The IRS today released an advance version of Notice 2018-41 that describes the new information reporting requirements under Code section 6050Y and that sets out details of future regulations that will be issued as guidance to assist taxpayers in complying with these information reporting requirements for reportable policy sales of life insurance contracts.
Section 6050Y was added to the Code by the new tax law (Pub. L. No. 115-97, enacted December 22, 2017).
Notice 2018-41 [PDF 63 KB] reports that the IRS and Treasury intend to issue proposed regulations as guidance to assist taxpayers in complying with the new information reporting obligations for certain life insurance contract transactions under section 6050Y. Today’s IRS notice also:
The IRS today also issued a press release—IR-2018-104—concerning Notice 2018-41.
Under Notice 2018-41, information returns need to be filed in the following situations:
A “reportable policy sale” is generally the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship to the insured.
A “reportable death benefit” is an amount paid at the death of the insured under a life insurance contract that was transferred in a reportable policy sale.
Section 6050Y provides that each of the returns required by section 6050Y must be made “at such time and in such manner as the Secretary shall prescribe.” Treasury and the IRS intend to propose regulations under section 6050Y describing the manner by which and time at which the reporting requirements of section 6050Y must be satisfied. The proposed regulations will also clarify which parties are subject to the reporting requirements and other definitional issues.
For example, Treasury and the IRS intend to define the term “reportable policy sale” in the proposed regulations to include a viatical settlement. A viatical settlement (a subset of life settlement transactions) may involve the sale of a life insurance contract, but may not be taxed as a sale. Under a viatical settlement, a policyholder may sell or assign a life insurance contract after the insured has become terminally ill or chronically ill.
In addition, Treasury and the IRS intend to clarify the extent to which section 6050Y applies to sales or acquisitions effected by transferors and transferees outside the United States and to sellers and issuers that are foreign persons for purposes of reporting under section 6050Y(b) or (c).
Section 6050Y(a) reporting of payments by acquirer in a reportable policy sale
Treasury and the IRS intend to propose regulations that will accomplish the following:
Section 6050Y(b) reporting of transferor’s investment in the contract by issuer (reportable policy sale or transfer to a foreign person)
Treasury and the IRS intend to propose regulations to accomplish the following:
Section 6050Y(c) reporting of reportable death benefits by payor
Treasury and the IRS intend to do the following:
The definition of “reportable policy sale” applies only to transfers made after December 31, 2017. Section 6050Y(d)(4) defines “reportable death benefits” as “amounts paid by reason of the death of the insured under a life insurance contract that has been transferred in a reportable policy sale.” Accordingly, death benefits are “reportable death benefits” under section 6050Y(d)(4), and are subject to the reporting requirements of section 6050Y(c), only if the death benefits are paid by reason of the death of the insured under a life insurance contract transferred after December 31, 2017, in a reportable policy sale.
Timing of section 6050Y reporting
The following items with regard to timing are included in the IRS notice:
Treasury and the IRS intend to propose amendments to Reg. section 1.101-1 to reflect the addition of section 101(a)(3) (added by section 13522 of H.R. 1—the bill that eventually became the new tax law).
Treasury and the IRS have requested comments on the proposed rules described in today’s notice and on any additional issues that should be addressed by the regulations. Comments are to be submitted in writing on or before June 13, 2018.
Tax professionals have observed that this is a very helpful notice that describes new tax reform information reporting requirements for certain life insurance contract transactions and that provides transitional guidance delaying reporting until final regulations are issued.
It further has been observed that Notice 2018-41 is also beneficial because there has been ambiguity regarding what is defined as a reportable policy sale. The expected section 101 regulation will help identify what qualifies as a substantial interest. In addition, it is viewed as being very beneficial that there is an opportunity for a comment period. There may be some questions as to why viatical settlements (which are covered by section 101(g)) are included given that these are not life settlement-type transactions.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Sheryl Flum | +1 (202) 533-3394 | email@example.com
Fred Campbell-Mohn | +1 (212) 954-8316 | firstname.lastname@example.org
Liz Young | +1 (202) 533-3125 | email@example.com
Rob Nelson | +1 (312) 665-6457 | firstname.lastname@example.org
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.