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Information reporting of reportable sales of life insurance contracts, of death benefit payments

Final regulations: Information reporting

The U.S. Treasury Department and IRS late on October 25, 2019, released for publication in the Federal Register final regulations (T.D. 9879) implementing the rules for reportable policy sales under section 101 and the associated information reporting obligations under section 6050Y.

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The final regulations [PDF 543 KB] were published in the Federal Register on October 31, 2019, and:

  • Provide guidance on the amount of death benefits excluded from gross income under section 101 following a reportable policy sale
  • Implement measures that were enacted in December 2017 by the U.S. tax law (Pub. L. No. 115-97), the law that is often referred to as the “Tax Cuts and Jobs Act” (TCJA), and affect parties involved in certain life insurance contract transactions including reportable policy sales, transfers of life insurance contracts to foreign persons, and payments of reportable death benefits
  • Finalize, with certain changes, regulations that were proposed in March 2019

Background

Generally, amounts received under a life insurance contract that are paid by reason of the death of the insured are excluded from gross income for federal income tax purposes under section 101(a)(1). However, if a life insurance contract or interest therein is sold or otherwise transferred for valuable consideration, the “transfer for value rule” set forth in section 101(a)(2) limits the excludable portion of the death benefit to the sum of the consideration paid for the contract or interest therein and any premiums and other amounts subsequently paid by the transferee.

Sections 101(a)(2)(A) and (B) provide two exceptions to this transfer for value rule. One exception (the “certain person exception”) applies to transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer (“certain persons”). See section 101(a)(2)(B). The other exception (the “carryover basis exception”) applies if the transferee’s basis for determining gain or loss in the life insurance contract or interest therein is determined in whole or in part by reference to the transferor’s basis in the contract or interest therein. See section 101(a)(2)(A).

Section 13522 of the TCJA amended section 101. New section 101(a)(3) defines the term “reportable policy sale” and provides rules for determining the amount of death benefits excluded from gross income following a reportable policy sale. Under section 101(a)(3), neither of the above exceptions to the transfer for value rule applies in the case of a transfer of a life insurance contract, or any interest therein, that is a reportable policy sale.

Additionally, section 13520 of the TCJA added section 6050Y. Section 6050Y imposes information reporting obligations related to certain life insurance contract transactions, including reportable policy sales and payments of reportable death benefits. Section 6050Y provides that each of the returns required by section 6050Y is to be made “at such time and in such manner as the Secretary shall prescribe.”

In March 2019, Treasury and the IRS proposed regulations that provided guidance on the definition of reportable policy sale under section 101 and the reporting obligations imposed by section 6050Y. Read a KPMG report of initial impressions about the proposed regulations: TaxNewsFlash

Section 101 regulations

Concerning section 101, the final regulations address comments made in response to the proposed regulations and provide the following:

  • The final regulations include an example that illustrates the application of the bargain sale rules.
  • The final regulations provide for a “fresh start” with respect to an interest gratuitously transferred to the insured, provided the interest has not previously been transferred for value in a reportable policy sale.
  • The preamble to the final regulations clarifies that gratuitous transfers are not excluded from the definition of a reportable policy sale.
  • The final regulations provide an exception from the definition of reportable policy sale with respect to the indirect acquisition of an interest in a life insurance contract by a person if a partnership, trust, or other entity in which an ownership interest is being acquired directly or indirectly holds the interest in the life insurance contract and acquired that interest before January 1, 2019, or acquired that interest in a reportable policy sale reported in compliance with section 6050Y(a) and Reg. section 1.6050Y-2.
  • Additionally, the final regulations clarify that if the partnership, trust, or other entity in which the acquirer is directly acquiring an ownership interest indirectly holds an interest in one or more life insurance contracts, then: (1) the assets of the partnership, trust, or other entity in which the ownership interest is being acquired are tested to determine whether more than 50% of the gross value of the assets of that partnership, trust, or other entity consists of life insurance contracts; and (2) the ownership interest in that partnership, trust, or other entity held by the acquirer and his or her family members after the acquisition is tested to determine whether they hold more than a 5% ownership interest in the entity. However, the assets of the partnership, trust, or other entity that directly holds the interest in the life insurance contract and the interest in that partnership, trust, or other entity held by the acquirer and his or her family member are tested only if the acquirer directly acquires an ownership interest in that partnership, trust, or other entity.
  • The final regulations clarify that the definition of an interest in a life insurance contract is not limited to legal title, and provide an example that illustrates a reportable policy sale in which one acquirer acquires legal title and another acquires beneficial ownership.
  • The final regulations provide that the acquisition of a life insurance contract by an insurance company in an exchange pursuant to section 1035 is not a reportable policy sale. The preamble notes that the reference in Prop. Reg. section 1.101-1(e)(2) to section 1035 exchanges was not intended to imply that the transfer of a policy to an insurance company in a section 1035 exchange would be a reportable policy sale.
  • The final regulations add a new rule to provide that any combination of substantial relationships between a trust’s beneficiaries and the insured is sufficient to qualify that a transfer to that trust is not counted under the reportable policy sale exclusion (e.g., because there is a substantial family, business, or financial relationship with the insured, apart from its interest in the life insurance contract, at the time of the transfer). As a result, under the final regulations, there is no need to expressly treat a trust established and maintained for the primary benefit of the insured or one or more of the insured’s family members as a family member of the insured. Therefore, the final regulations do not include such a trust in the definition of family member.
  • The final regulations provide that a substantial financial relationship exists between the acquirer and insured if the acquirer maintains the life insurance contract on the life of the insured, to provide funds to purchase assets of or to satisfy liabilities of the insured or the insured’s estate, heirs, legatees, or other successors in interest, or to satisfy other liabilities arising upon or by reason of the death of the insured.
  • The final regulations provide that the category of charities considered to have a substantial financial relationship with an insured has not been modified but may be expanded in future IRS guidance.
  • The final regulations revise, rather than remove, the second sentence of section 1.101-1(a)(1) under the existing regulations to clarify that the sentence only applies to contracts issued on or before December 31, 1984 (the effective date of section 7702). The sentence states: “Death benefit payments having the characteristics of life insurance proceeds payable by reason of death under contracts, such as workmen’s compensation insurance contracts, endowment contracts, or accident and health insurance contracts, are covered by this provision.”

Regulations under section 6050Y

Concerning section 6050Y, the preamble to the final regulations addresses comments received in response to the proposed regulations and provides measures including the following:

  • The final regulations clarify that an issuer—other than the issuer responsible for administering the life insurance contract—will not be considered a section 6050Y(b) issuer if it provides notice of a transfer to a foreign person to the issuer responsible for administering the life insurance contract. See Reg. section 1.6050Y-1(a)(8)(iii)(B). Additionally, a section 6050Y(b) issuer’s reporting obligation is deemed satisfied if the information required by section 6050Y(b) and Reg. section 1.6050Y-3 is timely reported on its behalf by any other section 6050Y(b) issuer. See section 1.6050Y-3(b) of the final regulations.
  • The definition of a section 6050Y(b) issuer under the proposed and final regulations is narrower than the definition of issuer in section 6050Y(d) and—consistent with the intent expressed in Notice 2018-41 to limit the information reporting obligations imposed under section 6050Y(b) to the life insurance company that is responsible for administering the contract—will generally exclude a reinsurer in an indemnity contract from reporting obligations. Furthermore, Reg. section 1.6050Y-1(a)(8)(iii)(B) provides any reinsurer in an indemnity contract that is not the issuer responsible for administering the life insurance contract, but nonetheless that falls within the definition of section 6050Y(b) issuer, with a mechanism to avoid that designation (by providing notice and relevant information to the section 6050Y(b) issuer responsible for administering the contract).
  • The final regulations modify the measure included in the proposed regulations concerning foreign persons and the obligation for an issuer to report under section 6050Y(b). Specifically, the reporting obligation under section 6050Y(b) and section 1.6050Y-3 of the proposed regulations is not triggered unless the issuer receives notice of a transfer of a life insurance contract to a foreign person that includes foreign indicia, including information provided for nontax purposes such as a change of address notice to a foreign residence or mailing address for purposes of sending statements or for other purposes.
  • Under the final regulations, an acquirer is not required to provide an issuer with the amount of any reportable policy sale payment when fulfilling its reporting obligations under section 6050Y(a).
  • The final regulations clarify that “consideration” for purposes of section 6050Y(d)(1) and Reg. section 1.6050Y-1(a)(15), which define payment with respect to any reportable policy sale, is the amount of cash and the fair market value of any consideration transferred in the sale. Specifically, consideration means consideration reducible to a money value, which is the standard used in Reg. section 1.101-1(f)(5) for determining whether a transfer of an interest in a life insurance contract is a transfer for valuable consideration. See Reg. section 1.6050Y-1(a)(15).
  • The final regulations reflect that an acquirer that reports a reportable policy sale payment made to a person other than the seller under section 6041 or section 6041A will be deemed to have satisfied its reporting requirements under section 6050Y(a) and Reg. section 1.6050Y-2 with respect to that payment. For these purposes, the final regulations exclude from the definition of a reportable policy sale payment recipient any person, other than the seller, who receives aggregate payments of less than $600 with respect to that reportable policy sale.
  • The final regulations expand the situations when acquirers may use unified reporting.
  • The final regulations provide that a payor of reportable death benefits is not required to file an information return under Reg. section 1.6050Y-4(a) with respect to the reportable death benefits if the payor never received, and has no knowledge of any issuer having received, a related reportable policy sale statement.
  • The final regulations replace the term “payments made” with the term “reportable death benefits paid” and clarify that “gross amount of payments” are death benefit payments.
  • The final regulations do not require reportable death benefits paid to a foreign person that must be reported on Form 1042-S to also be reported on Form 1099-R.

Applicability dates

Section 101

Section 1.101-6(b) of the proposed regulations provided that, for purposes of section 6050Y, Reg. section 1.101-1(b), (c), (d), (e), (f), and (g) applied to reportable policy sales made after December 31, 2017, and to reportable death benefits paid after December 31, 2017. Section 1.101-6(b) of the proposed regulations further provided that, for any other purpose, Reg. section 1.101-1(b), (c), (d), (e), (f), and (g) apply to transfers of life insurance contracts, or interests therein, made after the date the Treasury decision adopting the proposed regulations as final regulations is published in the Federal Register (scheduled for October 31, 2019).

The final regulations provide that, for purposes of determining whether a transfer of an interest in a life insurance contract is a reportable policy sale or a payment of death benefits is a payable of reportable death benefits subject to the reporting requirements of section 6050Y and Reg. sections 1.6050Y-1 through 1.6050Y-4, section 1.101-1(b) through (g) apply to reportable policy sales made after December 31, 2018, and to reportable death benefits paid after December 31, 2018. For any other purposes, including for purposes of determining the amount of the proceeds of life insurance contracts payable by reason of death excluded from gross income under section 101, section 1.101-1(b) through (g) of the final regulations apply to amounts paid by reason of the death of the insured under a life insurance contract, or interest therein, transferred after the date of publication of the final regulations in the Federal Register.

However, under section 7805(b)(7), a taxpayer may apply the rules set forth in section 1.101-1(b) through (g) of the final regulations, in their entirety, with respect to all amounts paid by reason of the death of the insured under a life insurance contract, or interest therein, transferred after December 31, 2017, and on or before the date of publication in the Federal Register.

Section 6050Y

Section 1.6050Y-1 of the proposed regulations provided that the rules in sections 1.6050Y-1 through 1.6050Y-4 of the proposed regulations apply to reportable policy sales made and reportable death benefits paid after December 31, 2017, and provided transition relief with respect to reporting required on reportable policy sales and payments of reportable death benefits occurring after December 31, 2017, and before the date final regulations under section 6050Y are published in the Federal Register.

In response to comments, and to give acquirers and issuers additional time to develop and implement reporting systems, the final regulations provide that the rules in sections 1.6050Y-1 through 1.6050Y-4 of the final regulations apply to reportable policy sales made and reportable death benefits paid after December 31, 2018. See section 1.6050Y-1(b) of the final regulations. As a result, no reporting is required under section 6050Y for reportable policy sales made and reportable death benefits paid after December 31, 2017, and before January 1, 2019.

Section 1.6050Y-1(a)(12) of the final regulations defines “reportable death benefits” as “amounts paid by reason of the death of the insured under a life insurance contract that are attributable to an interest in the contract that was transferred in a reportable policy sale.” Accordingly, because the definition of “reportable policy sale” under section 1.6050Y-1(a)(14) of the final regulations applies only to transfers of interests in life insurance contracts made after December 31, 2018, death benefits are “reportable death benefits” under section 1.6050Y-1(a)(12) of the final regulations and are subject to the reporting requirements of section 1.6050Y-4 of the final regulations only if the death benefits are paid by reason of the death of the insured under a life insurance contract transferred after December 31, 2018, in a reportable policy sale.

The final regulations also provide transition relief (as set forth in the proposed regulations) with several modifications to give acquirers and issuers ample time to develop and implement reporting systems.

Assuming the final regulations are in fact published in the Federal Register on October 31, 2019, as anticipated, Reg. section 1.6050Y-1(b) provides transition relief as follows:

  • Statements required to be furnished to issuers under section 6050Y(a)(2) and Reg. section 1.6050Y-2(d)(2)(i) must be furnished by the later of the applicable deadline set forth in Reg. section 1.6050Y-2(d)(2)(ii) or December 30, 2019.
  • Statements required to be furnished to reportable policy sale payment recipients under section 6050Y(a)(2) and Reg. section 1.6050Y-2(d)(1)(i) must be furnished by the later of the applicable deadline set forth in Reg. section 1.6050Y-2(d)(1)(ii) or February 28, 2020.
  • Statements required to be furnished to sellers under section 6050Y(b)(2) and Reg. section 1.6050Y-3(d)(1) must be furnished by the later of the applicable deadline set forth in Reg. section 1.6050Y-3(d)(2) or February 28, 2020.
  • Statements required to be furnished to reportable death benefits payment recipients under section 6050Y(c)(2) and Reg. section 1.6050Y-4(c)(1) must be furnished by the later of the applicable deadline set forth in Reg. section 1.6050Y-4(c)(2) or February 28, 2020.
  • Returns required to be filed under section 6050Y(a)(1) and Reg. section 1.6050Y-2(a), section 6050Y(b)(1) and Reg. section 1.6050Y-3(a); and section 6050Y(c)(1) and section 1.6050Y-4 must be filed by the later of the applicable deadline set forth in Reg. sections 1.6050Y-2(c), 1.6050Y-3(c), and 1.6050Y-4(b) or February 28, 2020.

KPMG observation

In general, the proposed and final regulations provide a reasonable approach to implementing the reportable policy sale rules. The regulations describe when an indirect reportable policy occurs and provide rules clarifying that, typically, an indirect acquisition of a life insurance policy will not be a reportable sale in many business contexts. Similarly, the clarification that transfers between members of a consolidated group will not be treated as reportable policy sales allows intra-group transfers without triggering adverse tax consequences under these rules. These exceptions and the modifications in the final regulations provide a practical approach to the implementation of the reportable policy sale regime.

However, Treasury and the IRS explicitly recognize that the reportable policy sale regime results in the disparate treatment of stock acquisitions and asset acquisitions. As one commenter noted, the safe harbor for indirect acquisitions will typically apply to acquisition transactions in which the corporate existence of the target survives the acquisition (e.g., a taxable stock sale with no section 338 election, a reverse subsidiary merger structured to qualify as a tax-free reorganizations under section 368(a)(2)(E), or a tax-free reorganization under section 368(a)(1)(B)). However, the safe harbors for indirect acquisitions will typically be inapplicable in the case of acquisition transactions in which the target corporation is merged with and into the acquiring corporation and the target’s separate existence is terminated as of the merger date (e.g., a tax-free reorganization under section 368(a)(1)(A), (C), or (D) or section 368(a)(2)(D)). As a result, tax practitioners will need to determine whether life insurance contracts are included in the target’s assets and highlight the disparate treatments based on the acquisition structure.

With regard to reporting requirements under section 6050Y, companies need to be mindful of the reporting deadlines.

 

For more information contact a tax professional in KPMG’s Washington National Tax:

Sheryl Flum | +1 (202) 533-3394 | sflum@kpmg.com

Fred Campbell-Mohn | +1 (212) 954-8316 | fcampbellmohn@kpmg.com

William Olver | +1 (617) 988-1642 | wolver@kpmg.com

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