American Council of Life Insurers Issues Public Comment to Treasury Dept.

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WASHINGTON, July 11 -- The American Council of Life Insurers has issued a public comment to the U.S. Department of the Treasury. The comment was written and posted on July 10, 2023.

The comment, on Docket No. IRS-2023-0023-0001, was sent to the Internal Revenue Service.

Here are excerpts:

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On behalf of the American Council of Life Insurers ("ACLI"), we write to provide comments on Proposed Regulations regarding Information Reporting and Transfer for Valuable Consideration Rules for Section 1035 Exchanges of Life Insurance and Certain Other Life Insurance Contract Transactions (Proposed Regulations). We appreciate the time and work that Treasury and IRS officials have undertaken to address comments on existing regulations under sections 101 and 6050Y, which were published as final regulations in 2019./1 Our comments in this letter are limited to the proposed tracking and information reporting requirements for section 1035 exchanges of policies that are the subject of reportable policy sales (RPS). We have attached to this letter a redline illustrating our suggested changes to the Proposed Regulations.

1 T.D. 9879, 84 Fed. Reg. 58460 (October 31, 2019).

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Tracking and Reporting of RPS Designation

Section 1.6050Y-1(a)(8)(v) of the Proposed Regulations defines a "section 1035 issuer" to mean both (1) an issuer of an existing life insurance contract in a section 1035 exchange that has received a reportable policy sale statement (RPSS) with respect to the existing life insurance contract and (2) an issuer of a new life insurance contract in a section 1035 exchange provided the issuer receives the statement required by 1.6050Y-3(d)(1)." Section 1.6050Y-3(d)(1)/2 requires the issuer of the existing contract to provide a statement under section 1.6050Y-3(a) which includes

(1) The name, address, and taxpayer identification number (TIN) of the seller;

(2) The investment in the contract with respect to the seller;

. . .; and

(4) Any other information that is required by the form or its instructions.

We appreciate the need to track the RPS attribute of a life insurance policy more formally within the confines of guidance provided under section 6050Y. Broadly, the Proposed Regulations would (1) track the RPS status of a policy in an exchange by the policy owner from one issuer to another, (2) assure the death benefits paid on such a policy are tax reported, and (3) be consistent with the remainder of the section 6050Y tax reporting regime. Our proposed changes would achieve all three goals with less risk of confusion for policyholders and less administrative burden on insurers than under the Proposed Regulations.

Because the insurer that issued the existing policy (i.e., the section 1035 issuer defined in Prop. Treas. Sec.1.6050Y-1(a)(8)(v)(A)) already must use Form 1099-R to report section 1035 exchanges, we recommend a new distribution code be provided for Box 7 to indicate that the section 1035 exchange being reported is an exchange of an RPS policy. Companies currently report section 1035 exchanges of life insurance policies on Form 1099-R, noting the amount that is being transferred to the issuer of the new policy with a distribution code "6" in Box 7, which identifies the distribution as a tax-free section 1035 exchange. The Instructions to Forms 1099-R and 5498 already require that the insurance company report in Box 5 the premiums paid for the policy being exchanged. The Instructions also require the payor of reportable policy death benefits to report the insurer's estimate of the investment in the contract. If necessary, the Proposed Regulations could require a section 1035 issuer to include the account number on Form 1099-R, although its inclusion for non-RPS policy exchanges is currently optional.

The requirement under Prop. Treas. Reg. Sec. 1.6050Y-3(d)(1) that an information return be filed by a section 1035 issuer described in Prop. Treas. Reg. Sec. 6050Y-1(a)(8)(v)(B) (i.e., the new issuer) is not necessary to accomplish the compliance goals stated above, and therefore, should be removed. The existing process established for companies to share critical information about policies exchanged is effective; the RPS tax attribute could be incorporated in this reliable and established practice./3 In fact, the proposed reporting to the IRS by the new issuer at the time of the exchange...

2 [E]very section 1035 issuer described in Sec.1.6050Y-1(a)(8)(v)(A) filing a return required by paragraph (a) of this section with respect to a section 1035 exchange must furnish to each section 1035 issuer described in Sec.1.6050Y-1(a)(8)(v)(B) with respect to that exchange a written statement showing the information required by paragraph (a) of this section with respect to the seller in the exchange and the name, address, and phone number of the information contact of the person filing the return.

3 Insurers involved in a section 1035 exchange share relevant information including cost basis without use of an official IRS form. Treas. Reg. section 35.3405-1T, Q&A (E-8). In addition, Treasury and IRS have permitted sharing of important tax information through means other than official tax forms in the context of the statement of an IRA's December 31st fair market value and required minimum distribution, if applicable. Notice 87-44, 1987-1 C.B. 502; Notice 2002-27, 2022-18 I.R.B. 814; Instructions to Forms 1099-R and 5498, at 18, 20 (2023). The reasonable flexibility afforded to issuers allows for the required information to be communicated efficiently between parties.

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...is duplicative and would lead to confusion, as the Proposed Regulations rightly provide that the 1035 exchange is not a reportable policy sale. The issuer of the new policy already is obligated to report any eventual death benefit pursuant to Treas. Reg. Sec. 1.6050Y-4(a), which requires reporting of death benefits paid under a contract that was transferred in a reportable policy sale under Prop. Treas. Reg. Sec. 1.101-1(c)(3). That existing legal obligation/4 obviates the need for a new section 1035 issuer to file a duplicative statement at the time of the exchange.

Requiring the use of Form 1099-R for reporting both the exchange of the RPS contract and the payment of any death benefit under an RPS contract is well within Treasury and IRS authority under section 6050Y. It also would fit within the existing regulatory scheme and long-standing IRS guidance under Code sections 6047(d) and 3405, which require the use of Form 1099-R to report section 1035 exchanges. Consequently, rather than define the issuer of the new contract as a 1035 issuer that must file an information return to report receiving the 1035 exchange, the Proposed Regulations under section 6050Y could define the issuer of the new life insurance contract as a payor who is obligated to furnish a statement on payment of a reportable death benefit, provided it has received a statement identifying a policy as an RPS from the issuer of the existing contract in a section 1035 exchange. Of course, the issuer of the new contract would be subject to existing reporting requirements if there were a taxable distribution from the new policy before the death of the insured.

With respect to section 1035 exchanges of RPS policies, the Preamble to the Proposed Regulations states that "[i]t is anticipated that this reporting will be completed on Form 1099-SB." However, neither section 6050Y nor the regulations thereunder identify the form to be used. Because the current version of Form 1099-SB has no provision for reporting any exchange of policies, that form and its instructions, as well as both the IRS and insurers' procedures, would have to be amended to enable reporting of such exchanges on that form. Our recommendation - that the issuer of the exchanged policy reports the exchange solely on Form 1099-R - is therefore consistent with the section 6050Y life settlement reporting regime and with broader tax reporting principles. Form 1099-SB is specifically required under current rules to tax report a potential current taxable event, and it is not necessarily a suitable vehicle to report a nontaxable section 1035 exchange.

We have attached a redline copy of the regulations that incorporates our recommended changes to redefine a "section 1035 issuer" as the issuer of the existing RPS policy, and the issuer of the new policy of the RPS policy in a section 1035 exchange as the "section 1035 payor" for your reference. Our changes also would remove the section 1035 issuers from Treas. Reg. Sec. 1.6050Y- 3(a) for reasons explained above and instead require the reporting of information under existing procedures for sharing information on the tax attributes of policies in a section 1035 exchange. We do not anticipate a high volume of section 1035 exchanges of RPS contracts. However, the infrequency of reporting with respect to such exchanges does not ease the burden on issuers. To assure optimum accurate compliance, companies strive to automate tax reporting functions. It is...

4 Treas. Reg. Sec.1.6050Y-1(a)(11).

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...therefore more efficient to allocate resources to existing systems and processes. Under the Proposed Regulations, the issuer of the existing contract would have to issue both a Form 1099-R with a Distribution Code 6 (or other code specified by the IRS) for the exchange, and a Form 1099- SB. The issuer of the new contract would also have to issue a Form 1099-SB to report the 1035 exchange. Requiring the issuer of the exchanged contract to report the transaction only on Form 1099-R, which for decades has been the vehicle for reporting section 1035 exchanges, would provide the most understandable and efficient tax reporting for the existing contract issuer and relieve the government from duplicative reporting. If the Treasury and IRS believe that it is necessary to identify the exchange specifically as one of an RPS policy, a new distribution code for Form 1099-R would be a much simpler change to current systems and procedures than a requirement to use a not-yet modified 1099-SB. Such an approach also would make it possible for issuers to comply with the required information exchange between insurers within 30 days from the date of the exchange./5

Effective date

Under the Proposed Regulations, the tax reporting obligations become effective on the date the Proposed Regulations are finalized. Because IRS will need to provide updated tax information reporting instructions, we ask that the final regulations not require reporting until the IRS has published final instructions and any final form revisions. In addition, we request that additional time be provided after final instructions and form revisions are published so that companies and their third-party vendors can implement the required changes. Companies and vendors will need time to update compliance systems, automated feeds (including, to IRS), and procedures, as well as to train company personnel. Although companies will take steps to implement these changes as quickly as possible, we ask that the final regulations provide penalty relief for reasonable, good faith, efforts to comply with the final regulations during a reasonable transition period. Specifically, an appropriate transition period would be the later of 6 months after the date of publication of the final regulations, or 6 months after IRS publishes final tax reporting instructions and any form revisions.

Sincerely,

Regina Y. Rose

Mandana Parsazad

Sarah Lashley

5 Insurance companies are not currently subject to a specified time period to share the cost basis information in a section 1035 exchange. If the proposed reporting outlined in this letter is not adopted, then insurers would need additional time to comply with the reporting requirements due to their complexity. A period of 60 days for the required exchange of information between insurers under Prop. Treas. Reg. Sec. 1.6050Y-3(d)(2) would be reasonable.

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Original text and appendix here: https://downloads.regulations.gov/IRS-2023-0023-0004/attachment_1.pdf