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.
The final regulations [PDF 543 KB] were published in the Federal Register on October 31, 2019, and:
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
Concerning section 101, the final regulations address comments made in response to the proposed regulations and provide the following:
Concerning section 6050Y, the preamble to the final regulations addresses comments received in response to the proposed regulations and provides measures including the following:
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 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:
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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