The IRS today released an advance version of Rev. Rul. 2020-05 that updates guidance previously provided in Rev. Rul. 2009-13 and Rev. Rul. 2009-14 with respect to adjustments to basis for life insurance contracts to account for the changes to section 1016(a), as amended by the U.S. 2017 tax law (Pub. L. No. 115-97)—the law that is often referred to as the “Tax Cuts and Jobs Act” (TCJA) and enacted December 22, 2017.
Read Rev. Rul. 2020-05 [PDF 47 KB]
Sections 1011 and 1012 of the Code generally provide that the adjusted basis for determining gain or loss is the cost of property as calculated based on rules contained in section 1016, which requires that proper adjustments must be made for expenditures, receipts, losses or other items properly chargeable to capital account.
A provision of the TCJA (Act section 13521) amended section 1016 by adding section 1016(a)(1)(B), which provides 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 after August 25, 2009.
Prior to amendment by the TCJA, Rev. Rul. 2009-13 and Rev. Rul. 2009-14 provided guidance on how to determine the adjusted basis of life insurance contracts under section 1011 and 1012 in several factual situations:
Because, subsequent to the TCJA, section 1016(a)(1)(B) does not reduce the cost basis of a life insurance contract for the cost of insurance, the situations in Rev. Rul. 2009-13 and Rev. Rul. 2009-14 (described above) are inconsistent with section 1016(a)(1)(B). Rev. Rul. 2020-05 modifies the above situations as follows:
Rev. Rul. 2020-05 provides useful clarifications to Rev. Rul. 2009-13 and Rev. Rul. 2009-14 in light of the TCJA amendment to section 1016(a). Taxpayers will now have clearer examples as to how to apply section 1016(a) to calculate bases of life insurance contracts.
Rev. Rul. 2009-13’s requirement to reduce basis by the cost of insurance was a highly controversial decision. The insurance industry for many years sought to change the IRS’s position, and the TCJA amendment to section 1016(a) represents the codification of what many have been saying for years. Rev. Rul. 2020-05 represents the IRS’s implementation of this change.
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