60 / What are the new reporting requirements that the 2017 tax reform legislation imposed on taxpayers involved in reportable policy sales of life insurance contracts?

Editor’s Note: Upon release of the final regulations, the IRS clarified that no reporting was required under Section 6050Y for reportable policy sales made and reportable death benefits paid after December 31, 2017, and before January 1, 2019.¹

The 2017 tax reform legislation imposes certain reporting requirements when an existing life insurance policy has been sold in a “reportable policy sale”. The requirements apply to anyone who acquires a life insurance contract (or an interest in a life insurance contract) in a reportable policy sale and any “issuer” of the contract involved. These requirements were to be effective for reportable policy sales made after December 31, 2017 and reportable death benefits paid after December 31, 2017. However, under the final regulations, the IRS and Treasury clarified that the requirements would apply to reportable policy sales and payments of death benefits occurring after December 31, 2018.

The final regulations also provide an exception from the definition of reportable policy sale with respect to the indirect acquisition of an interest in a life insurance contract by a person if a partnership, trust, or other entity in which an ownership interest is being acquired directly or indirectly holds the interest in the life insurance contract and acquired that interest before January 1, 2019, or acquired that interest in a reportable policy sale reported in compliance with IRC Section 6050Y(a) and Treasury Regulation Section 1.6050Y-2.²

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Planning Point: Forms 1099-LS and 1099-SB now contain instructions regarding these reporting requirements under the regulations, which were finalized late in 2019.³

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Form 1099-LS must be filed by anyone who acquires the life insurance in a reportable policy sale, while Form 1099-SB must be filed by an issuer of the life insurance policy to report information about the seller’s investment in the contract and contract surrender value, in addition to the basic information about the transaction.

The buyer must report information to the IRS, the seller and the insurance company that issued the policy, including:

(1)     His or her name, address and TIN,

(2)     The name, address and TIN of whoever received payment for the interest in the policy,

(3)     The date of the sale,

(4)     The name of the policy issuer, and

(5)     The amount of the payment.⁴

When the insurance company receives this notice, it must report the following information to the IRS and the seller:

(1)     The name, address and TIN of the seller,

(2)     The basis of the insurance contract, and

(3)     The policy number.⁵

A “reportable policy sale” means a sale where the acquirer has no substantial family, business or financial relationship with the insured (apart from the interest in the life insurance contract). The rules also apply with respect to indirect acquisitions made by way of purchasing an interest in a partnership, trust or other entity that holds an interest in the life insurance contract.⁶ The final regulations define “issuer” to include anyone that bears any part of the risk associated with the life insurance contract, including those collecting premiums and paying death benefits.⁷ However, where there are multiple issuers, the reporting obligations are satisfied if only one issuer or designee reports on a timely basis.⁸

When a reportable death benefit (a death benefit paid after a reportable policy sale) has been paid, the life insurance company is required to report certain information to the IRS and to the payee, including:

(1)     The name, address and TIN of the person making the payment,

(2)     The name, address and TIN of each recipient of payment,

(3)     The date of each payment,

(4)     The gross amount of the payment, and

(5)     The payor’s estimate of the buyer’s basis in the contract.⁹

The regulations exclude from certain aspects of the new rules situations where an individual or entity acquires a C corporation that owns life insurance contracts, so long as the life insurance contracts do not represent more than 50 percent of the corporation’s assets. Generally, the new rule created by tax reform would cause certain life insurance contracts to lose their tax-preferred status if transferred in a reportable policy sale (and most business combinations would qualify as such). Accordingly, the acquisition of ownership of a C corporation that owns an interest in a life insurance contract is not an indirect acquisition of such an interest, and therefore is not a reportable policy sale, if no more than 50 percent of the gross value of the assets of the C corporation consists of life insurance contracts. This means that under the regulations, the pre-tax reform exceptions to the transfer for value rule could apply when a C corporation is acquired.¹⁰