ACLI Urges Changes to Reporting Rules for CFCs of Life Insurers

On behalf of ACLI¹ and its member companies, we are writing to request that Treasury and IRS modify the current provisions under sections 6041 and 6049 related to current information reporting and documentation applicable to CFCs of life insurance companies so they may conform to chapter 4.² Prudential Financial, Inc. submitted a letter on August 11th requesting that Treasury and IRS modify the current provisions under sections 6041 and 6049 related to current information reporting and documentation applicable to CFCs of life insurance companies so they may conform to chapter 4. We support the comments of Prudential Financial, Inc. and hope our comments below will inform and assist Treasury and IRS in coordinating Foreign Account Tax Compliance Act (FATCA) with the rules in Chapters 3 and 61 to remove the extra burden and the current duplication in reporting imposed on U.S. CFCs.³

This letter describes briefly the issue and the industry's consistent and continuous search for a solution to this issue. ACLI first engaged IRS on this issue in 2001, and has continued to advocate for a reasonable solution since that time.⁴ Virtually all our letters in response to requests for comments on the implementation of FATCA included a description of the problem and offered a solution to eliminate the duplication in reporting by requiring CFCs of life insurers to report solely under Chapter 4, commensurate with their foreign counterparts. Most recently, ACLI requested the IRS to include this issue on its Priority Guidance Plan for the 2014-2015.

Background

Section 6041 requires that payments of $600 or more consisting of enumerated items, including annuities or other fixed or determinable gains, profits, and income are reported to the IRS if paid by a U.S. payor engaged in a trade or business. The regulations under section 6049 describe a CFC as a U.S. payor. Thus, under the current regime, CFCs are required to document the status of their customers, and to file information returns for income payments to customers that are known or presumed to be U.S. persons.

Prior to the recent amendment to the regulations, payments made to U.S. customers or customers whose status cannot be determined and are presumed to be U.S. persons, are reportable on Forms 1099. In this regard, the presumption rules treat any undocumented individual as a U.S. person. Thus, any failure by a CFC to collect documentation sufficiently reliable to treat the payee as a foreign person creates an obligation for the CFC to report all reportable payments on Forms 1099.

As a result of these rules, the CFCs' only choice is between 1) filing annual Forms 1099 for all of their customers prior to July 1, 2014, since they would all be presumed to be U.S. taxpayers in the absence of documentation, or 2) inserting the following legend on all applications and/or other distribution forms relating to U.S. information reporting requirements:

The chapter 4 Final Regulations'⁶ due diligence rules rely extensively on a foreign financial institution's ("FFI") existing customer intake procedures allowing identification of U.S. persons based on information normally collected. If based on this information there are indicia that an account owner is a U.S. taxpayer, the FFI will inquire further to determine if the account holder is a U.S. person. We applaud Treasury and IRS for adopting this objective approach for identifying U.S. persons.

In February of this year, Treasury and IRS changed the presumption rule for CFCs and applied the Chapter 4 standard for CFC chapter 61 reporting. We appreciate this change that removes a significant burden on the CFCs of life insurance companies. Updating the regulations to change the rule that allows for the presumption of individuals to be treated as U.S. only when there is actual knowledge as to accounts sold overseas is sound tax policy, levels in part the playing field for U.S. and non-U.S. owned FFIs and is consistent with the chapter 3 and chapter 4 conformity rules in the FATCA Final Regulations. This change responded in part to our ongoing requests on this issue.

We had also recommended that foreign life insurance companies that are CFCs be treated as having complied with all their reporting obligations under the Code if they fulfill the requirements of chapter 4 as proposed under FATCA for foreign life insurers. Unfortunately, the regulations continue to require CFCs to report under Chapter 61 and Chapter 4. This duplication in reporting places an extra burden on U.S. CFCs vis-à-vis their foreign-owned competitors. In light of the industry's numerous and consistent requests for reasonable and updated guidance with respect to such CFC reporting since the rules were adopted, we request clarification that;

² Except as otherwise noted, all references are to the Internal Revenue Code.

³ A copy of Prudential Financial Inc.'s letter of is attached.

⁴ ACLI letters of November 9, 2001, November 18, 2009, and April 9, 2012.

⁵ Treas. Reg. § 1.6049-5(c)(4)(ii) requires the legend appear near the signature line.

⁶ TD 9610 issued by Treasury and IRS on January 28, 2013, and TD 9657 and 9658 issued by Treasury and IRS on February 20, 2014.