Retroactive Reporting for Certain Life Insurance Transactions

| 4/4/2019
The U.S. Department of the Treasury and the IRS recently published proposed regulations to implement changes made by the Tax Cuts and Jobs Act (TCJA) for life insurance contracts transferred in a reportable policy sale under the new IRC Section 6050Y reporting requirements. A prior article addressed TCJA changes to IRC Section 101, which provides rules for when a transaction is treated as a reportable policy sale and the income tax effect of such transactions.

Section 1.6050Y-2 of the proposed regulations generally requires an acquirer (the buyer of the policy) to report certain information with respect to a reportable policy sale. The acquirer also must furnish statements to the issuer (generally an insurance company) as well as each reportable policy sale payment recipient. The proposed regulations provide dates for filing returns and furnishing statements, including a very short period to furnish statements to issuers (generally 20 calendar days after the reportable policy sale has occurred). The statement furnished to the issuer generally is called a reportable policy sale statement (RPSS).

A reportable policy sale payment recipient is any person who receives a reportable policy sale payment, including a broker or other intermediary that retains a portion of the cash or other consideration transferred in a reportable policy sale. A reportable policy sale payment is the total amount of cash and the fair market value of any other consideration transferred, or to be transferred, in a reportable policy sale. A reportable policy sale payment also includes the amount of any debt assumed by the acquirer from the recipient in a reportable policy sale, as well as ancillary expenses like broker fees.

For purposes of proposed Section 1.6050Y-2, the issuer is the person responsible for administering the life insurance contract (including collecting premiums and paying death benefits under the contract) on the date of the reportable policy sale. Reinsurers also might be included under this definition in certain circumstances.

Section 1.6050Y-3 of the proposed regulations generally provides that upon the receipt of an RPSS or any notice of the transfer of a life insurance contract to a foreign person, an issuer must report certain information to the IRS and also furnish statements to each seller. A notice of a transfer to a foreign person includes information provided for nontax purposes, such as a change of address. Under proposed Section 1.6050Y-3, an issuer includes a proposed Section 1.6050Y-2 issuer as well as certain designees and recipients of a notice of transfer to a foreign person. The proposed regulations specify the timing for filing and furnishing statements, as well as exceptions for certain transactions involving foreign persons.

Section 1.6050Y-4 of the proposed regulations addresses reporting that is required upon the death of the insured. Specifically, if the policy previously was acquired in a reportable policy sale, a payer of death benefits paid under a contract transferred in a reportable policy sale is required to report certain information to the IRS and the recipient of death benefits, including the recipient’s “investment in the contract” (which would allow the recipient to compute its taxable income). The proposed regulations include the timing for filing and furnishing statements and exceptions for certain transactions involving foreign persons.

Acquirers report using Form 1099-LS, “Reportable Life Insurance Sales,” and issuers report using Form 1099-SB, “Seller’s Investment in Life Insurance Contract.” Reportable death benefits are reported on Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.”

The statute generally requires reporting for transfers in a reportable policy sale occurring after Dec. 31, 2017, and payments of reportable death benefits made after Dec. 31, 2017. However, the proposed regulations delay (but do not eliminate) reporting until after final regulations are published. Specifically, unless eliminated in the final regulations, the reporting obligations still exist for transactions occurring after Dec. 31, 2017, and before final regulations are published.

This requirement means that taxpayers subject to these rules are required to maintain information for reportable policy sales entered into on or after Jan. 1, 2018, even though proposed regulations describing applicable transactions and the specific information required to be reported were not published until March 2019. Unless relief is provided in the final regulations, this retroactive reporting obligation will be a significant challenge for many taxpayers. The retroactive effects of these proposed regulations are likely to be a focus of comments due May 9, 2019, and the public hearing scheduled for June 5, 2019.
 

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax
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Allen Tobin