IRS Addresses Income Recognized on Sale of Life Insurance Contracts

IRS Addresses Income Recognized on Sale of Life Insurance Contracts

Internal Revenue Service

The IRS has issued a revenue ruling (Rev. Rul. 2020-5) addressing the amount of income recognized on the sale of life insurance contracts in situations described in two previous revenue rulings (<a href="/lr/resolve//dk9m">Rev. Rul. 2009-13</a>, <a href="/lr/resolve//dk9c">Rev. Rul. 2009-14</a>) in light of the amendment of <a href="/research/federal/usc26/1016#cpfv-0000002" resolve="/lr/resolve//cpfv#cpfv-0000002">section 1016(a)</a> by the Tax Cuts and Jobs Act. <a href="/research/federal/usc26/1011" resolve="/lr/resolve//cpbg">Sections 1011</a> and <a href="/research/federal/usc26/1012" resolve="/lr/resolve//cqgw">1012</a> provide that the adjusted basis for determining gain or loss is generally the cost of property adjusted as provided in <a href="/research/federal/usc26/1016" resolve="/lr/resolve//cpfv">section 1016</a>, except as otherwise provided in subchapters O, C, K, and P of chapter 1. <a href="/research/federal/usc26/1016#cpfv-0000002" resolve="/lr/resolve//cpfv#cpfv-0000002">Section 1016(a)</a> provides that proper adjustment must be made for expenditures, receipts, losses, or other items properly chargeable to capital account. The TCJA amended section 1016(a) to provide that, in determining the basis of a life insurance contract or an annuity contract, no adjustment is made for mortality, expense, or other reasonable charges incurred under the contract. This amendment is effective for transactions entered into on or after August 26, 2009. The 2009 rulings apply <a href="/research/federal/usc26/1016" resolve="/lr/resolve//cpfv">section 1016</a> (before its amendment by the TCJA) to determine the adjusted basis of life insurance contracts under <a href="/research/federal/usc26/1011" resolve="/lr/resolve//cpbg">sections 1011</a> and <a href="/research/federal/usc26/1012" resolve="/lr/resolve//cqgw">1012</a> in several factual situations. In Situation 2 of <a href="/lr/resolve//dk9m">Rev. Rul. 2009-13</a>, A, an individual, entered into a life insurance contract under which A was the insured and the named beneficiary was a member of A’s family. On June 15 of Year 8, A sold the contract to B, an unrelated person who would suffer no economic loss upon A’s death, for $80,000. Before the sale of the contract, A had paid $64,000 in premiums. The cost of insurance charges collected by the issuer was $10,000 as of the date of the sale. In Situation 3 of <a href="/lr/resolve//dk9m">Rev. Rul. 2009-13</a>, the contract was a level premium 15-year term life insurance contract without cash surrender value. The monthly premium for the term life insurance contract was $500, A held the contract for 89.5 months, and A paid premiums totaling $45,000 as of the date of the sale. A sold the contract for $20,000 to B, an unrelated person who would suffer no economic loss upon A’s death. In Situation 2 of <a href="/lr/resolve//dk9c">Rev. Rul. 2009-14</a>, the facts are the same as in Situation 3 of <a href="/lr/resolve//dk9m">Rev. Rul. 2009-13</a>, except that B purchased the contract for $20,000 from A, and at the end of the following year sold the contract to C, a person unrelated to either A or B, for $30,000. Before selling the contract, B paid a total of $9,000 in premiums. According to the IRS in Rev. Rul. 2020-5, in Situation 2 of <a href="/lr/resolve//dk9m">Rev. Rul. 2009-13</a>, A recognizes $16,000 of income upon the sale of the life insurance contract, of which $14,000 is ordinary income, and $2,000 is long-term capital gain. In Situation 3 of <a href="/lr/resolve//dk9m">Rev. Rul. 2009-13</a>, A recognizes a long-term capital loss of $25,000 upon the sale of the life insurance contract. In Situation 2 of <a href="/lr/resolve//dk9c">Rev. Rul. 2009-14</a>, B recognizes $1,000 of long-term capital gain upon the sale of the life insurance contract. Consistent with the effective date of the TCJA amendment to <a href="/research/federal/usc26/1016#cpfv-0000002" resolve="/lr/resolve//cpfv#cpfv-0000002">section 1016(a)</a>, Rev. Rul. 2020-5 is effective for transactions entered into on or after August 26, 2009.

The IRS has issued a revenue ruling (Rev. Rul. 2020-5) addressing the amount of income recognized on the sale of life insurance contracts in situations described in two previous revenue rulings (Rev. Rul. 2009-13, Rev. Rul. 2009-14) in light of the amendment of section 1016(a) by the Tax Cuts and Jobs Act.

The IRS has issued a revenue ruling (Rev. Rul. 2020-5) addressing the amount of income recognized on the sale of life insurance contracts in situations described in two previous revenue rulings (Rev. Rul. 2009-13, Rev. Rul. 2009-14) in light of the amendment of section 1016(a) by the Tax Cuts and Jobs Act. Sections 1011 and 1012 provide that the adjusted basis for determining gain or loss is generally the cost of property adjusted as provided in section 1016, except as otherwise provided in subchapters O, C, K, and P of chapter 1. Section 1016(a) provides that proper adjustment must be made for expenditures, receipts, losses, or other items properly chargeable to capital account. The TCJA amended section 1016(a) to provide that, in determining the basis of a life insurance contract or an annuity contract, no adjustment is made for mortality, expense, or other reasonable charges incurred under the contract. This amendment is effective for transactions entered into on or after August 26, 2009. The 2009 rulings apply section 1016 (before its amendment by the TCJA) to determine the adjusted basis of life insurance contracts under sections 1011 and 1012 in several factual situations. In Situation 2 of Rev. Rul. 2009-13, A, an individual, entered into a life insurance contract under which A was the insured and the named beneficiary was a member of A’s family. On June 15 of Year 8, A sold the contract to B, an unrelated person who would suffer no economic loss upon A’s death, for $80,000. Before the sale of the contract, A had paid $64,000 in premiums. The cost of insurance charges collected by the issuer was $10,000 as of the date of the sale. In Situation 3 of Rev. Rul. 2009-13, the contract was a level premium 15-year term life insurance contract without cash surrender value. The monthly premium for the term life insurance contract was $500, A held the contract for 89.5 months, and A paid premiums totaling $45,000 as of the date of the sale. A sold the contract for $20,000 to B, an unrelated person who would suffer no economic loss upon A’s death. In Situation 2 of Rev. Rul. 2009-14, the facts are the same as in Situation 3 of Rev. Rul. 2009-13, except that B purchased the contract for $20,000 from A, and at the end of the following year sold the contract to C, a person unrelated to either A or B, for $30,000. Before selling the contract, B paid a total of $9,000 in premiums. According to the IRS in Rev. Rul. 2020-5, in Situation 2 of Rev. Rul. 2009-13, A recognizes $16,000 of income upon the sale of the life insurance contract, of which $14,000 is ordinary income, and $2,000 is long-term capital gain. In Situation 3 of Rev. Rul. 2009-13, A recognizes a long-term capital loss of $25,000 upon the sale of the life insurance contract. In Situation 2 of Rev. Rul. 2009-14, B recognizes $1,000 of long-term capital gain upon the sale of the life insurance contract. Consistent with the effective date of the TCJA amendment to section 1016(a), Rev. Rul. 2020-5 is effective for transactions entered into on or after August 26, 2009.

Sec. 72 Annuities; certain proceeds of endowment and life insurance contracts

Sec. 861 Income from sources within the United States

Sec. 1001 Determination of amount of and recognition of gain or loss

Sec. 1011 Adjusted basis for determining gain or loss

Sec. 1012 Basis of property--cost

Sec. 1221 Capital asset defined

Sec. 1234A Gains or losses from certain terminations

United States

Accounting periods and methods

Foreign-source income

Individual income taxation

Insurance

DOC 2020-5174

2020 TPR 7-6

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IRS Addresses Income Recognized on Sale of Life Insurance Contracts