The IRS has proposed amending its final rules on interests in life insurance contracts to provide guidance on how the variable consideration rules and information reporting requirements apply to exchanges of interests in life insurance contracts that qualify for nonrecognition treatment and to certain acquisitions of interests in life insurance contracts in transactions that qualify as corporate reorgs. (Preamble to Prop Reg REG-108054-21, 5/9/2023)
Following the publication of the final regs, the IRS received letters relating to the application of Code Sec. 101 and Code Sec. 6050Y to Code Sec. 1035 exchanges and corporate reorganizations. Under the final regs, the application of the transfer for value rule limited the amount of death benefits excludable from income under Code Sec. 101(a)(1), even in the absence of a reportable policy sale, unless the transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer). The IRS has determined that this result is inconsistent with the prior treatment of new policies issued in Code Sec. 1035 exchanges.
The proposed regs would correct this unintended change while continuing to address the concern that the reporting of death benefits paid under Code Sec. 6050Y(c) could be avoided by exchanging a policy transferred in a reportable policy sale for a new policy in a Code Sec. 1035 exchange, as well as the concern that a policyholder could attempt to avoid the limitation on the excludability of death benefits resulting from the application of the transfer for value rule through a Code Sec. 1035 exchange. The proposals would also provide guidance on certain acquisitions of interests in life insurance contracts that qualify as a reorganization under Code Sec. 368(a).
For more information on the requirements for a tax-fee exchange of life insurance, see Checkpoint’s Federal Tax Coordinator ¶ J-5302.
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