Insurance Settlement Group Offers Recommendations on Reporting Regs

May 8, 2019

Internal Revenue Service
1111 Constitution Avenue, N.W.
Courier's Desk
CC:PA:LPD:PR
Washington, D.C. 20224

RE: Comments on Proposed Regulations on new reporting obligations under Code Section 6050Y

Ladies and Gentlemen:

The Life Insurance Settlement Association (“LISA”) is pleased to submit this letter providing comments and recommendations on proposed regulations that the Internal Revenue Service (the “IRS”) published in the Federal Register on or about March 25, 2019, for public comment relating to the implementation of Section 6050Y of the Internal Revenue Code of 1986, as amended, (the “Code”) which established certain reporting requirements regarding life settlement transactions, that is, the purchase and sale of interests in life insurance contracts by persons having no substantial family, business or financial relationship with the insured apart from the acquirer's interest in such life insurance contracts (the “Proposed Regulations”).

Established in 1994, LISA is the oldest and largest trade organization in the life settlement market, representing participants in the life settlement industry with a current membership of over sixty-five companies, doing business in all fifty states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Our membership consists of brokers, providers, financing entities, and service providers to the industry. The mission of LISA is to advance the highest standards of practice and professional development for the life settlement industry and to educate consumers and advisors about a life settlement as an alternative to lapse or surrender of a life insurance policy. Since its inception, LISA has been the leader in promoting responsible legislation and regulation in the industry. Members and staff have contributed conceptual as well as detailed language to laws governing the industry in every regulated state. These efforts have resulted in improved public information and awareness while helping to create a competitive market place for life insurance policies that provides consumers a valuable financial service.

On June 13, 2018, LISA provided a comment letter with respect to IRS' Notice 2018-41. That comment letter is attached to this letter for ease of reference (the “LISA June 2018 Comment Letter”). This comment letter, like the LISA June 2018 Comment Letter, focuses on the issues LISA believes are important to the life settlement industry and are consistent with the goal of Congress in enacting, and the IRS in enforcing, the rules contained in Code § 6050Y. LISA gratefully appreciates the attentiveness the IRS afforded to the letters of all contributors of comments in regard to Notice 2018-14, including the LISA June 2018 Comment Letter.

COMMENTS

LISA respectfully requests that the IRS consider the following comments which are not presented in order of importance to LISA and the life settlement industry.

A. Identification of the Acquirer

Section 4(b) of Notice 2018-41 asked for suggestions as to which party should be treated as the acquirer in a reportable policy sale in transactions in which legal, record title to a life insurance contract for state law purposes is nominally held in the name of one party, but beneficial ownership and actual control of the policy is held by another party. The relationship between the nominee that holds record title and the actual party that controls and enjoys the benefits of the life insurance policy is typically evidenced by a securities account agreement (a “SACA”) between the two parties.

The IRS has taken the approach in the Proposed Regulations that a direct acquirer of a life insurance policy in a reportable policy sale is the party that acquires legal title to the life insurance policy on the books and records of the issuer, even if that record title holder is only a nominee of the beneficial owner of the life insurance policy for another person or entity. See Section 1.101-1(e)(3)(i). On the other hand, an indirect acquirer is defined as a person or entity that holds a beneficial ownership interest in the direct acquirer. See Section 1.101-1(e)(3)(ii). LISA's comments in its June 2018 Comment Letter, page 4, focused on the common situation in many life settlement transactions where a nominee of the new beneficial owner of the life insurance policy, a securities intermediary, holds legal title to the life insurance policy. Under the Proposed Regulations, the beneficial owner of the life insurance policy, i.e., the person or entity that, through its SACA with the securities intermediary, controls and enjoys all of the benefits of the life insurance policy, is neither a direct owner of the life insurance policy nor is it an indirect owner, because that beneficial owner of the life insurance policy holds no beneficial ownership interest in the nominee/securities intermediary and direct acquirer of the life insurance policy, an indirect acquirer. See Section 1.101-1(f)(i) which defines beneficial ownership for this purpose.

One practical consideration in this context is that the securities intermediary, the new record and legal owner of the life insurance policy and direct acquirer charged with the duty to file the reportable policy sale statement (“RPSS”), in most transactions is 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. (See Comment D below for suggestions regarding ancillary fees and expenses.)

Similarly, as often happens in a tertiary transaction (see footnote 1, page 4, of the LISA June 2018 Comment Letter), beneficial ownership of a life insurance policy may be transferred by entitlement orders under Article 8 of the Uniform Commercial Code from and to accounts of different beneficial owners under separate SACAs with the same securities intermediary, without any ownership or beneficiary changes on the books and records of the issuer so, in that instance, conceptually, the securities intermediary might be both the seller and the acquirer and will be ill-suited to provide the required information solicited in the RPSS. For those reasons, LISA recommends reconsideration by the IRS of LISA's comment (and proposed language) that security intermediaries should not be deemed to be the acquirer. Alternatively, the regulations could provide for elective, substitute reporting by the beneficial owner of the life insurance policy under a SACA such that for a transaction in which a securities intermediary is involved, either the securities intermediary as the legal title holder of the life insurance policy or the beneficial owner of the life insurance policy under the SACA could file the RPSS (which could identify the initial beneficial owner and not the securities intermediary as the acquirer). That beneficial owner of the life insurance policy that controls the life insurance policy under the SACA would have a much clearer understanding of the payment recipients.

B. Eliminate Reporting for Certain Indirect Investors

Section 4(h) of the Notice requested comments on the definition of “reportable policy sale” under Code § 101(a)(3)(B). LISA recommended in its June 13 Comment Letter that such definition specifically could exclude certain types of acquisitions where reporting by acquirers in such acquisitions would be duplicative, especially in connection with a common industry structure in which investors indirectly invest in a pool of life insurance policies through equity investments in a limited partnership or other investment vehicle that holds life insurance policies directly or beneficially though a nominee or securities intermediary.

The Proposed Regulations implicitly recognize that an RPSS for indirect investors, especially where the life insurance contract portfolio of a fund, for example, owns multiple life insurance policies, is both impractical, duplicative and might not produce meaningful information for the IRS, especially in situations where the investment vehicles are reporting their acquisitions of life insurance policies. 1.101-1(c)(2)(iii)(A).

The LISA June 2018 Comment Letter described the situation where a fund might own as many as 100 life insurance policies which would mean that the indirect acquirer would be required to prepare, file and distribute 100 RPSSs. The Proposed Regulations provide that so long as the fund in this example has filed an RPSS with respect to a particular life insurance policy, the fund investor would not be required to file 100 RPSSs with respect to its ownership interest in the investment fund. LISA suggests a refinement in that approach.

Suppose, hypothetically, that the fund acquired 50 of those life insurance policies prior to December 31, 2017, and 50 other life insurance policies after that date. In theory, the fund's investor would have no notion of which life insurance policies might have been acquired before or after 2017. LISA asks the IRS to re-consider the approach suggested in the Proposed Regulations and provide that that any investor that acquires a 5% or less economic/voting interest in an investment vehicle that holds, directly or indirectly, life insurance policies, and who is not an officer or director of the investment vehicle, does not have an RPSS obligation. See page 6 of the LISA June 2018 Comment Letter.

LISA proposes that the IRS consider an alternative approach to relieve a post-2017 fund investor/indirect acquirer of any obligation to prepare and file a RPSS with respect to a portfolio of life insurance policies acquired by the investment vehicle in transactions prior to January 1, 2018, and with respect to which the investment vehicle has not filed, and has no obligation to file, an RPSS. LISA recommends for consideration an transition solution which would be for the investment vehicle/fund to file an informational RPSS with the IRS for its portfolio of policies acquired prior to January 1, 2018. Otherwise, the investment vehicle will have to provide information to its new, post-December 31, 2017, fund investors concerning those pre-2018 transactions so that such fund investors can file their RPSS, and that raises the privacy and competitive concerns described in the LISA June 2018 Comment Letter.

If the IRS chooses not to provide a broadened transitional exception to Code § 6050Y reporting for indirect acquisitions outlined in the preceding paragraph, we would strongly encourage the IRS to permit the partnership, trust or other entity in which the investment interest is purchased to undertake the applicable reporting, instead of requiring the investor to navigate the complexities of the reporting requirements.

There is another nuance to the exception created in the Proposed Regulations that relates to the exclusion from the definition of a reportable policy sale, briefly described above, with respect to an “indirect acquisition of an interest in a life insurance contract”, as that term is defined in Section 1.101-1(e)(3)(ii). Briefly, that definition applies to a beneficial owner of a partnership, trust or other entity that holds, whether directly or indirectly, the interest in a life insurance contract.

However, Proposed Regulation (Section 1.101-1(c)(2)(iii)(A)) only excludes “the indirect acquisition of an interest in a life insurance contract if (A) the partnership, trust or other entity that directly holds the interest in the life insurance contract acquired the interest in a reportable policy sale reported in compliance with Section 6050Y(a) and section 1.6050Y-2”. The technical issue is that partnership, trust or other investment entity in which an investor holds an ownership interest does not hold a direct interest in the life insurance contract, or viewed differently, the fund investor does not hold an equity ownership interest in a nominee/securities intermediary that directly holds the interest in the life insurance contract. We recommend that the final regulations clarify that the RPSS in such a transaction that triggers the exclusion would be one that is filed by either the record, direct owner of the life insurance contract (i.e., the securities intermediary) or the beneficial owner of the life insurance policy that controls the life insurance contract under a SACA.

LISA proposes the following adjustment to Proposed Regulation Section 1.101-1(c)(2)(iii)(A):

C. Unified Reporting

LISA supports the concept expressed in 1.6050Y-2(b) that authorizes but does not mandate unified reporting in situations where, for example, a licensed life settlement provider acquires a policy from its owner and then resells that policy to a financing entity or other purchaser as part of a pre-arranged transaction.

D. Ancillary Costs and Who is a Recipient of a Policy Sale Payment

The Treasury Department and the IRS requested comments about certain ancillary payments made by an acquirer in connection with the acquisition of a life insurance policy and asked about the nature of those ancillary payments. Those payments might include 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 or calculating the payment of premiums on a going forward basis, 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 (i.e., due diligence, contract drafting, legal research, legal opinions, closing coordination and documentation, etc.). 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. 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. 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 Code § 6041. Thus, the disclosure of fee information under Code § 6050Y would be duplicative with Code § 6041 information reporting. LISA recommends that such ancillary costs be specifically excluded from the definition of reportable policy sale payments. See LISA June 2018 Comment Letter, page 11.

If you have any questions or comments regarding this submission, please do not hesitate to contact the undersigned at (202) 580-6188.

Sincerely,

Christopher Conway
Chairman

Bryan Nicholson
Executive Director

Life Insurance Settlement Association