receipts greater than $38.5
million and, therefore, will not affect a substantial number of small
entities. See 13 CFR 121.201, sector 52 (finance and insurance).
Although the reporting burden falls primarily on larger entities,
some small entities under the size threshold may be subject to a one-
time reporting requirement that includes information that is readily
available to the entities. This one-time reporting is unlikely to
present a significant economic burden on any small entities affected.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding the final regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business, and no comments were received.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2018, that threshold is approximately $150 million. This
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (titled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This final rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Drafting Information
The principal author of these regulations is Kathryn M. Sneade,
Office of Associate Chief Counsel (Financial Institutions and
Products), IRS. However, other personnel from the Treasury Department
and the IRS participated in their development.
Availability of IRS Documents
The IRS notice cited in this preamble is published in the Internal
Revenue Bulletin and is available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for Part 1 is amended by adding
entries for Sec. Sec. 1.6050Y-2, 1.6050Y-3, and 1.6050Y-4 in numerical
order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.6050Y-2 also issued under 26 U.S.C. 6050Y(a).
Section 1.6050Y-3 also issued under 26 U.S.C. 6050Y(b).
Section 1.6050Y-4 also issued under 26 U.S.C. 6050Y(c).
* * * * *
0
Par. 2. Section 1.101-1 is amended by:
0
1. Revising the second sentence of paragraph (a)(1), removing the third
sentence of paragraph (a)(1), and adding a sentence at the end of
paragraph (a)(1).
0
2. Revising paragraphs (b)(1) through (3).
0
3. Removing paragraphs (b)(4) and (5).
0
4. Adding paragraphs (c) through (g).
The revisions and additions read as follows:
Sec. 1.101-1 Exclusion from gross income of proceeds of life
insurance contracts payable by reason of death.
(a)(1) * * * Death benefit payments having the characteristics of
life insurance proceeds payable by reason of death under contracts,
such as workmen's compensation insurance contracts, endowment
contracts, or accident and health insurance contracts, issued on or
before December 31, 1984, are covered by this provision. * * * If the
life insurance contract is an employer-owned life insurance contract
within the definition of section 101(j)(3), the amount to be excluded
from gross income may be affected by the provisions of section 101(j).
* * * * *
(b) * * *
(1) Transfer of an interest in a life insurance contract for
valuable consideration--(i) In general. In the case of a transfer of an
interest in a life insurance contract for valuable consideration,
including a reportable policy sale for valuable consideration, the
amount of the proceeds attributable to the interest that is excludable
from gross income under section 101(a)(1) is limited under section
101(a)(2) to the
[[Page 58479]]
sum of the actual value of the consideration for the transfer paid by
the transferee and the premiums and other amounts subsequently paid by
the transferee with respect to the interest. For exceptions to this
general rule for certain transfers for valuable consideration that are
not reportable policy sales, see paragraph (b)(1)(ii) of this section.
The application of section 101(d), (f) or (j), which is not addressed
in paragraph (b) of this section, may further limit the amount of the
proceeds excludable from gross income.
(ii) Exceptions--(A) Exception for carryover basis transfers. The
limitation described in paragraph (b)(1)(i) of this section does not
apply to the transfer of an interest in a life insurance contract for
valuable consideration if each of the following requirements are
satisfied. First, the transfer is not a reportable policy sale. Second,
the basis of the interest, for the purpose of determining gain or loss
with respect to the transferee, is determinable in whole or in part by
reference to the basis of the interest in the hands of the transferor
(see section 101(a)(2)(A)). Third, paragraph (b)(1)(ii)(B) of this
section does not apply. In the case of a transfer described in this
paragraph (b)(1)(ii)(A), the amount of the proceeds attributable to the
interest that is excludable from gross income under section 101(a)(1)
is limited to the sum of the amount that would have been excludable by
the transferor if the transfer had not occurred and the premiums and
other amounts subsequently paid by the transferee with respect to the
interest. The preceding sentence applies without regard to whether the
interest previously has been transferred and the nature of any prior
transfer of the interest.
(B) Exception for transfers to certain persons--(1) In general. The
limitation described in paragraph (b)(1)(i) of this section does not
apply to the transfer of an interest in a life insurance contract for
valuable consideration if both of the following requirements are
satisfied. First, the transfer is not a reportable policy sale and the
interest was not previously transferred for valuable consideration in a
reportable policy sale. Second, the interest is transferred to the
insured, a partner of the insured, a partnership in which the insured
is a partner, or a corporation in which the insured is a shareholder or
officer (see section 101(a)(2)(B)).
(2) Transfers to certain persons subsequent to a reportable policy
sale. Except as provided in paragraph (b)(1)(ii)(B)(3) of this section,
if a transfer of an interest in a life insurance contract would be
described in paragraph (b)(1)(ii)(B)(1) of this section, but for the
fact that the interest previously was transferred for valuable
consideration in a reportable policy sale (whether in the immediately
preceding transfer or an earlier transfer), then the amount of the
proceeds attributable to the interest that is excludable from gross
income under section 101(a)(1) is limited to the sum of--
(i) The higher of the amount that would have been excludable by the
transferor if the transfer had not occurred or the actual value of the
consideration for the transfer paid by the transferee; and
(ii) The premiums and other amounts subsequently paid by the
transferee with respect to the interest.
(3) Transfers to the insured subsequent to a reportable policy
sale--(i) Except as provided in paragraph (b)(1)(ii)(B)(3)(ii) of this
section, to the extent that an interest (or portion of an interest) in
a life insurance contract that was transferred for valuable
consideration in a reportable policy sale subsequently is transferred
to the insured for valuable consideration, the limitations described in
paragraph (b)(1)(i) of this section and paragraph (b)(1)(ii)(B)(2) of
this section do not apply. To the extent that fair market value is not
paid by the insured for the transferred interest, the transfer of the
portion of the interest with a value in excess of the consideration
paid will be treated as a gift under the bargain sale rule in paragraph
(b)(2)(iii) of this section.
(ii) This paragraph (b)(1)(ii)(B)(3)(ii) applies with respect to an
interest described in paragraph (b)(1)(ii)(B)(3)(i) of this section (or
portion of such an interest) that subsequently is transferred by the
insured to any other person. If all subsequent transfers of the
interest (or portion of the interest) are gratuitous transfers that are
not reportable policy sales, the amount of the proceeds excluded from
gross income is determined under paragraph (b)(2)(i) of this section,
taking into account the application of paragraph (b)(1)(ii)(B)(3)(i) of
this section to the insured's acquisition of the interest. If any
subsequent transfer of the interest (or portion of the interest) is for
valuable consideration or is a reportable policy sale, the amount of
the policy proceeds excludable from gross income is determined in
accordance with paragraph (b) of this section; if the amount that would
have been excludable from gross income by the insured following the
transaction described in paragraph (b)(1)(ii)(B)(3)(i) of this section
if no subsequent transfer had occurred is relevant, that amount is
determined under paragraph (b)(1)(ii)(B)(2) of this section. Paragraph
(g)(8) (Example 8) of this section and paragraph (g)(9) (Example 9) of
this section illustrate the application of this paragraph
(b)(1)(ii)(B)(3)(ii).
(2) Other transfers--(i) Gratuitous transfer of an interest in a
life insurance contract. To the extent that a transfer of an interest
in a life insurance contract is gratuitous, including a reportable
policy sale that is not for valuable consideration, the amount of the
proceeds attributable to the interest that is excludable from gross
income under section 101(a)(1) is limited to the sum of the amount of
the proceeds attributable to the gratuitously transferred interest that
would have been excludable by the transferor if the transfer had not
occurred and the premiums and other amounts subsequently paid by the
transferee with respect to the interest. However, if an interest in a
life insurance contract is transferred gratuitously to the insured, and
that interest has not previously been transferred for value in a
reportable policy sale, the entire amount of the proceeds attributable
to the interest transferred to the insured is excludable from gross
income.
(ii) Partial transfers. When only part of an interest in a life
insurance contract is transferred, the transferor's exclusion is
ratably apportioned between or among the several parts. If multiple
parts of an interest are transferred, the transfer of each part is
treated as a separate transaction, with each transaction subject to the
rule under paragraph (b) of this section that is applicable to the type
of transfer involved.
(iii) Bargain sales. When the transfer of an interest in a life
insurance contract is in part a transfer for valuable consideration and
in part a gratuitous transfer, the transfer of each part is treated as
a separate transaction for purposes of determining the amount of the
proceeds attributable to the interest that is excludable from gross
income under section 101(a)(1). Each separate transaction is subject to
the rule under paragraph (b) of this section that is applicable to the
type of transfer involved.
(3) Determination of amounts paid by the transferee. For purposes
of paragraphs (b)(1) and (2) of this section, in determining the
amounts, if any, of consideration paid by the transferee for the
transfer of an interest in a life insurance contract and premiums and
other amounts subsequently paid by the transferee with respect to that
interest, the amounts paid by the transferee are reduced, but not below
zero, by
[[Page 58480]]
amounts received by the transferee under the life insurance contract
that are not received as an annuity, to the extent excludable from
gross income under section 72(e).
(c) Reportable policy sale--(1) In general. Except as provided in
paragraph (c)(2) of this section, a reportable policy sale for purposes
of this section and section 6050Y is any direct or indirect acquisition
of an interest in a life insurance contract if the acquirer has, at the
time of the acquisition, no substantial family, business, or financial
relationship with the insured apart from the acquirer's interest in the
life insurance contract.
(2) Exceptions. None of the following transactions is a reportable
policy sale:
(i) A transfer of an interest in a life insurance contract between
entities with the same beneficial owners, if the ownership interest of
each beneficial owner in the transferor entity does not vary by more
than a 20 percent ownership interest from that beneficial owner's
ownership interest in the transferee entity. In a series of transfers,
the prior sentence is applied by comparing the beneficial owners'
ownership interest in the first transferor entity and the last
transferee entity. For purposes of this paragraph (c)(2)(i), each
beneficial owner of a trust is deemed to have an ownership interest
determined by the broadest possible exercise of a trustee's discretion
in that beneficial owner's favor. Paragraph (g)(13) (Example 13) of
this section provides an illustration of the application of this
paragraph (c)(2)(i).
(ii) A transfer between corporations that are members of an
affiliated group (as defined in section 1504(a)) that files a
consolidated U.S. income tax return for the taxable year in which the
transfer occurs.
(iii) The indirect acquisition of an interest in a life insurance
contract by a person if--
(A) A partnership, trust, or other entity in which an ownership
interest is being acquired directly or indirectly holds the interest in
the life insurance contract and acquired that interest before January
1, 2019, or acquired that interest in a reportable policy sale reported
in compliance with section 6050Y(a) and Sec. 1.6050Y-2; or
(B) Immediately before the acquisition, no more than 50 percent of
the gross value of the assets (as determined under paragraph (f)(4) of
this section) of the partnership, trust, or other entity that directly
or indirectly holds the interest in the life insurance contract, and in
which an ownership interest is being directly acquired, consists of
life insurance contracts, provided that, after the acquisition, with
respect to that partnership, trust, or other entity, the person
indirectly acquiring the interest in the life insurance contract and
his or her family members own, in the aggregate--
(1) With respect to an S corporation, stock possessing 5 percent or
less of the total combined voting power of all classes of stock
entitled to vote and 5 percent or less of the total value of shares of
all classes of stock of the S corporation;
(2) With respect to a trust or decedent's estate, 5 percent or less
of the corpus and 5 percent or less of the annual income (taking into
account, for the purpose of determining any person's ownership
interest, the maximum amount of income and corpus that could be
distributed to or held for the benefit of that person); or
(3) With respect to a partnership or other entity that is not a
corporation or a trust, 5 percent or less of the capital interest and 5
percent or less of the profits interest.
(iv) The acquisition of a life insurance contract by an insurance
company that issues a life insurance contract in an exchange pursuant
to section 1035.
(v) The acquisition of a life insurance contract by a policyholder
in an exchange pursuant to section 1035, if the policyholder has a
substantial family, business, or financial relationship with the
insured, apart from its interest in the life insurance contract, at the
time of the exchange.
(d) Substantial relationship--(1) Substantial family relationship.
For purposes of this section, a substantial family relationship means
the relationship between an individual and any family member of that
individual as defined in paragraph (f)(3) of this section. In addition,
a substantial family relationship exists between an individual and his
or her former spouse with regard to the transfer of an interest in a
life insurance contract to (or in trust for the benefit of) that former
spouse incident to divorce.
(2) Substantial business relationship. For purposes of this
section, a substantial business relationship between the insured and
the acquirer exists in each of the following situations:
(i) The insured is a key person (as defined in section 264) of, or
materially participates (within the meaning of section 469) in, an
active trade or business as an owner, employee, or contractor, and at
least 80 percent of that trade or business is owned (directly or
indirectly, through one or more partnerships, trusts, or other
entities) by the acquirer or the beneficial owners of the acquirer.
(ii) The acquirer acquires an active trade or business and acquires
the interest in the life insurance contract either as part of that
acquisition or from a person owning significant property leased to the
acquired trade or business or life insurance policies held to
facilitate the succession of the ownership of the business if--
(A) The insured--
(1) Is an employee within the meaning of section 101(j)(5)(A) of
the acquired trade or business immediately preceding the acquisition;
or
(2) Was a director, highly compensated employee, or highly
compensated individual within the meaning of section 101(j)(2)(A)(ii)
of the acquired trade or business, and the acquirer, immediately after
the acquisition, has ongoing financial obligations to the insured with
respect to the insured's employment by the trade or business (for
example, the life insurance contract is maintained by the acquirer to
fund current or future retirement, pension, or survivorship obligations
based on the insured's relationship with the entity or to fund a buy-
out of the insured's interest in the acquired trade or business); and
(B) The acquirer either carries on the acquired trade or business
or uses a significant portion of the acquired business assets in an
active trade or business that does not include investing in interests
in life insurance contracts.
(3) Substantial financial relationship. For purposes of this
section, a substantial financial relationship between the insured and
the acquirer exists in each of the following situations:
(i) The acquirer (directly or indirectly, through one or more
partnerships, trusts, or other entities of which it is a beneficial
owner) has, or the beneficial owners of the acquirer have, a common
investment (other than the interest in the life insurance contract)
with the insured and a buy-out of the insured's interest in the common
investment by the co-investor(s) after the insured's death is
reasonably foreseeable.
(ii) The acquirer maintains the life insurance contract on the life
of the insured to provide funds to purchase assets of or to satisfy
liabilities of the insured or the insured's estate, heirs, legatees, or
other successors in interest, or to satisfy other liabilities arising
upon or by reason of the death of the insured.
(iii) The acquirer is an organization described in sections 170(c),
2055(a), and 2522(a) that previously received from the insured either
financial support in a substantial amount or
[[Page 58481]]
significant volunteer support or that meets other requirements
prescribed in guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2) of this chapter) for establishing that a
substantial financial relationship exists between the insured and the
organization.
(4) Special rules. Paragraphs (d)(4)(i), (ii), and (iii) of this
section apply for purposes of determining whether a substantial
relationship (whether family, business, or financial) exists under
paragraph (d)(1), (2), or (3) of this section, respectively.
(i) Indirect acquisitions. The acquirer of an interest in a life
insurance contract in an indirect acquisition is deemed to have a
substantial business or financial relationship with the insured if the
direct holder of the interest in the life insurance contract has a
substantial business or financial relationship with the insured
immediately before and after the date the acquirer acquires its
interest.
(ii) Acquisitions by certain persons. The sole fact that an
acquirer is a partner of the insured, a partnership in which the
insured is a partner, or a corporation in which the insured is a
shareholder or officer, is not sufficient to establish a substantial
business or financial relationship with the insured. In addition, an
acquirer need not be a partner of the insured, a partnership in which
the insured is a partner, or a corporation in which the insured is a
shareholder or officer to have a substantial business or financial
relationship with the insured.
(iii) Acquisitions by those with differing types of substantial
relationships. A substantial family, business, or financial
relationship exists between the insured and a partnership, trust, or
other entity if each beneficial owner of that partnership, trust, or
other entity has a substantial family, business, or financial
relationship with the insured. For example, a substantial family,
business, or financial relationship exists between the insured and a
trust if each trust beneficiary is a family member of the insured or an
organization described in paragraph (d)(3)(iii) of this section.
(e) Interest in a life insurance contract--(1) Definition. For
purposes of this section and section 6050Y, the term interest in a life
insurance contract means the interest held by any person that has taken
title to or possession of the life insurance contract (also referred to
as a life insurance policy), in whole or part, for state law purposes,
including any person that has taken title or possession as nominee for
another person, and the interest held by any person that has an
enforceable right to receive all or a part of the proceeds of a life
insurance contract or to any other economic benefits of the policy as
described in Sec. 20.2042-1(c)(2) of this chapter, such as the
enforceable right to designate a contract beneficiary. Any person named
as the owner in the life insurance contract generally is the owner (or
an owner) of the contract and holds an interest in the contract.
(2) Transfer of an interest in a life insurance contract. For
purposes of this section and section 6050Y, the term transfer of an
interest in a life insurance contract means the transfer of any
interest in the life insurance contract, including any transfer of
title to, possession of, or legal or beneficial ownership of the life
insurance contract itself. The creation of an enforceable right to
receive all or a part of the proceeds of a life insurance contract
constitutes the transfer of an interest in the life insurance contract.
The following events are not a transfer of an interest in a life
insurance contract: The revocable designation of a beneficiary of the
policy proceeds (until the designation becomes irrevocable other than
by reason of the death of the insured); the pledging or assignment of a
policy as collateral security; and the issuance of a life insurance
contract to a policyholder, other than the issuance of a policy in an
exchange pursuant to section 1035.
(3) Acquisition of an interest in a life insurance contract. For
purposes of this section and section 6050Y, the acquisition of an
interest in a life insurance contract may be direct or indirect.
(i) Direct acquisition of an interest in a life insurance contract.
For purposes of this section and section 6050Y, the transfer of an
interest in a life insurance contract results in the direct acquisition
of the interest by the transferee (acquirer).
(ii) Indirect acquisition of an interest in a life insurance
contract. For purposes of this section and section 6050Y, an indirect
acquisition of an interest in a life insurance contract occurs when a
person (acquirer) becomes a beneficial owner of a partnership, trust,
or other entity that holds (whether directly or indirectly) the
interest (whether legal or beneficial) in the life insurance contract.
For purposes of this paragraph (e)(3)(ii), the term other entity does
not include a C corporation, unless more than 50 percent of the gross
value of the assets of the C corporation consists of life insurance
contracts (as determined under paragraph (f)(4) of this section)
immediately before the indirect acquisition.
(f) Definitions. The following definitions apply for purposes of
this section:
(1) Beneficial owner. A beneficial owner of a partnership, trust,
or other entity is an individual or C corporation with an ownership
interest in that entity. The interest may be held directly or
indirectly, through one or more other partnerships, trusts, or other
entities. For instance, an individual that directly owns an interest in
a partnership (P1), which directly owns an interest in another
partnership (P2), is an indirect beneficial owner of P2 and any assets
or other entities owned by P2 directly or indirectly. For purposes of
this paragraph (f)(1), the beneficial owners of a trust include those
who may receive current distributions of trust income or corpus and
those who could receive distributions if the trust were to terminate
currently.
(2) C corporation. The term C corporation has the meaning given to
it in section 1361(a)(2).
(3) Family member. With respect to any individual, the term family
member refers to any person described in paragraphs (f)(3)(i) through
(vi) of this section. For purposes of this paragraph (f)(3), full
effect is given to a legal adoption, and a step-child is deemed to be a
descendant. The family members of an individual include:
(i) The individual;
(ii) The individual's spouse or a person with whom the individual
is in a registered domestic partnership, civil union, or other similar
relationship established under state law;
(iii) Any parent, grandparent, or great-grandparent of the
individual or of the person described in paragraph (f)(3)(ii) of this
section and any spouse of such parent, grandparent, or great-
grandparent, or person with whom the parent, grandparent, or great-
grandparent is in a registered domestic partnership, civil union, or
other similar relationship established under state law;
(iv) Any lineal descendant of the individual or of any person
described in paragraph (f)(3)(ii) or (iii) of this section;
(v) Any spouse of a lineal descendant described in paragraph
(f)(3)(iv) of this section and any person with whom such a lineal
descendant is in a registered domestic partnership, civil union, or
other similar relationship established under state law; and
(vi) Any lineal descendant of a person described in paragraph
(f)(3)(v) of this section.
(4) Gross value of assets--(i) Determination of gross value of
assets. Except as provided in paragraph
[[Page 58482]]
(f)(4)(ii) or (iii) of this section, for purposes of paragraphs
(c)(2)(iii)(B) and (e)(3)(ii) of this section, the term gross value of
assets means, with respect to any entity, the fair market value of the
entity's assets, including assets beneficially owned by the entity
under paragraph (f)(1) of this section as a beneficial owner of a
partnership, trust, or other entity.
(ii) Determination of gross value of assets of publicly traded
entity. For purposes of determining the gross value of assets of an
entity that is publicly traded, if the entity's annual Form 10-K filed
with the United States Securities and Exchange Commission (or
equivalent annual filing if the entity is publicly traded in a non-U.S.
jurisdiction) for the period immediately preceding a person's
acquisition of an ownership interest in the entity does not contain
information demonstrating that more than 50 percent of the gross value
of the entity's assets consist of life insurance contracts, that person
may assume that no more than 50 percent of the gross value of the
entity's assets consists of life insurance contracts, unless that
person has actual knowledge or reason to know that more than 50 percent
of the gross value of the entity's assets consists of life insurance
contracts.
(iii) Safe harbor definition of gross value of assets. An entity
may choose to determine the gross value of all the entity's assets for
purposes of this section using the following alternative definition of
gross value of assets:
(A) In the case of assets that are life insurance policies or
annuity or endowment contracts that have cash values, the cash
surrender value as defined in section 7702(f)(2)(A); and
(B) In the case of assets not described in paragraph (f)(4)(iii)(A)
of this section, the adjusted bases (within the meaning of section
1016) of such assets.
(5) Transfer for valuable consideration. A transfer for valuable
consideration means any transfer of an interest in a life insurance
contract for cash or other consideration reducible to a money value.
(g) Examples. The application of this section is illustrated by the
following examples. Each example assumes that the transferee did not
receive any amounts under the life insurance contract other than the
amounts described in the examples. With the exception of paragraph
(g)(7) (Example 7) of this section, the bargain sale rules set forth in
paragraph (b)(2)(iii) of this section do not apply in the examples
because the consideration paid for the policy transferred is fair
market value:
(1) Example 1. A is the initial policyholder of a $100,000
insurance policy on A's life. A sells the policy to B, A's child,
for $6,000, its fair market value. B is not a partner in a
partnership in which A is a partner. B receives the proceeds of
$100,000 upon the death of A. Because the transfer to B was for
valuable consideration, and none of the exceptions in paragraph
(b)(1)(ii) of this section applies, the amount of the proceeds B may
exclude from B's gross income under this section is limited under
paragraph (b)(1)(i) of this section to $6,000 plus any premiums and
other amounts paid by B with respect to the policy subsequent to the
transfer.
(2) Example 2. The facts are the same as in Example 1 in
paragraph (g)(1) of this section except that, before A's death, B
gratuitously transfers the policy back to A. A's estate receives the
proceeds of $100,000 on A's death. Because the transfer from B to A
is a gratuitous transfer to the insured, and the preceding transfer
from A to B was not a reportable policy sale, the amount of the
proceeds A's estate may exclude from gross income under this section
is not limited by paragraph (b)(2)(i) of this section.
(3) Example 3. The facts are the same as in Example 1 in
paragraph (g)(1) of this section except that, before A's death, B
sells the policy back to A for its fair market value. A's estate
receives the proceeds of $100,000 on A's death. The transfer from A
to B is not a reportable policy sale because the acquirer B has a
substantial family relationship with the insured, A. The transfer
from B to A also is not a reportable policy sale because the
acquirer A has a substantial family relationship with the insured,
A. Accordingly, paragraph (b)(1)(ii)(B)(1) of this section applies
to the transfer to A, and the amount of the proceeds A's estate may
exclude from gross income is not limited by paragraph (b) of this
section.
(4) Example 4. A is the initial policyholder of a $100,000
insurance policy on A's life. A transfers the policy for $6,000, its
fair market value, to an individual, C, who does not have a
substantial family, business, or financial relationship with A. The
transfer from A to C is a reportable policy sale. C receives the
proceeds of $100,000 on A's death. The amount of the proceeds C may
exclude from C's gross income under this section is limited under
paragraph (b)(1)(i) of this section to $6,000 plus any premiums and
other amounts paid by C with respect to the policy subsequent to the
transfer.
(5) Example 5. The facts are the same as in Example 4 in
paragraph (g)(4) of this section, except that before A's death, C
transfers the policy to D, a partner of A who co-owns real property
with A, for $8,000, the policy's fair market value. D receives the
proceeds of $100,000 on A's death. The transfer from C to D is not a
reportable policy sale because the acquirer D has a substantial
financial relationship with the insured, A. However, because that
transfer follows a reportable policy sale (the transfer from A to
C), the amount of the proceeds that D may exclude from gross income
under this section is limited by paragraph (b)(1)(ii)(B)(2) of this
section to the sum of--
(i) The higher of the amount C could have excluded had the
transfer to D not occurred ($6,000 plus any premiums and other
amounts paid by C with respect to the policy subsequent to the
transfer to C, as described in Example 4 in paragraph (g)(4) of this
section) or the actual value of the consideration for that transfer
paid by D ($8,000); and
(ii) Any premiums and other amounts paid by D with respect to
the policy subsequent to the transfer to D.
(6) Example 6. The facts are the same as in Example 4 in
paragraph (g)(4) of this section, except that before A's death, C
transfers the policy back to A for $8,000, its fair market value.
A's estate receives the proceeds of $100,000 on A's death. The
transfer from C to A is not a reportable policy sale because the
acquirer A has a substantial family relationship with the insured,
A. Although the transfer follows a reportable policy sale (the
initial transfer from A to C), A's estate may exclude all of the
policy proceeds from gross income because paragraph
(b)(1)(ii)(B)(3)(i) of this section applies and, therefore, the
amount of the proceeds that A may exclude from gross income is not
limited by paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2)
of this section.
(7) Example 7. The facts are the same as in Example 6 in
paragraph (g)(6) of this section, except that C transfers the policy
back to A for $4,000, rather than its fair market value of $8,000.
A's estate receives the proceeds of $100,000 on A's death. Because A
did not pay fair market value for the policy, the transfer is
bifurcated and treated as a bargain sale under paragraph (b)(2)(iii)
of this section. A therefore is treated as having purchased 50% of
the policy interest for valuable consideration equal to fair market
value and as having received 50% of the policy interest in a
gratuitous transfer. The transfer from C to A is not a reportable
policy sale because the acquirer, A, has a substantial family
relationship with the insured, A, but the transfer from C to A
follows a reportable policy sale (the transfer from A to C).
(i) Treatment of policy interest purchased by A. A's estate may
exclude from income all of the policy proceeds related to the 50%
policy interest transferred for valuable consideration ($50,000)
because, under paragraph (b)(1)(ii)(B)(3)(i) of this section, the
amount of the proceeds that may be excluded from gross income is not
limited by paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2)
of this section.
(ii) Treatment of policy interest gratuitously transferred to A.
The amount of the policy proceeds related to the 50% policy interest
transferred gratuitously that A's estate may exclude from income is
limited under paragraph (b)(2)(i) of this section to the sum of the
amount C could have excluded with respect to 50% of the policy had
the transfer back to A not occurred (that is, 50% of the $6,000 that
C paid A for the policy, plus 50% of any premiums and other amounts
paid by C with respect to the policy subsequent to the transfer to
C), plus 50% of any premiums and other amounts paid by A with
respect to the policy subsequent to the transfer to A.
(8) Example 8. The facts are the same as in Example 6 in
paragraph (g)(6) of this
[[Page 58483]]
section, except that, before A's death, A gratuitously transfers 50%
of the policy interest to B, A's child, and sells 50% of the policy
interest for its fair market value to an individual, E, who does not
have a substantial family, business, or financial relationship with
A. B and E each receive $50,000 of the proceeds on A's death.
Paragraph (b)(1)(ii)(B)(3)(ii) of this section applies to determine
the amount of the proceeds that B and E may exclude from gross
income because the policy interests transferred to B and E were
first transferred for valuable consideration in a reportable policy
sale (the transfer by A to C) and then transferred to the insured,
A, for fair market value.
(i) Treatment of policy interest transferred to B. With respect
to the portion of the policy interest transferred to B, because the
transfer to B was the only transfer subsequent to the transfer to A
and the transfer to B was gratuitous and not a reportable policy
sale, under paragraph (b)(1)(ii)(B)(3)(ii) of this section, the
amount of the policy proceeds excludable from gross income by B is
determined under paragraph (b)(2)(i) of this section, taking into
account the application of paragraph (b)(1)(ii)(B)(3)(i) of this
section to A's acquisition of the interest. Under paragraph
(b)(2)(i) of this section, the amount of the proceeds B may exclude
is limited to the sum of the amount A could have excluded had the
transfer to B not occurred, and any premiums and other amounts paid
by B with respect to the policy subsequent to the transfer to B. As
described in Example 6 in paragraph (g)(6) of this section, under
paragraph (b)(1)(ii)(B)(3)(i) of this section, the amount of the
proceeds that A may exclude from gross income is not limited by
paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2) of this
section. Accordingly, the amount of the proceeds that B may exclude
from gross income is not limited by paragraph (b) of this section.
(ii) Treatment of policy interest transferred to E. With respect
to the portion of the policy interest transferred to E, because the
transfer to E was not gratuitous and was a reportable policy sale,
under paragraph (b)(1)(ii)(B)(3)(ii) of this section, the amount of
the policy proceeds excludable from gross income by E is determined
in accordance with paragraph (b) of this section. Accordingly,
because the transfer to E was for valuable consideration, the amount
excludable from gross income by E is limited by paragraph (b)(1)(i)
of this section unless an exception in paragraph (b)(1)(ii) of this
section applies. Because the transfer from A to E is a reportable
policy sale, none of the exceptions in paragraph (b)(1)(ii) of this
section apply. Therefore, the amount of the proceeds E may exclude
from gross income under this section is limited by paragraph
(b)(1)(i) of this section to the sum of the consideration paid by E
and the premiums and other amounts paid by E with respect to the
policy subsequent to the transfer to E.
(9) Example 9. The facts are the same as in Example 8 in
paragraph (g)(8) of this section, except that, before A's death, B
transfers B's policy interest to Partnership F, whose partners are A
and other family members of A, in exchange for a partnership
interest in Partnership F. Partnership F receives $50,000 of the
proceeds on A's death. With respect to the policy interest
transferred to Partnership F, paragraph (b)(1)(ii)(B)(3)(ii) of this
section applies to determine the amount of the proceeds that
Partnership F may exclude from gross income for the reasons
described in Example 8 in paragraph (g)(8) of this section.
(i) Treatment of policy interest transferred to Partnership F.
The transfer to Partnership F was not a reportable policy sale.
However, because the transfer to Partnership F was not gratuitous,
the amount of the policy proceeds excludable from gross income by
Partnership F is determined in accordance with paragraph (b) of this
section as if the amount that would have been excludable from gross
income by A following the transfer to A, if no subsequent transfer
had occurred, was determined under paragraph (b)(1)(ii)(B)(2) of
this section. Because B's transfer to Partnership F was a transfer
for valuable consideration to a partnership in which the insured is
a partner that was preceded by a reportable policy sale (the
transfer to C), the amount of the proceeds Partnership F may exclude
from gross income under this section is limited under paragraph
(b)(1)(ii)(B)(2) of this section to the higher of the amount that
would have been excludable by B if the transfer to Partnership F had
not occurred or the actual value of the consideration for the policy
paid by Partnership F, plus any premiums and other amounts paid by
Partnership F with respect to the policy subsequent to the transfer
to Partnership F.
(ii) Amount that B could have excluded. Because the transfer
from A to B was a gratuitous transfer, the amount of the proceeds B
could have excluded from gross income under this section if the
transfer to Partnership F had not occurred is limited under
paragraph (b)(2)(i) of this section to the sum of the amount A could
have excluded had the transfer to B not occurred, and any premiums
and other amounts paid by B with respect to the policy subsequent to
the transfer to B.
(iii) Amount that A could have excluded. As described in
paragraph (g)(9)(i) of this section, the amount of the proceeds A
could have excluded under this section if the transfer to B had not
occurred must be determined under paragraph (b)(1)(ii)(B)(2) of this
section in accordance with paragraph (b)(1)(ii)(B)(3)(ii) of this
section. Under paragraph (b)(1)(ii)(B)(2) of this section, the
amount that would have been excludable by A is limited to the higher
of the amount that would have been excludable by C if the transfer
to A had not occurred ($6,000 plus premiums and other amounts
subsequently paid by C) or the actual value of the consideration for
the policy paid by A ($8,000), plus any premiums and other amounts
paid by A with respect to the policy subsequent to the transfer to
A.
(10) Example 10. A is the initial policyholder of a $100,000
insurance policy on A's life. A contributes the policy to
Corporation X in exchange for stock. Corporation X's basis in the
policy is determinable in whole or in part by reference to A's basis
in the policy. Corporation X conducts an active trade or business
that it wholly owns, and A materially participates in that active
trade or business as an employee of Corporation X. Corporation X
receives the proceeds of $100,000 on A's death. A's contribution of
the policy to Corporation X is not a reportable policy sale because
Corporation X has a substantial business relationship with A under
paragraph (d)(2)(i) of this section. Although Corporation X's basis
in the policy is determinable in whole or in part by reference to
A's basis in the policy, paragraph (b)(1)(ii)(A) of this section
does not apply because the insured, A, is a shareholder of
Corporation X and the other requirements under paragraph
(b)(1)(ii)(B) of this section are satisfied. Accordingly, paragraph
(b)(1)(ii)(B) of this section applies, and paragraph (b)(1)(ii)(A)
of this section is inapplicable. Under paragraph (b)(1)(ii)(B)(1) of
this section, Corporation X's exclusion is not limited by paragraph
(b) of this section.
(11) Example 11. The facts are the same as in Example 10 in
paragraph (g)(10) of this section, except that Corporation X
transfers its active trade or business and the policy on A's life to
Corporation Y in a tax-free reorganization at a time when A is still
employed by Corporation X, but is no longer a shareholder of
Corporation X. Corporation Y's basis in the policy is determinable
in whole or in part by reference to Corporation X's basis in the
policy, and Corporation Y carries on the trade or business acquired
from Corporation X. Corporation Y receives the proceeds of $100,000
on A's death. The transfer from Corporation X to Corporation Y is
not a reportable policy sale because Corporation Y has a substantial
business relationship with A under paragraph (d)(2)(ii) of this
section. The amount of the proceeds that Corporation Y may exclude
from gross income is limited under paragraph (b)(1)(ii)(A) of this
section to the sum of the amount that would have been excludable by
Corporation X had the transfer to Corporation Y not occurred, plus
any premiums and other amounts paid by Corporation Y with respect to
the policy subsequent to the transfer. Accordingly, because
Corporation X's exclusion is not limited by paragraph (b) of this
section, as described in Example 10 in paragraph (g)(10) of this
section, Corporation Y's exclusion is not limited by paragraph (b)
of this section.
(12) Example 12. A is the initial policyholder of a $100,000
insurance policy on A's life. A contributes the policy to a C
corporation, Corporation W, in exchange for stock. After the
acquisition, A owns less than 20% of the outstanding stock of
Corporation W and owns stock possessing less than 20% of the total
combined voting power of all stock of Corporation W and is therefore
not a key person with respect to Corporation W under section
264(e)(3). Corporation W's basis in the policy is determinable in
whole or in part by reference to A's basis in the policy. However,
no substantial family, business, or financial relationship exists
between A and Corporation W, so A's contribution of the policy to
Corporation W is a reportable policy sale. Corporation W receives
the proceeds of $100,000 on A's death. Under paragraph (b)(1)(i) of
this section, the amount of the proceeds
[[Page 58484]]
Corporation W may exclude from gross income is limited to the actual
value of the stock exchanged for the policy, plus any premiums and
other amounts paid by Corporation W with respect to the policy
subsequent to the transfer. The exceptions in paragraph (b)(1)(ii)
of this section do not apply because the transfer to Corporation W
is a reportable policy sale.
(13) Example 13. Partnership X and Partnership Y are owned by
individuals A, B, and C. A holds 40% of the capital and profits
interest of Partnership X and 20% of the capital and profits
interest of Partnership Y. B holds 35% of the capital and profits
interest of Partnership X and 40% of the capital and profits
interest of Partnership Y. C holds 25% of the capital and profits
interest of Partnership X and 40% of the capital and profits
interest of Partnership Y. Partnership X is the initial policyholder
of a $100,000 insurance policy on the life of A. Partnership Y
purchases the policy from Partnership X. Under paragraph (c)(2)(i)
of this section, this transfer is not a reportable policy sale
because the ownership interest of each beneficial owner in
Partnership X does not vary from that owner's interest in
Partnership Y by more than a 20% ownership interest. A's ownership
varies by a 20% interest, B's ownership varies by a 5% interest, and
C's ownership varies by a 15% interest.
(14) Example 14. Partnership X conducts an active trade or
business and is the initial policyholder of a $100,000 insurance
policy on the life of its full-time employee, A. A materially
participates in Partnership X's active trade or business in A's
capacity as an employee. Individual B acquires a 10% profits
interest in Partnership X in exchange for a cash payment of
$1,000,000. Under paragraphs (d)(1) through (3) of this section, B
does not have a substantial family, business, or financial
relationship with A. Under paragraph (d)(4)(i) of this section,
however, B is deemed to have a substantial business relationship
with A because, under paragraph (d)(2)(i) of this section,
Partnership X (the direct policyholder) has a substantial business
relationship with A. Accordingly, although the acquisition of the
10% partnership interest by B is an indirect acquisition of a 10%
interest in the insurance policy covering A's life, the acquisition
is not a reportable policy sale.
(15) Example 15. The facts are the same as in Example 14 in
paragraph (g)(14) of this section, except that A is no longer an
employee of Partnership X, and Partnership X has no substantial
family, business, or financial relationship with A, when B acquires
the profits interest in Partnership X. Also, B acquires only a 5%
profits interest in exchange for a cash payment of $500,000.
Partnership X does not own an interest in any other life insurance
policies, and the gross value of its assets is $10 million. Although
neither Partnership X nor B has a substantial family, business, or
financial relationship with A at the time of B's indirect
acquisition of an interest in the policy covering A's life, because
B's profits interest in Partnership X does not exceed 5%, and
because no more than 50% of Partnership X's asset value consists of
life insurance contracts, the exception in paragraph (c)(2)(iii)(B)
of this section applies, and B's indirect acquisition of an interest
in the policy covering A's life is not a reportable policy sale.
(16) Example 16. A is the initial policyholder of a $100,000
insurance policy on A's life. A sells the policy for its fair market
value. As a result of the sale, Bank X holds legal title to the life
insurance contract as the nominee of Partnership B, and Partnership
B has the enforceable right to designate the contract beneficiary.
Under paragraphs (d)(1) through (4) of this section, neither Bank X
nor Partnership B has a substantial family, business, or financial
relationship with the insured, A, at the time of the sale.
Accordingly, the transfer of legal title to the policy to Bank X is
a reportable policy sale under paragraph (c)(1) of this section,
unless an exception set forth in paragraph (c)(2) of this section
applies. The same is true of the transfer of the economic benefits
of the policy to Partnership B. At a later date, Partnership B sells
its economic interest in the policy to Partnership C for fair market
value. Bank X continues to hold legal title to the life insurance
contract, but now holds it as Partnership C's nominee. Partnership C
has no substantial family, business, or financial relationship with
the insured, A, under paragraphs (d)(1) through (4) of this section
at the time of the transfer. Accordingly, Partnership C's
acquisition of the economic interest in the policy from Partnership
B is a reportable policy sale under paragraph (c)(1) of this
section, unless an exception set forth in paragraph (c)(2) of this
section applies.
0
Par. 3. Section 1.101-6 is amended by revising paragraph (b) to read as
follows:
Sec. 1.101-6 Effective date.
* * * * *
(b) Notwithstanding paragraph (a) of this section, for purposes of
determining whether a transfer of an interest in a life insurance
contract is a reportable policy sale or a payment of death benefits is
a payment of reportable death benefits subject to the reporting
requirements of section 6050Y and Sec. Sec. 1.6050Y-1 through 1.6050Y-
4, Sec. 1.101-1(b) through (g) apply to reportable policy sales made
after December 31, 2018, and to reportable death benefits paid after
December 31, 2018. For any other purpose, including for purposes of
determining the amount of the proceeds of life insurance contracts
payable by reason of death excluded from gross income under section
101, Sec. 1.101-1(b) through (g) apply to amounts paid by reason of
the death of the insured under a life insurance contract, or interest
therein, transferred after October 31, 2019. However, under section
7805(b)(7), a taxpayer may apply the rules set forth in Sec. 1.101-
1(b) through (g) of the final regulations, in their entirety, with
respect to all amounts paid by reason of the death of the insured under
a life insurance contract, or interest therein, transferred after
December 31, 2017, and on or before October 31, 2019.
0
Par. 4. Section 1.6050Y-1 is added to read as follows:
Sec. 1.6050Y-1 Information reporting for reportable policy sales,
transfers of life insurance contracts to foreign persons, and
reportable death benefits.
(a) Definitions. The following definitions apply for purposes of
this section and Sec. Sec. 1.6050Y-2 through 1.6050Y-4:
(1) Acquirer. The term acquirer means any person that acquires an
interest in a life insurance contract (through a direct acquisition or
indirect acquisition of the interest) in a reportable policy sale.
(2) Buyer. The term buyer means, with respect to any interest in a
life insurance contract that has been transferred in a reportable
policy sale, the person that was the most recent acquirer of that
interest in a reportable policy sale as of the date reportable death
benefits are paid under the contract.
(3) Direct acquisition of an interest in a life insurance contract.
The term direct acquisition of an interest in a life insurance contract
has the meaning given to it in Sec. 1.101-1(e)(3)(i).
(4) Foreign person. The term foreign person means a person that is
not a United States person, as defined in section 7701(a)(30).
(5) Indirect acquisition of an interest in a life insurance
contract. The term indirect acquisition of an interest in a life
insurance contract has the meaning given to it in Sec. 1.101-
1(e)(3)(ii).
(6) Interest in a life insurance contract. The term interest in a
life insurance contract has the meaning given to it in Sec. 1.101-
1(e)(1).
(7) Investment in the contract--(i) Definition of investment in the
contract. With respect to the original policyholder of a life insurance
contract, the term investment in the contract on any date means that
person's investment in the contract under section 72(e)(6) on that
date. With respect to any other person, the term investment in the
contract on any date means the estimate of investment in the contract
on that date.
(ii) Definition of estimate of investment in the contract. The term
estimate of investment in the contract with respect to any person,
other than the original policyholder, means, on any date, the aggregate
amount of premiums paid for the contract by that person before that
date, less the aggregate amount received under the contract by that
person before that date to the extent such information is known to or
can
[[Page 58485]]
reasonably be estimated by the issuer or payor.
(8) Issuer--(i) In general. Except as provided in paragraph
(a)(8)(ii) or (iii) of this section, the term issuer generally means,
on any date, with respect to any interest in a life insurance contract,
any person that bears any part of the risk with respect to the contract
on that date and any person responsible on that date for administering
the contract, including collecting premiums and paying death benefits.
For instance, if a reinsurer reinsures on an indemnity basis all or a
portion of the risks that the original issuer (and continuing contract
administrator) of the contract might otherwise have incurred with
respect to the contract, both the reinsurer and the original issuer of
the contract are issuers of the contract for purposes of this paragraph
(a)(8)(i). Any designee of an issuer of a contract is also considered
an issuer of the contract for purposes of this paragraph (a)(8)(i).
(ii) 6050Y(a) issuer. For purposes of information reporting under
section 6050Y(a) and Sec. 1.6050Y-2, the 6050Y(a) issuer is the issuer
that is responsible for administering the life insurance contract,
including collecting premiums and paying death benefits under the
contract, on the date of the reportable policy sale. In the case of the
issuance of a life insurance contract to a policyholder in an exchange
pursuant to section 1035, the 6050Y(a) issuer is the issuer that issues
the new contract.
(iii) 6050Y(b) issuer. For purposes of information reporting under
section 6050Y(b) and Sec. 1.6050Y-3, a 6050Y(b) issuer is:
(A) Any person that receives an RPSS with respect to a life
insurance contract or interest therein (or, in the case of a designee,
receives notice that the issuer for whom it serves as designee received
an RPSS), and is or was, on or before the date of receipt of the RPSS,
an issuer with respect to the contract; or
(B) Any person that receives notice of a transfer to a foreign
person of a life insurance contract, provided that the person is or
was, on the date of transfer or on the date of receipt of the notice,
an issuer with respect to the contract, and provided that the
information is not received from the issuer responsible for
administering the contract (or its designee), unless:
(1) That person (or, in the case of a designee, the issuer for whom
it serves as designee) is not responsible for administering the
contract, including collecting premiums and paying death benefits under
the contract, on the date the notice of a transfer to a foreign person
is received; and
(2) That person, or its designee, provides the issuer that is
responsible on that date for administering the contract, including
collecting premiums and paying death benefits under the contract, with
such notice and with any available information necessary to accomplish
reporting under section 6050Y(b) and Sec. 1.6050Y-3.
(iv) Designee. A person is treated as the designee of an issuer for
purposes of this paragraph (a)(8) only if so designated in writing,
including electronically. The designation must be signed and
acknowledged, in writing or electronically, by the person named as
designee, or that person's representative, and by the issuer making the
designation, or its representative.
(9) Life insurance contract. The term life insurance contract has
the meaning given to it in section 7702(a). A life insurance contract
may also be referred to as a life insurance policy.
(10) Notice of a transfer to a foreign person. The term notice of a
transfer to a foreign person means any notice of a transfer of title
to, possession of, or legal ownership of a life insurance contract
received by a 6050Y(b) issuer that includes foreign indicia, including
information provided for nontax purposes such as a change of address
notice for purposes of sending statements or for other purposes, and
information relating to loans, premiums, or death benefits with respect
to the contract, unless the 6050Y(b) issuer knows that no transfer of
the contract has occurred or knows that the transferee is a United
States person. For this purpose, a 6050Y(b) issuer may rely on a Form
W-9, Request for Taxpayer Identification Number and Certification, or a
valid substitute form that meets the requirements of Sec. 1.1441-
1(d)(2) (substituting ``6050Y(b) issuer'' for ``withholding agent''),
that indicates the transferee is a United States person. For instance,
a change of address notice that changes the address to a foreign
address or other updates to the information relating to the payment of
premiums that includes foreign banking or other foreign financial
institution information is notice of a transfer to a foreign person
unless the 6050Y(b) issuer knows that no transfer has occurred or the
transferee is a United States person.
(11) Payor. The term payor means any person making a payment of
reportable death benefits.
(12) Reportable death benefits. The term reportable death benefits
means amounts paid by reason of the death of the insured under a life
insurance contract that are attributable to an interest in the contract
that was transferred in a reportable policy sale.
(13) Reportable death benefits payment recipient. The term
reportable death benefits payment recipient means any person that
receives reportable death benefits as a beneficiary under a life
insurance contract or as the holder of an interest in a life insurance
contract.
(14) Reportable policy sale. The term reportable policy sale has
the meaning given to it in Sec. 1.101-1(c).
(15) Reportable policy sale payment. The term reportable policy
sale payment generally means the total amount of cash and the fair
market value of any other consideration reducible to a money value
transferred, or to be transferred, in a reportable policy sale,
including any amount of a reportable policy sale payment recipient's
debt assumed by the acquirer in a reportable policy sale. In the case
of an indirect acquisition of an interest in a life insurance contract
that is a reportable policy sale, the reportable policy sale payment is
the total amount of cash and the fair market value of any other
consideration reducible to a money value transferred, or to be
transferred, for the ownership interest in the entity, including the
amount of any debt assumed by the acquirer, that is appropriately
allocable to the interest in the life insurance contract held by the
entity.
(16) Reportable policy sale payment recipient--(i) Except as
provided in paragraph (a)(16)(ii) of this section, the term reportable
policy sale payment recipient means any person that receives a
reportable policy sale payment in a reportable policy sale. A broker or
other intermediary that retains a portion of the cash or other
consideration transferred in a reportable policy sale is also a
reportable policy sale payment recipient.
(ii) A person other than the seller is not a reportable policy sale
payment recipient with respect to a reportable policy sale if that
person receives aggregate payments of less than $600 with respect to
that reportable policy sale.
(17) Reportable policy sale statement. The term reportable policy
sale statement (RPSS) means a statement furnished by an acquirer to an
issuer under section 6050Y(a)(2) and Sec. 1.6050Y-2(d)(2)(i).
(18) Seller. The term seller means any person that--
(i) Holds an interest in a life insurance contract and transfers
that interest, or any part of that interest, to an acquirer in a
reportable policy sale; or
(ii) Owns a life insurance contract and transfers title to,
possession of, or legal
[[Page 58486]]
ownership of that contract to a foreign person.
(19) Transfer of an interest in a life insurance contract. The term
transfer of an interest in a life insurance contract has the meaning
given to it in Sec. 1.101-1(e)(2).
(20) United States person. The term United States person has the
meaning given to it in section 7701(a)(30).
(b) Applicability date. This section and Sec. Sec. 1.6050Y-2
through 1.6050Y-3 apply to reportable policy sales made after December
31, 2018. This section and Sec. 1.6050Y-4 apply to reportable death
benefits paid after December 31, 2018. However, for reportable policy
sales and payments of reportable death benefits occurring after
December 31, 2018, and on or before October 31, 2019, transition relief
is provided as follows:
(1) Statements required to be furnished to issuers under section
6050Y(a)(2) and Sec. 1.6050Y-2(d)(2)(i) must be furnished by the later
of the applicable deadline set forth in Sec. 1.6050Y-2(d)(2)(ii) or
December 30, 2019.
(2) Statements required to be furnished to reportable policy sale
payment recipients under section 6050Y(a)(2) and Sec. 1.6050Y-
2(d)(1)(i) must be furnished by the later of the applicable deadline
set forth in Sec. 1.6050Y-2(d)(1)(ii) or February 28, 2020.
(3) Statements required to be furnished to sellers under section
6050Y(b)(2) and Sec. 1.6050Y-3(d)(1) must be furnished by the later of
the applicable deadline set forth in Sec. 1.6050Y-3(d)(2) or February
28, 2020.
(4) Statements required to be furnished to reportable death
benefits payment recipients under section 6050Y(c)(2) and Sec.
1.6050Y-4(c)(1) must be furnished by the later of the applicable
deadline set forth in Sec. 1.6050Y-4(c)(2) or February 28, 2020.
(5) Returns required to be filed under section 6050Y(a)(1) and
Sec. 1.6050Y-2(a), section 6050Y(b)(1) and Sec. 1.6050Y-3(a), and
section 6050Y(c)(1) and Sec. 1.6050Y-4 must be filed by the later of
the applicable deadline set forth in Sec. 1.6050Y-2(c), Sec. 1.6050Y-
3(c), and Sec. 1.6050Y-4(b) or February 28, 2020.
0
Par. 5. Section 1.6050Y-2 is added to read as follows:
Sec. 1.6050Y-2 Information reporting by acquirers for reportable
policy sale payments.
(a) Requirement of reporting. Except as provided in paragraph (f)
of this section, every person that is an acquirer in a reportable
policy sale during any calendar year must file a separate information
return with the Internal Revenue Service (IRS) in the form and manner
as required by the IRS for each reportable policy sale payment
recipient, including any seller that is a reportable policy sale
payment recipient. Each return must include the following information
with respect to the seller or other reportable policy sale payment
recipient to which the return relates:
(1) The name, address, and taxpayer identification number (TIN) of
the acquirer;
(2) The name, address, and TIN of the seller or other reportable
policy sale payment recipient to which the return relates;
(3) The date of the reportable policy sale;
(4) The name of the 6050Y(a) issuer of the life insurance contract
acquired and the policy number of the life insurance contract;
(5) The aggregate amount of reportable policy sale payments made,
or to be made, to the seller or other reportable policy sale payment
recipient to which the return relates with respect to the reportable
policy sale; and
(6) Any other information that is required by the form or its
instructions.
(b) Unified reporting. The information reporting requirement of
paragraph (a) of this section applies to each acquirer in a series of
prearranged transfers of an interest in a life insurance contract, as
well as each acquirer in a simultaneous transfer of different interests
in a single life insurance contract. In either case, an acquirer's
reporting obligation is deemed satisfied if the information required by
paragraph (a) of this section with respect to that acquirer is timely
reported on behalf of that acquirer in a manner that is consistent with
forms, instructions, and other IRS guidance by one or more other
acquirers or by a third party information reporting contractor.
(c) Time and place for filing. Returns required to be made under
paragraph (a) of this section must be filed with the Internal Revenue
Service Center designated on the prescribed form or in its instructions
on or before February 28 (March 31 if filed electronically) of the year
following the calendar year in which the reportable policy sale
occurred. However, see Sec. 1.6050Y-1(b)(5) for transition rules.
(d) Requirement of and time for furnishing statements--(1)
Statements to reportable policy sale payment recipients--(i)
Requirement of furnishing statement. Every person required to file an
information return under paragraph (a) of this section with respect to
a reportable policy sale payment recipient must furnish in the form and
manner prescribed by the IRS to the reportable policy sale payment
recipient whose name is set forth in that return a written statement
showing the information required by paragraph (a) of this section with
respect to the reportable policy sale payment recipient and the name,
address, and phone number of the information contact of the person
furnishing the written statement. The contact information of the person
furnishing the written statement must provide direct access to a person
that can answer questions about the statement. The statement is not
required to include information with respect to any other reportable
policy sale payment recipient in the reportable policy sale or
information about reportable policy sale payments to any other
reportable policy sale payment recipient.
(ii) Time for furnishing statement. Each statement required by
paragraph (d)(1)(i) of this section to be furnished to any reportable
policy sale payment recipient must be furnished on or before February
15 of the year following the calendar year in which the reportable
policy sale occurred. However, see Sec. 1.6050Y-1(b)(2) for transition
rules.
(2) Statements to 6050Y(a) issuers--(i) Requirement of furnishing
RPSS--(A) In general. Except as provided in paragraph (d)(2)(i)(B) of
this section, every person required to file a return under paragraph
(a) of this section must furnish in the form and manner prescribed by
the IRS to the 6050Y(a) issuer whose name is required to be set forth
in the return an RPSS with respect to each reportable policy sale
payment recipient that is also a seller. Each RPSS must show the
information required by paragraph (a) of this section with respect to
the seller named therein, except that the RPSS is not required to set
forth the amount of any reportable policy sale payment. Each RPSS must
also show the name, address, and phone number of the information
contact of the person furnishing the RPSS. This contact information
must provide direct access to a person that can answer questions about
the RPSS.
(B) Exception from reporting. An RPSS is not required to be
furnished to the 6050Y(a) issuer by an acquirer acquiring an interest
in a life insurance contract in an indirect acquisition.
(ii) Time for furnishing RPSS. Except as provided in this paragraph
(d)(2)(ii), each RPSS required by paragraph (d)(2)(i) of this section
to be furnished to a 6050Y(a) issuer must be furnished by the later of
20 calendar days after the reportable policy sale, or 5 calendar days
after the end of the applicable state law rescission period. However,
if the later date is after January 15 of the year
[[Page 58487]]
following the calendar year in which the reportable policy sale
occurred, the RPSS must be furnished by January 15 of the year
following the calendar year in which the reportable policy sale
occurred. However, see Sec. 1.6050Y-1(b)(1) for transition rules.
(3) Unified reporting. The information reporting requirements of
paragraphs (d)(1)(i) and (d)(2)(i) of this section apply to each
acquirer in a series of prearranged transfers of an interest in a life
insurance contract, as well as each acquirer in a simultaneous transfer
of different interests in a single life insurance contract, as
described in paragraph (b) of this section. In either case, an
acquirer's obligation to furnish statements is deemed satisfied if the
information required by paragraphs (d)(1)(i) and (d)(2)(i) of this
section with respect to that acquirer is timely reported on behalf of
that acquirer consistent with forms, instructions, and other IRS
guidance by one or more other acquirers or by a third party information
reporting contractor.
(e) Notice of rescission of a reportable policy sale. Any person
that has filed a return required by section 6050Y(a)(1) and this
section with respect to a reportable policy sale must file a corrected
return within 15 calendar days of the receipt of notice of the
rescission of the reportable policy sale. Any person that has furnished
a written statement under section 6050Y(a)(2) and this section with
respect to the reportable policy sale must furnish the recipient of
that statement with a corrected statement within 15 calendar days of
the receipt of notice of the rescission of the reportable policy sale.
(f) Exceptions to requirement to file--(1) An acquirer that is a
foreign person is not required to file an information return under
paragraph (a) of this section with respect to a reportable policy sale
unless--
(i) The life insurance contract (or interest therein) transferred
in the sale is on the life of an insured who is a United States person
at the time of the sale; or
(ii) The sale is subject to the laws of one or more States of the
United States that pertain to acquisitions or sales of life insurance
contracts (or interests therein).
(2) An acquirer is not required to file an information return under
paragraph (a) of this section with respect to a reportable policy sale
payment to a reportable policy sale payment recipient other than the
seller if the reportable policy sale payment is reported by the
acquirer under section 6041 or 6041A.
(3) An acquirer is not required to file an information return under
paragraph (a) of this section with respect to the issuance of a life
insurance contract in an exchange pursuant to section 1035. However,
the acquirer is required to furnish the 6050Y(a) issuer with the
statement required under paragraph (d)(2) of this section as if the
acquirer were required to file an information return under paragraph
(a) of this section.
(g) Cross-reference to penalty provisions--(1) Failure to file
correct information return. For provisions relating to the penalty
provided for failure to file timely a correct information return
required under section 6050Y(a)(1) and this section, see section 6721
and Sec. 301.6721-1 of this chapter. See section 6724(a) and Sec.
301.6724-1 of this chapter for the waiver of a penalty if the failure
is due to reasonable cause and is not due to willful neglect.
(2) Failure to furnish correct statement. For provisions relating
to the penalty provided for failure to furnish timely a correct
statement to identified persons under section 6050Y(a)(2) and this
section, see section 6722 and Sec. 301.6722-1 of this chapter. See
section 6724(a) and Sec. 301.6724-1 of this chapter for the waiver of
a penalty if the failure is due to reasonable cause and is not due to
willful neglect.
0
Par. 6. Section 1.6050Y-3 is added to read as follows:
Sec. 1.6050Y-3 Information reporting by 6050Y(b) issuers for
reportable policy sales and transfers of life insurance contracts to
foreign persons.
(a) Requirement of reporting. Except as provided in paragraph (f)
of this section, each 6050Y(b) issuer that receives an RPSS or any
notice of a transfer to a foreign person must file an information
return with the Internal Revenue Service (IRS) with respect to each
seller in the form and manner prescribed by the IRS. The return must
include the following information with respect to the seller:
(1) The name, address, and taxpayer identification number (TIN) of
the seller;
(2) The investment in the contract with respect to the seller;
(3) The amount the seller would have received if the seller had
surrendered the life insurance contract on the date of the reportable
policy sale or the transfer of the contract to a foreign person, or if
the date of the transfer to a foreign person is not known to the
6050Y(b) issuer, the date the 6050Y(b) issuer received notice of the
transfer; and
(4) Any other information that is required by the form or its
instructions.
(b) Unified reporting. Each 6050Y(b) issuer subject to the
information reporting requirement of paragraph (a) of this section must
satisfy that requirement, but a 6050Y(b) issuer's reporting obligation
is deemed satisfied if the information required by paragraph (a) of
this section with respect to that 6050Y(b) issuer is timely reported on
behalf of that 6050Y(b) issuer in a manner that is consistent with
forms, instructions, and other IRS guidance by one or more other
6050Y(b) issuers or by a third party information reporting contractor.
(c) Time and place for filing. Except as provided in this paragraph
(c), returns required to be made under paragraph (a) of this section
must be filed with the Internal Revenue Service Center designated on
the prescribed form or in its instructions on or before February 28
(March 31 if filed electronically) of the year following the calendar
year in which the reportable policy sale or the transfer to a foreign
person occurred. If the 6050Y(b) issuer does not receive notice of a
transfer to a foreign person until after January 31 of the calendar
year following the year in which the transfer occurred, returns
required to be made under paragraph (a) of this section must be filed
by the later of February 28 (March 31 if filed electronically) of the
calendar year following the year in which the transfer occurred or
thirty days after the date notice is received. However, see Sec.
1.6050Y-1(b)(5) for transition rules.
(d) Requirement of and time for furnishing statements--(1)
Requirement of furnishing statement. Every 6050Y(b) issuer filing a
return required by paragraph (a) of this section must furnish to each
seller that is a reportable policy sale payment recipient or makes a
transfer to a foreign person and whose name is required to be set forth
in the return a written statement showing the information required by
paragraph (a) of this section with respect to that seller and the name,
address, and phone number of the information contact of the person
filing the return. This contact information must provide direct access
to a person that can answer questions about the statement.
(2) Time for furnishing statement. Except as provided in this
paragraph (d)(2), each statement required by paragraph (d)(1) of this
section to be furnished to any seller must be furnished on or before
February 15 of the year following the calendar year in which the
reportable policy sale or transfer to a foreign person occurred. If a
6050Y(b) issuer does not receive notice of a transfer to a foreign
person until after January 31 of the calendar
[[Page 58488]]
year following the year in which the transfer occurred, each statement
required to be made under paragraph (d) of this section must be
furnished by the date thirty days after the date notice is received.
However, see Sec. 1.6050Y-1(b)(3) for transition rules.
(3) Unified reporting. Each 6050Y(b) issuer subject to the
information reporting requirement of paragraph (d)(1) of this section
must satisfy that requirement, but a 6050Y(b) issuer's reporting
obligation is deemed satisfied if the information required by paragraph
(d)(1) of this section with respect to that 6050Y(b) issuer is timely
reported on behalf of that 6050Y(b) issuer consistent with forms,
instructions, and other IRS guidance by one or more other 6050Y(b)
issuers or by a third party information reporting contractor.
(e) Notice of rescission of a reportable policy sale or transfer of
an insurance contract to a foreign person. Any 6050Y(b) issuer that has
filed a return required by section 6050Y(b)(1) and this section with
respect to a reportable policy sale or transfer of an insurance
contract to a foreign person must file a corrected return within 15
calendar days of the receipt of notice of the rescission of the
reportable policy sale or transfer of the insurance contract to a
foreign person. Any 6050Y(b) issuer that has furnished a written
statement under section 6050Y(b)(2) and this section with respect to
the reportable policy sale or transfer of the insurance contract to a
foreign person must furnish the recipient of that statement with a
corrected statement within 15 calendar days of the receipt of notice of
the rescission of the reportable policy sale or transfer of the
insurance contract to a foreign person.
(f) Exceptions to requirement to file. A 6050Y(b) issuer is not
required to file an information return under paragraph (a) of this
section if paragraph (f)(1), (2), or (3) of this section applies.
(1) Except as provided in this paragraph (f)(1), the 6050Y(b)
issuer obtains documentation upon which it may rely to treat a seller
of a life insurance contract or interest therein as a foreign
beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii), applying
in such case the provisions of Sec. 1.1441-1 by substituting the term
``6050Y(b) issuer'' for the term ``withholding agent'' and without
regard to the fact that that these provisions apply only to amounts
subject to withholding under chapter 3 of subtitle A of the Internal
Revenue Code. A 6050Y(b) issuer may also obtain from a seller that is a
partnership or trust, in addition to documentation establishing the
entity's foreign status, a written certification from the entity that
no beneficial owner of any portion of the proceeds of the sale is a
United States person. In such a case, the issuer may rely upon the
written certification to treat the partnership or trust as a foreign
beneficial owner for purposes of this paragraph (f)(1) provided that
the seller does not have actual knowledge that a United States person
is the beneficial owner of all or a portion of the proceeds of the
sale. See Sec. 1.1441-1(c)(6)(ii) for the definition of beneficial
owner that applies for purposes of this paragraph (f)(1). Additionally,
for certifying its status as a foreign beneficial owner (as applicable)
for purposes of this paragraph (f)(1), a seller that is required to
report any of the income from the sale as effectively connected with
the conduct of a trade or business in the United States under section
864(b) is required to provide to the 6050Y(b) issuer a Form W-8ECI,
Certificate of Foreign Person's Claim that Income is Effectively
Connected with the Conduct of a Trade or Business in the United States.
If a 6050Y(b) issuer obtains a Form W-8ECI from a seller with respect
to the sale or has reason to know that income from the sale is
effectively connected with the conduct of a trade or business in the
United States under section 864(b), the exception to reporting
described in this paragraph (f)(1) does not apply.
(2) The 6050Y(b) issuer receives notice of a transfer to a foreign
person, but does not receive an RPSS with respect to the transfer,
provided that, at the time the notice is received--
(i) The 6050Y(b) issuer is not a United States person;
(ii) The life insurance contract (or interest therein) transferred
is not on the life of a United States person; and
(iii) The 6050Y(b) issuer has not classified the seller as a United
States person in its books and records.
(3) The RPSS received by the 6050Y(b) issuer is with respect to the
6050Y(b) issuer's issuance of a life insurance contract to a
policyholder in an exchange pursuant to section 1035.
(g) Cross-reference to penalty provisions--(1) Failure to file
correct information return. For provisions relating to the penalty
provided for failure to file timely a correct information return
required under section 6050Y(b)(1) and this section, see section 6721
and Sec. 301.6721-1 of this chapter. See section 6724(a) and Sec.
301.6724-1 of this chapter for the waiver of a penalty if the failure
is due to reasonable cause and is not due to willful neglect.
(2) Failure to furnish correct statement. For provisions relating
to the penalty provided for failure to furnish timely a correct
statement to identified persons under section 6050Y(b)(2) and this
section, see section 6722 and Sec. 301.6722-1 of this chapter. See
section 6724(a) and Sec. 301.6724-1 of this chapter for the waiver of
a penalty if the failure is due to reasonable cause and is not due to
willful neglect.
0
Par. 7. Section 1.6050Y-4 is added to read as follows:
Sec. 1.6050Y-4 Information reporting by payors for reportable death
benefits.
(a) Requirement of reporting. Except as provided in paragraph (e)
of this section, every person that is a payor of reportable death
benefits during any calendar year must file a separate information
return for such calendar year with the Internal Revenue Service (IRS)
for each reportable death benefits payment recipient in the form and
manner prescribed by the IRS. The return must include the following
information with respect to the reportable death benefits payment
recipient to which the return relates:
(1) The name, address, and taxpayer identification number (TIN) of
the payor;
(2) The name, address, and TIN of the reportable death benefits
payment recipient;
(3) The date of the payment;
(4) The gross amount of reportable death benefits paid to the
reportable death benefits payment recipient during the taxable year;
(5) The payor's estimate of investment in the contract with respect
to the buyer, limited to the payor's estimate of the buyer's investment
in the contract with respect to the interest for which the reportable
death benefits payment recipient was paid; and
(6) Any other information that is required by the form or its
instructions.
(b) Time and place for filing. Returns required to be made under
this section must be filed with the Internal Revenue Service Center
designated in the instructions for the form on or before February 28
(March 31 if filed electronically) of the year following the calendar
year in which the payment of reportable death benefits was made.
However, see Sec. 1.6050Y-1(b)(5) for transition rules.
(c) Requirement of and time for furnishing statements--(1)
Requirement of furnishing statement. Every person required to file an
information return under paragraph (a) of this section must furnish to
each reportable death benefits payment recipient whose name is required
to be set forth in that return a written statement showing the
information required by paragraph (a) of
[[Page 58489]]
this section with respect to that reportable death benefits payment
recipient and the name, address, and phone number of the information
contact of the payor. This contact information must provide direct
access to a person that can answer questions about the statement.
(2) Time for furnishing statement. Each statement required by
paragraph (c)(1) of this section to be furnished to any reportable
death benefits payment recipient must be furnished on or before January
31 of the year following the calendar year in which the payment of
reportable death benefits was made. However, see Sec. 1.6050Y-1(b)(4)
for transition rules.
(d) Notice of rescission of a reportable policy sale. Any person
that has filed a return required by section 6050Y(c) and this section
with respect to a payment of reportable death benefits must file a
corrected return within 15 calendar days of recovering any portion of
the reportable death benefits payment from the reportable death
benefits payment recipient as a result of the rescission of the
reportable policy sale. Any person that has furnished a written
statement under section 6050Y(c)(2) and this section with respect to a
payment of reportable death benefits must furnish the recipient of that
statement with a corrected statement within 15 calendar days of
recovering any portion of the reportable death benefits payment from
the reportable death benefits payment recipient as a result of the
rescission of the reportable policy sale.
(e) Exceptions to requirement to file. A payor is not required to
file an information return under paragraph (a) of this section with
respect to a payment of reportable death benefits if paragraph (e)(1),
(2), or (3) of this section applies.
(1) Except as provided in this paragraph (e)(1), the payor obtains
documentation in accordance with Sec. 1.1441-1(e)(1)(ii) upon which it
may rely to treat the reportable death benefits payment recipient as a
foreign beneficial owner of the reportable death benefits, applying in
such case the provisions of Sec. 1.1441-1 by substituting the term
``payor'' for the term ``withholding agent'' and without regard to the
fact that the provisions apply only to amounts subject to withholding
under chapter 3 of subtitle A of the Internal Revenue Code. A payor may
also obtain from a partnership or trust that is a reportable death
benefits recipient, in addition to documentation establishing the
entity's foreign status, a written certification from the entity that
no beneficial owner of any portion of the reportable death benefits
payment is a United States person. In such a case, a payor may rely
upon the written certification to treat the partnership or trust as a
foreign beneficial owner for purposes of this paragraph (e)(1) provided
that the payor does not have actual knowledge that a United States
person is the beneficial owner of all or a portion of the reportable
death benefits payment. See Sec. 1.1441-1(c)(6)(ii) for the definition
of beneficial owner that applies for purposes of this paragraph (e)(1).
Other due diligence or reporting requirements may, however, apply to a
payor that relies on the exception set forth in this paragraph (e)(1).
See Sec. 1.1441-5(c) and (e) (determination of payees of foreign
partnerships and certain foreign trusts for amounts subject to
withholding under Sec. 1.1441-2(a)) and Sec. 1.1461-1(b) and (c)
(amounts subject to reporting for chapter 3 purposes).
(2) The buyer obtained the life insurance contract (or interest
therein) under which reportable death benefits are paid in a reportable
policy sale to which the exception to reporting described in Sec.
1.6050Y-3(f)(2) applies.
(3) The payor never received, and has no knowledge of any issuer
having received, an RPSS with respect to the interest in a life
insurance contract with respect to which the reportable death benefits
are paid.
(f) Cross-reference to penalty provisions--(1) Failure to file
correct information return. For provisions relating to the penalty
provided for failure to file timely a correct information return
required under section 6050Y(c)(1) and this section, see section 6721
and Sec. 301.6721-1 of this chapter. See section 6724(a) and Sec.
301.6724-1 of this chapter for the waiver of a penalty if the failure
is due to reasonable cause and is not due to willful neglect.
(2) Failure to furnish correct statement. For provisions relating
to the penalty provided for failure to furnish timely a correct
statement to identified persons under section 6050Y(c)(2) and this
section, see section 6722 and Sec. 301.6722-1 of this chapter. See
section 6724(a) and Sec. 301.6724-1 of this chapter for the waiver of
a penalty if the failure is due to reasonable cause and is not due to
willful neglect.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: October 15, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-23559 Filed 10-25-19; 4:15 pm]
BILLING CODE 4830-01-P
