Short title

This Act may be cited as the

Protecting Proper Life Insurance from Abuse Act

or the

PPLI Abuse Act

Tax treatment of private placement contracts

(a)

In general

Chapter 79 of the Internal Revenue Code of 1986 is amended by inserting after section 7702B the following new section:

7702C.

Treatment of applicable private placement contracts

(a)

General rule

Notwithstanding any other provision of this title, an applicable private placement contract shall not be treated as an insurance or annuity contract for purposes of this title.(b)

Applicable private placement contract

For purposes of this section—(1)

In general

The term applicable private placement contract means any private placement contract if the requirements of subsection (c) are not met with respect to any segregated asset account described in section 817(d) to which amounts received under such contract are allocated.(2)

Private placement contract

The term private placement contract means any contract—(A)which, without regard to this section, would be treated for purposes of this title as—(i)a life insurance contract under section 7702 or an annuity contract under section 72, and(ii)a variable contract (within the meaning of section 817(d)), and(B)with respect to which the holder of the contract is required, for purposes of obtaining a registration exemption under securities laws as in effect on the date of enactment of this section (including the Securities Exchange Act of 1934 and the Investment Advisors Act of 1940), to make a representation that such holder—(i)has a specified minimum amount of income or assets,(ii)has completed a specified minimum level of education, or(iii)holds a specific license or credential.(3)

Special rules for foreign issued contracts

In the case of a contract issued outside of the United States which is directly or indirectly held by a United States person, if, without regard to this section—(A)such contract is a life insurance or annuity contract under the laws under which it is issued (or, unless otherwise provided under regulations, would be such a contract if issued in the United States), and(B)(i)in the case of an annuity contract, or a contract providing insurance on retired lives (as described in section 807(c)(6)), the amounts paid into or out of such contract reflect the investment return and the market value of 1 or more assets (other than assets in the general accounts of the issuer or reinsurer), or(ii)in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of 1 or more assets described in clause (i),

such contract shall (without regard to whether or not the requirements of subsection (c) are met with respect to such contract) be treated as an applicable private placement contract for purposes of this section (and, for such purposes, the assets described in subparagraph (B) with respect to such contract shall be treated as a segregated asset account with respect to such contract).

(4)

Permanent treatment

A contract, once treated as an applicable private placement contract under this section, shall be so treated for all subsequent periods without regard to whether it continues to meet the requirements to be so treated.(c)

Limitations for assets in segregated asset account

(1)

In general

The requirements of this subsection are met with respect to a segregated asset account only if—(A)the assets in such account support at least 25 private placement contracts, and(B)in the case of each of the contracts supported by such account—(i)the value of such contract is supported by each of the assets in such account (and not by any asset not in such account), and(ii)the proportion of each such asset supporting such contract is the same as the proportion of each other such asset supporting such contract.(2)

Aggregation of contracts held by persons

For purposes of paragraph (1)—(A)

In general

All private placement contracts held directly or indirectly by the same person, or a related person to such person, shall be treated as 1 private placement contract.(B)

Related person

(i)

In general

A person shall be treated as related to another person if they bear a relationship to such other person described in section 267(b) or 707(b)(1).(ii)

Members of family

For purposes of clause (i), sections 267(b) and 707(b)(1) shall be applied as if section 267(c)(4) provided that the family of an individual consists of a husband and wife and members of a family described in section 1361(c)(1)(B), except that the applicable date for purposes of clause (ii) thereof shall be the date the segregated asset account is established.(iii)

Members under common control

For purposes of clause (i), a rule similar to section 108(e)(4)(C) shall apply.(d)

Tax treatment of holders of contracts

(1)

Ownership of assets and income

(A)

In general

In the case of an applicable private placement contract, the holder of such contract shall be treated as if the holder—(i)held its share of the assets in the segregated asset account supporting such contract, and(ii)received or accrued directly its share of any amount of net income, net loss, or credit earned or accrued with respect to such assets (without regard to whether any amount is actually distributed).(B)

Net income or loss

For purposes of subparagraph (A)(ii)—(i)

Net income

The term net income means, with respect to any assets supporting a contract—(I)the amount (if any) by which the aggregate amount of income (including interest, dividends, or gains) with respect to such assets is greater than(II)the deductions allowed under this title which are directly connected with the production of such income.(ii)

Net loss

The term net loss means, with respect to any assets supporting a contract, the amount (if any) by which the amount under clause (i)(II) exceeds the amount under clause(i)(I).(iii)

Amounts not taken into account

No deduction shall be taken into account under clause (i)(II) (including for reserves, fees, or mortality charges) which—(I)is taken into account by the insurer or reinsurer of the applicable private placement contract, or(II)would be so taken into account if such contract were treated as a life insurance or annuity contract.(C)

Taxable year of cessation

If a life insurance contract or annuity contract ceases to be such a contract by reason of this section in a taxable year after the taxable year in which issued, amounts described in subparagraph (A)(ii) for all preceding taxable years shall be treated as received or accrued during the taxable year in which such cessation occurs.(2)

Distributions

(A)

In general

Any excess distribution received by a taxpayer from an applicable private placement contract shall be included by the taxpayer in gross income as ordinary income.(B)

Excess distribution

For purposes of this paragraph, the term excess distribution means, with respect to any applicable private placement contract, any applicable distribution to a taxpayer to the extent that—(i)the amount of such applicable distribution, when added to the aggregate amount of applicable distributions made with respect to such contract (whether or not made to such taxpayer) for all periods preceding such applicable distribution, exceeds(ii)the applicable adjusted basis in such contract immediately before such applicable distribution.(C)

Applicable adjusted basis

For purposes of this paragraph, the term applicable adjusted basis means, with respect to any applicable private placement contract as of the date of any applicable distribution, the sum of the premiums and other amounts paid by any person with respect to such contract as of such date—(i)increased by the aggregate amount of net income includible in gross income under paragraph (1) with respect to such contract (whether or not includible by the taxpayer) for all periods preceding such date, and(ii)decreased by the aggregate amount of deductions for net losses allowable to any person under paragraph (1) with respect to such contract for all periods preceding such date.(D)

Applicable distribution

For purposes of this paragraph, the term applicable distribution means, with respect to any applicable private placement contract, any payment by reason of the death of the insured, any payment in the nature of an annuity payment, any withdrawal, the distribution of any loan proceeds, and any other similar distribution or payment.(E)

Assignments, etc

In the case of the transferee of a transfer for valuable consideration by assignment or otherwise of an applicable private placement contract (or an interest therein)—(i)the premiums and other amounts paid by the transferee with respect to such contract shall be the sum of the actual value of such consideration plus any premiums and other amounts subsequently paid by the transferee, and(ii)the amounts determined under subparagraph (C) with respect to such contract shall only include amounts included in gross income, and deductions of, the transferee.(e)

Tax treatment of issuers and reinsurers

(1)

In general

In the case of an issuer or reinsurer of an applicable private placement contract (including a reinsurer with respect to mortality risk for such contract)—(A)premiums and reserves with respect to such contract shall not be treated as life insurance premiums or reserves, and(B)notwithstanding section 446(a) or part I of subchapter L of chapter 1—(i)premiums, expenses, and fees with respect to such contract which, without regard to this section, would be taken into account in determining life insurance taxable income shall be so taken into account, but(ii)the amounts so taken into account shall be determined under the accrual method of accounting described in section 446(c)(2).(2)

Contracts issued by foreign issuers

Notwithstanding subsection (a), an applicable private placement contract issued by a foreign insurer or reinsurer and to which section 4371 applies (without regard to this section) shall continue to be treated as a contract to which such section applies.(f)

Regulations

The Secretary shall issue such regulations and other guidance as are necessary to carry out this section and section 6050AA, including regulations or other guidance—(1)preventing the avoidance of the application of this section through related parties, accommodation parties, passthrough entities, trusts, or the allocation of assets other than through segregated asset accounts,(2)providing that an asset account or set of assets not meeting the requirements of section 817(d) shall be treated as a segregated asset account meeting such requirements if such account or set of assets achieves substantially the same results as such a segregated asset account or if such treatment is otherwise necessary to prevent the avoidance of the purposes of this section,(3)preventing the taking into account of items more than once,(4)providing rules for determining whether 1 or more persons are indirect holders of applicable private placement contracts, and(5)providing rules for the application of this section in cases where there is more than 1 holder of an applicable private placement contract or where applicable distributions are made at the same time to 2 or more persons with respect to such a contract.

(b)

Conforming amendment

The table of sections for chapter 79 of the Internal Revenue Code of 1986 is amended by inserting after the item relating to section 7702B the following new item:

Section 7702C. Treatment of applicable private placement contracts.

(c)

Effective date

(1)

In general

The amendments made by this section shall take effect on the date of the enactment of this Act and shall apply to contracts whether issued before, on, or after such date.(2)

Transition rule

The amendments made by this section shall not apply to a contract issued on or before the date of the enactment of this Act which (without regard to this paragraph) is an applicable private placement contract under section 7702C of the Internal Revenue Code of 1986 (as added by this section) if, before the end of the 180-day period beginning on such date of enactment, such contract—(A)is exchanged for, or converted to, a life insurance or annuity contract that is not such an applicable private placement contract, or(B)is cancelled or otherwise liquidated.

Reporting requirements

(a)

In general

(1)

Return requirement

(A)

In general

Subpart B of part III of subchapter A of chapter 61 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

6050BB.

Returns relating to applicable private placement contracts

(a)

Initial report

(1)

In general

Every reporting issuer, shall, not later than the applicable date, make a return (in such form as the Secretary may prescribe) with respect to each applicable private placement contract issued or reinsured by the issuer.(2)

Information included

Such return shall set forth—(A)the name, address, and TIN of the reporting issuer,(B)the name, address, and TIN of the holder of the contract,(C)the applicable adjusted basis (as defined in section 7702C(d)(2)) in the contract of such holder (determined as if an applicable distribution were to be made as of the applicable date),(D)any other contracts which are supported by the segregated asset account supporting such contract,(E)the name, address, and TIN of the holder of any contract described in subparagraph (D) who is related (within the meaning of section 7702C(c)(2)(B)) to the holder of such contract, and(F)such other information as the Secretary may require.(3)

Applicable date

For purposes of this section, the applicable date means, with respect to any applicable private placement contract, 30 days after the later of—(A)the date that is 180 days after the date of the enactment of this section, or(B)the date the contract first became an applicable private placement contract.(b)

Annual reports

(1)

In general

Every reporting issuer shall file an annual return with respect to each applicable private placement contract issued or reinsured by the issuer.(2)

Time for filing return

The return under paragraph (1) shall be filed at such time and in such manner as the Secretary shall prescribe.(3)

Information included

A return filed under paragraph (1) shall set forth—(A)the name, address, and TIN of the reporting issuer,(B)the name address, and TIN of the holder of the applicable private placement contract,(C)the name, address, and TIN of each person receiving an applicable distribution (as defined in section 7792C(d)(2)) under the contract if such person is not the holder of the contract,(D)the amounts for the taxable year of—(i)items of income, loss, deduction, and credit for the year with respect to the assets of which the holder is treated as the owner by reason of section 7702C(d)(1),(ii)the amount of any applicable distribution (as so defined) under the applicable private placement contract and the portion of such distribution which is treated as an excess distribution (as defined in section 7702C(d)(2)),(iii)the holder’s applicable adjusted basis (as defined in section 7702C(d)(2)) in the contract as of the date of each applicable distribution made during the reporting period and as of the last day of the reporting period (determined as if an applicable distribution were to be made on such day), and(iv)in the case of a reporting issuer described in subsection (d)(1)(B), premiums or other amounts paid or received by any person pursuant to any reinsurance or risk-shifting arrangement described in such subsection, and(E)such other information as the Secretary may require. (c)

Statement To be furnished to taxpayers with respect to whom information is required

(1)

In general

Every person that is required to make a return under subsection (a) or (b) shall furnish to each person whose identity is required to be set forth under subsection (a)(2)(B) or subparagraph (B) or (C) of subsection (b)(3) a written statement showing— (A) the name, address, and phone number of the information contact of the person required to make such return, and (B) the information required to be shown on such return with respect to the person to whom such statement is required to be furnished. (2)

Furnishing of information

The written statement required under paragraph (1) with respect to any return shall be furnished to the person on or before January 31 of the year following the calendar year for which the return is required to be made. (d)

Definitions

For purposes of this section—(1)

Reporting issuer

The term reporting issuer means any person who—(A)issues a life insurance contract or annuity contract which is treated as an applicable private placement contract, or(B)reinsures, or shifts risks with respect to any portion of, an applicable private placement contract.(2)

Applicable private placement contract

The term applicable private placement contract has the meaning given such term under section 7702C.

(2)

Penalties

(A)

Failure to provide initial return

Part I of subchapter B of chapter 68 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

6720D.

Penalty for failure to report applicable private placement contracts

(a)

Imposition of penalty

(1)

In general

Any person required to make a return under section 6050BB(a) who fails to file such return with the Secretary before the applicable date shall pay a penalty equal to the amount determined under paragraph (2).(2)

Amount of penalty

(A)

In general

The amount of the penalty determined under this paragraph is the sum of—(i)$1,000,000, plus(ii)an additional $1,000,000 for each penalty period ending before the date on which the failure described in subsection (a) has been corrected.(B)

Penalty period

For purposes of this subsection, the term penalty period means each period of 30 days beginning after the first 30-day period beginning with the applicable date.(3)

Applicable date

For purposes of this subsection, the term applicable date has the meaning given such term under section 6050BB(a)(3).(b)

Special rules

(1)

Persons subject to insurance regulation

In the case of a person—(A)which is regulated by an agency or entity under foreign, State, or local law, and(B)which is required to pay a penalty under this section,

the requirement to pay such penalty shall be disclosed to such agency or entity. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which this section applies.

(2)

Persons subject to Securities Exchange Act of 1932

In the case of a person—(A)which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and(B)which is required to pay a penalty under this section,

the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which this section applies.

(B)

Failure to make annual returns or payee statements

(i)

Returns

Section 6724(d)(1)(B) of the Internal Revenue Code of 1986 is amended by striking or at the end of clause (xxviii), by inserting or at the end of clause (xxix), and by inserting after clause (xxix) the following new clause:

(xxx)section 6050BB(b),

(ii)

Statements

Section 6724(d)(2) of such Code is amended—(I)by redesignating subparagraphs (NN) and (OO) as subparagraphs (OO) and (PP), respectively, and(II)by inserting after subparagraph (MM) the following new subparagraph:

(NN)section 6050BB(c).

(3)

Clerical amendments

(A)The table of sections for subpart B of part III of subchapter A of chapter 61 of the Internal Revenue Code of 1986 is amended by inserting after the item relating to section 6050AA the following new item:

Sec. 6050BB. Returns relating to applicable private placement contracts.

(B)The table of sections for part I of subchapter B of chapter 68 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

Sec. 6720D. Penalty for failure to report applicable private placement contracts.

(b)

Rules relating to foreign account tax compliance

(1)

Insurance companies treated as financial institutions

(A)

In general

Section 1471(d)(5) of the Internal Revenue Code of 1986 is amended by striking or at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting , or, and by adding at the end the following new subparagraph:

(D)except as otherwise provided by the Secretary, holds itself out as a life insurance company.

(B)

Treatment of certain corporations as foreign financial institutions

Section 1471(d)(4) of such Code is amended by inserting (determined without regard to any election made under section 953(d)) after foreign entity.(C)

Limitation on authority to exclude

Section 1471(f)(4) of such Code is amended by inserting (other than an entity described in subsection (d)(5)(D)) before the period at the end.(2)

Private placement contracts treated as financial accounts

Section 1471(d)(2) of the Internal Revenue Code of 1986 is amended by striking and at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting , and, and by inserting after subparagraph (C) the following new subparagraph:

(D)any contract which is described in section 7702C(b)(3) and any separate segregated asset account that holds assets supporting such a contract.

(3)

Additional limitation on exceptions

Section 1472(c)(2) of the of the Internal Revenue Code of 1986 is amended by inserting (other than payments to an entity described in section 1471(d)(5)(D)) before the period at the end.(4)

Effective date

The amendments made by this subsection shall apply to payments made after the date that is 1 year after the date of the enactment of this Act.