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ACLI Comments on Insurance Contract Reporting Rules

JUN. 13, 2018

ACLI Comments on Insurance Contract Reporting Rules

DATED JUN. 13, 2018
DOCUMENT ATTRIBUTES
[Editor's Note:

Exhibits can be viewed in the PDF version of the document.

]

June 13, 2018

Ms. Helen Hubbard
Associate Chief Counsel (Financial Institutions & Products)
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224

Ms. Alexis MacIvor
Chief, Branch 4
Office of the Associate Chief Counsel (Financial Institutions & Products)
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224

Re: Notice 2018-41, regarding information reporting of sales of life insurance contracts and modification to the rules on transfers of life insurance contracts for valuable considerations

Dear Helen and Alexis:

On behalf of ACLI and its member companies,1 we are writing to respond to proposed reporting and definitional rules outlined in Notice 2018-41 (the “Notice”) regarding information reporting of sales of life insurance contracts and modification to the rules on transfers of life insurance contracts for valuable considerations. We thank you and your team for meeting with us and our member company representatives since the passage of the Tax Cuts and Jobs Act to discuss some of the issues presented by the new tax reporting obligations addressed in the Notice, and commend you for seeking input through the Notice before issuing proposed regulations.

New sections 101(a)(3) and 6050Y2 were enacted to clarify pre-existing rules governing the sales of life insurance contracts to assist the Internal Revenue Service (“IRS”) in fully collecting revenues that were not previously being collected when life insurance contracts were transferred for valuable consideration, and the exceptions to such rules were not satisfied.3

We will focus on the obligations imposed on life insurance companies and will limit our comments to the interests of our member companies and their policyholders. These comments are intended, in large part, to support the goal of facilitating compliance when a life insurance contract is sold for value to a life settlement company while minimizing possible unintended consequences for other common transactions where no compliance issue is present.

II. Summary of Recommendations

There are three distinct information reporting obligations created in section 6050Y: (1) the acquirer of a life insurance contract in a reportable policy sale (the “Acquirer”) is to report to the IRS and the life insurance contract issuer (the “Issuer”) the fact of the sale; (2) the Issuer is to provide a report to the IRS of the seller's basis in the contract subject to reporting; and (3) the Issuer is to report to the IRS the gross death benefit, upon paying the death benefit on the contract transferred in a reportable policy sale. These new sections also introduce and define four new terms to assist in the implementation of the new rules. We provide our recommendations for refining these definitions in the context of our discussion of each reporting obligation below. In enacting these new definitions and reporting requirements, we believe that Congress may have inadvertently raised questions about certain arrangements that were not intended to be covered by these provisions. Accordingly, we recommend the following with respect to each instance of reporting imposed under section 6050Y:

  • The definition of a “Reportable Policy Sale” in section 101(a)(3)(B) should be clarified to exclude its application to ordinary-course business transactions that do not directly involve the acquisition of life insurance contracts but, rather, the sale of one trade or business to another.

  • A new IRS Form should be provided to implement the Acquirer's reporting obligation to provide a reportable policy sale statement (“RPSS”) under section 6050Y(a). To help expedite the receipt of the RPSS by the Issuer and to ensure the successful and speedy processing of this information by the Issuer, we request that the IRS provide guidance that the RPSS form must be sent to the Issuer's administrative office that, pursuant to the insurance contract, processes transfers of ownership.

  • The Issuer's obligation to report the Seller's basis in a life insurance contract under section 6050Y(b) is limited to: (1) the name, address, and Taxpayer Identification Number of the Seller of the life insurance contract (the “Seller”); (2) the Seller's investment in the contract as defined in section 72(e)(6); and (3) the life insurance contract's number. The statute's language is clear and unambiguous as to the content of information that must be provided; the IRS should avoid imposing additional reporting requirements that were not intended by Congress.

  • Section 6050Y(b)'s requirement that an Issuer provide a report of Seller's basis when a life insurance contract is transferred to a foreign person should be interpreted to apply when the foreign person is acquiring an interest in the life insurance contract in a reportable policy sale. The IRS could require transferors of life insurance contracts to foreign persons to provide an RPSS to the Issuer when the life insurance contract is transferred as part of a sale or other “Commercial Transfer.” In such cases, we believe the use of federal jurisdiction over the U.S. Issuer may be sufficient to require Acquirers to provide Forms W-8 to Issuers when the Acquirer is a foreign person.

  • The definition of “reportable death benefit” in section 6050Y(d)(4) should be refined to clarify that an Issuer's obligation to report under section 6050Y(c) is conditioned upon receipt of an RPSS with respect to the life insurance contract, consistent with the requirement that the reporting of the Seller's basis is conditioned in section 6050Y(b) upon receipt of an RPSS.

  • The Notice proposes that an Acquirer may furnish an RPSS to an Issuer as late as January 15 of the year following the calendar year in which the reportable policy sale occurs. This provides an unreasonably short window for an Issuer to meet its obligations under sections 6050Y(b) and (c). We request that Issuers be allowed to meet the obligations under sections 6050Y(b) and (c) on or before February 15. This is the same due date currently allowed for section 6045 broker returns and consolidated statements, as brokers also rely on third party information (e.g., dividend reclassifications).

  • Form 1099R and its instructions should be modified to allow the Issuer to meet its obligation under section 6050Y(b) and (c).

III. Returns Relating to Certain Commercial Transfers or Acquisitions of Life Insurance Contracts

A. Section 6050Y (a) Reportable Policy Sale Statement

Subsection 6050Y(a) requires the Acquirer of an interest in a life insurance contract in a “reportable policy sale” (as defined in new subsection 101(a)(3)(B)) to provide a report of such acquisition to the IRS, the Issuer and the Seller.

i. Section 101 (a)(3) — Reportable Policy Sale

New subsection 101(a)(3)(B) defines “Reportable Policy Sale” 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.” If a contract has been acquired in a reportable policy sale, section 101(a)(3)(A) provides that the exceptions under section 101(a)(2) are not available to fully exempt the contract's death benefit from income taxation under the Transfer for Valuable Consideration rule.

It is important to note that section 101(a) has always required persons purchasing life insurance contracts for valuable consideration who had essentially no pre-existing relationship with the insured apart from purchasing the life insurance contract to pay income4 taxes on the amount of the death benefit that exceeds the owner's basis (more specifically, the amount paid for the contract plus any subsequent premiums paid).5 The existing exceptions under section 101(a)(2) ensured that a person acquiring an interest in a life insurance contract would only fully avoid paying tax on the death benefit if the Acquirer had a pre-existing relationship with the Seller that met the requirements of the statute.

Section 101(a)(3), which limits the exception to the transfer-for-value rules only to circumstances where the Acquirer has a “substantial” family, business, or financial relationship with the insured, was not intended to catch ordinary course mergers and acquisitions of trades or businesses. Rather, section 101(a)(3) was intended to prevent potentially abusive scenarios where taxpayers were alleged to be structuring the sale of life insurance contracts such that the sale could, as a technical matter, qualify for one of the existing exceptions to the transfer-for-value rules.

In order to prevent this result, and in keeping with Congress's intent, Treasury Regulations should be promulgated to clarify that the reportable policy sale rules do not apply to ordinary course transactions involving the sale of interests in a trade or business. We recommend that the term “indirectly” be refined to exclude its application to ordinary-course business transactions that do not directly involve the acquisition of life insurance contracts but, rather, the sale of one trade or business to another.6 Thus, where one business acquires another business, and the acquired business (or any predecessor trade or business) has life insurance contracts on the lives of certain existing or former employees, officers, or directors of such business, such an acquisition should not be recast as an indirect reportable policy sale of the life insurance contracts on the lives of the existing or former employees, officers, or directors of the acquired business.7

The Treasury Department has ample authority to issue such rules, as the definition of indirect reportable policy sales is ambiguous in key areas, and issuing such guidance is a reasonable construction of the statute (and one that is consistent with Congressional intent).

In Section 4(h) of the Notice, Treasury and the IRS request comments on, among other things, the definition of “reportable policy sale,” including comments on the extent to which the definition should exclude sales or acquisitions effected by transferors and transferees outside the U.S. Our recommendations regarding transferees outside the US are captured in section III.B.ii. below.

ii. Definition of Issuer

The statute defines “issuer” as “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 Notice appropriately proposes 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.” We recommend defining Issuer to include a payor or third-party administrator designated by the Issuer, and 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.

Additionally, the definition of “Issuer” proposed in the Notice only addresses that term for purposes of section 6050Y(b). There is nothing to tie the Issuer to the “payor,” the party required to report a Reportable Death Benefit under 6050Y(c). We recommend that a “payor” be defined the same as “Issuer” for purposes of section 6050Y.

iii. Definition of “Written Statement” under Section 6050Y(a)(2)

The new information reporting obligations imposed pursuant to section 6050Y(a) require an Acquirer in a reportable policy sale to provide the Issuer with a written statement that serves as a notice that a contract it issued or is administering has been the subject of a reportable policy sale. We refer to this written statement as a “Reportable Policy Sale Statement” or “RPSS”. This is critically important for the issuer to be able to fulfil its obligation under section 6050Y(b) to report the Seller's investment in the contract. Issuers do not generally have the requisite information to confirm conclusively that a contract is transferred for value or sold. For example, a change of ownership form may be submitted related to succession or business planning without any indication that such a transfer is for valuable consideration, let alone whether it may be a Reportable Policy Sale. Such a change of ownership, which may be excepted from the transfer for value rule, may look identical to one that may be submitted on behalf of Acquirers in the secondary and tertiary markets who are wagering on the life expectancy of the insured if the Acquirers do not otherwise indicate that the change of ownership is one involving a reportable policy sale.

B. Section 6050Y(b) Requirement of Reporting Seller's Basis in Life Insurance Contracts

Section 6050Y(b) requires the Issuer of a life insurance contract that has been the subject of a reportable policy sale to report the Seller's basis in the contract to the IRS. Section 6050Y(b)(1) describes definitively the information that the Issuer is to provide in its return, a copy of which is to be provided to the Seller; that information is (1) the name, address, and Taxpayer Identification Number of the Seller of the contract, (2) the Seller's investment in the contract as defined in section 72(e)(6), and (3) the contract's number.

i. Proposed Requirement to Report Surrender Value

The proposed requirement that a life insurer provide the Seller with the amount the Seller would have received if the contract was surrendered is beyond the scope of the authority granted to Treasury and IRS. The Secretary's authority to prescribe rules in this regard is limited to “such time and in such manner” and should not be expanded to require reporting of the surrender value. The statute limits Treasury's discretion to prescribe rules regarding the timing of when the return/form must be provided and the specific manner as to how the form/return is provided. The statute's language is clear and unambiguous as to the content of information that must be provided, and Treasury has no authority to, in effect, legislate additional requirements not intended by Congress.

Section 3.ii. of the Notice states inclusion of the surrender value of the contract is necessary “because the information is needed to determine the amount of the seller's gain that is ordinary income.” As noted above, such information is only relevant in the case where the contract is a cash value contract and may be provided directly by the Issuer to the policyholder upon request. We understand the IRS may be seeking assistance in tracking/verifying the capital versus ordinary income, if any, that contract sellers may have realized in a reportable policy sale, but respectfully submit that the statutory language simply does not require life insurers to report such information on the information return required under section 6050Y(b). To assist the IRS in its tracking and verifying the character of gain realized by the Seller, we recommend that the information reporting form (or instructions to such form) used to report the Seller's basis include two new codes, one for a cash value contract, another for a term life contract.8 Instructions could further educate taxpayers who have sold their contracts how to calculate their ordinary and capital gain on the sale of cash value polices. This would allow the IRS to track sellers whose gain may have an ordinary income component.

In Section 4(k) of the Notice, Treasury and the IRS request comments on the definition of “investment in the contract” for purposes of Section 6050Y(b). We recommend that in the case of multiple Sellers, Issuers should not be required to determine the allocation of the investment in the contract among the Sellers.

ii. Transfers to Foreign Persons

In section 4(i) of the Notice, among other things, Treasury and the IRS request comments on the definition of “notice of a transfer to a foreign person” for purposes of section 6050Y(b).

Section 6050Y(b)(1) also requires an Issuer to report a seller's basis “upon notice of a transfer of a life insurance contract to a foreign person” without regard to whether the transfer was a Reportable Policy Sale. This requirement, however, appears to conflict with Congress's intent of identifying life insurance contract interests that have been acquired where the Acquirer has no family, business, or financial relationship with the insured. It fails to recognize that a transfer to a foreign person may fall outside the definition of a Commercial Transfer.

To support this position, we look to the title of section 6050Y(b) “Requirement of Reporting of Seller's Basis in Life Insurance Contracts” [emphasis added], which on its face contemplates the requirement of a “sale.” Further, section 6050Y(b)(1)(A) explicitly requires reporting to a “seller who transfers any interest in such contract in such sale”; however, the basis reporting triggering requirement — i.e., a “transfer of a life insurance contract to a foreign person” — clearly fails to include a “sale” element.

This provision, if not clarified, will require Issuers to file unintended and unnecessary basis reporting returns to both the IRS and to contract transferors who clearly are NOT “sellers” in transactions that are NOT Commercial Transfers. For example, section 6050Y(b)(1) basis reporting would be triggered when a contract owner transfers a life insurance contract via gift to a foreign person (e.g., to a relative who happens to have a foreign address). The requirement to file tax information returns in these instances, when there is no income tax consequence as a result of the information change, would not only burden the IRS with unnecessary, meaningless reports, but also alarm, confuse, and misinform a contract owner (taxpayer) regarding his/her income tax liability. This is particularly true because contract owners understand that there will generally be no income tax consequences under the contract unless the contract owner takes affirmative action with respect to his/her contract. Moreover, the Issuer risks exposure pursuant to any representations made in issuing the contract, as well as damage to its business reputation by being required to gratuitously tax report on its contract owners.

We appreciate that in cases where the Acquirer may be a foreign person, the U.S., and therefore the IRS, may be without jurisdiction to require Acquirers to provide Issuers with an information return with notification that a contract it has issued is the subject of a reportable policy sale. The Conference Report for the Tax Cuts and Jobs Act of 2017 describes:

[n]otice of the transfer of a life insurance contract to a foreign person is intended to include any sort of notice, including information provided for nontax purposes such as change of address notices for purposes of sending statements or for other purposes, or information relating to loans, premiums, or death benefits with respect to the contract.9

However, such an interpretation casts a worldwide net and implies an ownership change when there are mundane occurrences, such as a change of address, and fails to acknowledge that a contract owner may move overseas and notify the Issuer of such fact for all the purposes articulated in the Conference Report. Regulations to be issued should clarify that donative transfers and tax-free exchanges are not captured by the basis reporting requirement.

We recommend a solution that is appropriately targeted to the concern this tax gap measure sought to address, namely, the offshoring of life insurance contracts owned by third parties on life insurance contracts issued in the US. We understand one concern may be the use of US bilateral tax treaties either to lower the withholding tax or to eliminate taxes altogether by owners in the secondary and tertiary markets. To address these concerns, the IRS could require transferors to foreign persons to provide an RPSS to the Issuer when the life insurance contract is transferred as part of a sale or other Commercial Transfer. In such cases, we believe the use of jurisdiction over the U.S. Issuer to require Acquirers to provide W-8 forms to Issuers when the Acquirer is a foreign person would likely curb any abuse, and the taxes owed by the Seller on the sale of contracts and by Acquirers on collection of the death benefit may be collected.

Further, the determination as to whether a contract is transferred to a U.S. or “foreign person” typically requires the collection of documentary evidence (in the form of a properly completed Form W-9 or a form from the Form W-8 series) to determine the transferee's U.S. or foreign status. An insurance contract Issuer does not have a relationship with the transferee, and therefore does not hold documentary evidence that allows the Issuer to determine whether a transferee is a US or foreign person. Typically, an insurance company Issuer is not required to obtain documentary evidence from a transferee unless the insurance company is making a reportable or withholdable payment under the contract to the transferee. Absent valid documentation, under typical reportable transactions, an insurance company Issuer will use the presumption rules under Treas. Reg. 1.1441-1(b)(3)(iii) to determine U.S. status classification. We recommend requiring an RPSS to ensure the transfer meets the definition of a reportable policy sale and, absent that, the transferee be required to submit a Form W-9 or Form W-8 to allow the Issuer to determine whether the transferee is a U.S. or foreign person for purposes of this requirement.

C. Section 6050Y (c) — Requirement of Reporting with Respect to Reportable Death Benefits

Section 6050Y(d)(4) defines “reportable death benefits” as “amounts paid by reason of the death of the insured under a life insurance contract that has been transferred in a reportable policy sale.” This definition should be refined to clarify that an Issuer's obligation to report under section 6050Y(c) is conditioned upon receipt of an RPSS with respect to the contract, as the reporting of the Seller's basis is conditioned upon receipt of an RPSS in section 6050Y(b). We appreciate that a similar requirement is not expressly provided for in section 6050Y(b), and that section 6050Y(d)(4) refers to contracts transferred in an RPSS, perhaps to capture the concern about any abuses regarding sales of life insurance contracts to foreign persons disguised as transfers; however, a life insurance company cannot always know when there has been a transfer for value, let alone a reportable policy sale, without first being notified of such a transaction by the parties to such transaction.10

For a transfer to a foreign person, we recommend a reportable death benefit be defined as one where Issuer has been notified of a transfer for value by a domestic Seller or has received a Form W-8 from an Acquirer for value. The Issuer is not in a position to satisfactorily determine whether a death benefit payment on a contract is a reportable death benefit unless it is notified that a reportable policy sale or a transfer for value that does not qualify for either exceptions under section 101(a)(2)(A) or (B) has occurred. The same reasons apply in this instance as those articulated in section III.B.ii. concerning the transfer to foreign persons under section 6050Y(b)(1). If Treasury and IRS require Acquirers to provide Forms W-8, then the Issuer can report the gross death benefit payment on a Form 1042-S.

IV. Comments Regarding Forms and Timing of Section 6050Y Reporting

In Section 4(a) of the Notice, Treasury and the IRS request comments on the time and manner for reporting certain life insurance contract transactions under § 6050Y, including the timing of reporting under the transition relief for reportable policy sales and payment of reportable death benefits occurring prior to the issuance of final regulations.

i. Delaying Compliance

We appreciate the proposal in the Notice to allow additional time for Issuers to fulfill their new reporting obligations under section 6050Y and request that when crafting any transition rules, the IRS continue to consider that an Issuer's obligations under 6050Y are contingent upon timely and complete notifications by Acquirers (and in the case of a foreign transfer, Acquirers and Sellers) of life insurance contracts.

B. Forms

i. Reportable Policy Sale Statement (“RPSS”)

The Notice properly recognizes that “reporting under § 6050Y(b) is contingent on the issuer receiving either notice of a reportable policy sale via a written statement furnished under § 6050Y(a)(2) or notice of the transfer of a life insurance contract to a foreign person.” As noted above in the discussion under section III.B. regarding the section 6050Y(b) requirement of reporting of Seller's basis in life insurance contracts, the prerequisite to the Issuer's reporting requirement is the Issuer's receipt of the Acquirer's RPSS.

We request that the RPSS be furnished on a new form provided by the IRS rather than on an existing IRS form, to accommodate this reporting. Changing an existing form, such as IRS Form 1099-R, would create an additional and undue burden on insurers as it would entail system updates, training, and procedural changes, which would extend to other informational reporting, if required to be reported on the same form. We suggest that operational efficiency and correct administration of reportable policy sale information reporting will be vastly improved by having a dedicated IRS form to be used to trigger an Issuer's reporting requirements.11 Having a dedicated IRS form number will permit optical character recognition (OCR), which will allow for expeditious forwarding to the appropriate administrative areas.

The Notice indicates that use of substitute forms will be permitted; this would enable the insurer to modify their ownership change forms to include an area to collect the required information from the Acquirer. This would create a more streamlined process for the Acquirer (i.e., they would have the option to submit one form to the insurer) and likely both result in a higher success rate in receiving this information and expedite the time within which this information is received (see “Timing of Forms” section IV.C. below).

To help processing of this information by the insurer, we would request that the IRS provide guidance that the RPSS form must be sent to the insurer's administrative office that, pursuant to the insurance contract, processes transfers of ownership.

ii. Issuer's Basis Report

We request that IRS Form 1099-R be the form used by the Issuer to report the Seller's basis under section 6050Y(b). This would allow for minimal system and procedural changes for insurers. The existing fields on the current form could be used to meet the requirements required by the statute as outlined below:

Section 6050Y(b) Requirement

IRS Form 1099-R Box

Requirement 1: name, address, TIN of seller

The appropriate “Recipients” boxes on the form

Requirement 2: investment in the contract

Box 5

Requirement 3: policy number

“Account Number” box on the form

Requirement 4: Amount that would have been
received if contract was surrendered

We recommend this requirement be removed
(see Section B above). However, if not removed, this amount placed in Box 1

We also request that a “Taxable amount not determined” selection be allowed in Box 2b as it is important for insurers to clearly indicate that although this information is being provided to the IRS and the Seller, the insurer is not making a determination that any amount of value being transferred is taxable. The insurer is simply providing the amount of the Seller's investment in the contract at time of sale/acquisition.

In order to distinguish between this type of reporting and other reporting done on the Form 1099-R, we recommend that two new source codes be created as follows (see section B above for additional information on the need to distinguish between cash value and term insurance contracts):

  • Reportable Policy Sale of a Cash Value Life Insurance Policy

  • Reportable Policy Sale of a Term Life Insurance Policy

A sample version of what this form would look like is attached.

iii. Issuer's Report of Taxable Death Benefit

Similar to the Issuer's report of Seller's basis, and for the same reasons, we request that IRS Form 1099-R be the form used for reporting taxable death benefits to U.S. persons. The existing fields on the current form could be used to meet the requirements of section 6050Y as outlined below:

Section 6050Y(c) Requirement

IRS Form 1099-R Box

Requirement 1: name, address, TIN of payor

The appropriate “Payors” boxes on the form

Requirement 2: name, address, TIN of recipient

The appropriate “Recipients” boxes on the form

Requirement 3: date of payment

We recommend that this requirement be removed as the exact date of the payment is not what is needed. What is needed is the year in which the income is received, which is already indicated on the form. However, if not removed, a new field could be created on the form to provide this date. Note that creating a new field would create an undue burden on insurers, including system updates, training, and procedural changes.

Requirement 4: gross amount of the payment

Box 1

Requirement 5: payor's estimate investment in the contract

Box 5

A sample version of what this form would look like is attached.

For foreign persons, we request that the Form 1042-S be used to report these distributions. The existing fields on the current form could be used to meet the requirements of Notice 2018-41 as outlined below:

Notice 2018-41(3)(A)(iii) Requirement

IRS Form 1042-S Box

Requirement 1: name, address, TIN of payor

The appropriate Box 12 fields

Requirement 2: name, address, TIN of recipient

The appropriate Box 13 fields

Requirement 3: date of payment

We recommend that this requirement be removed as the exact date of the payment is not what is needed. What is needed is the year in which the income is received, which is already indicated on the form. However, if not removed, a new field could be created on the form to provide this date. Note that creating a new field would create an undue burden on insurers, including system updates, training and procedural changes.

Requirement 4: gross amount of the payment

Box 2

Requirement 5: payor's estimate investment in the contract

We recommend a new field be provided.

A sample version of what this form would look like is attached.

C. Timing of Section 6050Y Reporting

More generally, the Notice proposes “to require that an acquirer furnish the written statements required under § 6050Y(a)(2) to an issuer by the later of (1) 20 days after the reportable policy sale, or (2) 5 days after the end of the applicable state law rescission period, if any, but in no event later than January 15 of the year following the calendar year in which the reportable policy sale occurs.” We appreciate the proposed requirement for prompt reporting of a RPSS to the Issuer. The Notice, however, provides a very short window (which could be only a few days) for an issuer to meet its obligations under sections 6050Y(b) and (c). The Notice states:

“Upon receiving notice of the rescission, any person who has filed a return required by § 6050Y with respect to the reportable policy sale or transfer would have 15 days to file a corrected return. Upon receiving notice of the rescission, any person who has furnished a written statement under § 6050Y with respect to the reportable policy sale or transfer would have 15 days to furnish the recipient of that statement with a corrected statement reporting the rescission.”

The IRS intends to require 6050Y (b)(2) and (c)(2) statements to be furnished no later than January 31. Section 6050Y reporting relies on the prior receipt of third party information, which could be furnished as late as January 15 (actual receipt can occur much later than January 15, due to the postmark rule and internal mail processing time). We request that Issuers be allowed to meet the obligations under sections 6050Y(b) and (c) on or before February 15. This is the same due date currently allowed for section 6045 broker returns and consolidated statements, as brokers also rely on third party information (e.g., dividend reclassifications).

V. Effective Date

The amendments to section 6050Y apply to “1) reportable policy sales (as defined in section 6050Y(d)(2) of the Internal Revenue Code of 1986 (as added by subsection (a)) after December 31, 2017, and 2) reportable death benefits (as defined in section 6050Y(d)(4) of such Code (as added by subsection (a)) paid after December 31, 2017.” The Notice states:

The definition of “reportable policy sale” applies only to transfers made after December 31, 2017. Accordingly, death benefits are “reportable death benefits” under § 6050Y(d)(4), and are subject to the reporting requirements of § 6050Y(c), only if the death benefits are paid by reason of the death of the insured under a life insurance contract transferred after December 31, 2017, in a reportable policy sale.

We appreciate the clarification that Issuers are not required to report death benefits paid after January 1, 2018 on contracts that were acquired in a RPSS prior to January 1, 2018, and believe many similar common sense inferences can be drawn, as we recommend above, to implement the provisions of sections 6050Y and 101(a)(3) most effectively.

VI. Additional Comments

Treasury and IRS seek input on a series of discrete questions in section 4 of the Notice. We do not currently have any comments regarding treatment of viatical settlements under section 101(a)(3)(B), but will provide any we may develop as we continue to consider the application of the new rules. We include our current comments and recommendations with respect to the following issues identified in the Notice:

A. Definition of Acquirer We recommend the narrowing of the definition of acquirer so as to avoid potentially inconsistent, overlapping, and confusing information reports.

B. Definition of Payment A policyholder could sell or transfer for value a contract that is encumbered with a policy loan. Therefore, we recommend the term “payment” be expanded to include any income that may be attributed to a policyholder or owner when the life insurance contract that is acquired in a reportable policy sale (or transferred for value to a foreign person) is used as collateral for a policy loan.

C. Definition of Seller — We understand that “Treasury and the IRS intend to propose regulations defining 'seller' for purposes of section 6050Y(b) to include any person who transfers an interest in a life insurance contract to an acquirer in a reportable policy sale or to a foreign person.” We recommend defining “seller” for purposes of section 6050Y(b) to include only the first named owner on the life insurance contract who sells an interest in a life insurance contract to an acquirer in a reportable policy sale or to a foreign person. The reason for this recommendation is that under existing rules, payments to joint payees are generally treated as if all the payments were made to the first person listed on the payments. See section 3406(h)(3), IRS Form W-9 and 2018 General Instructions for Certain Information Returns (2018), Section J. Recipient Names and Taxpayer Identification Numbers (TIN). We strongly recommend that the IRS continue to adopt this approach in handling the requirements under section 6050Y(b).

We continue to consider the issues presented by the Notice and will provide any additional helpful comments we may have in this regard.

VII. Conclusion

We thank you and your team for the time and efforts that you have devoted to providing guidance to our industry on these new rules and look forward to working with you to develop an effective reporting regime to ensure optimal collection of revenues owed on reportable policy sales. Please do not hesitate to contact us should you wish to discuss any of the issues addressed in this letter.

Sincerely,

Peter J. Bautz

Mandana Parsazad

Regina Rose

American Council of Life Insurers
Washington, DC

Cc:
Ms. Kathryn Sneade
Assistant Branch Chief
Office of the Associate Chief Counsel (Financial Institutions & Products)
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224

Section 6050Y(b) - Issuer's basis Reporting

Section 6050Y(b) - Issuer's Basis Reporting (Foreign Persons)

Section 6050Y(c) - Issuer's Report of Taxable Death Benefit (U.S. Persons)

Section 6050Y(c) – Issuer’s Report of Taxable Death Benefit (Foreign Persons) 

FOOTNOTES

11. The American Council of Life Insurers (ACLI) advocates on behalf of approximately 290 member companies dedicated to providing products and services that contribute to consumers' financial and retirement security. ACLI members represent 95% of industry assets, 93% of life insurance premiums, and 98% of annuity considerations in the United States. 75 million families depend on our members' life insurance, annuities, retirement plans, long-term care insurance, disability income insurance and reinsurance products. Taking into account additional products including dental, vision and other supplemental benefits, ACLI members provide financial protection to 90 million American families.

22. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended by the Tax Cuts and Jobs Act of 2017, (P.L. 115-97).

33. See General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals, Department of the Treasury May 2009, “Modify Rules That Apply To Sales Of Life Insurance Contracts” fiscal years 2010-2017, that required tax reporting for sales of life insurance contracts with face amounts of $1,000,000 or more; see also S. 2048, 112th Cong. (2012); see also H. 5973, 114th Cong. § 101(a)(2)(A)-(B) (2016).

44. Except where a tax treaty to which the U.S. is signatory may provide otherwise.

55. Section 101(a)(2). We also recommend that the Regulations include the following definition for a “substantial family relationship”:

A substantial family relationship includes individuals who are related to the insured by blood or affinity or whose close association with the insured is the equivalent of a family relationship. Individuals meeting this test include stepparents and stepchildren, grandparents, grandchildren, and domestic partners.

66. This definition would prevent transfers of business-owned life insurance that are made as part of a merger, acquisition or other transfer of a trade or business from inadvertently being subject to the reportable policy sale rules. We believe this change is appropriate for several reasons:

1. Section 101(a)(3), was not intended to include ordinary course mergers and acquisitions. Rather, section 101(a)(3) was intended to prevent potentially abusive scenarios; for example, scenarios where taxpayers structured sales of life insurance contracts to technically qualify for an exception to the transfer-for-value rules by virtue of a “carry-over basis,” but were actually abusive.

2. Life insurance transferred in a merger or acquisition has never been considered a transfer for value under section 101(a)(2).

3. Business-owned life insurance is already heavily regulated in the tax law under section 101(j) and those rules should not be indirectly repealed by rules targeting unrelated life settlement transactions.

4. The value of the life insurance transferred in a merger or acquisition may be impacted negatively by uncertainty as to the tax-free nature of the death benefit.

77. In this regard, we refer you to H. 5973, 114th Cong. (2016) supra note 3 that clarified the application of indirect reportable policy sales as follows:

"(ii) INDIRECT ACQUISITIONS.— For purposes of clause (i), the term 'indirectly' applies to the acquisition of an interest in a partnership, trust, or other entity that holds an interest in the life insurance contract unless —

"(I) the insured of the life insurance contract is an existing or former employee, officer, director, 5-percent owner, or independent contractor of the acquired entity or its subsidiaries or predecessors, and

"(II) no more than 50 percent of the gross value of the assets of the acquired entity consists of life insurance contracts or the parties demonstrate to the satisfaction of the Secretary that the acquisition of the life insurance is not the principal purpose of the acquired entity.

"(iii) DETERMINATION OF GROSS VALUE OF ASSETS.— For purposes of clause (ii), the term 'gross value of assets' means, with respect to any acquired entity, the sum of —

"(I) in the case of assets of the acquired entity which are life insurance policies or annuity or endowment contracts, the unborrowed policy cash values of such policies and contracts, and

"(II) in the case of assets of the acquired entity not described in subclause (I), the adjusted bases (within the meaning of section 1016) of such assets."

88. Our recommendations in section IV.B.ii. below address the details in this regard.

99. S. Rep. No. 115-466, at 339-340 (2017) (Conf. Rep.).

1010. We also refer you to H. 5973, 114th Cong. (2016) supra note 3, which addressed this issue to resolve any doubt as to what would trigger the Issuer's obligation to file a reportable death benefit return:

"(4) 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 has been transferred in a reportable policy sale with respect to which, a statement is required to be furnished under subsection (a)(2), or a notice of a transfer of a life insurance contract to a foreign person has been received."

Moreover, Senate Finance Committee staff who helped draft the legislation that was enacted as part of the Tax Cuts and Jobs Act assured us common sense would infer such a prerequisite to reporting of a reportable policy sale death benefit, and that no changes needed to be made.

1111. See the discussion under “Transfers to Foreign Persons” in section III.B.ii. for the problems that would be generated by treating an Issuer's non-specific change of owner or change of address forms as a Section 6050Y reporting trigger.

END FOOTNOTES

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