Investors Group Comments on Proposed Insurance Contract Reporting Regs

May 9, 2019

CC:PA:LPD:PR (REG-103083-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Comments to Proposed Regulations on Information Reporting for Certain Life Insurance Contract Transactions 

Ladies and Gentlemen:

The Institutional Longevity Markets Association, Inc. ("ILMA") welcomes this opportunity to provide comments and recommendations to the proposed regulations (the "Proposed Regulations") released by the Internal Revenue Service (the "Service") on March 25, 2019, that provided additional guidance on the information return filing and reporting obligations imposed on parties involved in transfers of interests in life settlement contracts under Section 6050Y of the Internal Revenue Code of 1986, as amended (the "Code").¹

ILMA is a not-for-profit trade association comprised of a number of the world's leading institutional investors and intermediaries in the longevity marketplace, formed to encourage the prudent and competitive development of a suite of evolving longevity related financial businesses.

In response to the Service's invitation for comments to the Proposed Regulations, ILMA respectfully requests that the Service consider whether the reporting requirements imposed under Code Section 6050Y are appropriate to transactions in the tertiary market. The parties involved in tertiary transactions in the life settlement industry are already highly regulated, and the reporting requirements under Code Section 6050Y are unduly cumbersome given that the tax information sought by the Service is already included in such parties' audited financial statements and tax returns.

Additionally, ILMA respectfully requests that the Service consider the following observations and recommendations, which are presented in no particular order of importance.

1. Indirect Acquisition Exemption

The reporting obligations of an acquirer under the Proposed Regulations are triggered by the occurrence of a reportable policy sale (a "RPS"), which is defined quite broadly. The Proposed Regulations include a helpful carve-out from RPS treatment for certain indirect acquisitions. Under the exception, a RPS excludes the indirect acquisition of interests in life insurance contracts by a person if the entity that directly holds the interests in the life insurance contracts acquired those interests in a reportable policy sale reported in compliance with Code Section 6050Y(a) and Proposed Regulations Section 1.6050Y-2 (the "Indirect Acquisition Exemption").² The application of this exemption is ambiguous in circumstances in which the entity holding direct interests in the life insurance contracts acquired its interests in such contracts before January 1, 2018 (i.e., before the existence of any reporting requirements under Code Section 6050Y or corresponding Regulations). For example, consider a situation in which an investment fund holds a portfolio of life insurance contracts, half of which were acquired by the fund prior to January 1, 2018, and half of which were acquired after such date in RPS transactions where all reporting pursuant to Code Section 6050Y(a) was complied with. It is unclear how the Indirect Acquisition Exemption would apply with respect to a person who acquires an interest in the fund with respect to the life insurance contracts acquired by the fund prior to effective date of Code Section 6050Y. Additionally, with respect to those contracts acquired before January 1, 2018, the investment fund itself may not have tracked or retained the information sufficient to discharge the reporting requirements under the Proposed Regulations and thus would be unable (notwithstanding privacy concerns) to provide those to the indirect acquirer.

Accordingly, ILMA recommends that the Service clarify that indirect acquirers are able to avail themselves of the Indirect Acquisition Exemption if the entity through which they hold an indirect interest in life insurance contracts acquired those interests either prior to January 1, 2018 or in RPS transactions which were reported in accordance with Code Section 6050Y(a). ILMA proposes the following adjustments to Proposed Regulations Section 1.101-1(c)(2)(iii):

(iii) The indirect acquisition of an interest in a life insurance contract by a person if — 

(A) The partnership, trust, or other entity that directly holds the interest in the life insurance contract acquired that interest (x) before January 1, 2018 or (y) in a reportable policy sale in compliance with section 6050Y(a) and §1.6050Y-2 . . .

A separate problem for indirect acquirers could arise in situations where they acquire a non-controlling interest in the entity holding direct interests in life insurance contracts and such entity has neither the obligation nor the willingness to provide the indirect acquirer with either (i) information necessary for it to satisfy its reporting obligations or (ii) information necessary for indirect acquirer to determine whether it is subject to the reporting requirements. This problem is exacerbated when there are tiers of entities between the indirect acquirer and the entity holding direct interests in life insurance contracts. ILMA recommends that where an indirect acquirer demonstrates that it has in good faith requested information required to comply with the applicable reporting requirements from the relevant entities but is unable to obtain such information, then such indirect acquirer will have complied with its requirement to submit a "reportable policy sale statement" pursuant to the Proposed Regulations if it reports to the Service (i) the information it does have, (ii) a statement of its efforts to collect any missing data and (iii) an information statement to the Service with identifying information on the entity through which it acquired an indirect interest in life insurance contracts. The Service would then be able to communicate with the relevant entities to obtain the appropriate information.

2. Scope of "Acquirer"

In connection with the sale of a single life insurance contract, the Proposed Regulations designate several parties involved in the transaction as an "acquirer" and impose a reporting obligation on each such acquirer in connection with the same transaction. The Proposed Regulations define the term broadly as "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."³ The Proposed Regulations similarly broadly define the term "interest in a life insurance contract" as "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."⁴ Under a plain reading, 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.

Such broad definitions may be over-inclusive given the realities of the life settlement industry. Common practice in the industry is for legal and record title for state law purposes to be divorced from beneficial ownership of a life insurance contract. Legal title is typically held by a securities intermediary as nominee for the beneficial owner, with the beneficial owner exercising actual control over the policy. Additionally, other service providers and their respective securities intermediaries may transitorily hold legal title to a life insurance contract during the course of a transaction. Notwithstanding that the Proposed Regulations provide optionality for unified reporting, each such transitory legal title holder would nonetheless be subject to the full requirements described in Regulations Section 1.6050Y-2 despite likely not having access to all the information required to sufficiently discharge its reporting obligations.

Accordingly, ILMA recommends that the Service narrow the definition of acquirer to include only those acquirers that will ultimately hold beneficial ownership of a life insurance contract after a transfer. Such beneficial owners would have a clearer understanding of the overall chain of transfers and cash flows which resulted in such beneficial owners coming to own the contracts. Clearly, such beneficial owners would be best positioned to coordinate (or designate) among the parties involved to discharge the reporting requirements described in the Proposed Regulations.

3. Treatment of Ancillary Fees

The Service requested comments regarding the treatment of certain ancillary costs and expenses ("Ancillary Fees") incurred in connection with the transfer of a life insurance contract and the treatment of the recipients of these payments. The Proposed Regulations define a "reportable policy sale payment" as any cash or consideration transferred in a reportable policy sale.⁵ This definition is sufficiently broad and general to capture Ancillary Fees. The sale of a single life insurance contract from the insured individual to a purchaser on the secondary market can involve several transfers and implicate several potential recipients of a "reportable policy sale payment." The parties that commonly receive Ancillary Fees in connection with the sale of a life insurance contract include securities intermediaries, escrow agents (including separate sub-escrow agents), policy servicers and other service providers.

Such Ancillary Fees should already be otherwise reported to the Service under other provisions of the Code and Treasury Regulations. The Proposed Regulations' inclusion of these Ancillary Fees as reportable policy sale payments means that the recipients of the Ancillary Fees would be treated as "reportable policy sale payment recipients"⁶ to whom acquirers are required to furnish a reporting statement. This adds a significant administrative burden to acquirers given the multitude of potential reportable policy sale payment recipients and illuminates little information to the Service that is not otherwise already required to be reported. As such, ILMA recommends that the Ancillary Fees be excluded from the definition of reportable policy sale payments or that recipients of such Ancillary Fees be excluded from the definition of reportable policy sale payment recipients.

We look forward to working with the Service toward the development of final Regulations regarding the information reporting requirements under Section 6050Y of the Code. Please feel free to contact the undersigned at 202-342-9610.

Sincerely,

John A. Kelly
Managing Director, ILMA
Washington, DC