[Federal Register Volume 84, Number 211 (Thursday, October 31, 2019)]
[Rules and Regulations]
[Pages 58460-58489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23559]



[[Page 58459]]

Vol. 84

Thursday,

No. 211

October 31, 2019

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Information Reporting for Certain Life Insurance Contract Transactions 
and Modifications to the Transfer for Valuable Consideration Rules; 
Final Rule

  Federal Register / Vol. 84 , No. 211 / Thursday, October 31, 2019 / 
Rules and Regulations  

[[Page 58460]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9879]
RIN 1545-BO49


Information Reporting for Certain Life Insurance Contract 
Transactions and Modifications to the Transfer for Valuable 
Consideration Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance on 
new information reporting obligations under section 6050Y related to 
reportable policy sales of life insurance contracts and payments of 
reportable death benefits. The final regulations also provide guidance 
on the amount of death benefits excluded from gross income under 
section 101 following a reportable policy sale. The final regulations 
affect parties involved in certain life insurance contract 
transactions, including reportable policy sales, transfers of life 
insurance contracts to foreign persons, and payments of reportable 
death benefits.

DATES: 
    Effective Date: These regulations are effective October 31, 2019.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.101-6 and 1.6050Y-1(b).

FOR FURTHER INFORMATION CONTACT: Kathryn M. Sneade, (202) 317-6995 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 under sections 
101 and 6050Y of the Internal Revenue Code (Code). These amendments 
(final regulations) implement legislative changes to sections 101 and 
6050Y of the Code by sections 13520 and 13522 of Public Law 115-97 (131 
Stat. 2054, 2149, 2151), commonly referred to as the Tax Cuts and Jobs 
Act (TCJA). The final regulations under section 101 amend final 
regulations under section 101 published in the Federal Register on 
November 26, 1960 (25 FR 11402), as subsequently amended on December 
24, 1964 (29 FR 18356), September 27, 1982 (47 FR 42337), and July 26, 
2007 (72 FR 41159) (existing regulations).
    Section 13520 of the TCJA added section 6050Y to chapter 61 
(Information and Returns) of subtitle F of the Code (chapter 61). 
Section 6050Y imposes information reporting obligations related to 
certain life insurance contract transactions, including reportable 
policy sales and payments of reportable death benefits. Section 6050Y 
provides that each of the returns required by section 6050Y is to be 
made ``at such time and in such manner as the Secretary shall 
prescribe.'' The final regulations under section 6050Y implement 
section 6050Y by specifying the manner in which and time at which the 
information reporting obligations must be satisfied. The final 
regulations also provide definitions and rules that govern the 
application of the information reporting obligations.
    Section 13522 of the TCJA amended section 101. New section 
101(a)(3) defines the term ``reportable policy sale'' and provides 
rules for determining the amount of death benefits excluded from gross 
income following a reportable policy sale. The final regulations under 
section 101 provide definitions applicable under sections 101 and 6050Y 
and guidance for determining the amount of death benefits excluded from 
gross income following a reportable policy sale.
    Notice 2018-41, 2018-20 I.R.B. 584, described sections 13520 and 
13522 of the TCJA and the regulations the Department of the Treasury 
(Treasury Department) and the IRS expected to propose under section 
6050Y, requested comments on the definition of ``reportable policy 
sale'' set forth in section 101(a)(3)(B), among other things, and 
identified the need for regulations providing guidance on the 
application of section 101(a) following the addition of section 
101(a)(3) to the Code. The Treasury Department and the IRS received 
comments in response to the notice and considered these comments in 
developing the proposed regulations.
    The Treasury Department and the IRS published proposed regulations 
under sections 101 and 6050Y (REG-103083-18) in the Federal Register 
(84 FR 11009) on March 25, 2019 (proposed regulations). The Treasury 
Department and the IRS received public comments on the proposed 
regulations and held a public hearing on June 5, 2019.
    After consideration of all of the comments on the proposed 
regulations, the proposed regulations are adopted as amended by this 
Treasury decision.

Summary of Comments and Explanation of Revisions

    This section discusses the public comments received on the proposed 
regulations and explains the revisions adopted by the final regulations 
in response to those comments.

1. Comments and Changes Relating to Applicability Dates

A. Applicability Date for Section 6050Y Regulations
    Section 1.6050Y-1 of the proposed regulations provides that the 
rules in Sec.  1.6050Y-1 through 1.6050Y-4 of the proposed regulations 
apply to reportable policy sales made and reportable death benefits 
paid after December 31, 2017, and provides transition relief with 
respect to reporting required on reportable policy sales and payments 
of reportable death benefits occurring after December 31, 2017, and 
before the date final regulations under section 6050Y are published in 
the Federal Register.
    One commenter recommended that reporting obligations under section 
6050Y (as well as application of the rules under section 101 relating 
to section 6050Y) be delayed until 60 days after the date the final 
regulations are published in the Federal Register. Informal comments 
also were received requesting transition relief (such as delayed 
reporting) or permanent relief with respect to the reporting 
obligations under section 6050Y for reportable policy sales and 
payments of reportable death benefits occurring after December 31, 
2017, and before January 1, 2019 (such as waiving the reporting 
obligations for this period). One commenter requested that at least an 
additional 30 days be added to the 90-day relief period provided in 
Sec.  1.6050Y-1(b)(2) and (3) of the proposed regulations for filing 
returns and furnishing statements required under section 6050Y(b) and 
(c) and Sec.  1.6050Y-3 and 1.6050Y-4 of the proposed regulations, to 
give issuers at least 60 days to complete their reporting after the 60-
day extension period provided to acquirers of an interest in a life 
insurance contract under Sec.  1.6050Y-1(b)(1) of the proposed 
regulations. The commenter asserted that issuers require significantly 
more time than the 30 days effectively provided to complete Forms 1099-
SB, ``Seller's Investment in Life Insurance Contract,'' and 1099-R 
``Distributions From Pensions, Annuities, Retirement or Profit-Sharing 
Plans, IRAs, Insurance Contracts, etc.'', and to add new forms (such as 
Form 1099-SB) to their systems. The commenter stated that issuers must 
identify policies that are subject to reporting once the Forms 1099-LS, 
``Reportable Life Insurance Sale,'' are received as well as enhance 
systems to track these policies over their life and transmit data 
between various systems in order to accurately report under sections 
6050Y(b) and (c).

[[Page 58461]]

    In response to these comments, and to give acquirers and issuers 
ample time to develop and implement reporting systems, the final 
regulations provide that the rules in Sec. Sec.  1.6050Y-1 through 
1.6050Y-4 of the final regulations apply to reportable policy sales 
made and reportable death benefits paid after December 31, 2018. See 
Sec.  1.6050Y-1(b) of the final regulations. As a result, no reporting 
is required under section 6050Y for reportable policy sales made and 
reportable death benefits paid after December 31, 2017, and before 
January 1, 2019.
    Section 1.6050Y-1(a)(12) of the final regulations defines 
``reportable death benefits'' as ``amounts paid by reason of the death 
of the insured under a life insurance contract that are attributable to 
an interest in the contract that was transferred in a reportable policy 
sale.'' Accordingly, because the definition of ``reportable policy 
sale'' under Sec.  1.6050Y-1(a)(14) of the final regulations applies 
only to transfers of interests in life insurance contracts made after 
December 31, 2018, death benefits are ``reportable death benefits'' 
under Sec.  1.6050Y-1(a)(12) of the final regulations and are subject 
to the reporting requirements of Sec.  1.6050Y-4 of the final 
regulations only if the death benefits are paid by reason of the death 
of the insured under a life insurance contract transferred after 
December 31, 2018, in a reportable policy sale.
    The final regulations also provide transition relief as set forth 
in the proposed regulations with two modifications. First, the 
transition relief applies with respect to reportable policy sales made 
and reportable death benefits paid after December 31, 2018, and on or 
before October 31, 2019. Second, as requested by one of the commenters, 
Sec.  1.6050Y-1(b)(3), (4), and (5) of the final regulations provide 
issuers with at least 120 days after the final regulations are 
published in the Federal Register to file returns and furnish 
statements under section 6050Y(b) and (c) and Sec. Sec.  1.6050Y-3 and 
1.6050Y-4 of the final regulations. These features of the final 
regulations are intended to give acquirers and issuers ample time to 
develop and implement reporting systems.
    Noting that 250 or more information returns of a single taxpayer 
must be filed electronically, one commenter requested waivers from 
electronic filing for 2018 and 2019 issuer reporting under section 
6050Y(b) and (c). The Treasury Department and the IRS have determined 
not to provide the requested waiver in the final regulations under 
section 6050Y because procedures already exist for any person required 
to file 250 or more returns during the calendar year to request a 
waiver from the requirement to file electronically by showing hardship. 
See Sec.  301.6011-2(c).
B. Applicability Date for Section 101 Regulations
    Section 1.101-6(b) of the proposed regulations provides that, for 
purposes of section 6050Y, Sec.  1.101-1(b), (c), (d), (e), (f), and 
(g) apply to reportable policy sales made after December 31, 2017, and 
to reportable death benefits paid after December 31, 2017. Section 
1.101-6(b) of the proposed regulations further provides that, for any 
other purpose, Sec.  1.101-1(b), (c), (d), (e), (f), and (g) apply to 
transfers of life insurance contracts, or interests therein, made after 
the date the Treasury decision adopting the proposed regulations as 
final regulations is published in the Federal Register.
    Several commenters requested clarification regarding the 
applicability dates set forth in Sec.  1.101-6(b) of the proposed 
regulations. Two of these commenters requested that the Treasury 
Department and the IRS clarify that the rules issued with respect to 
section 101(a)(3) apply to all transfers of life insurance contracts, 
or interests therein, made after December 31, 2017, or alternatively, 
that the Treasury Department and the IRS allow taxpayers to rely upon 
the rules in Sec.  1.101-1 of the proposed regulations for transactions 
undertaken after December 31, 2017, and before the date that the 
Treasury Department adopts final rules. Another commenter recommended 
that application of the rules under section 101 (as well as the 
reporting obligations under section 6050Y) be delayed until 60 days 
after the date the final regulations are published in the Federal 
Register, but suggested that language should be included in the 
preamble to the final regulations to provide that taxpayers may rely on 
the proposed regulations for the period prior to the effective date of 
the final regulations.
    Because the final regulations provide that the reporting 
obligations under section 6050Y apply to reportable policy sales and 
payments of reportable death benefits occurring after December 31, 
2018, for purposes of determining whether a transfer of an interest in 
a life insurance contract is a reportable policy sale or a payment of 
death benefits is a payment of reportable death benefits subject to the 
reporting requirements of section 6050Y and Sec. Sec.  1.6050Y-1 
through 1.6050Y-4 of the final regulations, the definitions and rules 
set forth in Sec.  1.101-1(b) through (g) of the final regulations 
apply to reportable policy sales made after December 31, 2018, and to 
reportable death benefits paid after December 31, 2018. See Sec. Sec.  
1.101-6(b) and 1.6050Y-1(b) of the final regulations.
    The final regulations provide that, for other purposes, 
specifically for purposes of determining the amount of the proceeds of 
life insurance contracts payable by reason of death excluded from gross 
income under section 101, Sec.  1.101-1(b) through (g) of the final 
regulations apply to amounts paid by reason of the death of the insured 
under a life insurance contract, or interest therein, transferred after 
October 31, 2019. However, under section 7805(b)(7), a taxpayer may 
apply the rules set forth in Sec.  1.101-1(b) through (g) of the final 
regulations, in their entirety, with respect to all amounts paid by 
reason of the death of the insured under a life insurance contract, or 
interest therein, transferred after December 31, 2017, and on or before 
October 31, 2019.

2. Comments and Changes Relating to Sec.  1.101-1(b) of the Proposed 
Regulations

    Generally, amounts received under a life insurance contract that 
are paid by reason of the death of the insured are excluded from gross 
income for Federal income tax purposes under section 101(a)(1). 
However, if a life insurance contract or interest therein is sold or 
otherwise transferred for valuable consideration, the ``transfer for 
value rule'' set forth in section 101(a)(2) limits the excludable 
portion of the amount received by reason of the death of the insured to 
the sum of the consideration paid for the contract or interest therein 
and any premiums and other amounts subsequently paid by the transferee 
with respect to the contract or interest therein. Section 101(a)(2)(A) 
and (B) provide two exceptions to this transfer for value rule. One 
exception (the ``certain person exception'') applies to transfers to 
the insured, a partner of the insured, a partnership in which the 
insured is a partner, or a corporation in which the insured is a 
shareholder or officer (``certain persons''). See section 101(a)(2)(B). 
The other exception (the ``carryover basis exception'') applies if the 
transferee's basis for determining gain or loss in the life insurance 
contract or interest therein is determined in whole or in part by 
reference to the transferor's basis in the contract or interest 
therein. See section 101(a)(2)(A). Under section 101(a)(3), which was 
added by section 13522 of the TCJA, neither of these exceptions to the 
transfer for value rule apply in the case of a transfer of a life 
insurance contract, or any interest therein, that is a reportable 
policy sale.

[[Page 58462]]

    Section 1.101-1(b)(1)(i) of the proposed regulations provides the 
general transfer for value rule set forth in section 101(a)(2). Section 
1.101-1(b)(1)(ii) of the proposed regulations sets forth the exceptions 
from this general rule for transfers for valuable consideration that 
are not reportable policy sales (the certain person exception and 
carryover basis exception provided in section 101(a)(2)). Section 
1.101-1(b)(2) of the proposed regulations provides rules regarding 
gratuitous transfers of interests in life insurance contracts, as well 
as transfers of only a part of an interest in a life insurance contract 
and bargain sales of an interest in a life insurance contract (that is, 
transfers that are in part gratuitous and in part transfers for 
valuable consideration). This section of this Summary of Comments and 
Explanation of Revisions discusses comments received on Sec.  1.101-
1(b) of the proposed regulations.
A. Transfers to Certain Persons
    One commenter on the proposed regulations described a life 
insurance policy subject to the section 101(a)(2) transfer for value 
rule as ``tainted,'' in that death benefits paid under the policy are 
no longer fully excluded from income under section 101(a)(1). The 
commenter asked that the final regulations provide for removal of the 
``taint'' by a transfer to the insured, as was permitted before the 
TCJA, and asked for clarification regarding whether a transfer of a 
policy to the insured must be a sale for fair market value to remove 
the ``taint'' of a transfer for valuable consideration. The commenter 
suggested that mistakes happen, including the mistake of not seeking 
tax advice from a professional who knows the section 101 rules, and 
that taxpayers should be able to take corrective measures to remove 
this ``taint.'' The commenter noted that the insured may no longer have 
a business or other need for the current transferee to own the policy 
and may wish to hold the policy to protect the insured's family, or the 
insured may regret selling the policy and wish to buy the policy back 
after the policy was transferred in a reportable policy sale. The 
commenter pointed out that Sec.  1.101-1(b)(3)(ii) of the existing 
regulations (not yet revised to reflect TCJA changes to section 101) 
currently provides such a corrective measure, allowing the ``taint'' to 
be removed by a transfer of the policy to certain persons. However, 
Sec.  1.101-1(b)(1)(ii)(B)(2) of the proposed regulations makes this 
corrective measure unavailable to the extent that the transfer to those 
certain persons was preceded by a transfer of the policy for valuable 
consideration in a reportable policy sale. The commenter also noted 
that Sec.  1.101-1(b)(3)(ii) of the existing regulations does not 
require the corrective transfer to be a sale for fair market value, and 
that Sec.  1.101-1(b)(1)(ii)(B)(1) of the proposed regulations does not 
impose such a requirement. The commenter suggested that Example 1, 
Example 2, and Example 3 in Sec.  1.101-1(g)(1), (2), and (3) of the 
proposed regulations, read together, however, appear to require that 
the transfer to the insured be a sale for fair market value to clear 
the ``taint'' of a prior transfer for valuable consideration. The 
commenter asked for clarification on this point. The commenter 
suggested that the transfer to the insured be available as a corrective 
measure even if that transfer was preceded by a reportable policy sale, 
and, to prevent any possible abuse, that the insured be required to pay 
fair market value if the policy previously had been transferred in a 
reportable policy sale.
    Section 1.101-1(b)(1)(ii)(B)(1) of the proposed regulations does 
not explicitly require that the valuable consideration for a transfer 
of an interest in a life insurance contract be equal to the interest's 
fair market value, but, in the case of a bargain sale, the rules 
implementing the provisions of section 101 are applied separately to 
the sale and gift portions of the transferred interest. Under Sec.  
1.101-1(b)(2)(iii) of the proposed regulations, part of the transfer in 
a bargain sale is treated as a gratuitous transfer subject to Sec.  
1.101-1(b)(2)(i) of the proposed regulations. Example 1, Example 2, and 
Example 3 in Sec.  1.101-1(g)(1), (2), and (3) of the proposed 
regulations are intended to illustrate the application of the rules 
implementing the changes made by the TCJA. For the sake of simplicity, 
the consideration in these examples equals fair market value, so the 
bargain sale rules do not apply. The final regulations include an 
example that illustrates the application of the bargain sale rules. See 
Example 7 in Sec.  1.101-1(g)(7) of the final regulations.
    In response to the comments received, the final regulations provide 
for a fresh start with respect to an interest gratuitously transferred 
to the insured, provided the interest has not previously been 
transferred for value in a reportable policy sale. See Sec.  1.101-
1(b)(2)(i) of the final regulations. Example 2 in Sec.  1.101-1(g)(2) 
of the final regulations illustrates the application of this rule. The 
final regulations also provide for a fresh start with respect to an 
interest (or portion thereof) that is transferred to the insured 
following a reportable policy sale of the interest for valuable 
consideration, but only to the extent that the insured pays fair market 
value for the interest and only with respect to the interest (or 
relevant portion thereof) transferred to the insured that is not 
subsequently transferred in a transfer for valuable consideration or in 
a reportable policy sale. See Sec.  1.101-1(b)(1)(ii)(B)(3) of the 
final regulations. The application of this rule is illustrated in 
revised Example 6, new Example 7, new Example 8, and new Example 9 in 
Sec.  1.101-1(g)(6), (g)(7), (g)(8), and (g)(9) of the final 
regulations.
B. Gratuitous Transfers
    Under Sec.  1.101-1(b)(2)(i) of the proposed regulations, the 
amount of the policy proceeds attributable to a gratuitously 
transferred interest in a life insurance policy that is excludable from 
gross income under section 101(a)(1) is limited to the sum of the 
amount attributable to the gratuitously transferred interest that would 
have been excludable by the transferor if the transfer had not 
occurred, and the premiums and other amounts subsequently paid by the 
transferee with respect to the interest. Unlike the existing 
regulations, the proposed regulations do not provide a special rule for 
a gratuitous transfer made by or to certain persons.\1\ As explained in 
the preamble to the proposed regulations, such a rule is not required 
by section 101(a), and a special rule for these transfers could be 
subject to abuse. See 84 FR 11009, 11017.
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    \1\ Under Sec.  1.101-1(b)(2) of the existing regulations, in 
the case of a gratuitous transfer, by assignment or otherwise, of a 
life insurance policy or any interest therein, the amount of the 
proceeds attributable to such policy or interest that is excludable 
from the transferee's gross income under section 101(a) is, as a 
general rule, limited to the sum of the amount which would have been 
excludable by the transferor if no such transfer had taken place and 
any premiums and other amounts subsequently paid by the transferee 
with respect to the interest. However, if the gratuitous transfer in 
question is made by or to the insured, a partner of the insured, a 
partnership in which the insured is a partner, or a corporation in 
which the insured is a shareholder or officer, the entire amount of 
the proceeds attributable to the policy or interest transferred is 
excludable from the transferee's gross income.
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    Section 1.101-1(b)(2)(i) of the proposed regulations applies to any 
gratuitous transfer of an interest in a life insurance contract, 
``including a reportable policy sale that is not for valuable 
consideration.'' One commenter requested that this language be deleted, 
asserting that including gratuitous transfers within the definition of 
reportable policy sales is

[[Page 58463]]

not consistent with section 101.\2\ The commenter noted that the title 
of section 101(a)(3) is ``Exception to valuable consideration rules for 
commercial transactions,'' which the commenter asserted makes clear 
that a reportable policy sale can occur only if there has been a 
transfer for valuable consideration. The commenter further asserted 
that the provisions of section 101(a)(3)(A) and (B) limit the relevance 
of reportable policy sales to those situations in which a taxpayer 
needs to determine whether one of the section 101(a)(2) exceptions 
applies and, because those exceptions are never relevant for gratuitous 
transfers, reportable policy sales are never relevant for gratuitous 
transfers.
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    \2\ The commenter also asserted that this language creates 
unnecessary and confusing reporting requirements under section 6050Y 
for gift transfers and is inconsistent with the statutory language, 
which, according to the commenter, indicates that a reportable 
policy sale must be a transfer for value. The commenter's concerns 
about reporting are discussed in section 10.A of this Summary of 
Comments and Explanation of Revisions.
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    The TCJA added section 101(a)(3)(A) to provide that the two pre-
existing exceptions to the transfer for value rules no longer apply if 
the transfer is a reportable policy sale. Section 101(a)(3)(B) defines 
a reportable policy sale as any acquisition of an interest in a life 
insurance contract in the absence of the described relationship between 
the acquirer and insured. Although the availability of exceptions from 
the transfer for value rules is not directly relevant to a gratuitous 
transfer standing alone, the acquisition of an interest in a contract 
by an acquirer that does not have the described relationship with the 
insured, including a gratuitous transfer, may affect the exclusion of 
the policy proceeds from gross income under section 101(a) and the 
regulations thereunder if there are subsequent transfers. Consistent 
with the statutory language, the definition of a reportable policy sale 
in the final regulations does not exclude gratuitous transfers.

3. Comments and Changes Relating to Sec.  1.101-1(c) of the Proposed 
Regulations

    Under section 101(a)(3)(B) and Sec.  1.101-1(c)(1) of the proposed 
regulations, a reportable policy sale is, as a general matter, any 
direct or indirect acquisition of an interest in a life insurance 
contract if the acquirer has, at the time of the acquisition, no 
substantial family, business, or financial relationship with the 
insured apart from the acquirer's interest in the life insurance 
contract. Exceptions to the definition of reportable policy sale for 
transfers between certain related entities are provided in Sec.  1.101-
1(c)(2)(i) and (ii) of the proposed regulations. Section 1.101-
1(c)(2)(iii) of the proposed regulations sets forth exceptions from the 
definition of reportable policy sales for certain indirect 
acquisitions. This section of this Summary of Comments and Explanation 
of Revisions discusses comments received on Sec.  1.101-1(c) of the 
proposed regulations.
A. Pre-TCJA Acquisitions
    Two commenters on the proposed regulations requested clarification 
regarding the application of Sec.  1.101-1(c)(2)(iii)(A) with respect 
to the indirect acquisition of an interest in a life insurance contract 
if the entity that directly holds the interest acquired the interest 
before January 1, 2018 (that is, before the existence of any reporting 
requirements under section 6050Y(a)). Both commenters recommended that 
an exception from the definition of reportable policy sale be provided 
with respect to the indirect acquisition of an interest in a life 
insurance contract by a person if the partnership, trust, or other 
entity that directly holds the interest in the life insurance contract 
acquired the interest before January 1, 2018. One commenter recommended 
that, if the requested exception is not provided, the partnership, 
trust, or other entity in which the investment interest is purchased 
should be permitted to undertake the applicable reporting, instead of 
requiring the investor to navigate the complexities of the reporting 
requirements. This commenter also suggested that, if the requested 
exception is provided, the partnership, trust, or other entity could 
file an information return with the IRS for its portfolio of policies 
acquired prior to January 1, 2018, as a transition solution. However, 
the other commenter suggested that the partnership, trust, or other 
entity may not have tracked or retained information sufficient to 
satisfy the reporting requirements under section 6050Y with respect to 
interests acquired before January 1, 2018.
    In response to these comments, Sec.  1.101-1(c)(2)(iii)(A) of the 
final regulations provides 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 
section 6050Y(a) and Sec.  1.6050Y-2.\3\
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    \3\ As discussed in section 1.A of this Summary of Comments and 
Explanation of Revisions, the final regulations provide that the 
reporting obligations under section 6050Y apply to reportable policy 
sales and payments of reportable death benefits occurring after 
December 31, 2018. See Sec.  1.6050Y-1(b) of the final regulations. 
Section 3.B of this Summary of Comments and Explanation of Revisions 
describes changes adopted in Sec.  1.101-1(c)(2)(iii)(A) of the 
final regulations in response to other comments requesting expanded 
indirect acquisition exceptions.
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B. Additional Requests for Expanded Indirect Acquisition Exceptions
    One commenter on the proposed regulations identified the existence 
of a possible technical issue with Sec.  1.101-1(c)(2)(iii)(A) of the 
proposed regulations, which provides an exception from reportable 
policy sale status for certain indirect acquisitions. The commenter 
noted that, under this provision, the indirect acquisition of an 
interest in a life insurance contract is not a reportable policy sale 
if the partnership, trust, or other entity that directly holds the 
interest in the life insurance contract acquired the interest in a 
reportable policy sale that was reported in compliance with section 
6050Y(a) and the regulations thereunder. The commenter described a fact 
pattern in which legal title to a life insurance contract is held by a 
nominee (for example, a securities intermediary) on behalf of a 
partnership, trust, or other entity (for example, an investment fund). 
The commenter concluded that, in this fact pattern, the exception in 
Sec.  1.101-1(c)(2)(iii)(A) of the proposed regulations cannot apply to 
an investor in the partnership, trust, or other entity because the 
investor's ownership interest is in the partnership, trust, or other 
entity (which does not hold a direct interest in the life insurance 
contract), not in the nominee (which directly holds the legal interest 
in the life insurance contract). The commenter also recommended that 
Sec.  1.101-1(c)(2)(iii)(A) be revised to clarify that the exception 
applies if reporting under section 6050Y is done by either the legal 
owner of the life insurance contract (such as a securities intermediary 
holding legal title as a nominee) or the beneficial owner of the life 
insurance policy that controls the life insurance contract under a 
securities account agreement (such as an investment fund).
    In the fact pattern described in the comment letter, the 
partnership, trust, or other entity in which the investor acquires an 
ownership interest holds an interest in the life insurance contract. An 
interest in a life insurance contract is not limited to legal ownership 
of the

[[Page 58464]]

contract. Instead, any person that acquires an enforceable right to 
receive all or a part of the proceeds of the life insurance contract or 
acquires the right to any other economic benefits of the policy as 
described in Sec.  20.2042-1(c)(2) acquires an interest in the life 
insurance contract under Sec.  1.101-1(e)(1) of the proposed 
regulations.
    The partnership, trust, or other entity described by the commenter 
presumably would hold such an interest directly, even though legal 
title to the life insurance contract is held by a nominee or other 
intermediary. By acquiring an interest in the partnership, trust, or 
other entity, the investor indirectly would acquire a beneficial 
interest in the life insurance contract. The exception in Sec.  1.101-
1(c)(2)(iii)(A) of the proposed regulations would apply to this 
indirect acquisition if the partnership, trust, or other entity 
reported its acquisition of the beneficial interest in the contract in 
compliance with section 6050Y(a). The commenter's recommended revision 
to Sec.  1.101-1(c)(2)(iii)(A) of the proposed regulations therefore is 
not adopted in the final regulations.
    The commenter also proposed that Sec.  1.101-1(c)(2)(iii)(A) of the 
proposed regulations be modified to apply if ``the partnership, trust, 
or other entity that directly or indirectly holds the interest in the 
life insurance contract acquired that interest in a reportable policy 
sale reported in compliance with section 6050Y(a) and Sec.  1.6050Y-
2.'' This change is adopted in the final regulations, which also 
clarify that the partnership, trust, or other entity must be a 
partnership, trust, or other entity in which an ownership interest is 
being acquired. As modified, the exception applies to the indirect 
acquisition of an interest in a life insurance contract by a person 
acquiring an ownership interest in a partnership, trust, or other 
entity that holds the interest in the life insurance contract, 
regardless of whether the person's ownership interest in the 
partnership, trust, or other entity that reported its acquisition of 
the interest in the life insurance contract is direct or indirect and 
regardless of whether that partnership, trust, or other entity acquired 
its interest in a direct or indirect acquisition, provided the 
partnership, trust, or other entity acquired its interest in a 
reportable policy sale reported in compliance with section 6050Y(a) and 
Sec.  1.6050Y-2 or, as discussed in section 3.A of this Summary of 
Comments and Explanation, acquired its interest before January 1, 2019.
    One commenter on the proposed regulations reiterated its previous 
request, made in comments on Notice 2018-41, that an exception from the 
reporting requirements of section 6050Y be provided with respect to an 
indirect acquisition of an interest in a life insurance contract by any 
investor that acquires a 5 percent or less economic and voting interest 
in an investment vehicle that holds, directly or indirectly, life 
insurance policies, with the added proviso that the investor must not 
be an officer or director of the investment vehicle. Section 1.101-
1(c)(2)(iii)(B) of the proposed regulations provides that the indirect 
acquisition of an interest in a life insurance contract is not a 
reportable policy sale if the acquirer and his or her family members 
own, in the aggregate, 5 percent or less of the partnership, trust, or 
other entity that directly holds the interest in the life insurance 
contract, but this exception applies only if, immediately before the 
acquisition, no more than 50 percent of the gross value of the assets 
of the partnership, trust, or other entity that directly holds the 
interest in the life insurance contract consists of life insurance 
contracts.
    The final regulations do not adopt the proposed change because, if 
more than 50 percent of an entity's asset value is life insurance 
contracts, investment in life insurance contracts is likely the 
entity's primary business activity, and it is reasonable to expect even 
small investors to be able to determine the primary activity of the 
business they are investing in, regardless of whether they are also 
officers or directors of the entity. In addition, any investor that 
does not qualify for the exception set forth in Sec.  1.101-
1(c)(2)(iii)(B) of the final regulations because more than 50 percent 
of the gross value of the assets of the partnership, trust, or other 
entity that directly holds the interest in the life insurance contract 
consists of life insurance contracts may still qualify for the 
exception set forth in Sec.  1.101-1(c)(2)(iii)(A) of the final 
regulations if a partnership, trust, or other entity that directly or 
indirectly holds the interest in the life insurance contract acquired 
the interest before January 1, 2019, or acquired that interest in a 
reportable policy sale reported in compliance with section 6050Y(a) and 
Sec.  1.6050Y-2.
    Separately, Sec.  1.101-1(c)(2)(iii)(B) of the final regulations 
clarifies that, if the partnership, trust, or other entity in which the 
acquirer is directly acquiring an ownership interest indirectly holds 
an interest in one or more life insurance contracts, (i) the assets of 
the partnership, trust, or other entity in which the ownership interest 
is being acquired are tested to determine whether more than 50 percent 
of the gross value of the assets of that partnership, trust, or other 
entity consists of life insurance contracts, and (ii) the ownership 
interest in that partnership, trust, or other entity held by the 
acquirer and his or her family members after the acquisition is tested 
to determine whether they hold more than a 5 percent ownership interest 
in the entity. The assets of the partnership, trust, or other entity 
that directly holds the interest in the life insurance contract and the 
interest in that partnership, trust, or other entity held by the 
acquirer and his or her family member are tested only if the acquirer 
is directly acquiring an ownership interest in that partnership, trust, 
or other entity.

4. Comments and Changes Relating to Sec.  1.101-1(e) of the Proposed 
Regulations

    Section 1.101-1(e) of the proposed regulations defines the terms 
used to determine whether there has been an acquisition of an interest 
in a life insurance contract. This section of this Summary of Comments 
and Explanation of Revisions discusses comments that generally relate 
to the definitions in Sec.  1.101-1(e) of the proposed regulations.
A. Interest in a Life Insurance Contract
    Under Sec.  1.101-1(e)(1) of the proposed regulations, an 
``interest in a life insurance contract'' is generally defined as the 
interest held by any person that has taken title to or possession of 
the life insurance contract, in whole or part, for state law purposes, 
and the interest held by any person that has an enforceable right to 
receive all or a part of the proceeds of the life insurance contract or 
to any other economic benefits of the policy as described in Sec.  
20.2042-1(c)(2). Section 1.101-1(e)(2) of the proposed regulations 
provides that the term ``transfer of an interest in a life insurance 
contract'' means the transfer of any interest in the life insurance 
contract, including any transfer of title to, possession of, or legal 
or beneficial ownership of the life insurance contract itself. Under 
Sec.  1.101-1(e)(3) of the proposed regulations, the acquisition of an 
interest in a life insurance contract may be direct or indirect, as 
described in Sec.  1.101-1(e)(3)(i) (defining ``direct acquisition of 
an interest in a life insurance contract'') and (ii) (defining 
``indirect acquisition of an interest in a life insurance contract'').
    One commenter on the proposed regulations suggested that, in a life 
settlement transaction in which a securities intermediary holds legal 
title to the acquired life insurance contract as nominee for the new 
beneficial owner of the life insurance contract pursuant to a

[[Page 58465]]

securities account agreement, the new beneficial owner does not acquire 
an interest in the life insurance contract under Sec.  1.101-1(e)(3) of 
the proposed regulations, even though the new beneficial owner controls 
and enjoys all of the benefits of the life insurance policy, because 
the new beneficial owner neither acquires legal title to the life 
insurance policy nor holds an ownership interest in the securities 
intermediary holding legal title. However, under the proposed 
regulations, the new beneficial owner acquires an interest in the life 
insurance contract because it acquires control of all of the benefits 
of the life insurance policy. Any person that acquires an enforceable 
right to receive all or a part of the proceeds of the life insurance 
contract or to any other economic benefits of the policy as described 
in Sec.  20.2042-1(c)(2) acquires an interest in the life insurance 
contract under Sec.  1.101-1(e)(1) of the proposed regulations. In the 
situation described in the comment, after the life settlement 
transaction, there are two persons who have an interest in the life 
insurance contract at issue: The legal title holder and the new 
beneficial owner. Example 16 of Sec.  1.101-1(g)(16) of the final 
regulations illustrates a reportable policy sale in which one acquirer 
acquires legal title and another acquires beneficial ownership.
B. Section 1035 Exchanges
    Section 1.101-1(e)(2) of the proposed regulations provides that the 
issuance of a life insurance contract to a policyholder, other than the 
issuance of a policy in an exchange pursuant to section 1035, is not a 
transfer of an interest in a life insurance contract. The preamble to 
the proposed regulations requests comments on whether the proposed 
regulations should include additional provisions regarding the 
treatment of section 1035 exchanges of life insurance contracts. See 84 
FR 11009, 11019.
    One commenter on the proposed regulations recommended that no 
additional provisions be added to the proposed regulations for this 
circumstance. The commenter stated that the acquirer of a life 
insurance contract in a reportable policy sale would be unlikely to 
meet the requirements for an insurable interest in the insured and, 
consequently, would not be able to make a section 1035 exchange. In 
support of this position, the commenter explained that, in order for an 
exchange of policies to qualify as a section 1035 exchange, the owner 
of the new contract must be the same person who owned the old contract 
at the time of the exchange. The commenter also stated that an insurer 
can issue a new policy only when that new policy will meet state 
insurance laws requiring an insurable interest in the insured, and an 
insurable interest is generally based on a close familial relationship 
with the insured or a lawful and substantial financial interest in the 
continued life of the insured.
    Another commenter recommended that the statement in Sec.  1.101-
1(e)(2) of the proposed regulations regarding section 1035 exchanges be 
deleted or amended to eliminate any suggestion that such transactions, 
by themselves, can lead to reportable policy sales. The commenter 
indicated that the statement suggests that the mere issuance of a new 
life insurance policy in a section 1035 exchange could (or perhaps 
would) give rise to a reportable policy sale and asserted that such 
treatment is unnecessary and would be inappropriate.
    In support of this position, the commenter explained that, 
mechanically, a section 1035 exchange typically involves the assignment 
by the policyholder of the existing policy to the carrier, followed by 
the surrender of the policy and the application of the cash proceeds as 
a premium under a new policy issued to the same owner on the same 
insured's life. The commenter remarked that, although the new carrier 
acquires an interest in the old policy, that interest is immediately 
extinguished. The commenter also remarked that treating the exchange as 
a reportable policy sale is not necessary to serve any information 
collection purpose in the case of an exchange involving a new, 
different carrier, because the exchange must be reported to the IRS and 
the policyholder on a Form 1099-R. Additionally, the commenter 
suggested that, even if an exchange were viewed as potentially meeting 
the definition of a reportable policy sale, the new carrier should be 
viewed as having a substantial business or financial relationship with 
the insured, considering that the carrier just issued a new policy on 
that individual's life.
    The commenter suggested that, if there are specific transactions 
involving section 1035 exchanges that fall outside the normal situation 
described by the commenter, and the Treasury Department and the IRS 
determine that such atypical scenarios might give rise to reportable 
policy sales, the scope of any provision addressing those transactions 
should be limited to those particular transactions, so that doubt will 
not be cast on everyday policy exchanges.
    The reference in Sec.  1.101-1(e)(2) of the proposed regulations to 
section 1035 exchanges was not intended to imply that the transfer of a 
policy to an insurance company in a section 1035 exchange would be a 
reportable policy sale. In response to the comments received on section 
1035 exchanges, Sec.  1.101-1(c)(2)(iv) of the final regulations 
provides that the acquisition of a life insurance contract by an 
insurance company in an exchange pursuant to section 1035 (such as the 
acquisition that would result from the assignment by the policyholder 
of the existing policy to the insurance company in exchange for the 
issuance of a new life insurance contract) is not a reportable policy 
sale.
    The concern prompting the reference in Sec.  1.101-1(e)(2) of the 
proposed regulations to section 1035 exchanges related to the 
possibility that a policy transferred in a reportable policy sale 
subsequently could be exchanged for a new policy in an exchange 
pursuant to section 1035 and that, absent the reference in Sec.  1.101-
1(e)(2), the death benefits paid under the new policy might not be 
reported under section 6050Y(c). Under the final regulations, which 
adopt Sec.  1.101-1(e)(2) of the proposed regulations as proposed, the 
issuance of a new life insurance contract to a policyholder in an 
exchange pursuant to section 1035 is a transfer of an interest in a 
life insurance contract (the newly issued life insurance contract) to 
the policyholder, which results in a direct acquisition of an interest 
in a life insurance contract (the newly issued life insurance contract) 
by the policyholder. See Sec.  1.101-1(e)(2) and (3)(i) of the final 
regulations. The tax treatment of the newly issued life insurance 
contract under section 101 is not affected by the tax treatment of the 
policy for which it was exchanged. However, if the policyholder's 
acquisition of the newly issued contract constitutes a reportable 
policy sale, the rules generally applicable to reportable policy sales 
under section 101 and the regulations thereunder apply to determine the 
effect of the reportable policy sale on the tax treatment of the newly 
issued policy under section 101, and the rules generally applicable to 
reportable policy sales under section 6050Y and the regulations 
thereunder apply to determine whether section 6050Y reporting is 
required with respect to the reportable policy sale. The final 
regulations provide that the acquisition of a newly issued life 
insurance contract by a policyholder in an exchange pursuant to section 
1035 is not a reportable policy sale, if the

[[Page 58466]]

policyholder has a substantial family, business, or financial 
relationship with the insured, apart from its interest in the life 
insurance contract, at the time of the exchange. See Sec.  1.101-
1(c)(2)(v) of the final regulations. If no such relationship exists at 
the time of the section 1035 exchange, the exchange is a reportable 
policy sale under Sec.  1.101-1(c)(1) of the final regulations. The 
Treasury Department and the IRS have determined that no exception from 
the definition of reportable policy sale should apply in this 
situation. Based on comments received, this situation should rarely 
arise due to state law insurable interest requirements.
    Should this situation arise, however, the policyholder, as an 
acquirer, must furnish the statement to the issuer required by section 
6050Y(a)(2) and Sec.  1.6050Y-2(d)(2) of the final regulations (the 
reportable policy sale statement or ``RPSS''). See Sec.  1.6050Y-
2(f)(3) of the final regulations. In this case, the statement must be 
furnished to the issuer that issues the new life insurance contract. 
See Sec.  1.6050Y-1(8)(ii) of the final regulations. However, the 
policyholder is not required to file the information return required by 
section 6050Y(a)(1) and Sec.  1.6050Y-2(a) of the final regulations. 
See Sec.  1.6050Y-2(f)(3). Also, because the policyholder is not only 
the acquirer, but is also the reportable policy sale payment recipient 
and the seller with respect to the reportable policy sale, the 
policyholder is not required to furnish the statement generally 
required to be furnished to the reportable policy sale payment 
recipient under Sec.  1.6050Y-2(d)(1) of the final regulations. See 
Sec.  1.6050Y-1(a)(15), (16), and (18) of the final regulations; Sec.  
1.6050Y-2(f)(3) of the final regulations. Additionally, although the 
issuer that issues the new life insurance contract receives an RPSS, it 
is not required to file a return or furnish a statement to the seller 
under section 6050Y(b) and Sec.  1.6050Y-3 because the seller does not 
need the information that would be provided on the statement to 
properly report a section 1035 exchange. See Sec.  1.6050Y-3(f)(3) of 
the final regulations. However, if the issuer makes a payment of 
reportable death benefits under the newly issued life insurance 
contract, the issuer must report that payment under section 6050Y(c) 
and Sec.  1.6050Y-4 of the final regulations, unless an exception under 
Sec.  1.6050Y-4 applies.
C. Ordinary Course Trade or Business Acquisitions
    Several commenters on Notice 2018-41 suggested that acquisitions of 
life insurance contracts, or interests therein, in ordinary course 
business transactions in which one trade or business acquires another 
trade or business that owns life insurance on the lives of former 
employees or directors should not be reportable policy sales. The 
proposed regulations include provisions that exclude certain of these 
transactions from the definition of reportable policy sales. These 
provisions include the definition of substantial business relationship 
in Sec.  1.101-1(d)(2) of the proposed regulations, the special rule 
for indirect acquisitions in Sec.  1.101-1(d)(4)(i) of the proposed 
regulations, and the definition of the term ``indirect acquisition of 
an interest in a life insurance contract'' in Sec.  1.101-1(e)(3)(ii) 
of the proposed regulations.
    Two commenters on the proposed regulations suggested that ordinary 
course business transactions (such as mergers or acquisitions) 
involving businesses that own life insurance contracts were not 
intended by Congress to fall within the meaning of a reportable policy 
sale and noted that the rules describing a reportable policy sale in 
the proposed regulations are very helpful in confirming that narrow 
intent. Another commenter stated that, although the legislative history 
does not elaborate on the intent of section 101(a)(3)(A) (which limits 
the carryover basis exception to transfers for value that fall outside 
the definition of reportable policy sale in section 101(a)(3)(B)), it 
is widely understood to be aimed at ensuring enforcement of the 
transfer for value rule with respect to newer forms of speculative 
transfers involving life insurance policies, rather than imposing new 
restrictions on legitimate business uses of life insurance. The 
commenter asserted that the preamble to the proposed regulations 
implicitly acknowledges this by stating that some provisions are meant 
to ensure that ``certain ordinary course business transactions'' will 
not be treated as reportable policy sales. In response to these 
comments supporting the ordinary course exclusions from the definition 
of reportable policy sales in the proposed regulations, those 
provisions are retained in the final regulations.
    One commenter on the proposed regulations requested that the 
proposed regulations be revised to provide that any transfer of an 
interest in a life insurance contract as part of a tax-free 
reorganization conducted in the ordinary course of business is eligible 
for an exception to being treated as a reportable policy sale under 
section 101(a)(3)(B), regardless of whether the target survives the 
reorganization transaction. In this regard, the commenter recommended 
revising Sec.  1.101-1(e)(3)(ii) of the proposed regulations, which 
defines the term ``indirect acquisition of an interest in a life 
insurance contract,'' to specifically cover all transactions involving 
the acquisition of a C corporation that qualify for tax-free 
reorganization treatment unless, immediately prior to the acquisition, 
more than 50 percent of the gross value of the assets of the C 
corporation consists of life insurance contracts. The commenter also 
recommended adding an example to illustrate this point. The commenter 
concluded that Sec.  1.101-1(e)(3)(ii) of the proposed regulations 
applies in the case of acquisition transactions in which the corporate 
existence of the target survives the acquisition (for instance, a 
taxable stock sale with no section 338 election, a reverse subsidiary 
merger structured to qualify as a tax-free reorganization under section 
368(a)(2)(E), or a tax-free reorganization under section 368(a)(1)(B)) 
and appears not to apply in the case of acquisition transactions in 
which the target corporation is merged with and into the acquiring 
corporation and the target's separate corporate existence is terminated 
as of the merger date (for instance, a tax-free reorganization under 
section 368(a)(1)(A), (C), or (D) or section 368(a)(2)(D)).
    Under Sec.  1.101-1(e)(3)(ii) of the proposed regulations, an 
indirect acquisition of an interest in a life insurance contract occurs 
when a person (acquirer) becomes a beneficial owner of a partnership, 
trust, or other entity that holds (whether directly or indirectly) the 
interest in the life insurance contract. However, for this purpose, the 
term ``other entity'' does not include a C corporation, unless more 
than 50 percent of the gross value of the assets of the C corporation 
consists of life insurance contracts immediately before the indirect 
acquisition. 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. The commenter thus is correct that Sec.  1.101-1(e)(3)(ii) 
of the proposed regulations applies only in the case of indirect 
acquisitions of life insurance contracts (which include a tax-free 
reorganization in which the corporate existence of the target that 
holds an interest in a life insurance contract survives the 
acquisition), and not direct acquisitions

[[Page 58467]]

of life insurance contracts (which include a tax-free reorganization in 
which the separate corporate existence of a target that holds an 
interest in a life insurance contract is terminated).
    The commenter asserted that this disparate treatment (between 
policies transferred directly in tax-free asset reorganizations and 
indirectly in stock reorganizations) is inappropriate and not warranted 
as a matter of good tax policy. The commenter further asserted that all 
tax-free reorganizations should be eligible for an exception similar to 
the exception provided in Sec.  1.101-1(e)(3)(ii) of the proposed 
regulations. The commenter noted that the proposed regulations provide 
certain exceptions that could apply to tax-free mergers in which the 
target goes out of existence and the surviving corporation continues to 
hold the life insurance contract, but asserted that having to determine 
in these types of tax-free mergers whether a particular exception 
applies on a contract-by-contract basis is unduly complex and a trap 
for the unwary. The commenter further asserted that this burdensome 
exercise does not appear to serve the purpose of the change in the 
statute, which is to address abusive transactions and a failure to 
report income when appropriate.
    The final regulations do not adopt the commenter's recommendation 
regarding amendments to Sec.  1.101-1(e)(3)(ii). The exception in Sec.  
1.101-1(e)(3)(ii) of the proposed regulations is not targeted to 
acquisitions of C corporation stock in tax-free reorganizations, but 
instead is a relatively broad exception that applies to the acquisition 
of any interest in a C corporation, provided that no more than 50 
percent of the C corporation's gross asset value consists of life 
insurance contracts. This exception is one of a number of exceptions in 
the proposed regulations intended to provide relief for indirect 
acquisitions in which acquisition of the underlying life insurance 
contract interest likely was not a significant motivating factor for 
the acquisition. The final regulations preserve the different results 
for stock and asset reorganizations because there are significant 
differences between these two types of reorganizations, and the 
Treasury Department and the IRS have concluded that those distinctions 
justify different treatment for purposes of sections 101 and 6050Y. In 
addition, no exception is provided in the final regulations that 
excludes reorganizations from the definition of a reportable policy 
sale. Rather, there are exclusions based on the application of the 
definitions of substantial relationships as mandated by the statute and 
exceptions for certain indirect acquisitions that may produce different 
results in different types of reorganizations.
    One reason for treating indirect and direct acquisitions of life 
insurance contract interests differently is that an acquirer of an 
interest in an entity may have limited ability to determine what types 
of assets an entity owns, or to obtain from the entity information 
necessary to report on the entity's assets. Thus, for example, the 
proposed regulations provide a reportable policy sale exception for the 
acquisition of a small (five percent or less) interest in any entity, 
unless more than 50 percent of the entity's gross asset value consists 
of life insurance contracts. See Sec.  1.101-1(c)(2)(iii)(B) of the 
proposed regulations. In addition, in the case of a C corporation, a 
corporate level income tax applies to corporate earnings in addition to 
income tax on distributions at the shareholder level. As a result, C 
corporations are not frequently used as vehicles for investing in life 
insurance contracts covering insureds with respect to which the 
corporation does not have a substantial business, financial, or family 
relationship at the time the contract is issued. For this reason, the 
proposed regulations provide a more generous exception for acquisitions 
of interests in a C corporation, provided that no more than 50 percent 
of the C corporation's gross asset value consists of life insurance 
contracts, as determined under Sec.  1.101-1(f)(4) of the proposed 
regulations. See Sec.  1.101-1(e)(3)(ii) of the proposed 
regulations.\4\
---------------------------------------------------------------------------

    \4\ Section 1.101-1(f)(4) of the final regulations clarifies 
that the gross value of assets means, with respect to any entity, 
the fair market value of the entity's assets, including assets 
beneficially owned by the entity under Sec.  1.101-1(f)(1) of the 
final regulations as a beneficial owner of a partnership, trust, or 
other entity. Accordingly, the 50 percent test in Sec.  1.101-
1(e)(3)(ii) of the final regulations applies to a C corporation's 
assets and the assets held by any partnership, trust, or other 
entity beneficially owned by the C corporation.
---------------------------------------------------------------------------

    After the TCJA amendments to section 101, the fact that the 
transfer of a life insurance contract occurs in a carryover basis 
transaction qualifying under section 101(a)(2)(A) (such as a tax-free 
reorganization) is no longer sufficient to avoid the limit on the 
amount of life insurance policy proceeds that are excludable from gross 
income under the section 101(a)(1) transfer for value rule. Rather, 
Congress provided that the carryover basis exception in section 
101(a)(2)(A) does not apply unless the transferee also has a 
substantial family, business, or financial relationship with the 
insured. Under the proposed regulations, in the case of life insurance 
contracts transferred in an asset reorganization, the surviving 
corporation could, for example, establish that a substantial business 
relationship exists by determining that the life insurance policies 
transferred in the reorganization cover insureds who are key persons 
of, or materially participate in, an active trade or business of the 
acquirer as owners, employees, or contractors. See Sec.  1.101-
1(d)(2)(i) of the proposed regulations. The surviving corporation could 
also establish that a substantial business relationship exists by 
determining that the life insurance contracts cover insureds who either 
(i) are officers, directors or employees of the business being acquired 
immediately before the acquisition or (ii) previously were directors, 
highly compensated employees or highly compensated individuals within 
the meaning of section 101(j)(2)(A)(ii) and the surviving corporation 
will have ongoing financial obligations with respect to these 
individuals after the acquisition (such as retirement obligations). See 
Sec.  1.101-1(d)(2)(ii) of the proposed regulations. Corporations must 
track this data annually for purposes of section 101(j) corporate owned 
life insurance (COLI) reporting obligations and related recordkeeping, 
so it should not be overly burdensome to obtain this information. 
Additionally, in an asset reorganization, it would in any case be 
necessary to review the life insurance contracts directly acquired on a 
contract-by-contract basis in order to update insurance contract 
ownership and beneficiary information with the relevant insurance 
company.
    It is possible that an asset acquisition could result in the loss 
of the complete exclusion of death benefits from income with respect to 
some COLI policies that cover insureds who are not employed by the 
target immediately before the acquisition or employed by the acquirer 
after the acquisition and with respect to whom the acquirer has no 
ongoing obligations to pay retirement or other benefits. However, the 
Treasury Department and the IRS have not identified any clear policy 
reason why that tax benefit should carry over when ownership of the 
insurance policy is transferred. The indirect transfer exceptions in 
the proposed regulations that could permit COLI benefits to be retained 
with respect to some policies covering no-longer-connected officers, 
directors, and employees apply only when ownership of the insurance 
policy is not transferred, such as in a stock reorganization. These 
exceptions reflect a weighing by the Treasury Department and the IRS of 
information collection

[[Page 58468]]

burdens versus potential for abuse in indirect acquisition scenarios.
    The commenter also recommended modifying the language in Example 8 
of Sec.  1.101-1(g)(8) of the proposed regulations to clarify that the 
example is intended only to illustrate application of the rule under 
Sec.  1.101-1(d) of the proposed regulations and is not intended to 
imply that, without the insured's current employment by the acquired 
corporation, the transaction would be treated as a reportable policy 
sale. Example 8 of Sec.  1.101-1(g)(8) of the proposed regulations 
describes a tax-free reorganization in which a corporation transfers to 
an acquiring corporation its active trade or business and a life 
insurance policy on the life of a current employee that was acquired 
from the employee. The example concludes that, because the insured was 
an employee of the target corporation at the time of the tax-free 
reorganization, and the acquiring corporation carries on the acquired 
trade or business, the transfer in the tax-free reorganization is not a 
reportable policy sale because the acquirer has a substantial business 
relationship with the insured under Sec.  1.101-1(d)(2)(ii) of the 
proposed regulations. The commenter observed that the example suggests 
that the transfer of the policy as part of the tax-free reorganization 
described in the example would not have qualified for an exception from 
being treated as a reportable policy sale under the proposed 
regulations absent the existence of the substantial business 
relationship. The commenter's understanding of the example is correct. 
The substantial business relationship is necessary for the tax-free 
reorganization in the example to avoid being treated as a reportable 
policy sale. As discussed in this section of this Summary of Comments 
and Explanation of Revisions, the Treasury Department and the IRS have 
not adopted the commenter's recommendation regarding amendments to 
Sec.  1.101-1(e)(3)(ii), and therefore have not revised the example in 
the final regulations.
    This commenter also recommended a related change to Sec.  1.101-
1(d)(4)(i) of the proposed regulations. Under Sec.  1.101-1(d)(4)(i) of 
the proposed regulations, an indirect acquirer is deemed to have a 
substantial business or financial relationship with the insured if the 
direct holder of the interest in the life insurance contract has a 
substantial business or financial relationship with the insured 
immediately before and after the date the indirect acquirer acquires 
its interest. Section 1.101-1(d)(4)(i) of the proposed regulations 
provides relief for acquirers who do not hold their interest in the 
relevant life insurance contracts directly, when the direct holder of 
those interests has a substantial business or financial relationship 
with the insured before and after the acquisition. The Department of 
Treasury and the IRS have determined that it is not appropriate to 
treat an indirect acquisition of an interest in a life insurance 
contract as a reportable policy sale when the direct owner of the 
interest in the life insurance contract does not change and the direct 
owner has a substantial family, business, or financial relationship 
with the insured. The commenter recommended modification of Sec.  
1.101-1(d)(4)(i) of the proposed regulations to eliminate what the 
commenter describes as disparate treatment that arises depending on the 
type of merger transaction the acquirer undertakes or whether after the 
merger the insured remains with the company or retains the right to 
retirement or other post-employment benefits.
    First, the commenter observed that, in a tax-free merger in which 
the target goes out of existence, the direct holder of the life 
insurance contract no longer exists, and therefore would no longer have 
any relationship with the insured. Accordingly, the acquirer cannot be 
deemed to have a substantial business or financial relationship with 
the insured under Sec.  1.101-1(d)(4)(i) of the proposed regulations. 
However, in a tax-free merger in which the target does not survive, 
Sec.  1.101-1(d)(4)(i) of the proposed regulations would not apply 
because the acquirer would own the insurance contract directly. An 
acquirer that holds its interest in the relevant life insurance 
contract directly must determine whether it has a substantial family, 
business, or financial relationship with the insured under Sec.  1.101-
1(d) of the proposed regulations at the time of the acquisition.
    Second, the commenter suggested that there are situations in which 
the insured's employment with the target company is terminated as a 
result of a merger or acquisition, and the insured has no continuing 
relationship with the surviving company that retains the life insurance 
contract. The commenter observed that, in such cases, the ``after the 
date of the acquisition'' prong of Sec.  1.101-1(d)(4)(i) of the 
proposed regulations cannot be satisfied. The commenter recommended 
modifying Sec.  1.101-1(d)(4)(i) of the proposed regulations to provide 
that the acquirer of an interest in a life insurance contract in a tax-
free merger is deemed to have a substantial business or financial 
relationship with the insured if the target has a substantial business 
or financial relationship with the insured immediately prior to the 
merger, provided the acquirer does not otherwise transfer any interest 
in the life insurance contract in a transaction treated as a reportable 
policy sale. The commenter also recommended that the rule specifically 
state that the fact that the surviving company continues to hold, after 
the merger, the contract on the life of an individual with whom the 
target had a substantial financial or business relationship is the 
determinative factor under this modified rule.
    The proposed modification is not adopted because, although Sec.  
1.101-1(d)(4)(i) of the proposed regulations generally would not apply 
to the situations referenced by the commenter, the proposed regulations 
already include exceptions that may apply in the situations referenced 
by the commenter. In a tax-free merger in which the target does not 
survive, Sec.  1.101-1(d)(4)(i) of the proposed regulations would not 
apply because the acquirer would have a direct acquisition of any 
interest in a life insurance contract acquired from the target. 
However, the acquirer does not have a reportable policy sale if the 
acquirer has a substantial family, business, or financial relationship 
with the insured. Under Sec.  1.101-1(d)(2)(ii) of the proposed 
regulations, the surviving company has a substantial business 
relationship with the insured, and therefore has not acquired its 
interest in the life insurance contract on the insured's life in a 
reportable policy sale, if: (1) The insured is an employee within the 
meaning of section 101(j)(5)(A) of the acquired trade or business 
immediately preceding the acquisition, and (2) the surviving company 
either carries on the acquired trade or business or uses a significant 
portion of the acquired business assets in an active trade or business 
that does not include investing in interests in life insurance 
contracts. Accordingly, the proposed regulations already include a rule 
similar to the one requested by the commenter that is applicable to 
direct acquisitions of interests in life insurance contracts (such as 
acquisitions resulting from tax-free mergers in which the target does 
not survive).

5. Comments and Changes Relating to Sec.  1.101-1(d) of the Proposed 
Regulations

    Section 1.101-1(d) of the proposed regulations defines the terms 
substantial family relationship, substantial business relationship, and 
substantial financial relationship, and provides special rules for 
applying these definitions. This section of this Summary of Comments

[[Page 58469]]

and Explanation of Revisions discusses comments that generally relate 
to the definitions and special rules in Sec.  1.101-1(d) of the 
proposed regulations.
A. Beneficial Owners With a Combination of Substantial Relationships
    Under Sec.  1.101-1(d)(1) of the proposed regulations, a 
substantial family relationship exists between the insured and a 
partnership, trust, or other entity if all of the beneficial owners of 
that partnership, trust, or other entity have a substantial family 
relationship with the insured. A partnership, trust, or other entity 
may itself have a substantial business or financial relationship with 
the insured under Sec.  1.101-1(d)(2) or (3) of the proposed 
regulations.
    One commenter on the proposed regulations recommended that a 
transfer to a trust, partnership, or other entity not be a reportable 
policy sale within the meaning of section 101(a)(3) if all of the 
beneficial owners of the trust, partnership, or other entity have a 
substantial family, business, or financial relationship with the 
insured. The Treasury Department and the IRS have determined it would 
be appropriate to expand the definition of substantial family, 
business, or financial relationship to include the relationship between 
the insured and a trust, partnership, or other entity, every beneficial 
owner of which has a substantial family, business, or financial 
relationship with the insured. Accordingly, Sec.  1.101-1(d)(4)(iii) of 
the final regulations provides this expanded definition.
    The commenter also suggested that the definition of ``family 
member'' under Sec.  1.101-1(f)(3) should include charities to which 
the insured has given substantial financial support or significant 
volunteer support. Another commenter suggested that a trust with 
beneficiaries that include both individual family members and a charity 
with a substantial financial relationship to the insured should qualify 
as a ``family member.'' Under Sec.  1.101-1(d)(3)(iii) of the proposed 
regulations, a substantial financial relationship exists between the 
insured and acquirer if the acquirer is an organization described in 
sections 170(c), 2055(a), and 2522(a) that previously received 
financial support in a substantial amount or significant volunteer 
support from the insured. Under either of the approaches suggested by 
the commenters, the acquisition of an interest in a life insurance 
contract by a trust with beneficiaries that include both individuals 
who are family members of the insured and a charity described in Sec.  
1.101-1(d)(3)(iii) of the proposed regulations would not be a 
reportable policy sale. The Treasury Department and the IRS agree that 
the existence of a trust beneficiary that is a charity described in 
Sec.  1.101-1(d)(3)(iii) of the proposed regulations should not cause a 
transfer to that trust to be a reportable policy sale. However, rather 
than expanding the definition of ``family member'' under Sec.  1.101-
1(f)(3) of the proposed regulations as suggested by the commenters, the 
Treasury Department and the IRS have adopted a more direct and 
expansive approach to address the commenters' concerns by adding a new 
rule in the final regulations providing that any combination of the 
described substantial relationships between a trust's beneficiaries and 
the insured is sufficient to qualify the transfer to that trust for the 
reportable policy sale exclusion. See Sec.  1.101-1(d)(4)(iii) of the 
final regulations. As a result, under the final regulations, there is 
no need to also expressly treat a trust established and maintained for 
the primary benefit of the insured or one or more of the insured's 
family members as a family member of the insured. Therefore, the final 
regulations do not include such a trust in the definition of family 
member.
B. Substantial Financial Relationships With Charities
    Under Sec.  1.101-1(d)(3)(iii) of the proposed regulations, the 
acquirer of an interest in a life insurance contract has a substantial 
financial relationship with the insured if the acquirer is an 
organization described in sections 170(c), 2055(a), and 2522(a) that 
previously received financial support in a substantial amount or 
significant volunteer support from the insured. One commenter on the 
proposed regulations suggested that this provision be expanded to 
include any other such organization with which the insured has 
substantial personal ties, such as the donor or a family member having 
benefitted from the charitable organization's services in some manner. 
The commenter stated that it is not uncommon for a donor to both (i) 
contribute very modestly, if at all, to a charity during life because 
the donor is concerned about having sufficient retirement income, and 
(ii) want to benefit the charity when the donor no longer needs to 
preserve retirement income sources. The commenter also stated that 
donors often benefit charities through either a split interest trust 
described in section 170(f)(2) or a bargain sale described in Sec.  
1.1011-2.
    The Treasury Department and IRS have not adopted this suggestion in 
the final regulations because it would be challenging to determine when 
personal ties with a charity are substantial enough to constitute a 
substantial financial relationship with the insured, in the absence of 
a significant donation of time or property. Also, there generally will 
be little detriment to a charity as a result of an acquisition (whether 
gratuitous or for value) of an interest in a life insurance contract in 
a reportable policy sale. Nevertheless, as discussed later in this 
section, the final regulations provide that the category of charities 
considered to have a substantial financial relationship with an insured 
may be expanded in the future in guidance published in the Internal 
Revenue Bulletin.
    Treating a gratuitous transfer of an interest in a life insurance 
contract (or the part of the transfer that is gratuitous, in the case 
of a bargain sale) as a reportable policy sale does not affect the 
amount of proceeds excludable by the gratuitous transferee. Section 
1.101-1(b)(2)(i) of the final regulations applies to all gratuitous 
transfers of interests in life insurance contracts and generally 
provides that the transferee in a gratuitous transfer of an interest in 
a life insurance contract steps into the shoes of the transferor and 
may exclude death benefits paid under the contract from gross income to 
the same extent that the transferor would have been able to exclude the 
benefits, in addition to the premiums and other amounts paid by the 
transferee. Furthermore, treatment of a gratuitous transfer as a 
reportable policy sale does not result in reporting obligations for the 
gratuitous transferee because the gratuitous transferor is not a 
reportable policy sale payment recipient. See Sec. Sec.  1.6050Y-
1(a)(16) and 1.6050Y-2(a) of the final regulations.
    Even if a charity purchased some or all of its interest in a life 
insurance contract for valuable consideration, a charity generally is 
not subject to Federal income tax on its income (including insurance 
policy proceeds) unless the income arises from an unrelated trade or 
business. Thus, the charity's obligation in case of a purchase 
generally would be limited to acquirer reporting under Sec.  1.6050Y-2, 
which merely requires providing on Form 1099-LS information that should 
be readily available to the charity. This reporting provides important 
information regarding the sale to reportable policy sale payment 
recipients and the IRS.
    In response to the commenter's concerns, however, the final 
regulations provide that the IRS may publish

[[Page 58470]]

guidance in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of 
this chapter) describing other situations in which a substantial 
financial relationship exists between the insured and an acquirer that 
is an organization described in sections 170(c), 2055(a), and 2522(a). 
See Sec.  1.101-1(d)(3)(iii) of the final regulations.
C. Substantial Financial Relationships and BOLI Pooling Transactions
    One commenter on the proposed regulations requested confirmation 
that a reportable policy sale will not arise when a life insurance 
policy is involved in a transaction that pools bank-owned life 
insurance (BOLI). The commenter explained that businesses, such as 
banks, commonly promise certain pre-and post-retirement benefits to 
their employees, such as retiree health care benefits, which can result 
in substantial liabilities for the businesses that must be reflected on 
their financial statements. The commenter described BOLI as permanent, 
cash value life insurance coverage on the lives of a bank's officers, 
directors, and employees purchased by the bank to fund such obligations 
informally and to establish assets on its financial statements to 
offset liabilities for the promised benefits. The commenter stated that 
BOLI owners typically hold the policies until the death benefits become 
payable and use the benefits to fund the costs of the employee benefits 
or to recover such costs after the fact. The commenter described BOLI 
pooling transactions as transactions that pool the BOLI policies of 
multiple banks for the continued purpose of funding each bank's 
employee benefits, but in a more effective, centralized way. The 
commenter described the initial step of a BOLI pooling transaction as 
the transfer by multiple unrelated banks of their pre-existing BOLI 
policies to a partnership, in return for which each bank receives a 
partnership interest proportional to the value of its contributed 
policies. The commenter explained that the partnership holds and 
manages the contributed policies and distributes death benefits among 
the bank-partners pro rata based on their respective partnership 
interests, which is expected to help normalize cash flows from the 
policies.
    The commenter asserted that BOLI pooling transactions are ordinary 
course business transactions that should not be treated as reportable 
policy sales because they are not speculative and can be distinguished 
from sales of policies to third parties because the intent and result 
is to pool the policies among all the original policyholders for the 
continued purpose of funding their employee benefit liabilities. The 
commenter noted that the IRS has issued private letter rulings that 
confirm, directly or indirectly, that the carryover basis exception to 
the transfer for value rule in section 101(a)(2) applies to a bank's 
contribution of BOLI policies to the partnership in a BOLI pooling 
transaction, thereby preserving the tax-free character of the death 
benefits when paid to the partnership. These rulings pre-date the 
addition of section 101(a)(3) to the Code. The reportable policy sale 
rules of section 101(a)(3) are in addition to the carryover basis 
exception of section 101(a)(2). As a result, policy transfers are 
ineligible for the carryover basis exception if no substantial family, 
business, or financial relationship exists between the acquirer of an 
interest in a life insurance contract and the insured under that 
contract at the time of the acquisition.
    The commenter asserted that the proposed regulations support the 
requested treatment of BOLI pooling transactions because a substantial 
financial relationship exists between the acquirer and insured. A 
substantial financial relationship exists under Sec.  1.101-1(d)(3)(ii) 
of the proposed regulations if the acquirer maintains the life 
insurance contract on the life of the insured to provide funds to 
purchase assets or satisfy liabilities following the death of the 
insured. The commenter asserted that this provision applies in BOLI 
pooling transactions with respect to both the bank and the partnership 
as follows: (1) The partnership has a direct acquisition of life 
insurance policies, which it maintains to satisfy liabilities following 
the death of the insured, namely, the employee benefit liabilities of 
the bank-partners for which they originally purchased the policies; (2) 
the bank has an indirect acquisition of life insurance policies 
contributed by other banks to the partnership; and (3) the bank 
maintains its indirect interest in those policies to continue funding 
the same employee benefit liabilities. The commenter recommended 
clarification of the regulations to confirm this treatment, either by 
adding additional language to the definition of substantial financial 
relationship, or by adding an example that applies that provision to 
the BOLI pooling transaction. Alternatively, the commenter suggested a 
separate exception to the reportable policy sale definition.
    The final regulations do not adopt the commenter's requested 
changes because the changes would be inconsistent with the statute. The 
proposed regulations do not support, and were not intended to support, 
the requested treatment of BOLI pooling transactions.
    First, the partnership described by the commenter does not have a 
substantial family, business, or financial relationship with the 
insureds under the proposed regulations. Specifically, it does not have 
a substantial financial relationship with any insured under Sec.  
1.101-1(d)(3)(ii) of the proposed regulations because it does not 
maintain the life insurance contract on the life of the insured to 
provide funds for the partnership to purchase assets or satisfy 
liabilities following the insured's death. As described by the 
commenter, the partnership maintains the life insurance contracts to 
provide its partners, the banks, with funds to satisfy the banks' 
employee benefit liabilities. Accordingly, the partnership's 
acquisition of the life insurance contracts in the circumstances 
described is a reportable policy sale that must be reported under 
section 6050Y and Sec.  1.6050Y-2 of the proposed regulations.
    Second, the definition of a substantial financial relationship in 
Sec.  1.101-1(d)(3)(ii) of the proposed regulations was not intended to 
cover relationships as tenuous as those existing between the indirect 
acquirers (the banks) and the insureds in the BOLI pooling transactions 
described by the commenter. Section 1.101-1(d)(3)(ii) of the proposed 
regulations was intended to cover situations in which the life 
insurance contract is held to provide funds to purchase assets or 
satisfy liabilities, when the need for the asset purchases or liability 
payments results from the insured's death. In the situation described 
by the commenter, a bank does not have this kind of relationship with 
the insureds under life insurance contracts contributed to the 
partnership by other banks. However, in the circumstances described, 
because the partnership acquires the life insurance contracts in a 
reportable policy sale that must be reported under section 6050Y(a) and 
Sec.  1.6050Y-2 of the proposed regulations, the bank's indirect 
acquisition of the life insurance contracts is not a reportable policy 
sale, provided the partnership complies with the reporting 
requirements. See Sec.  1.101-1(c)(2)(iii)(A) of the proposed 
regulations.
D. Substantial Financial Relationships Under Sec.  1.101-1(d)(3)(ii)
    A substantial financial relationship exists under Sec.  1.101-
1(d)(3)(ii) of the proposed regulations if the acquirer maintains the 
life insurance contract on the life of the insured to provide funds to 
purchase assets or satisfy liabilities

[[Page 58471]]

following the death of the insured. As described in section 5.C of this 
Summary of Comments and Explanation of Revisions, this definition was 
intended to apply in situations in which the life insurance contract is 
held to provide funds to purchase assets or satisfy liabilities 
following the death of the insured, when the need for the asset 
purchases or liability payments results from the insured's death. 
Accordingly, Sec.  1.101-1(d)(3)(ii) of the final regulations revises 
the definition to provide that a substantial financial relationship 
exists between the acquirer and insured if the acquirer maintains the 
life insurance contract on the life of the insured to provide funds to 
purchase assets of or to satisfy liabilities of the insured or the 
insured's estate, heirs, legatees, or other successors in interest, or 
to satisfy other liabilities arising upon or by reason of the death of 
the insured.

6. Comments and Changes Relating to Sec.  1.101-1(a) of the Proposed 
Regulations

    The proposed regulations would remove the second sentence of Sec.  
1.101-1(a)(1) of the existing regulations, which states: ``Death 
benefit payments having the characteristics of life insurance proceeds 
payable by reason of death under contracts, such as workmen's 
compensation insurance contracts, endowment contracts, or accident and 
health insurance contracts, are covered by this provision.'' As noted 
in the preamble to the proposed regulations, this update reflects the 
addition of section 7702 to the Code in 1984. See 84 FR 11015.
    One commenter stated that it is important that no changes be made 
with respect to the second sentence because the benefits described 
therein were written into older policies, some of which are still in 
effect, and changing the rules would negatively impact policyholders 
who have long relied on the appropriate exclusion of these death 
benefits from income. The commenter further stated that there is a 
longstanding and extensive body of court decisions and IRS rulings that 
establish the conditions under which such benefits qualify for 
treatment as life insurance proceeds.
    In response to these comments, the final regulations revise, rather 
than remove, the second sentence of Sec.  1.101-1(a)(1) of the existing 
regulations to clarify that the sentence only applies to contracts 
issued on or before December 31, 1984, the effective date of section 
7702.

7. Comments and Changes Relating to Sec.  1.6050Y-1 of the Proposed 
Regulations

    Section 1.6050Y-1(a) of the proposed regulations provides 
definitions for terms used in Sec. Sec.  1.6050Y-1 through -4 of the 
proposed regulations. This section of this Summary of Comments and 
Explanation of Revisions discusses comments received that generally 
relate to Sec.  1.6050Y-1(a) of the proposed regulations.
A. Definition of Issuer
    Section 6050Y(d)(3) defines issuer to mean any life insurance 
company that bears the risk with respect to a life insurance contract 
on the date any return or statement is required to be made under 
section 6050Y. The definition of issuer under the proposed regulations 
depends on the context in which the term is used. In general, the term 
``issuer'' means, on any date, with respect to any interest in a life 
insurance contract, any person that bears any part of the risk with 
respect to the life insurance contract on that date and any person 
responsible on that date for administering the contract, including 
collecting premiums and paying death benefits. See Sec.  1.6050Y-
1(a)(8)(i) of the proposed regulations. For instance, if a reinsurer 
reinsures on an indemnity basis all or a portion of the risks that the 
original issuer (and continuing contract administrator) might otherwise 
have incurred with respect to a life insurance contract, both the 
reinsurer and the original issuer of the contract are issuers of the 
life insurance contract.
    One commenter noted that this definition of issuer in the proposed 
regulations appears to be a reversal of position from a statement in 
Notice 2018-41 that, according to the commenter, appropriately proposed 
to exclude a ``reinsurer in an indemnity contract covering all or a 
portion of the risks that the original issuer (and continuing contract 
administrator) might otherwise have incurred with respect to a life 
insurance contract.'' In Notice 2018-41, the Treasury Department and 
the IRS announced the intent to limit the information reporting 
obligations imposed under Sec.  6050Y(b) to the life insurance company 
that is responsible for administering the contract, including paying 
death benefits under the life insurance contract to reduce the burden 
on reporting life insurance companies and prevent duplicative 
reporting. Notice 2018-41 indicated that, under the proposed 
regulations, the reporting obligations would not apply, for instance, 
to a reinsurer in an indemnity contract covering all or a portion of 
the risks that the original issuer (and continuing contract 
administrator) might otherwise have incurred with respect to a life 
insurance contract.
    Under the proposed regulations, although the definition of issuer 
is broad enough that information reporting obligations could apply to a 
reinsurer, reporting obligations in practice will generally be limited 
to the life insurance company that is responsible for administering the 
life insurance contract, or its designee. The proposed regulations 
facilitate this result by providing relief for an issuer that is 
subject to reporting obligations, but is not responsible for 
administering the contract. For purposes of information reporting by 
the acquirer under section 6050Y(a) and Sec.  1.6050Y-2 of the proposed 
regulations, the ``6050Y(a) issuer'' to which the acquirer must furnish 
an RPSS is the issuer responsible for administering the life insurance 
contract, including collecting premiums and paying death benefits under 
the contract, on the date of the reportable policy sale. See Sec.  
1.6050Y-1(a)(8)(ii) of the proposed regulations. For purposes of 
information reporting by the issuer under section 6050Y(b) and Sec.  
1.6050Y-3 of the proposed regulations, reporting is required by any 
``6050Y(b) issuer'' that receives an RPSS or notice of a transfer to a 
foreign person, or its designee. See Sec.  1.6050Y-1(a)(8)(iii)(A) and 
(B) of the proposed regulations. Accordingly, with respect to 
reportable policy sales, 6050Y(b) issuers responsible for reporting 
under section 6050Y(b) and Sec.  1.6050Y-3 of the proposed regulations 
will generally be issuers responsible for administering the life 
insurance contracts. No other issuer should receive an RPSS. Also, with 
respect to a transfer to a foreign person, if any issuer other than the 
issuer responsible for administering the life insurance contract 
receives notice of the transfer, it will not be considered a 6050Y(b) 
issuer if it provides the 6050Y(b) issuer responsible for administering 
the life insurance contract with notice of the transfer and any 
available information necessary to accomplish reporting under section 
6050Y(b) and Sec.  1.6050Y-3 of the proposed regulations. See Sec.  
1.6050Y-1(a)(8)(iii)(B) of the proposed regulations. The final 
regulations clarify that an issuer other than the issuer responsible 
for administering the life insurance contract will not be considered a 
6050Y(b) issuer if it received notice of a transfer to a foreign person 
from the issuer responsible for administering the life insurance 
contract. See Sec.  1.6050Y-1(a)(8)(iii)(B) of

[[Page 58472]]

the final regulations. Additionally, a 6050Y(b) issuer's reporting 
obligation is deemed satisfied if the information required by section 
6050Y(b) and Sec.  1.6050Y-3 of the final regulations is timely 
reported by any other 6050Y(b) issuer. See Sec.  1.6050Y-3(b) of the 
final regulations.
    The commenter recommended that the definition of issuer expressly 
exclude a reinsurer in an indemnity contract covering all or a portion 
of the risks that the original issuer (or its continuing contract 
administrator) might otherwise have incurred with respect to a life 
insurance contract. The commenter stated that in most instances of 
indemnity reinsurance transactions, the original insurer continues to 
administer the life insurance contracts, some or all of the underlying 
risks of which the reinsurer may have assumed, or alternatively, the 
parties select a third-party contract administrator who assumes such a 
role, which includes managing ownership changes and other functions 
relating to contract administration and interfacing with policyholders. 
The commenter asserted that if the approach in the proposed regulations 
is due to any presumption that a reinsurer in an indemnity reinsurance 
transaction may be or may become privy to any information relating to 
transfers to domestic or foreign persons, such presumptions are 
misplaced.
    The final regulations do not adopt the commenter's proposal because 
a reinsurer in an indemnity contract bears risk with respect to the 
life insurance contracts reinsured, and is therefore an issuer under 
section 6050Y(d). It is thus not appropriate to completely exclude an 
indemnity reinsurer from the possibility of being an issuer for 
reporting purposes. However, the definition of 6050Y(b) issuer under 
the proposed and final regulations is narrower than the definition of 
issuer in section 6050Y(d) and, consistent with the intent expressed in 
Notice 2018-41 to limit the information reporting obligations imposed 
under section 6050Y(b) to the life insurance company that is 
responsible for administering the contract, will generally exclude a 
reinsurer in an indemnity contract from reporting obligations, as the 
commenter acknowledges. Furthermore, Sec.  1.6050Y-1(a)(8)(iii)(B) of 
the final regulations provides any reinsurer in an indemnity contract 
that is not the issuer responsible for administering the life insurance 
contract, but nonetheless falls within the definition of 6050Y(b) 
issuer, with a mechanism to avoid that designation (by providing notice 
and relevant information to the 6050Y(b) issuer responsible for 
administering the contract).
B. Definition of Notice of a Transfer to a Foreign Person
    Section 6050Y(b) and Sec.  1.6050Y-3 of the proposed regulations 
generally require reporting by an issuer upon notice of a transfer of a 
life insurance contract to a foreign person. The proposed regulations 
define ``notice of a transfer to a foreign person'' to mean any notice 
of a transfer of a life insurance contract (that is, a transfer of 
title to, possession of, or legal ownership of the life insurance 
contract) received by a 6050Y(b) issuer. See Sec.  1.6050Y-1(a)(10) of 
the proposed regulations. The proposed regulations further provide that 
notice of a transfer to a foreign person includes information provided 
for nontax purposes, such as a change of address notice for purposes of 
sending statements or for other purposes, and information relating to 
loans, premiums, or death benefits with respect to the contract, unless 
the 6050Y(b) issuer knows that no transfer of the contract has occurred 
or knows the transferee is a United States person. Id. For this 
purpose, a 6050Y(b) issuer may rely on a Form W-9, ``Request for 
Taxpayer Identification Number and Certification'' or a valid 
substitute form that meets the requirements of Sec.  1.1441-1(d)(2) 
(substituting ``6050Y(b) issuer'' for ``withholding agent''), that 
indicates the transferee is a United States person. Id.
    One commenter expressed appreciation that the proposed regulations 
exclude from the definition of notice of a transfer to a foreign person 
situations in which the issuer knows that no transfer has occurred or 
that the transferee is a United States person. The commenter requested 
that the definition be modified so that the obligation for an issuer to 
report under section 6050Y(b) and Sec.  1.6050Y-3 of the proposed 
regulations is not triggered unless the issuer receives notice of a 
transfer of a life insurance contract to a foreign person that includes 
foreign indicia. Such foreign indicia may include information provided 
for nontax purposes such as a change of address notice to a foreign 
residence or mailing address for purposes of sending statements or for 
other purposes. The commenter noted that section 6050Y(b) requires 
issuers to identify transfers to foreign persons to capture transfers 
that may escape section 6050Y(a)(2) reporting in the event that a 
foreign acquirer does not comply with section 6050Y(a)(2) and suggested 
that the foreign indicia requirement furthers this purpose by allowing 
an issuer to identify a foreign acquirer as foreign based on 
information the acquirer provides to the issuer. This recommendation is 
adopted in Sec.  1.6050Y-1(a)(10) of the final regulations.
C. Definition of Estimate of Investment in the Contract
    Informal comments were received regarding the definition of the 
term ``estimate of investment in the contract'' in the proposed 
regulations. The commenter asked whether the estimate of investment in 
the contract with respect to a person includes any amount paid by the 
person for the life insurance contract or interest therein other than 
premiums (such as, for example, the amount paid for the contract or 
interest therein in a transfer for value) and whether information about 
any other payments must be provided to issuers and payors reporting the 
estimate of investment in the contract. The definition in Sec.  
1.6050Y-1(a)(7)(ii) of the proposed regulations, which is adopted 
without modification by the final regulations, provides that the 
estimate of investment in the contract is the aggregate amount of 
premiums paid for the contract by that person before that date, less 
the aggregate amount received under the contract by that person before 
that date to the extent such information is known to or can reasonably 
be estimated by the issuer or payor. Accordingly, the only amounts paid 
by a person that are included in the estimate of investment in the 
contract with respect to that person are the premiums paid for the 
contract by that person. Issuers and payors of reportable death 
benefits do not need information about other amounts paid for a life 
insurance contract or interest therein to determine the estimate of 
investment in the contract. Under section 6050Y(a)(2)(B) and Sec.  
1.6050Y-2(d)(2)(i)(A) of the final regulations, an acquirer is not 
required to provide an issuer with the amount of any reportable policy 
sale payment when fulfilling its reporting obligations under section 
6050Y(a).
D. Definition of Reportable Policy Sale Payments
    Under section 6050Y(a) and Sec.  1.6050Y-2(a) of the proposed 
regulations, as a general matter, every person that is an acquirer in a 
reportable policy sale during any calendar year must file a separate 
information return with the IRS for each reportable policy sale payment 
recipient, including any seller that is a reportable policy sale 
payment recipient. A reportable policy sale payment recipient is 
defined in

[[Page 58473]]

Sec.  1.6050Y-1(a)(16) of the proposed regulations as any person that 
receives a reportable policy sale payment in a reportable policy sale, 
as well as any broker or other intermediary that retains a portion of 
the cash or other consideration transferred in a reportable policy 
sale. Under section 6050Y(d)(1), the term ``payment'' means, with 
respect to any reportable policy sale, the amount of cash and the fair 
market value of any consideration transferred in the sale. A reportable 
policy sale payment is defined by Sec.  1.6050Y-1(a)(15) of the 
proposed regulations as the total amount of cash and the fair market 
value of any other consideration transferred, or to be transferred in a 
reportable policy sale, including any amount of a reportable policy 
sale payment recipient's debt assumed by the acquirer in a reportable 
policy sale. The final regulations clarify that consideration in this 
case means consideration reducible to a money value, which is the 
standard used in Sec.  1.101-1(f)(5) of the proposed and final 
regulations for determining whether a transfer of an interest in a life 
insurance contract is a transfer for valuable consideration. See Sec.  
1.6050Y-1(a)(15) of the final regulations.
    The preamble to the proposed regulations requested information 
about the types and timing of payments made by acquirers in reportable 
policy sales, including the types of ancillary costs and expenses paid 
in reportable policy sales, the recipients of those payments, and 
existing reporting requirements applicable to those payments. See 84 FR 
11009, 11019. One commenter on the proposed regulations described 
ancillary payments made by an acquirer in connection with the 
acquisition of a life insurance policy as including escrow agent fees 
and expenses, fees and expenses of securities intermediaries, fees paid 
to companies that assist the acquirer in evaluating a life insurance 
policy, fees for policy services, origination fees, fees to life 
expectancy report providers, miscellaneous other administrative costs 
such as mailing and courier charges, and legal fees. The commenter 
asserted that these are all normal and customary transaction costs paid 
by the acquirer in the ordinary course of its business in connection 
with the routine process of acquiring a life insurance policy and that 
the aggregate of such costs in each transaction is relatively small in 
contrast to the aggregate amount of the consideration paid to the 
seller of the policy and the seller's broker, if any. The commenter 
stated that these minor costs and expenses are primarily administrative 
in nature, and the IRS is already receiving information regarding the 
payment of fees in connection with existing reporting required under 
section 6041. The commenter recommended that such ancillary costs be 
specifically excluded from the definition of reportable policy sale 
payments.
    Another commenter also recommended excluding ancillary fees from 
the definition of reportable policy sale payments. Alternatively, the 
commenter suggested that recipients of such ancillary fees could be 
excluded from the definition of reportable policy sale payment 
recipients. The commenter stated that the sale of a single life 
insurance contract from the insured individual to a purchaser on the 
secondary market may involve several transfers and implicate several 
potential recipients of a reportable policy sale payment, as that term 
is defined by the proposed regulations. The commenter described the 
parties that commonly receive ancillary fees in connection with the 
sale of a life insurance contract as including securities 
intermediaries, escrow agents (including separate sub-escrow agents), 
policy servicers, and other service providers. The commenter asserted 
that these ancillary fees already should be otherwise reported to the 
IRS under other provisions of the Code and Treasury Regulations and 
that including these fees as reportable policy sale payments adds a 
significant administrative burden to acquirers given the multitude of 
potential reportable policy sale payment recipients.
    The definition of ``payment'' in section 6050Y(d)(4) is broad, and 
the legislative history does not suggest that this term was intended to 
exclude any payment made in a reportable policy sale, such as the 
ancillary fees described by the commenters. Accordingly, the 
recommendations to exclude ancillary fees from the definition of 
reportable policy sale payments or exclude recipients of ancillary fees 
from the definition of reportable policy sale payment recipients are 
not adopted. However, after consideration of these comments, the 
Treasury Department and the IRS have determined that an acquirer that 
reports a reportable policy sale payment made to a person other than 
the seller under section 6041 or section 6041A will be deemed to have 
satisfied its reporting requirements under section 6050Y(a) and Sec.  
1.6050Y-2 of the final regulations with respect to that payment. See 
Sec.  1.6050Y-2(f)(2) of the final regulations. The Treasury Department 
and the IRS have also determined to exclude from the definition of 
reportable policy sale payment recipient any person, other than the 
seller, that receives aggregate payments of less than $600 with respect 
to that reportable policy sale. See Sec.  1.6050Y-1(a)(16)(ii) of the 
final regulations.

8. Comments and Changes Relating to Sec.  1.6050Y-2 of the Proposed 
Regulations

    Section 6050Y(a) requires reporting of payments made by an acquirer 
in a reportable policy sale. Section 1.6050Y-2(a) of the proposed 
regulations sets forth the requirement of information reporting 
applicable to acquirers in reportable policy sales under section 
6050Y(a)(1) and describes the information that must be reported. This 
section of this Summary of Comments and Explanation of Revisions 
discusses comments that generally relate to Sec.  1.6050Y-2 of the 
proposed regulations.
A. Requests To Limit the Definition of Acquirer or Expand Unified 
Reporting Option
    Under Sec.  1.6050Y-1(a)(1) of the proposed regulations, an 
``acquirer'' is any person that acquires an interest in a life 
insurance contract (through a direct or indirect acquisition of the 
interest) in a reportable policy sale. Section 1.6050Y-1(a)(6) of the 
proposed regulations adopts by cross-reference the definition of 
``interest in a life insurance contract'' set forth in Sec.  1.101-1(e) 
of the proposed regulations. Section 6050Y(a) imposes reporting 
requirements on an acquirer in a reportable policy sale.
    One commenter on Notice 2018-41 recommended that the definition of 
acquirer be limited to any person who acquires a direct or indirect 
economic interest in a life insurance contract and not include any 
person who acquires title to a life insurance contract as an agent or 
intermediary for another person and whose sole economic interest in the 
life insurance contract is security for the payment of a fee to act as 
an agent or intermediary. For this purpose, the commenter noted, a 
partnership or a trust (other than a grantor trust) would not be 
treated as an agent or intermediary. The commenter observed that, in 
many transactions that will be treated as reportable policy sales, 
title to the life insurance contract is held in the name of a 
securities intermediary, but beneficial ownership of the policy is held 
by an investor. The commenter asserted that, although the securities 
intermediary may, in a given case, have a portion of the information 
required to be reported by section 6050Y, burdening the securities 
intermediary with a

[[Page 58474]]

reporting obligation is beyond the scope of its duties.
    Commenting on the proposed regulations, this commenter again 
recommended that securities intermediaries should not be deemed to be 
acquirers in life settlement transactions because they are not likely 
to know, among other things, the purchase price paid to the seller, 
fees paid to a life settlement broker, or ancillary fees paid in 
connection with the acquisition of a policy. The commenter suggested 
that, if securities intermediaries are deemed acquirers, the 
regulations could instead provide for elective, substitute reporting by 
the beneficial owner of the life insurance policy under a securities 
account agreement. In other words, for a transaction in which a 
securities intermediary is involved, either the securities intermediary 
as the legal title holder or the beneficial owner of the life insurance 
policy under the securities account agreement could be responsible for 
the reporting required by section 6050Y(a) and Sec.  1.6050Y-2 of the 
proposed regulations.
    In response to these comments, Sec.  1.6050Y-2(b) of the final 
regulations expands the situations in which acquirers may use unified 
reporting. Under Sec.  1.6050Y-2(b) of the proposed regulations, the 
reporting requirement in Sec.  1.6050Y-2(a) of the proposed regulations 
applies to each acquirer in a series of prearranged transfers of an 
interest in a life insurance contract. However, Sec.  1.6050Y-2(b) of 
the proposed regulations provides for ``unified reporting.'' In a 
series of prearranged transfers, an acquirer's reporting obligation is 
deemed satisfied if the information required by Sec.  1.6050Y-2(a) of 
the proposed regulations with respect to that acquirer is timely 
reported on behalf of that acquirer in a manner that is consistent with 
forms, instructions, and other IRS guidance by one or more other 
acquirers or by a third party information reporting contractor. One 
commenter expressed support for the concept set forth in Sec.  1.6050Y-
2(b) of the proposed regulations that authorizes but does not mandate 
unified reporting in certain situations. The final regulations retain 
this approach of authorizing, but not mandating, unified reporting in 
certain situations. Additionally, in response to comments requesting 
elective, substitute reporting by the beneficial owner of the life 
insurance policy under a securities account agreement for a securities 
intermediary with reporting obligations, the final regulations expand 
the applicability of this provision to include acquirers in 
simultaneous transfers, as well as acquirers in a series of prearranged 
transfers.
    Another commenter recommended that the definition of acquirer be 
narrowed to include only those acquirers that will ultimately hold 
beneficial ownership of a life insurance contract after a transfer, 
thus excluding transitory interest holders from the definition of 
acquirer. The commenter stated that, under a plain reading of Sec.  
1.101-1(e)(1) of the proposed regulations, beneficial owners as well as 
nominees and any other person that holds legal title to any part of a 
beneficial interest in any life insurance contract for any amount of 
time during the course of the transaction would be subject to the 
acquirer reporting requirements of the proposed regulations. The 
commenter suggested that the definition may be over-inclusive given the 
realities of the life settlement industry including, for instance, the 
fact that service providers and their respective securities 
intermediaries may transitorily hold legal title to a life insurance 
contract during the course of a transaction. Acknowledging that the 
proposed regulations provide a unified reporting option, the commenter 
objected to each such transitory legal title holder being subject to 
the reporting requirements described in Sec.  1.6050Y-2 of the proposed 
regulations, despite likely not having access to all the information 
required to sufficiently discharge its reporting obligations. This 
recommendation is not adopted in the final regulations because the 
option of unified reporting is available in the situations described by 
the commenter and it should be feasible, as part of the acquisition 
transaction, to assign section 6050Y reporting responsibilities to a 
party with the information needed to satisfy the reporting requirements 
described in Sec.  1.6050Y-2 of the final regulations.
B. Request To Reduce or Eliminate Reporting on Tertiary Market 
Transactions
    One commenter asked that the Treasury Department and the IRS 
consider whether reporting requirements imposed under section 6050Y are 
appropriate to transactions in the tertiary market (that is, with 
respect to sales of life insurance contract interests between 
investors, after the contract has been purchased from the original 
policyholder). The commenter asserted that the parties (that is, the 
acquirers and sellers) involved in tertiary transactions in the life 
settlement industry are already highly regulated, and the reporting 
requirements under section 6050Y are unduly cumbersome given that the 
tax information sought by the IRS is already included in such parties' 
audited financial statements. This request to eliminate or reduce 
reporting obligations under section 6050Y with respect to tertiary 
market transactions is not adopted in the final regulations. Section 
6050Y requires reporting with respect to reportable policy sales. That 
term is broadly defined by section 101(a)(3) as the acquisition of an 
interest in a life insurance contract, directly or indirectly, if the 
acquirer has no substantial family, business, or financial relationship 
with the insured apart from the acquirer's interest in such life 
insurance contract. Tertiary market transactions generally fall within 
this definition, and therefore are required to be reported.
    This commenter also suggested that in the tertiary market, 
beneficial ownership of a life insurance policy may be transferred 
between different beneficial owners under separate securities account 
agreements with the same securities intermediary, without any ownership 
or beneficiary changes on the books and records of the issuer, so the 
securities intermediary might be both the seller and the acquirer of 
the policy interest for purposes of section 6050Y reporting. However, 
even though the securities intermediary does not transfer its interest 
in the life insurance contract as the legal title holder in the 
transfer described, the previous beneficial owner transfers its 
interest to the new beneficial owner. Under the final regulations, as 
under the proposed regulations, the new beneficial owner is the 
acquirer of an interest in the life insurance contract under Sec.  
1.101-1(e)(3)(i) and Sec.  1.6050Y-1(a)(1) and (3), and the previous 
beneficial owner is the seller under Sec.  1.6050Y-1(a)(18)(i), which 
defines ``seller'' to include any person that holds an interest in a 
life insurance contract and transfers that interest, or any part of 
that interest, to an acquirer in a reportable policy sale.
C. Request To Allow Good Faith Effort Reporting
    One commenter on the proposed regulations observed that a situation 
could arise in which a person acquires a non-controlling interest in an 
entity that holds direct interests in life insurance contracts, and 
such entity has neither the obligation nor the willingness to provide 
the indirect acquirer with information necessary for the indirect 
acquirer to determine whether it is subject to the reporting 
requirements or to satisfy any reporting obligations. The commenter 
suggested

[[Page 58475]]

that this problem is exacerbated when there are tiers of entities 
between the indirect acquirer and the entity holding direct interests 
in life insurance contracts. The commenter recommended that an indirect 
acquirer be considered to have complied with the reporting requirements 
of section 6050Y(a) and Sec.  1.6050Y-2 of the proposed regulations if 
it demonstrates that it has in good faith requested information 
required to comply with the reporting requirements from the relevant 
entity or entities and was unable to obtain such information by 
providing to the IRS: (i) The information it does have, (ii) a 
statement of its efforts to collect any missing data, and (iii) the 
identifying information on the entity through which it acquired an 
indirect interest in a life insurance contract or contracts.
    Sections 1.6050Y-2(g)(1) and (2) cross-reference section 6724(a) 
and Sec.  301.6724-1 for the waiver of a penalty for failure to file 
timely a correct information return or furnish a correct statement 
under section 6050Y and Sec.  1.6050Y-2 if the failure is due to 
reasonable cause and is not due to willful neglect. The penalty may be 
waived if the filer establishes there are significant mitigating 
factors with respect to the failure (such as the fact that the filer 
had not previously had this filing obligation, or has a history of 
complying with information reporting obligations), or that the failure 
was due to events beyond the filer's control. Events beyond the filer's 
control may include the actions of a third party who has information 
needed by the filer. The filer must show that the failure was due to 
the failure of another person, who is required to provide information 
to the filer that is necessary for the filer to comply with information 
reporting requirements, to provide information or to provide correct 
information. In addition, a filer seeking a waiver based on reasonable 
cause must establish that it acted in a responsible manner both before 
and after the failure. The filer must exercise reasonable care in 
determining its filing obligations, including requesting extensions to 
prevent failures, preventing impediments to failures, and rectifying 
failures when discovered. These penalty relief procedures are available 
to acquirers and may apply to acquirers in the situation described by 
the commenter. Accordingly, the final regulations do not adopt the 
change suggested by the commenter.

9. Comments Relating to Sec.  1.6050Y-3 of the Proposed Regulations

    Section 6050Y(b) imposes reporting requirements on an issuer of a 
life insurance contract upon the receipt of a written statement 
furnished by an acquirer under section 6050Y(a)(2), or upon any notice 
of the transfer of a life insurance contract to a foreign person. 
Section 1.6050Y-3 of the proposed regulations sets forth the 
requirement of information reporting applicable to issuers under 
section 6050Y(b) and describes the information that must be reported. 
This section of this Summary of Comments and Explanation of Revisions 
discusses comments that generally relate to Sec.  1.6050Y-3 of the 
proposed regulations.
    Section 1.6050Y-3(d)(1) of the proposed regulations requires an 
issuer to furnish a statement to a seller. Section 1.6050Y-3(d)(2) of 
the proposed regulations provides that such statement generally must be 
furnished on or before February 15 of the year following the calendar 
year in which the reportable policy sale or transfer to a foreign 
person occurred. This due date was adopted in response to comments on 
Notice 2018-41. The proposed regulations also provide that if a 
6050Y(b) issuer does not receive notice of a transfer to a foreign 
person until after January 31 of the calendar year following the year 
in which the transfer occurred, the statement generally must be 
furnished by the date thirty days after the date notice is received. 
See Sec.  1.6050Y-3(d)(2) of the proposed regulations.
    One commenter expressed appreciation regarding the adoption of the 
February 15 due date and the relief provided to 6050Y(b) issuers that 
do not receive notice of a transfer to a foreign person until after 
January 31 of the calendar year following the year in which the 
transfer occurred. The commenter asked that a similar thirty-day period 
be provided if the 6050Y(b) issuer does not receive an RPSS until after 
January 31 of the calendar year following the year in which the 
reportable policy sale occurred. If a 6050Y(b) issuer that receives an 
RPSS after the January 31 due date and before the February 15 due date 
is unable to furnish the required statement to the seller by the 
February 15 due date because of this delay, the 6050Y(b) issuer 
generally may request, before the February 15 due date, an extension of 
time to furnish the statement, pursuant to IRS procedures. For example, 
procedures for requesting such an extension are currently described in 
the ``General Instructions for Certain Information Returns.'' 
Additionally, the late furnishing of an RPSS by an acquirer to a 
6050Y(a) issuer would generally constitute an event beyond the issuer's 
control for purposes of determining whether the issuer is eligible for 
penalty relief for failure, as a 6050Y(b) issuer, to timely furnish a 
statement to the seller named in the RPSS. See Sec. Sec.  1.6050Y-
3(g)(2), 301.6722-1, and 301.6724-1. Therefore, the Treasury Department 
and the IRS have determined not to adopt this recommendation.

10. Comments and Changes Relating to Sec.  1.6050Y-4 of the Proposed 
Regulations

    Section 6050Y(c) imposes reporting requirements on every person who 
makes a payment of reportable death benefits during any taxable year. 
Section 1.6050Y-4 of the proposed regulations sets forth the 
requirement of information reporting applicable to payors of reportable 
death benefits under section 6050Y(c) and describes the information 
that must be reported. This section of this Summary of Comments and 
Explanation of Revisions discusses comments that generally relate to 
Sec.  1.6050Y-4 of the proposed regulations.
A. Gratuitous Transfers
    As discussed in section 2.B of this Summary of Comments and 
Explanation of Revisions, one commenter requested an exception from the 
definition of reportable policy sale for any gratuitous transfer of an 
interest in a life insurance contract. The commenter asserted that 
treating gratuitous transfers as reportable policy sales creates 
unnecessary and confusing reporting requirements under section 6050Y 
for gift transfers. The change requested by the commenter is not 
adopted in the final regulations because the reporting required under 
section 6050Y for gift transfers is limited under the proposed and 
final regulations. However, in response to these comments, the 
reporting required under section 6050Y for gift transfers is further 
limited by the addition of Sec.  1.6050Y-4(e)(3) of the final 
regulations, which provides that a payor of reportable death benefits 
is not required to file an information return under Sec.  1.6050Y-4(a) 
of the final regulations with respect to the reportable death benefits 
if the payor never received, and has no knowledge of any issuer having 
received, a related RPSS.
    The commenter asserted that the reporting requirements under 
section 6050Y will result in an acquirer having to send a Form 1099-LS 
for transfers that are mere gifts, and that this will be

[[Page 58476]]

confusing to the parties involved, making it appear that the transfer 
will have taxable consequences to both the donor, who will receive a 
Form 1099-SB and the gift recipient, who will receive a Form 1099-R 
(when a death benefit is paid).
    However, with respect to a gratuitous transfer, there is no 
requirement to provide a Form 1099-SB to the donor. Section 1.6050Y-
2(a) of the proposed regulations requires the acquirer (the gratuitous 
transferee in a gratuitous transfer) to undertake reporting with 
respect to any reportable policy sale payment recipient, including any 
seller that is a reportable policy sale payment recipient. A gratuitous 
transferor will not receive any reportable policy sale payment and 
therefore will not be a reportable policy sale payment recipient. 
Accordingly, a gratuitous transferee will not be required to file a 
Form 1099-LS with respect to the gratuitous transferor, to furnish a 
statement to the gratuitous transferor, or to furnish an RPSS to the 
issuer. See Sec.  1.6050Y-2(a) and (d) of the proposed regulations. 
Because a gratuitous transferee is not required to furnish an RPSS to 
the issuer, the issuer should not be required to file a Form 1099-SB or 
furnish a statement to the ``seller'' (in this case, the gratuitous 
transferor) as a result of a gratuitous transfer. See Sec.  1.6050Y-
3(a) of the proposed regulations.
    Because amounts paid by reason of the death of the insured under a 
life insurance contract that are attributable to an interest in the 
contract that was transferred in a reportable policy sale are 
reportable death benefits under Sec.  1.6050Y-1(a)(12) of the proposed 
regulations, the proposed regulations technically would require 
reporting under section 6050Y(c) when death benefits are paid with 
respect to an interest in a life insurance contract that was 
transferred in a gratuitous reportable policy sale. See 1.6050Y-4(a) 
and (c). The issuer therefore could be required under the proposed 
regulations to provide the gratuitous transferee with a statement (for 
instance, a copy of the Form 1099-R) if the gratuitous transferee is 
the reportable death benefits payment recipient. See 1.6050Y-4(c). The 
commenter asserted that this would confuse the Form 1099-R recipient, 
who now possesses a Form 1099-R reporting a gross distribution amount 
that indicates a possible taxable distribution when none exists. The 
commenter also asserted that inclusion of the estimate of investment in 
the contract on the Form 1099-R will further confuse the gift recipient 
because it would indicate to a taxpayer that they have a taxable gain 
based on the difference between the gross distribution amount and the 
basis amount reported on the form.
    However, the distribution to the gift recipient may be taxable. 
Under Sec.  1.101-1(b)(2)(i) of the proposed regulations, the amount of 
the proceeds attributable to the interest that is excludable from gross 
income under section 101(a)(1) is limited to the sum of the amount of 
the proceeds attributable to the gratuitously transferred interest that 
would have been excludable by the transferor if the transfer had not 
occurred, and the premiums and other amounts subsequently paid by the 
transferee with respect to the interest. Thus, for example, if an 
interest in a life insurance contract was transferred for value in a 
reportable policy sale, and then transferred again as a gift, the death 
benefit exclusion would be limited to the consideration paid in the 
reportable policy sale, plus subsequent premiums paid.
    As a practical matter, however, if the only reportable policy sale 
of an interest in a life insurance contract is a gratuitous reportable 
policy sale, and the issuer does not receive an RPSS, the issuer would 
not know that the death benefits are attributable to an interest in a 
life insurance contract transferred in a reportable policy sale, and 
thus would not be on notice to do the reporting technically required 
under Sec.  1.6050Y-4(a) and (c) of the proposed regulations. 
Accordingly, in response to these comments, Sec.  1.6050Y-4(e)(3) of 
the final regulations provides that a payor of reportable death 
benefits is not required to file an information return under Sec.  
1.6050Y-4(a) of the final regulations with respect to the reportable 
death benefits if the payor never received, and has no knowledge of any 
issuer having received, a related RPSS.
B. Other Comments Relating to Sec.  1.6050Y-4
    Section 1.6050Y-4(a)(4) of the proposed regulations requires that 
``the gross amount of payments made to the reportable death benefits 
payment recipient during the taxable year'' be reported by the payor. 
One commenter requested that ``payments made'' be replaced by 
``reportable death benefits paid'' to clarify that ``gross amount of 
payments'' are death benefit payments. The commenter asserted that the 
broader term ``payments made'' could be confused to include items such 
as interest paid on delayed claims, which is reportable on Form 1099-
INT, ``Interest Income,'' or a payment to the policy owner resulting 
from a partial surrender in the same year as the insured's death. This 
recommendation is adopted in the final regulations.
    Section 1.6050Y-4(d) of the proposed regulations requires a payor 
of reportable death benefits that files a return or furnishes a 
statement reporting the payment of the reportable death benefits to 
file a corrected return or furnish a corrected statement after 
receiving notice of rescission of the reportable policy sale. The 
commenter indicated that, if a payor has already paid the death benefit 
pursuant to the change in ownership, the payor may not be contractually 
required, or may not attempt to, reclaim such benefit after a 
rescission. The commenter asserted that payors of death benefits 
generally do not file corrected Forms 1099-R in similar instances 
because the payment was, in fact, made to the initial recipient. The 
commenter recommended that Sec.  1.6050Y-4(d) of the proposed 
regulations be modified to provide that the payor is required to 
correct the Form 1099-R only if the reportable death benefit payment 
was returned to the payor. In response to this comment, Sec.  1.6050Y-
4(d) of the final regulations requires a payor of reportable death 
benefits that files a return or furnishes a statement reporting the 
payment of the reportable death benefits to file a corrected return or 
furnish a corrected statement within 15 days after recovering any 
portion of the reportable death benefits payment from the reportable 
death benefits payment recipient as the result of the rescission of a 
reportable policy sale.
    The commenter also requested that the final regulations clarify 
that the reportable death benefits paid to a foreign person should be 
reported on Form 1042-S, ``Foreign Person's U.S. Source Income Subject 
to Withholding,'' instead of on Form 1099-R. Under Sec.  1.6050Y-
4(e)(1) of the proposed regulations, a payor generally is not required 
to report reportable death benefits paid to a foreign person on Form 
1099-R if the payor obtains documentation in accordance with Sec.  
1.1441-1(e)(1)(ii) upon which the payor may rely to treat the 
reportable death benefits payment recipient as a foreign beneficial 
owner of the reportable death benefits. However, this exception does 
not apply if a 6050Y(b) issuer obtains a Form W-8ECI, ``Certificate of 
Foreign Person's Claim that Income is Effectively Connected with the 
Conduct of a Trade or Business in the United States.'' Accordingly, if 
the payment of reportable death benefits to a foreign beneficial owner 
is income effectively connected with the foreign person's trade or 
business in the United

[[Page 58477]]

States, the payor may be required to report the payment on both the 
Form 1042-S in accordance with Sec.  1.1461-1(c) and the Form 1099-R in 
accordance with Sec.  1.6050Y-4 of the proposed regulations. In 
response to this comment, therefore, Sec.  1.6050Y-4(e)(1) of the final 
regulations does not include the limitation on the use of the exception 
for reportable death benefits that are income effectively connected 
with the conduct of a trade or business in the United States, but 
instead references other due diligence or reporting requirements that 
may apply to a payor that relies on the exception, including reporting 
requirements under Sec.  1.1461-1(c). As a result, the final 
regulations do not require reportable death benefits paid to a foreign 
person that must be reported on Form 1042-S to also be reported on Form 
1099-R.

11. Comments and Changes Relating to Penalties

    Sections 1.6050Y-2(g), 1.6050Y-3(g), and 1.6050Y-4(f) of the 
proposed regulations cross-reference sections 6721 and 6722 and the 
regulations thereunder for provisions relating to the penalties 
provided for failure to file timely a correct information return or 
furnish timely a correct information return required under section 
6050Y and Sec. Sec.  1.6050Y-2, 1.6050Y-3, or 1.6050Y-4 of the proposed 
regulations. Sections 1.6050Y-2(g), 1.6050Y-3(g), and 1.6050Y-4(f) of 
the proposed regulations also cross-reference Sec.  301.6724-1 for the 
waiver of a penalty if the failure is due to reasonable cause and is 
not due to willful neglect.
    One commenter asked for permanent penalty relief for issuers unable 
to meet the filing due date for reasons beyond the control of the 
issuer. The commenter stated that such relief is available under 
section 6724(a), which allows for waivers for reasonable cause for 
reporting failures. The commenter suggested that the requested relief 
could be accomplished through guidance that designates late receipt of 
a Form 1099-LS (serving as an RPSS) as establishing reasonable cause 
for purposes of section 6724. To identify reports eligible for such 
relief, the commenter suggested that a check box could be added to Form 
1099-SB for ``late receipt of Form 1099-LS,'' thereby avoiding the 
inefficiencies and costs associated with waiver and abatement 
procedures. The commenter did not provide any reason to anticipate that 
many acquirers will fail to timely furnish statements to 6050Y(a) 
issuers as required by section 6050Y(a) and Sec.  1.6050Y-2(d)(2). 
Accordingly, the Treasury Department and the IRS have determined that 
the normal penalty relief procedures, as described in section 9 of this 
Summary of Comments and Explanation of Revisions, should be sufficient 
and have not adopted the commenter's recommendation.

Applicability Dates

    Section 1 of this Summary of Comments and Explanation of Revisions 
describes the applicability dates for Sec.  1.101-1(b) through (g) of 
the final regulations and Sec. Sec.  1.6050Y-1 through 1.6050Y-4 of the 
final regulations.
    As described in section 1 of this Summary of Comments and 
Explanation of Revisions, the final regulations provide transition 
relief as set forth in Sec.  1.6050Y-1(b) of the proposed regulations, 
with some modifications. For reportable policy sales and payments of 
reportable death benefits occurring after December 31, 2018, and on or 
before October 31, 2019, Sec.  1.6050Y-1(b) of the final regulations 
provides transition relief as follows:
    (1) Statements required to be furnished to issuers under section 
6050Y(a)(2) and Sec.  1.6050Y-2(d)(2)(i) must be furnished by the later 
of the applicable deadline set forth in Sec.  1.6050Y-2(d)(2)(ii) or 
December 30, 2019.
    (2) Statements required to be furnished to reportable policy sale 
payment recipients under section 6050Y(a)(2) and Sec.  1.6050Y-
2(d)(1)(i) must be furnished by the later of the applicable deadline 
set forth in Sec.  1.6050Y-2(d)(1)(ii) or February 28, 2020.
    (3) Statements required to be furnished to sellers under section 
6050Y(b)(2) and Sec.  1.6050Y-3(d)(1) must be furnished by the later of 
the applicable deadline set forth in Sec.  1.6050Y-3(d)(2) or February 
28, 2020.
    (4) Statements required to be furnished to reportable death 
benefits payment recipients under section 6050Y(c)(2) and Sec.  
1.6050Y-4(c)(1) must be furnished by the later of the applicable 
deadline set forth in Sec.  1.6050Y-4(c)(2) or February 28, 2020.
    (5) Returns required to be filed under section 6050Y(a)(1) and 
Sec.  1.6050Y-2(a), section 6050Y(b)(1) and Sec.  1.6050Y-3(a), and 
section 6050Y(c)(1) and Sec.  1.6050Y-4 must be filed by the later of 
the applicable deadline set forth in Sec.  1.6050Y-2(c), Sec.  1.6050Y-
3(c), and Sec.  1.6050Y-4(b) or February 28, 2020.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.

Paperwork Reduction Act

    The collection of information contained in the final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under OMB Control Numbers 1545-0119, 1545-1621, and 1545-2281. 
In general, the collection of information in the final regulations is 
required under section 6050Y of the Code: (1) The requirement under 
Sec.  1.6050Y-2 of the final regulations for an acquirer to report 
certain information about payments made in reportable policy sales is 
required under section 6050Y(a); (2) the requirement under Sec.  
1.6050Y-3 of the final regulations for an issuer to report certain 
information about transferors of life insurance contracts is required 
under section 6050Y(b); and (3) the requirement under Sec.  1.6050Y-4 
of the final regulations for a payor to report certain information 
about payments of reportable death benefits is required under section 
6050Y(c). Section 1.6050Y-3(a)(3) of the final regulations also 
requires the issuer to report to the seller and the IRS the amount the 
seller would have received if the seller had surrendered the life 
insurance contract on the date of the reportable policy sale. This 
information is necessary to allow the seller and the IRS to determine 
the character (capital or ordinary) of all or a portion of the seller's 
taxable income from the sale of the life insurance contract. Section 
1.6050Y-3(f)(1) of the final regulations contains reporting exceptions 
for certain foreign beneficial owners. To determine qualification for 
these reporting exceptions, Sec.  1.6050Y-3(f)(1) of the final 
regulations requires that certain foreign beneficial owners provide a 
Form W-8ECI to the 6050Y(b) issuer. This information is necessary to 
document whether the reporting exception in Sec.  1.6050Y-3(f)(1) of 
the final regulations applies in a particular situation.
    For purposes of the Paperwork Reduction Act, the burden associated 
with the collection of information contained in section 6050Y(a) and 
Sec.  1.6050Y-2 of the final regulations is reflected in the IRS Form 
1099-LS (OMB control number 1545-2281). For purposes of the Paperwork 
Reduction Act, the burden associated with the collection of information 
contained in section 6050Y(b) and Sec.  1.6050Y-3 of the final 
regulations is reflected in the IRS Form 1099-SB (OMB control number 
1545-2281). For purposes of the Paperwork Reduction Act, the burden

[[Page 58478]]

associated with the collection of information contained in section 
6050Y(c) and Sec.  1.6050Y-4 of the final regulations is reflected in 
the IRS Form 1099-R (OMB Control Number 1545-0119). For purposes of the 
Paperwork Reduction Act, the burden associated with the collection of 
information contained in Sec.  1.6050Y-3(f)(1) of the final regulations 
will be reflected in the IRS Form W-8ECI (OMB Control Number 1545-
1621), when the burden is revised to reflect the additional collection 
of information in Sec.  1.6050Y-3(f)(1) of the final regulations.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget. Books 
and records relating to a collection of information must be retained as 
long as their contents may become material in the administration of any 
internal revenue law. Generally, tax returns and tax return information 
are confidential, as required by 26 U.S.C. 6103.

Regulatory Flexibility Act

    It is hereby certified that this rule will not have a significant 
economic impact on a substantial number of small entities pursuant to 
the Regulatory Flexibility Act (5 U.S.C. chapter 6). Section 13520 of 
the TCJA added section 6050Y to chapter 61 (Information and Returns) of 
the Code. Section 6050Y imposes information reporting obligations 
related to certain life insurance contract transactions, including 
reportable policy sales and payments of reportable death benefits. 
Section 6050Y provides that each of the returns required by section 
6050Y is to be made ``at such time and in such manner as the Secretary 
shall prescribe.'' The final regulations under section 6050Y implement 
section 6050Y by specifying the manner in which and time at which the 
information reporting obligations must be satisfied. Because the 
regulations are limited in scope to time and manner of information 
reporting and definitional information, the economic impact of the 
regulations is expected to be minimal. In addition, the IRS and 
Treasury expect that the reporting burden will fall primarily on 
financial and insurance firms with annual receipts greater than $38.5 
million and, therefore, will not affect a substantial number of small 
entities. See 13 CFR 121.201, sector 52 (finance and insurance).
    Although the reporting burden falls primarily on larger entities, 
some small entities under the size threshold may be subject to a one-
time reporting requirement that includes information that is readily 
available to the entities. This one-time reporting is unlikely to 
present a significant economic burden on any small entities affected.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding the final regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business, and no comments were received.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2018, that threshold is approximately $150 million. This 
rule does not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

Executive Order 13132: Federalism

    Executive Order 13132 (titled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Drafting Information

    The principal author of these regulations is Kathryn M. Sneade, 
Office of Associate Chief Counsel (Financial Institutions and 
Products), IRS. However, other personnel from the Treasury Department 
and the IRS participated in their development.

Availability of IRS Documents

    The IRS notice cited in this preamble is published in the Internal 
Revenue Bulletin and is available from the Superintendent of Documents, 
U.S. Government Publishing Office, Washington, DC 20402, or by visiting 
the IRS website at www.irs.gov.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for Part 1 is amended by adding 
entries for Sec. Sec.  1.6050Y-2, 1.6050Y-3, and 1.6050Y-4 in numerical 
order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.6050Y-2 also issued under 26 U.S.C. 6050Y(a).
    Section 1.6050Y-3 also issued under 26 U.S.C. 6050Y(b).
    Section 1.6050Y-4 also issued under 26 U.S.C. 6050Y(c).
* * * * *

0
Par. 2. Section 1.101-1 is amended by:
0
1. Revising the second sentence of paragraph (a)(1), removing the third 
sentence of paragraph (a)(1), and adding a sentence at the end of 
paragraph (a)(1).
0
2. Revising paragraphs (b)(1) through (3).
0
3. Removing paragraphs (b)(4) and (5).
0
4. Adding paragraphs (c) through (g).
    The revisions and additions read as follows:


Sec.  1.101-1   Exclusion from gross income of proceeds of life 
insurance contracts payable by reason of death.

    (a)(1) * * * Death benefit payments having the characteristics of 
life insurance proceeds payable by reason of death under contracts, 
such as workmen's compensation insurance contracts, endowment 
contracts, or accident and health insurance contracts, issued on or 
before December 31, 1984, are covered by this provision. * * * If the 
life insurance contract is an employer-owned life insurance contract 
within the definition of section 101(j)(3), the amount to be excluded 
from gross income may be affected by the provisions of section 101(j).
* * * * *
    (b) * * *
    (1) Transfer of an interest in a life insurance contract for 
valuable consideration--(i) In general. In the case of a transfer of an 
interest in a life insurance contract for valuable consideration, 
including a reportable policy sale for valuable consideration, the 
amount of the proceeds attributable to the interest that is excludable 
from gross income under section 101(a)(1) is limited under section 
101(a)(2) to the

[[Page 58479]]

sum of the actual value of the consideration for the transfer paid by 
the transferee and the premiums and other amounts subsequently paid by 
the transferee with respect to the interest. For exceptions to this 
general rule for certain transfers for valuable consideration that are 
not reportable policy sales, see paragraph (b)(1)(ii) of this section. 
The application of section 101(d), (f) or (j), which is not addressed 
in paragraph (b) of this section, may further limit the amount of the 
proceeds excludable from gross income.
    (ii) Exceptions--(A) Exception for carryover basis transfers. The 
limitation described in paragraph (b)(1)(i) of this section does not 
apply to the transfer of an interest in a life insurance contract for 
valuable consideration if each of the following requirements are 
satisfied. First, the transfer is not a reportable policy sale. Second, 
the basis of the interest, for the purpose of determining gain or loss 
with respect to the transferee, is determinable in whole or in part by 
reference to the basis of the interest in the hands of the transferor 
(see section 101(a)(2)(A)). Third, paragraph (b)(1)(ii)(B) of this 
section does not apply. In the case of a transfer described in this 
paragraph (b)(1)(ii)(A), the amount of the proceeds attributable to the 
interest that is excludable from gross income under section 101(a)(1) 
is limited to the sum of the amount that would have been excludable by 
the transferor if the transfer had not occurred and the premiums and 
other amounts subsequently paid by the transferee with respect to the 
interest. The preceding sentence applies without regard to whether the 
interest previously has been transferred and the nature of any prior 
transfer of the interest.
    (B) Exception for transfers to certain persons--(1) In general. The 
limitation described in paragraph (b)(1)(i) of this section does not 
apply to the transfer of an interest in a life insurance contract for 
valuable consideration if both of the following requirements are 
satisfied. First, the transfer is not a reportable policy sale and the 
interest was not previously transferred for valuable consideration in a 
reportable policy sale. Second, the interest is transferred to the 
insured, a partner of the insured, a partnership in which the insured 
is a partner, or a corporation in which the insured is a shareholder or 
officer (see section 101(a)(2)(B)).
    (2) Transfers to certain persons subsequent to a reportable policy 
sale. Except as provided in paragraph (b)(1)(ii)(B)(3) of this section, 
if a transfer of an interest in a life insurance contract would be 
described in paragraph (b)(1)(ii)(B)(1) of this section, but for the 
fact that the interest previously was transferred for valuable 
consideration in a reportable policy sale (whether in the immediately 
preceding transfer or an earlier transfer), then the amount of the 
proceeds attributable to the interest that is excludable from gross 
income under section 101(a)(1) is limited to the sum of--
    (i) The higher of the amount that would have been excludable by the 
transferor if the transfer had not occurred or the actual value of the 
consideration for the transfer paid by the transferee; and
    (ii) The premiums and other amounts subsequently paid by the 
transferee with respect to the interest.
    (3) Transfers to the insured subsequent to a reportable policy 
sale--(i) Except as provided in paragraph (b)(1)(ii)(B)(3)(ii) of this 
section, to the extent that an interest (or portion of an interest) in 
a life insurance contract that was transferred for valuable 
consideration in a reportable policy sale subsequently is transferred 
to the insured for valuable consideration, the limitations described in 
paragraph (b)(1)(i) of this section and paragraph (b)(1)(ii)(B)(2) of 
this section do not apply. To the extent that fair market value is not 
paid by the insured for the transferred interest, the transfer of the 
portion of the interest with a value in excess of the consideration 
paid will be treated as a gift under the bargain sale rule in paragraph 
(b)(2)(iii) of this section.
    (ii) This paragraph (b)(1)(ii)(B)(3)(ii) applies with respect to an 
interest described in paragraph (b)(1)(ii)(B)(3)(i) of this section (or 
portion of such an interest) that subsequently is transferred by the 
insured to any other person. If all subsequent transfers of the 
interest (or portion of the interest) are gratuitous transfers that are 
not reportable policy sales, the amount of the proceeds excluded from 
gross income is determined under paragraph (b)(2)(i) of this section, 
taking into account the application of paragraph (b)(1)(ii)(B)(3)(i) of 
this section to the insured's acquisition of the interest. If any 
subsequent transfer of the interest (or portion of the interest) is for 
valuable consideration or is a reportable policy sale, the amount of 
the policy proceeds excludable from gross income is determined in 
accordance with paragraph (b) of this section; if the amount that would 
have been excludable from gross income by the insured following the 
transaction described in paragraph (b)(1)(ii)(B)(3)(i) of this section 
if no subsequent transfer had occurred is relevant, that amount is 
determined under paragraph (b)(1)(ii)(B)(2) of this section. Paragraph 
(g)(8) (Example 8) of this section and paragraph (g)(9) (Example 9) of 
this section illustrate the application of this paragraph 
(b)(1)(ii)(B)(3)(ii).
    (2) Other transfers--(i) Gratuitous transfer of an interest in a 
life insurance contract. To the extent that a transfer of an interest 
in a life insurance contract is gratuitous, including a reportable 
policy sale that is not for valuable consideration, the amount of the 
proceeds attributable to the interest that is excludable from gross 
income under section 101(a)(1) is limited to the sum of the amount of 
the proceeds attributable to the gratuitously transferred interest that 
would have been excludable by the transferor if the transfer had not 
occurred and the premiums and other amounts subsequently paid by the 
transferee with respect to the interest. However, if an interest in a 
life insurance contract is transferred gratuitously to the insured, and 
that interest has not previously been transferred for value in a 
reportable policy sale, the entire amount of the proceeds attributable 
to the interest transferred to the insured is excludable from gross 
income.
    (ii) Partial transfers. When only part of an interest in a life 
insurance contract is transferred, the transferor's exclusion is 
ratably apportioned between or among the several parts. If multiple 
parts of an interest are transferred, the transfer of each part is 
treated as a separate transaction, with each transaction subject to the 
rule under paragraph (b) of this section that is applicable to the type 
of transfer involved.
    (iii) Bargain sales. When the transfer of an interest in a life 
insurance contract is in part a transfer for valuable consideration and 
in part a gratuitous transfer, the transfer of each part is treated as 
a separate transaction for purposes of determining the amount of the 
proceeds attributable to the interest that is excludable from gross 
income under section 101(a)(1). Each separate transaction is subject to 
the rule under paragraph (b) of this section that is applicable to the 
type of transfer involved.
    (3) Determination of amounts paid by the transferee. For purposes 
of paragraphs (b)(1) and (2) of this section, in determining the 
amounts, if any, of consideration paid by the transferee for the 
transfer of an interest in a life insurance contract and premiums and 
other amounts subsequently paid by the transferee with respect to that 
interest, the amounts paid by the transferee are reduced, but not below 
zero, by

[[Page 58480]]

amounts received by the transferee under the life insurance contract 
that are not received as an annuity, to the extent excludable from 
gross income under section 72(e).
    (c) Reportable policy sale--(1) In general. Except as provided in 
paragraph (c)(2) of this section, a reportable policy sale for purposes 
of this section and section 6050Y is any direct or indirect acquisition 
of an interest in a life insurance contract if the acquirer has, at the 
time of the acquisition, no substantial family, business, or financial 
relationship with the insured apart from the acquirer's interest in the 
life insurance contract.
    (2) Exceptions. None of the following transactions is a reportable 
policy sale:
    (i) A transfer of an interest in a life insurance contract between 
entities with the same beneficial owners, if the ownership interest of 
each beneficial owner in the transferor entity does not vary by more 
than a 20 percent ownership interest from that beneficial owner's 
ownership interest in the transferee entity. In a series of transfers, 
the prior sentence is applied by comparing the beneficial owners' 
ownership interest in the first transferor entity and the last 
transferee entity. For purposes of this paragraph (c)(2)(i), each 
beneficial owner of a trust is deemed to have an ownership interest 
determined by the broadest possible exercise of a trustee's discretion 
in that beneficial owner's favor. Paragraph (g)(13) (Example 13) of 
this section provides an illustration of the application of this 
paragraph (c)(2)(i).
    (ii) A transfer between corporations that are members of an 
affiliated group (as defined in section 1504(a)) that files a 
consolidated U.S. income tax return for the taxable year in which the 
transfer occurs.
    (iii) The indirect acquisition of an interest in a life insurance 
contract by a person if--
    (A) 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 section 6050Y(a) and Sec.  1.6050Y-2; or
    (B) Immediately before the acquisition, no more than 50 percent of 
the gross value of the assets (as determined under paragraph (f)(4) of 
this section) of the partnership, trust, or other entity that directly 
or indirectly holds the interest in the life insurance contract, and in 
which an ownership interest is being directly acquired, consists of 
life insurance contracts, provided that, after the acquisition, with 
respect to that partnership, trust, or other entity, the person 
indirectly acquiring the interest in the life insurance contract and 
his or her family members own, in the aggregate--
    (1) With respect to an S corporation, stock possessing 5 percent or 
less of the total combined voting power of all classes of stock 
entitled to vote and 5 percent or less of the total value of shares of 
all classes of stock of the S corporation;
    (2) With respect to a trust or decedent's estate, 5 percent or less 
of the corpus and 5 percent or less of the annual income (taking into 
account, for the purpose of determining any person's ownership 
interest, the maximum amount of income and corpus that could be 
distributed to or held for the benefit of that person); or
    (3) With respect to a partnership or other entity that is not a 
corporation or a trust, 5 percent or less of the capital interest and 5 
percent or less of the profits interest.
    (iv) The acquisition of a life insurance contract by an insurance 
company that issues a life insurance contract in an exchange pursuant 
to section 1035.
    (v) The acquisition of a life insurance contract by a policyholder 
in an exchange pursuant to section 1035, if the policyholder has a 
substantial family, business, or financial relationship with the 
insured, apart from its interest in the life insurance contract, at the 
time of the exchange.
    (d) Substantial relationship--(1) Substantial family relationship. 
For purposes of this section, a substantial family relationship means 
the relationship between an individual and any family member of that 
individual as defined in paragraph (f)(3) of this section. In addition, 
a substantial family relationship exists between an individual and his 
or her former spouse with regard to the transfer of an interest in a 
life insurance contract to (or in trust for the benefit of) that former 
spouse incident to divorce.
    (2) Substantial business relationship. For purposes of this 
section, a substantial business relationship between the insured and 
the acquirer exists in each of the following situations:
    (i) The insured is a key person (as defined in section 264) of, or 
materially participates (within the meaning of section 469) in, an 
active trade or business as an owner, employee, or contractor, and at 
least 80 percent of that trade or business is owned (directly or 
indirectly, through one or more partnerships, trusts, or other 
entities) by the acquirer or the beneficial owners of the acquirer.
    (ii) The acquirer acquires an active trade or business and acquires 
the interest in the life insurance contract either as part of that 
acquisition or from a person owning significant property leased to the 
acquired trade or business or life insurance policies held to 
facilitate the succession of the ownership of the business if--
    (A) The insured--
    (1) Is an employee within the meaning of section 101(j)(5)(A) of 
the acquired trade or business immediately preceding the acquisition; 
or
    (2) Was a director, highly compensated employee, or highly 
compensated individual within the meaning of section 101(j)(2)(A)(ii) 
of the acquired trade or business, and the acquirer, immediately after 
the acquisition, has ongoing financial obligations to the insured with 
respect to the insured's employment by the trade or business (for 
example, the life insurance contract is maintained by the acquirer to 
fund current or future retirement, pension, or survivorship obligations 
based on the insured's relationship with the entity or to fund a buy-
out of the insured's interest in the acquired trade or business); and
    (B) The acquirer either carries on the acquired trade or business 
or uses a significant portion of the acquired business assets in an 
active trade or business that does not include investing in interests 
in life insurance contracts.
    (3) Substantial financial relationship. For purposes of this 
section, a substantial financial relationship between the insured and 
the acquirer exists in each of the following situations:
    (i) The acquirer (directly or indirectly, through one or more 
partnerships, trusts, or other entities of which it is a beneficial 
owner) has, or the beneficial owners of the acquirer have, a common 
investment (other than the interest in the life insurance contract) 
with the insured and a buy-out of the insured's interest in the common 
investment by the co-investor(s) after the insured's death is 
reasonably foreseeable.
    (ii) The acquirer maintains the life insurance contract on the life 
of the insured to provide funds to purchase assets of or to satisfy 
liabilities of the insured or the insured's estate, heirs, legatees, or 
other successors in interest, or to satisfy other liabilities arising 
upon or by reason of the death of the insured.
    (iii) The acquirer is an organization described in sections 170(c), 
2055(a), and 2522(a) that previously received from the insured either 
financial support in a substantial amount or

[[Page 58481]]

significant volunteer support or that meets other requirements 
prescribed in guidance published in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2) of this chapter) for establishing that a 
substantial financial relationship exists between the insured and the 
organization.
    (4) Special rules. Paragraphs (d)(4)(i), (ii), and (iii) of this 
section apply for purposes of determining whether a substantial 
relationship (whether family, business, or financial) exists under 
paragraph (d)(1), (2), or (3) of this section, respectively.
    (i) Indirect acquisitions. The acquirer of an interest in a life 
insurance contract in an indirect acquisition is deemed to have a 
substantial business or financial relationship with the insured if the 
direct holder of the interest in the life insurance contract has a 
substantial business or financial relationship with the insured 
immediately before and after the date the acquirer acquires its 
interest.
    (ii) Acquisitions by certain persons. The sole fact that an 
acquirer is a partner of the insured, a partnership in which the 
insured is a partner, or a corporation in which the insured is a 
shareholder or officer, is not sufficient to establish a substantial 
business or financial relationship with the insured. In addition, an 
acquirer need not be a partner of the insured, a partnership in which 
the insured is a partner, or a corporation in which the insured is a 
shareholder or officer to have a substantial business or financial 
relationship with the insured.
    (iii) Acquisitions by those with differing types of substantial 
relationships. A substantial family, business, or financial 
relationship exists between the insured and a partnership, trust, or 
other entity if each beneficial owner of that partnership, trust, or 
other entity has a substantial family, business, or financial 
relationship with the insured. For example, a substantial family, 
business, or financial relationship exists between the insured and a 
trust if each trust beneficiary is a family member of the insured or an 
organization described in paragraph (d)(3)(iii) of this section.
    (e) Interest in a life insurance contract--(1) Definition. For 
purposes of this section and section 6050Y, the term interest in a life 
insurance contract means the interest held by any person that has taken 
title to or possession of the life insurance contract (also referred to 
as a life insurance policy), in whole or part, for state law purposes, 
including any person that has taken title or possession as nominee for 
another person, and the interest held by any person that has an 
enforceable right to receive all or a part of the proceeds of a life 
insurance contract or to any other economic benefits of the policy as 
described in Sec.  20.2042-1(c)(2) of this chapter, such as the 
enforceable right to designate a contract beneficiary. Any person named 
as the owner in the life insurance contract generally is the owner (or 
an owner) of the contract and holds an interest in the contract.
    (2) Transfer of an interest in a life insurance contract. For 
purposes of this section and section 6050Y, the term transfer of an 
interest in a life insurance contract means the transfer of any 
interest in the life insurance contract, including any transfer of 
title to, possession of, or legal or beneficial ownership of the life 
insurance contract itself. The creation of an enforceable right to 
receive all or a part of the proceeds of a life insurance contract 
constitutes the transfer of an interest in the life insurance contract. 
The following events are not a transfer of an interest in a life 
insurance contract: The revocable designation of a beneficiary of the 
policy proceeds (until the designation becomes irrevocable other than 
by reason of the death of the insured); the pledging or assignment of a 
policy as collateral security; and the issuance of a life insurance 
contract to a policyholder, other than the issuance of a policy in an 
exchange pursuant to section 1035.
    (3) Acquisition of an interest in a life insurance contract. For 
purposes of this section and section 6050Y, the acquisition of an 
interest in a life insurance contract may be direct or indirect.
    (i) Direct acquisition of an interest in a life insurance contract. 
For purposes of this section and section 6050Y, the transfer of an 
interest in a life insurance contract results in the direct acquisition 
of the interest by the transferee (acquirer).
    (ii) Indirect acquisition of an interest in a life insurance 
contract. For purposes of this section and section 6050Y, an indirect 
acquisition of an interest in a life insurance contract occurs when a 
person (acquirer) becomes a beneficial owner of a partnership, trust, 
or other entity that holds (whether directly or indirectly) the 
interest (whether legal or beneficial) in the life insurance contract. 
For purposes of this paragraph (e)(3)(ii), the term other entity does 
not include a C corporation, unless more than 50 percent of the gross 
value of the assets of the C corporation consists of life insurance 
contracts (as determined under paragraph (f)(4) of this section) 
immediately before the indirect acquisition.
    (f) Definitions. The following definitions apply for purposes of 
this section:
    (1) Beneficial owner. A beneficial owner of a partnership, trust, 
or other entity is an individual or C corporation with an ownership 
interest in that entity. The interest may be held directly or 
indirectly, through one or more other partnerships, trusts, or other 
entities. For instance, an individual that directly owns an interest in 
a partnership (P1), which directly owns an interest in another 
partnership (P2), is an indirect beneficial owner of P2 and any assets 
or other entities owned by P2 directly or indirectly. For purposes of 
this paragraph (f)(1), the beneficial owners of a trust include those 
who may receive current distributions of trust income or corpus and 
those who could receive distributions if the trust were to terminate 
currently.
    (2) C corporation. The term C corporation has the meaning given to 
it in section 1361(a)(2).
    (3) Family member. With respect to any individual, the term family 
member refers to any person described in paragraphs (f)(3)(i) through 
(vi) of this section. For purposes of this paragraph (f)(3), full 
effect is given to a legal adoption, and a step-child is deemed to be a 
descendant. The family members of an individual include:
    (i) The individual;
    (ii) The individual's spouse or a person with whom the individual 
is in a registered domestic partnership, civil union, or other similar 
relationship established under state law;
    (iii) Any parent, grandparent, or great-grandparent of the 
individual or of the person described in paragraph (f)(3)(ii) of this 
section and any spouse of such parent, grandparent, or great-
grandparent, or person with whom the parent, grandparent, or great-
grandparent is in a registered domestic partnership, civil union, or 
other similar relationship established under state law;
    (iv) Any lineal descendant of the individual or of any person 
described in paragraph (f)(3)(ii) or (iii) of this section;
    (v) Any spouse of a lineal descendant described in paragraph 
(f)(3)(iv) of this section and any person with whom such a lineal 
descendant is in a registered domestic partnership, civil union, or 
other similar relationship established under state law; and
    (vi) Any lineal descendant of a person described in paragraph 
(f)(3)(v) of this section.
    (4) Gross value of assets--(i) Determination of gross value of 
assets. Except as provided in paragraph

[[Page 58482]]

(f)(4)(ii) or (iii) of this section, for purposes of paragraphs 
(c)(2)(iii)(B) and (e)(3)(ii) of this section, the term gross value of 
assets means, with respect to any entity, the fair market value of the 
entity's assets, including assets beneficially owned by the entity 
under paragraph (f)(1) of this section as a beneficial owner of a 
partnership, trust, or other entity.
    (ii) Determination of gross value of assets of publicly traded 
entity. For purposes of determining the gross value of assets of an 
entity that is publicly traded, if the entity's annual Form 10-K filed 
with the United States Securities and Exchange Commission (or 
equivalent annual filing if the entity is publicly traded in a non-U.S. 
jurisdiction) for the period immediately preceding a person's 
acquisition of an ownership interest in the entity does not contain 
information demonstrating that more than 50 percent of the gross value 
of the entity's assets consist of life insurance contracts, that person 
may assume that no more than 50 percent of the gross value of the 
entity's assets consists of life insurance contracts, unless that 
person has actual knowledge or reason to know that more than 50 percent 
of the gross value of the entity's assets consists of life insurance 
contracts.
    (iii) Safe harbor definition of gross value of assets. An entity 
may choose to determine the gross value of all the entity's assets for 
purposes of this section using the following alternative definition of 
gross value of assets:
    (A) In the case of assets that are life insurance policies or 
annuity or endowment contracts that have cash values, the cash 
surrender value as defined in section 7702(f)(2)(A); and
    (B) In the case of assets not described in paragraph (f)(4)(iii)(A) 
of this section, the adjusted bases (within the meaning of section 
1016) of such assets.
    (5) Transfer for valuable consideration. A transfer for valuable 
consideration means any transfer of an interest in a life insurance 
contract for cash or other consideration reducible to a money value.
    (g) Examples. The application of this section is illustrated by the 
following examples. Each example assumes that the transferee did not 
receive any amounts under the life insurance contract other than the 
amounts described in the examples. With the exception of paragraph 
(g)(7) (Example 7) of this section, the bargain sale rules set forth in 
paragraph (b)(2)(iii) of this section do not apply in the examples 
because the consideration paid for the policy transferred is fair 
market value:

    (1) Example 1. A is the initial policyholder of a $100,000 
insurance policy on A's life. A sells the policy to B, A's child, 
for $6,000, its fair market value. B is not a partner in a 
partnership in which A is a partner. B receives the proceeds of 
$100,000 upon the death of A. Because the transfer to B was for 
valuable consideration, and none of the exceptions in paragraph 
(b)(1)(ii) of this section applies, the amount of the proceeds B may 
exclude from B's gross income under this section is limited under 
paragraph (b)(1)(i) of this section to $6,000 plus any premiums and 
other amounts paid by B with respect to the policy subsequent to the 
transfer.
    (2) Example 2. The facts are the same as in Example 1 in 
paragraph (g)(1) of this section except that, before A's death, B 
gratuitously transfers the policy back to A. A's estate receives the 
proceeds of $100,000 on A's death. Because the transfer from B to A 
is a gratuitous transfer to the insured, and the preceding transfer 
from A to B was not a reportable policy sale, the amount of the 
proceeds A's estate may exclude from gross income under this section 
is not limited by paragraph (b)(2)(i) of this section.
    (3) Example 3. The facts are the same as in Example 1 in 
paragraph (g)(1) of this section except that, before A's death, B 
sells the policy back to A for its fair market value. A's estate 
receives the proceeds of $100,000 on A's death. The transfer from A 
to B is not a reportable policy sale because the acquirer B has a 
substantial family relationship with the insured, A. The transfer 
from B to A also is not a reportable policy sale because the 
acquirer A has a substantial family relationship with the insured, 
A. Accordingly, paragraph (b)(1)(ii)(B)(1) of this section applies 
to the transfer to A, and the amount of the proceeds A's estate may 
exclude from gross income is not limited by paragraph (b) of this 
section.
    (4) Example 4. A is the initial policyholder of a $100,000 
insurance policy on A's life. A transfers the policy for $6,000, its 
fair market value, to an individual, C, who does not have a 
substantial family, business, or financial relationship with A. The 
transfer from A to C is a reportable policy sale. C receives the 
proceeds of $100,000 on A's death. The amount of the proceeds C may 
exclude from C's gross income under this section is limited under 
paragraph (b)(1)(i) of this section to $6,000 plus any premiums and 
other amounts paid by C with respect to the policy subsequent to the 
transfer.
    (5) Example 5. The facts are the same as in Example 4 in 
paragraph (g)(4) of this section, except that before A's death, C 
transfers the policy to D, a partner of A who co-owns real property 
with A, for $8,000, the policy's fair market value. D receives the 
proceeds of $100,000 on A's death. The transfer from C to D is not a 
reportable policy sale because the acquirer D has a substantial 
financial relationship with the insured, A. However, because that 
transfer follows a reportable policy sale (the transfer from A to 
C), the amount of the proceeds that D may exclude from gross income 
under this section is limited by paragraph (b)(1)(ii)(B)(2) of this 
section to the sum of--
    (i) The higher of the amount C could have excluded had the 
transfer to D not occurred ($6,000 plus any premiums and other 
amounts paid by C with respect to the policy subsequent to the 
transfer to C, as described in Example 4 in paragraph (g)(4) of this 
section) or the actual value of the consideration for that transfer 
paid by D ($8,000); and
    (ii) Any premiums and other amounts paid by D with respect to 
the policy subsequent to the transfer to D.
    (6) Example 6. The facts are the same as in Example 4 in 
paragraph (g)(4) of this section, except that before A's death, C 
transfers the policy back to A for $8,000, its fair market value. 
A's estate receives the proceeds of $100,000 on A's death. The 
transfer from C to A is not a reportable policy sale because the 
acquirer A has a substantial family relationship with the insured, 
A. Although the transfer follows a reportable policy sale (the 
initial transfer from A to C), A's estate may exclude all of the 
policy proceeds from gross income because paragraph 
(b)(1)(ii)(B)(3)(i) of this section applies and, therefore, the 
amount of the proceeds that A may exclude from gross income is not 
limited by paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2) 
of this section.
    (7) Example 7. The facts are the same as in Example 6 in 
paragraph (g)(6) of this section, except that C transfers the policy 
back to A for $4,000, rather than its fair market value of $8,000. 
A's estate receives the proceeds of $100,000 on A's death. Because A 
did not pay fair market value for the policy, the transfer is 
bifurcated and treated as a bargain sale under paragraph (b)(2)(iii) 
of this section. A therefore is treated as having purchased 50% of 
the policy interest for valuable consideration equal to fair market 
value and as having received 50% of the policy interest in a 
gratuitous transfer. The transfer from C to A is not a reportable 
policy sale because the acquirer, A, has a substantial family 
relationship with the insured, A, but the transfer from C to A 
follows a reportable policy sale (the transfer from A to C).
    (i) Treatment of policy interest purchased by A. A's estate may 
exclude from income all of the policy proceeds related to the 50% 
policy interest transferred for valuable consideration ($50,000) 
because, under paragraph (b)(1)(ii)(B)(3)(i) of this section, the 
amount of the proceeds that may be excluded from gross income is not 
limited by paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2) 
of this section.
    (ii) Treatment of policy interest gratuitously transferred to A. 
The amount of the policy proceeds related to the 50% policy interest 
transferred gratuitously that A's estate may exclude from income is 
limited under paragraph (b)(2)(i) of this section to the sum of the 
amount C could have excluded with respect to 50% of the policy had 
the transfer back to A not occurred (that is, 50% of the $6,000 that 
C paid A for the policy, plus 50% of any premiums and other amounts 
paid by C with respect to the policy subsequent to the transfer to 
C), plus 50% of any premiums and other amounts paid by A with 
respect to the policy subsequent to the transfer to A.
    (8) Example 8. The facts are the same as in Example 6 in 
paragraph (g)(6) of this

[[Page 58483]]

section, except that, before A's death, A gratuitously transfers 50% 
of the policy interest to B, A's child, and sells 50% of the policy 
interest for its fair market value to an individual, E, who does not 
have a substantial family, business, or financial relationship with 
A. B and E each receive $50,000 of the proceeds on A's death. 
Paragraph (b)(1)(ii)(B)(3)(ii) of this section applies to determine 
the amount of the proceeds that B and E may exclude from gross 
income because the policy interests transferred to B and E were 
first transferred for valuable consideration in a reportable policy 
sale (the transfer by A to C) and then transferred to the insured, 
A, for fair market value.
    (i) Treatment of policy interest transferred to B. With respect 
to the portion of the policy interest transferred to B, because the 
transfer to B was the only transfer subsequent to the transfer to A 
and the transfer to B was gratuitous and not a reportable policy 
sale, under paragraph (b)(1)(ii)(B)(3)(ii) of this section, the 
amount of the policy proceeds excludable from gross income by B is 
determined under paragraph (b)(2)(i) of this section, taking into 
account the application of paragraph (b)(1)(ii)(B)(3)(i) of this 
section to A's acquisition of the interest. Under paragraph 
(b)(2)(i) of this section, the amount of the proceeds B may exclude 
is limited to the sum of the amount A could have excluded had the 
transfer to B not occurred, and any premiums and other amounts paid 
by B with respect to the policy subsequent to the transfer to B. As 
described in Example 6 in paragraph (g)(6) of this section, under 
paragraph (b)(1)(ii)(B)(3)(i) of this section, the amount of the 
proceeds that A may exclude from gross income is not limited by 
paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2) of this 
section. Accordingly, the amount of the proceeds that B may exclude 
from gross income is not limited by paragraph (b) of this section.
    (ii) Treatment of policy interest transferred to E. With respect 
to the portion of the policy interest transferred to E, because the 
transfer to E was not gratuitous and was a reportable policy sale, 
under paragraph (b)(1)(ii)(B)(3)(ii) of this section, the amount of 
the policy proceeds excludable from gross income by E is determined 
in accordance with paragraph (b) of this section. Accordingly, 
because the transfer to E was for valuable consideration, the amount 
excludable from gross income by E is limited by paragraph (b)(1)(i) 
of this section unless an exception in paragraph (b)(1)(ii) of this 
section applies. Because the transfer from A to E is a reportable 
policy sale, none of the exceptions in paragraph (b)(1)(ii) of this 
section apply. Therefore, the amount of the proceeds E may exclude 
from gross income under this section is limited by paragraph 
(b)(1)(i) of this section to the sum of the consideration paid by E 
and the premiums and other amounts paid by E with respect to the 
policy subsequent to the transfer to E.
    (9) Example 9. The facts are the same as in Example 8 in 
paragraph (g)(8) of this section, except that, before A's death, B 
transfers B's policy interest to Partnership F, whose partners are A 
and other family members of A, in exchange for a partnership 
interest in Partnership F. Partnership F receives $50,000 of the 
proceeds on A's death. With respect to the policy interest 
transferred to Partnership F, paragraph (b)(1)(ii)(B)(3)(ii) of this 
section applies to determine the amount of the proceeds that 
Partnership F may exclude from gross income for the reasons 
described in Example 8 in paragraph (g)(8) of this section.
    (i) Treatment of policy interest transferred to Partnership F. 
The transfer to Partnership F was not a reportable policy sale. 
However, because the transfer to Partnership F was not gratuitous, 
the amount of the policy proceeds excludable from gross income by 
Partnership F is determined in accordance with paragraph (b) of this 
section as if the amount that would have been excludable from gross 
income by A following the transfer to A, if no subsequent transfer 
had occurred, was determined under paragraph (b)(1)(ii)(B)(2) of 
this section. Because B's transfer to Partnership F was a transfer 
for valuable consideration to a partnership in which the insured is 
a partner that was preceded by a reportable policy sale (the 
transfer to C), the amount of the proceeds Partnership F may exclude 
from gross income under this section is limited under paragraph 
(b)(1)(ii)(B)(2) of this section to the higher of the amount that 
would have been excludable by B if the transfer to Partnership F had 
not occurred or the actual value of the consideration for the policy 
paid by Partnership F, plus any premiums and other amounts paid by 
Partnership F with respect to the policy subsequent to the transfer 
to Partnership F.
    (ii) Amount that B could have excluded. Because the transfer 
from A to B was a gratuitous transfer, the amount of the proceeds B 
could have excluded from gross income under this section if the 
transfer to Partnership F had not occurred is limited under 
paragraph (b)(2)(i) of this section to the sum of the amount A could 
have excluded had the transfer to B not occurred, and any premiums 
and other amounts paid by B with respect to the policy subsequent to 
the transfer to B.
    (iii) Amount that A could have excluded. As described in 
paragraph (g)(9)(i) of this section, the amount of the proceeds A 
could have excluded under this section if the transfer to B had not 
occurred must be determined under paragraph (b)(1)(ii)(B)(2) of this 
section in accordance with paragraph (b)(1)(ii)(B)(3)(ii) of this 
section. Under paragraph (b)(1)(ii)(B)(2) of this section, the 
amount that would have been excludable by A is limited to the higher 
of the amount that would have been excludable by C if the transfer 
to A had not occurred ($6,000 plus premiums and other amounts 
subsequently paid by C) or the actual value of the consideration for 
the policy paid by A ($8,000), plus any premiums and other amounts 
paid by A with respect to the policy subsequent to the transfer to 
A.
    (10) Example 10. A is the initial policyholder of a $100,000 
insurance policy on A's life. A contributes the policy to 
Corporation X in exchange for stock. Corporation X's basis in the 
policy is determinable in whole or in part by reference to A's basis 
in the policy. Corporation X conducts an active trade or business 
that it wholly owns, and A materially participates in that active 
trade or business as an employee of Corporation X. Corporation X 
receives the proceeds of $100,000 on A's death. A's contribution of 
the policy to Corporation X is not a reportable policy sale because 
Corporation X has a substantial business relationship with A under 
paragraph (d)(2)(i) of this section. Although Corporation X's basis 
in the policy is determinable in whole or in part by reference to 
A's basis in the policy, paragraph (b)(1)(ii)(A) of this section 
does not apply because the insured, A, is a shareholder of 
Corporation X and the other requirements under paragraph 
(b)(1)(ii)(B) of this section are satisfied. Accordingly, paragraph 
(b)(1)(ii)(B) of this section applies, and paragraph (b)(1)(ii)(A) 
of this section is inapplicable. Under paragraph (b)(1)(ii)(B)(1) of 
this section, Corporation X's exclusion is not limited by paragraph 
(b) of this section.
    (11) Example 11. The facts are the same as in Example 10 in 
paragraph (g)(10) of this section, except that Corporation X 
transfers its active trade or business and the policy on A's life to 
Corporation Y in a tax-free reorganization at a time when A is still 
employed by Corporation X, but is no longer a shareholder of 
Corporation X. Corporation Y's basis in the policy is determinable 
in whole or in part by reference to Corporation X's basis in the 
policy, and Corporation Y carries on the trade or business acquired 
from Corporation X. Corporation Y receives the proceeds of $100,000 
on A's death. The transfer from Corporation X to Corporation Y is 
not a reportable policy sale because Corporation Y has a substantial 
business relationship with A under paragraph (d)(2)(ii) of this 
section. The amount of the proceeds that Corporation Y may exclude 
from gross income is limited under paragraph (b)(1)(ii)(A) of this 
section to the sum of the amount that would have been excludable by 
Corporation X had the transfer to Corporation Y not occurred, plus 
any premiums and other amounts paid by Corporation Y with respect to 
the policy subsequent to the transfer. Accordingly, because 
Corporation X's exclusion is not limited by paragraph (b) of this 
section, as described in Example 10 in paragraph (g)(10) of this 
section, Corporation Y's exclusion is not limited by paragraph (b) 
of this section.
    (12) Example 12. A is the initial policyholder of a $100,000 
insurance policy on A's life. A contributes the policy to a C 
corporation, Corporation W, in exchange for stock. After the 
acquisition, A owns less than 20% of the outstanding stock of 
Corporation W and owns stock possessing less than 20% of the total 
combined voting power of all stock of Corporation W and is therefore 
not a key person with respect to Corporation W under section 
264(e)(3). Corporation W's basis in the policy is determinable in 
whole or in part by reference to A's basis in the policy. However, 
no substantial family, business, or financial relationship exists 
between A and Corporation W, so A's contribution of the policy to 
Corporation W is a reportable policy sale. Corporation W receives 
the proceeds of $100,000 on A's death. Under paragraph (b)(1)(i) of 
this section, the amount of the proceeds

[[Page 58484]]

Corporation W may exclude from gross income is limited to the actual 
value of the stock exchanged for the policy, plus any premiums and 
other amounts paid by Corporation W with respect to the policy 
subsequent to the transfer. The exceptions in paragraph (b)(1)(ii) 
of this section do not apply because the transfer to Corporation W 
is a reportable policy sale.
    (13) Example 13. Partnership X and Partnership Y are owned by 
individuals A, B, and C. A holds 40% of the capital and profits 
interest of Partnership X and 20% of the capital and profits 
interest of Partnership Y. B holds 35% of the capital and profits 
interest of Partnership X and 40% of the capital and profits 
interest of Partnership Y. C holds 25% of the capital and profits 
interest of Partnership X and 40% of the capital and profits 
interest of Partnership Y. Partnership X is the initial policyholder 
of a $100,000 insurance policy on the life of A. Partnership Y 
purchases the policy from Partnership X. Under paragraph (c)(2)(i) 
of this section, this transfer is not a reportable policy sale 
because the ownership interest of each beneficial owner in 
Partnership X does not vary from that owner's interest in 
Partnership Y by more than a 20% ownership interest. A's ownership 
varies by a 20% interest, B's ownership varies by a 5% interest, and 
C's ownership varies by a 15% interest.
    (14) Example 14. Partnership X conducts an active trade or 
business and is the initial policyholder of a $100,000 insurance 
policy on the life of its full-time employee, A. A materially 
participates in Partnership X's active trade or business in A's 
capacity as an employee. Individual B acquires a 10% profits 
interest in Partnership X in exchange for a cash payment of 
$1,000,000. Under paragraphs (d)(1) through (3) of this section, B 
does not have a substantial family, business, or financial 
relationship with A. Under paragraph (d)(4)(i) of this section, 
however, B is deemed to have a substantial business relationship 
with A because, under paragraph (d)(2)(i) of this section, 
Partnership X (the direct policyholder) has a substantial business 
relationship with A. Accordingly, although the acquisition of the 
10% partnership interest by B is an indirect acquisition of a 10% 
interest in the insurance policy covering A's life, the acquisition 
is not a reportable policy sale.
    (15) Example 15. The facts are the same as in Example 14 in 
paragraph (g)(14) of this section, except that A is no longer an 
employee of Partnership X, and Partnership X has no substantial 
family, business, or financial relationship with A, when B acquires 
the profits interest in Partnership X. Also, B acquires only a 5% 
profits interest in exchange for a cash payment of $500,000. 
Partnership X does not own an interest in any other life insurance 
policies, and the gross value of its assets is $10 million. Although 
neither Partnership X nor B has a substantial family, business, or 
financial relationship with A at the time of B's indirect 
acquisition of an interest in the policy covering A's life, because 
B's profits interest in Partnership X does not exceed 5%, and 
because no more than 50% of Partnership X's asset value consists of 
life insurance contracts, the exception in paragraph (c)(2)(iii)(B) 
of this section applies, and B's indirect acquisition of an interest 
in the policy covering A's life is not a reportable policy sale.
    (16) Example 16. A is the initial policyholder of a $100,000 
insurance policy on A's life. A sells the policy for its fair market 
value. As a result of the sale, Bank X holds legal title to the life 
insurance contract as the nominee of Partnership B, and Partnership 
B has the enforceable right to designate the contract beneficiary. 
Under paragraphs (d)(1) through (4) of this section, neither Bank X 
nor Partnership B has a substantial family, business, or financial 
relationship with the insured, A, at the time of the sale. 
Accordingly, the transfer of legal title to the policy to Bank X is 
a reportable policy sale under paragraph (c)(1) of this section, 
unless an exception set forth in paragraph (c)(2) of this section 
applies. The same is true of the transfer of the economic benefits 
of the policy to Partnership B. At a later date, Partnership B sells 
its economic interest in the policy to Partnership C for fair market 
value. Bank X continues to hold legal title to the life insurance 
contract, but now holds it as Partnership C's nominee. Partnership C 
has no substantial family, business, or financial relationship with 
the insured, A, under paragraphs (d)(1) through (4) of this section 
at the time of the transfer. Accordingly, Partnership C's 
acquisition of the economic interest in the policy from Partnership 
B is a reportable policy sale under paragraph (c)(1) of this 
section, unless an exception set forth in paragraph (c)(2) of this 
section applies.

0
Par. 3. Section 1.101-6 is amended by revising paragraph (b) to read as 
follows:


Sec.  1.101-6   Effective date.

* * * * *
    (b) Notwithstanding paragraph (a) of this section, for purposes of 
determining whether a transfer of an interest in a life insurance 
contract is a reportable policy sale or a payment of death benefits is 
a payment of reportable death benefits subject to the reporting 
requirements of section 6050Y and Sec. Sec.  1.6050Y-1 through 1.6050Y-
4, Sec.  1.101-1(b) through (g) apply to reportable policy sales made 
after December 31, 2018, and to reportable death benefits paid after 
December 31, 2018. For any other purpose, including for purposes of 
determining the amount of the proceeds of life insurance contracts 
payable by reason of death excluded from gross income under section 
101, Sec.  1.101-1(b) through (g) apply to amounts paid by reason of 
the death of the insured under a life insurance contract, or interest 
therein, transferred after October 31, 2019. However, under section 
7805(b)(7), a taxpayer may apply the rules set forth in Sec.  1.101-
1(b) through (g) of the final regulations, in their entirety, with 
respect to all amounts paid by reason of the death of the insured under 
a life insurance contract, or interest therein, transferred after 
December 31, 2017, and on or before October 31, 2019.

0
Par. 4. Section 1.6050Y-1 is added to read as follows:


Sec.  1.6050Y-1  Information reporting for reportable policy sales, 
transfers of life insurance contracts to foreign persons, and 
reportable death benefits.

    (a) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec.  1.6050Y-2 through 1.6050Y-4:
    (1) Acquirer. The term acquirer means any person that acquires an 
interest in a life insurance contract (through a direct acquisition or 
indirect acquisition of the interest) in a reportable policy sale.
    (2) Buyer. The term buyer means, with respect to any interest in a 
life insurance contract that has been transferred in a reportable 
policy sale, the person that was the most recent acquirer of that 
interest in a reportable policy sale as of the date reportable death 
benefits are paid under the contract.
    (3) Direct acquisition of an interest in a life insurance contract. 
The term direct acquisition of an interest in a life insurance contract 
has the meaning given to it in Sec.  1.101-1(e)(3)(i).
    (4) Foreign person. The term foreign person means a person that is 
not a United States person, as defined in section 7701(a)(30).
    (5) Indirect acquisition of an interest in a life insurance 
contract. The term indirect acquisition of an interest in a life 
insurance contract has the meaning given to it in Sec.  1.101-
1(e)(3)(ii).
    (6) Interest in a life insurance contract. The term interest in a 
life insurance contract has the meaning given to it in Sec.  1.101-
1(e)(1).
    (7) Investment in the contract--(i) Definition of investment in the 
contract. With respect to the original policyholder of a life insurance 
contract, the term investment in the contract on any date means that 
person's investment in the contract under section 72(e)(6) on that 
date. With respect to any other person, the term investment in the 
contract on any date means the estimate of investment in the contract 
on that date.
    (ii) Definition of estimate of investment in the contract. The term 
estimate of investment in the contract with respect to any person, 
other than the original policyholder, means, on any date, the aggregate 
amount of premiums paid for the contract by that person before that 
date, less the aggregate amount received under the contract by that 
person before that date to the extent such information is known to or 
can

[[Page 58485]]

reasonably be estimated by the issuer or payor.
    (8) Issuer--(i) In general. Except as provided in paragraph 
(a)(8)(ii) or (iii) of this section, the term issuer generally means, 
on any date, with respect to any interest in a life insurance contract, 
any person that bears any part of the risk with respect to the contract 
on that date and any person responsible on that date for administering 
the contract, including collecting premiums and paying death benefits. 
For instance, if a reinsurer reinsures on an indemnity basis all or a 
portion of the risks that the original issuer (and continuing contract 
administrator) of the contract might otherwise have incurred with 
respect to the contract, both the reinsurer and the original issuer of 
the contract are issuers of the contract for purposes of this paragraph 
(a)(8)(i). Any designee of an issuer of a contract is also considered 
an issuer of the contract for purposes of this paragraph (a)(8)(i).
    (ii) 6050Y(a) issuer. For purposes of information reporting under 
section 6050Y(a) and Sec.  1.6050Y-2, the 6050Y(a) issuer is the issuer 
that is responsible for administering the life insurance contract, 
including collecting premiums and paying death benefits under the 
contract, on the date of the reportable policy sale. In the case of the 
issuance of a life insurance contract to a policyholder in an exchange 
pursuant to section 1035, the 6050Y(a) issuer is the issuer that issues 
the new contract.
    (iii) 6050Y(b) issuer. For purposes of information reporting under 
section 6050Y(b) and Sec.  1.6050Y-3, a 6050Y(b) issuer is:
    (A) Any person that receives an RPSS with respect to a life 
insurance contract or interest therein (or, in the case of a designee, 
receives notice that the issuer for whom it serves as designee received 
an RPSS), and is or was, on or before the date of receipt of the RPSS, 
an issuer with respect to the contract; or
    (B) Any person that receives notice of a transfer to a foreign 
person of a life insurance contract, provided that the person is or 
was, on the date of transfer or on the date of receipt of the notice, 
an issuer with respect to the contract, and provided that the 
information is not received from the issuer responsible for 
administering the contract (or its designee), unless:
    (1) That person (or, in the case of a designee, the issuer for whom 
it serves as designee) is not responsible for administering the 
contract, including collecting premiums and paying death benefits under 
the contract, on the date the notice of a transfer to a foreign person 
is received; and
    (2) That person, or its designee, provides the issuer that is 
responsible on that date for administering the contract, including 
collecting premiums and paying death benefits under the contract, with 
such notice and with any available information necessary to accomplish 
reporting under section 6050Y(b) and Sec.  1.6050Y-3.
    (iv) Designee. A person is treated as the designee of an issuer for 
purposes of this paragraph (a)(8) only if so designated in writing, 
including electronically. The designation must be signed and 
acknowledged, in writing or electronically, by the person named as 
designee, or that person's representative, and by the issuer making the 
designation, or its representative.
    (9) Life insurance contract. The term life insurance contract has 
the meaning given to it in section 7702(a). A life insurance contract 
may also be referred to as a life insurance policy.
    (10) Notice of a transfer to a foreign person. The term notice of a 
transfer to a foreign person means any notice of a transfer of title 
to, possession of, or legal ownership of a life insurance contract 
received by a 6050Y(b) issuer that includes foreign indicia, including 
information provided for nontax purposes such as a change of address 
notice for purposes of sending statements or for other purposes, and 
information relating to loans, premiums, or death benefits with respect 
to the contract, unless the 6050Y(b) issuer knows that no transfer of 
the contract has occurred or knows that the transferee is a United 
States person. For this purpose, a 6050Y(b) issuer may rely on a Form 
W-9, Request for Taxpayer Identification Number and Certification, or a 
valid substitute form that meets the requirements of Sec.  1.1441-
1(d)(2) (substituting ``6050Y(b) issuer'' for ``withholding agent''), 
that indicates the transferee is a United States person. For instance, 
a change of address notice that changes the address to a foreign 
address or other updates to the information relating to the payment of 
premiums that includes foreign banking or other foreign financial 
institution information is notice of a transfer to a foreign person 
unless the 6050Y(b) issuer knows that no transfer has occurred or the 
transferee is a United States person.
    (11) Payor. The term payor means any person making a payment of 
reportable death benefits.
    (12) Reportable death benefits. The term reportable death benefits 
means amounts paid by reason of the death of the insured under a life 
insurance contract that are attributable to an interest in the contract 
that was transferred in a reportable policy sale.
    (13) Reportable death benefits payment recipient. The term 
reportable death benefits payment recipient means any person that 
receives reportable death benefits as a beneficiary under a life 
insurance contract or as the holder of an interest in a life insurance 
contract.
    (14) Reportable policy sale. The term reportable policy sale has 
the meaning given to it in Sec.  1.101-1(c).
    (15) Reportable policy sale payment. The term reportable policy 
sale payment generally means the total amount of cash and the fair 
market value of any other consideration reducible to a money value 
transferred, or to be transferred, in a reportable policy sale, 
including any amount of a reportable policy sale payment recipient's 
debt assumed by the acquirer in a reportable policy sale. In the case 
of an indirect acquisition of an interest in a life insurance contract 
that is a reportable policy sale, the reportable policy sale payment is 
the total amount of cash and the fair market value of any other 
consideration reducible to a money value transferred, or to be 
transferred, for the ownership interest in the entity, including the 
amount of any debt assumed by the acquirer, that is appropriately 
allocable to the interest in the life insurance contract held by the 
entity.
    (16) Reportable policy sale payment recipient--(i) Except as 
provided in paragraph (a)(16)(ii) of this section, the term reportable 
policy sale payment recipient means any person that receives a 
reportable policy sale payment in a reportable policy sale. A broker or 
other intermediary that retains a portion of the cash or other 
consideration transferred in a reportable policy sale is also a 
reportable policy sale payment recipient.
    (ii) A person other than the seller is not a reportable policy sale 
payment recipient with respect to a reportable policy sale if that 
person receives aggregate payments of less than $600 with respect to 
that reportable policy sale.
    (17) Reportable policy sale statement. The term reportable policy 
sale statement (RPSS) means a statement furnished by an acquirer to an 
issuer under section 6050Y(a)(2) and Sec.  1.6050Y-2(d)(2)(i).
    (18) Seller. The term seller means any person that--
    (i) Holds an interest in a life insurance contract and transfers 
that interest, or any part of that interest, to an acquirer in a 
reportable policy sale; or
    (ii) Owns a life insurance contract and transfers title to, 
possession of, or legal

[[Page 58486]]

ownership of that contract to a foreign person.
    (19) Transfer of an interest in a life insurance contract. The term 
transfer of an interest in a life insurance contract has the meaning 
given to it in Sec.  1.101-1(e)(2).
    (20) United States person. The term United States person has the 
meaning given to it in section 7701(a)(30).
    (b) Applicability date. This section and Sec. Sec.  1.6050Y-2 
through 1.6050Y-3 apply to reportable policy sales made after December 
31, 2018. This section and Sec.  1.6050Y-4 apply to reportable death 
benefits paid after December 31, 2018. However, for reportable policy 
sales and payments of reportable death benefits occurring after 
December 31, 2018, and on or before October 31, 2019, transition relief 
is provided as follows:
    (1) Statements required to be furnished to issuers under section 
6050Y(a)(2) and Sec.  1.6050Y-2(d)(2)(i) must be furnished by the later 
of the applicable deadline set forth in Sec.  1.6050Y-2(d)(2)(ii) or 
December 30, 2019.
    (2) Statements required to be furnished to reportable policy sale 
payment recipients under section 6050Y(a)(2) and Sec.  1.6050Y-
2(d)(1)(i) must be furnished by the later of the applicable deadline 
set forth in Sec.  1.6050Y-2(d)(1)(ii) or February 28, 2020.
    (3) Statements required to be furnished to sellers under section 
6050Y(b)(2) and Sec.  1.6050Y-3(d)(1) must be furnished by the later of 
the applicable deadline set forth in Sec.  1.6050Y-3(d)(2) or February 
28, 2020.
    (4) Statements required to be furnished to reportable death 
benefits payment recipients under section 6050Y(c)(2) and Sec.  
1.6050Y-4(c)(1) must be furnished by the later of the applicable 
deadline set forth in Sec.  1.6050Y-4(c)(2) or February 28, 2020.
    (5) Returns required to be filed under section 6050Y(a)(1) and 
Sec.  1.6050Y-2(a), section 6050Y(b)(1) and Sec.  1.6050Y-3(a), and 
section 6050Y(c)(1) and Sec.  1.6050Y-4 must be filed by the later of 
the applicable deadline set forth in Sec.  1.6050Y-2(c), Sec.  1.6050Y-
3(c), and Sec.  1.6050Y-4(b) or February 28, 2020.

0
Par. 5. Section 1.6050Y-2 is added to read as follows:


Sec.  1.6050Y-2   Information reporting by acquirers for reportable 
policy sale payments.

    (a) Requirement of reporting. Except as provided in paragraph (f) 
of this section, every person that is an acquirer in a reportable 
policy sale during any calendar year must file a separate information 
return with the Internal Revenue Service (IRS) in the form and manner 
as required by the IRS for each reportable policy sale payment 
recipient, including any seller that is a reportable policy sale 
payment recipient. Each return must include the following information 
with respect to the seller or other reportable policy sale payment 
recipient to which the return relates:
    (1) The name, address, and taxpayer identification number (TIN) of 
the acquirer;
    (2) The name, address, and TIN of the seller or other reportable 
policy sale payment recipient to which the return relates;
    (3) The date of the reportable policy sale;
    (4) The name of the 6050Y(a) issuer of the life insurance contract 
acquired and the policy number of the life insurance contract;
    (5) The aggregate amount of reportable policy sale payments made, 
or to be made, to the seller or other reportable policy sale payment 
recipient to which the return relates with respect to the reportable 
policy sale; and
    (6) Any other information that is required by the form or its 
instructions.
    (b) Unified reporting. The information reporting requirement of 
paragraph (a) of this section applies to each acquirer in a series of 
prearranged transfers of an interest in a life insurance contract, as 
well as each acquirer in a simultaneous transfer of different interests 
in a single life insurance contract. In either case, an acquirer's 
reporting obligation is deemed satisfied if the information required by 
paragraph (a) of this section with respect to that acquirer is timely 
reported on behalf of that acquirer in a manner that is consistent with 
forms, instructions, and other IRS guidance by one or more other 
acquirers or by a third party information reporting contractor.
    (c) Time and place for filing. Returns required to be made under 
paragraph (a) of this section must be filed with the Internal Revenue 
Service Center designated on the prescribed form or in its instructions 
on or before February 28 (March 31 if filed electronically) of the year 
following the calendar year in which the reportable policy sale 
occurred. However, see Sec.  1.6050Y-1(b)(5) for transition rules.
    (d) Requirement of and time for furnishing statements--(1) 
Statements to reportable policy sale payment recipients--(i) 
Requirement of furnishing statement. Every person required to file an 
information return under paragraph (a) of this section with respect to 
a reportable policy sale payment recipient must furnish in the form and 
manner prescribed by the IRS to the reportable policy sale payment 
recipient whose name is set forth in that return a written statement 
showing the information required by paragraph (a) of this section with 
respect to the reportable policy sale payment recipient and the name, 
address, and phone number of the information contact of the person 
furnishing the written statement. The contact information of the person 
furnishing the written statement must provide direct access to a person 
that can answer questions about the statement. The statement is not 
required to include information with respect to any other reportable 
policy sale payment recipient in the reportable policy sale or 
information about reportable policy sale payments to any other 
reportable policy sale payment recipient.
    (ii) Time for furnishing statement. Each statement required by 
paragraph (d)(1)(i) of this section to be furnished to any reportable 
policy sale payment recipient must be furnished on or before February 
15 of the year following the calendar year in which the reportable 
policy sale occurred. However, see Sec.  1.6050Y-1(b)(2) for transition 
rules.
    (2) Statements to 6050Y(a) issuers--(i) Requirement of furnishing 
RPSS--(A) In general. Except as provided in paragraph (d)(2)(i)(B) of 
this section, every person required to file a return under paragraph 
(a) of this section must furnish in the form and manner prescribed by 
the IRS to the 6050Y(a) issuer whose name is required to be set forth 
in the return an RPSS with respect to each reportable policy sale 
payment recipient that is also a seller. Each RPSS must show the 
information required by paragraph (a) of this section with respect to 
the seller named therein, except that the RPSS is not required to set 
forth the amount of any reportable policy sale payment. Each RPSS must 
also show the name, address, and phone number of the information 
contact of the person furnishing the RPSS. This contact information 
must provide direct access to a person that can answer questions about 
the RPSS.
    (B) Exception from reporting. An RPSS is not required to be 
furnished to the 6050Y(a) issuer by an acquirer acquiring an interest 
in a life insurance contract in an indirect acquisition.
    (ii) Time for furnishing RPSS. Except as provided in this paragraph 
(d)(2)(ii), each RPSS required by paragraph (d)(2)(i) of this section 
to be furnished to a 6050Y(a) issuer must be furnished by the later of 
20 calendar days after the reportable policy sale, or 5 calendar days 
after the end of the applicable state law rescission period. However, 
if the later date is after January 15 of the year

[[Page 58487]]

following the calendar year in which the reportable policy sale 
occurred, the RPSS must be furnished by January 15 of the year 
following the calendar year in which the reportable policy sale 
occurred. However, see Sec.  1.6050Y-1(b)(1) for transition rules.
    (3) Unified reporting. The information reporting requirements of 
paragraphs (d)(1)(i) and (d)(2)(i) of this section apply to each 
acquirer in a series of prearranged transfers of an interest in a life 
insurance contract, as well as each acquirer in a simultaneous transfer 
of different interests in a single life insurance contract, as 
described in paragraph (b) of this section. In either case, an 
acquirer's obligation to furnish statements is deemed satisfied if the 
information required by paragraphs (d)(1)(i) and (d)(2)(i) of this 
section with respect to that acquirer is timely reported on behalf of 
that acquirer consistent with forms, instructions, and other IRS 
guidance by one or more other acquirers or by a third party information 
reporting contractor.
    (e) Notice of rescission of a reportable policy sale. Any person 
that has filed a return required by section 6050Y(a)(1) and this 
section with respect to a reportable policy sale must file a corrected 
return within 15 calendar days of the receipt of notice of the 
rescission of the reportable policy sale. Any person that has furnished 
a written statement under section 6050Y(a)(2) and this section with 
respect to the reportable policy sale must furnish the recipient of 
that statement with a corrected statement within 15 calendar days of 
the receipt of notice of the rescission of the reportable policy sale.
    (f) Exceptions to requirement to file--(1) An acquirer that is a 
foreign person is not required to file an information return under 
paragraph (a) of this section with respect to a reportable policy sale 
unless--
    (i) The life insurance contract (or interest therein) transferred 
in the sale is on the life of an insured who is a United States person 
at the time of the sale; or
    (ii) The sale is subject to the laws of one or more States of the 
United States that pertain to acquisitions or sales of life insurance 
contracts (or interests therein).
    (2) An acquirer is not required to file an information return under 
paragraph (a) of this section with respect to a reportable policy sale 
payment to a reportable policy sale payment recipient other than the 
seller if the reportable policy sale payment is reported by the 
acquirer under section 6041 or 6041A.
    (3) An acquirer is not required to file an information return under 
paragraph (a) of this section with respect to the issuance of a life 
insurance contract in an exchange pursuant to section 1035. However, 
the acquirer is required to furnish the 6050Y(a) issuer with the 
statement required under paragraph (d)(2) of this section as if the 
acquirer were required to file an information return under paragraph 
(a) of this section.
    (g) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. For provisions relating to the penalty 
provided for failure to file timely a correct information return 
required under section 6050Y(a)(1) and this section, see section 6721 
and Sec.  301.6721-1 of this chapter. See section 6724(a) and Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure 
is due to reasonable cause and is not due to willful neglect.
    (2) Failure to furnish correct statement. For provisions relating 
to the penalty provided for failure to furnish timely a correct 
statement to identified persons under section 6050Y(a)(2) and this 
section, see section 6722 and Sec.  301.6722-1 of this chapter. See 
section 6724(a) and Sec.  301.6724-1 of this chapter for the waiver of 
a penalty if the failure is due to reasonable cause and is not due to 
willful neglect.

0
Par. 6. Section 1.6050Y-3 is added to read as follows:


Sec.  1.6050Y-3  Information reporting by 6050Y(b) issuers for 
reportable policy sales and transfers of life insurance contracts to 
foreign persons.

    (a) Requirement of reporting. Except as provided in paragraph (f) 
of this section, each 6050Y(b) issuer that receives an RPSS or any 
notice of a transfer to a foreign person must file an information 
return with the Internal Revenue Service (IRS) with respect to each 
seller in the form and manner prescribed by the IRS. The return must 
include the following information with respect to the seller:
    (1) The name, address, and taxpayer identification number (TIN) of 
the seller;
    (2) The investment in the contract with respect to the seller;
    (3) The amount the seller would have received if the seller had 
surrendered the life insurance contract on the date of the reportable 
policy sale or the transfer of the contract to a foreign person, or if 
the date of the transfer to a foreign person is not known to the 
6050Y(b) issuer, the date the 6050Y(b) issuer received notice of the 
transfer; and
    (4) Any other information that is required by the form or its 
instructions.
    (b) Unified reporting. Each 6050Y(b) issuer subject to the 
information reporting requirement of paragraph (a) of this section must 
satisfy that requirement, but a 6050Y(b) issuer's reporting obligation 
is deemed satisfied if the information required by paragraph (a) of 
this section with respect to that 6050Y(b) issuer is timely reported on 
behalf of that 6050Y(b) issuer in a manner that is consistent with 
forms, instructions, and other IRS guidance by one or more other 
6050Y(b) issuers or by a third party information reporting contractor.
    (c) Time and place for filing. Except as provided in this paragraph 
(c), returns required to be made under paragraph (a) of this section 
must be filed with the Internal Revenue Service Center designated on 
the prescribed form or in its instructions on or before February 28 
(March 31 if filed electronically) of the year following the calendar 
year in which the reportable policy sale or the transfer to a foreign 
person occurred. If the 6050Y(b) issuer does not receive notice of a 
transfer to a foreign person until after January 31 of the calendar 
year following the year in which the transfer occurred, returns 
required to be made under paragraph (a) of this section must be filed 
by the later of February 28 (March 31 if filed electronically) of the 
calendar year following the year in which the transfer occurred or 
thirty days after the date notice is received. However, see Sec.  
1.6050Y-1(b)(5) for transition rules.
    (d) Requirement of and time for furnishing statements--(1) 
Requirement of furnishing statement. Every 6050Y(b) issuer filing a 
return required by paragraph (a) of this section must furnish to each 
seller that is a reportable policy sale payment recipient or makes a 
transfer to a foreign person and whose name is required to be set forth 
in the return a written statement showing the information required by 
paragraph (a) of this section with respect to that seller and the name, 
address, and phone number of the information contact of the person 
filing the return. This contact information must provide direct access 
to a person that can answer questions about the statement.
    (2) Time for furnishing statement. Except as provided in this 
paragraph (d)(2), each statement required by paragraph (d)(1) of this 
section to be furnished to any seller must be furnished on or before 
February 15 of the year following the calendar year in which the 
reportable policy sale or transfer to a foreign person occurred. If a 
6050Y(b) issuer does not receive notice of a transfer to a foreign 
person until after January 31 of the calendar

[[Page 58488]]

year following the year in which the transfer occurred, each statement 
required to be made under paragraph (d) of this section must be 
furnished by the date thirty days after the date notice is received. 
However, see Sec.  1.6050Y-1(b)(3) for transition rules.
    (3) Unified reporting. Each 6050Y(b) issuer subject to the 
information reporting requirement of paragraph (d)(1) of this section 
must satisfy that requirement, but a 6050Y(b) issuer's reporting 
obligation is deemed satisfied if the information required by paragraph 
(d)(1) of this section with respect to that 6050Y(b) issuer is timely 
reported on behalf of that 6050Y(b) issuer consistent with forms, 
instructions, and other IRS guidance by one or more other 6050Y(b) 
issuers or by a third party information reporting contractor.
    (e) Notice of rescission of a reportable policy sale or transfer of 
an insurance contract to a foreign person. Any 6050Y(b) issuer that has 
filed a return required by section 6050Y(b)(1) and this section with 
respect to a reportable policy sale or transfer of an insurance 
contract to a foreign person must file a corrected return within 15 
calendar days of the receipt of notice of the rescission of the 
reportable policy sale or transfer of the insurance contract to a 
foreign person. Any 6050Y(b) issuer that has furnished a written 
statement under section 6050Y(b)(2) and this section with respect to 
the reportable policy sale or transfer of the insurance contract to a 
foreign person must furnish the recipient of that statement with a 
corrected statement within 15 calendar days of the receipt of notice of 
the rescission of the reportable policy sale or transfer of the 
insurance contract to a foreign person.
    (f) Exceptions to requirement to file. A 6050Y(b) issuer is not 
required to file an information return under paragraph (a) of this 
section if paragraph (f)(1), (2), or (3) of this section applies.
    (1) Except as provided in this paragraph (f)(1), the 6050Y(b) 
issuer obtains documentation upon which it may rely to treat a seller 
of a life insurance contract or interest therein as a foreign 
beneficial owner in accordance with Sec.  1.1441-1(e)(1)(ii), applying 
in such case the provisions of Sec.  1.1441-1 by substituting the term 
``6050Y(b) issuer'' for the term ``withholding agent'' and without 
regard to the fact that that these provisions apply only to amounts 
subject to withholding under chapter 3 of subtitle A of the Internal 
Revenue Code. A 6050Y(b) issuer may also obtain from a seller that is a 
partnership or trust, in addition to documentation establishing the 
entity's foreign status, a written certification from the entity that 
no beneficial owner of any portion of the proceeds of the sale is a 
United States person. In such a case, the issuer may rely upon the 
written certification to treat the partnership or trust as a foreign 
beneficial owner for purposes of this paragraph (f)(1) provided that 
the seller does not have actual knowledge that a United States person 
is the beneficial owner of all or a portion of the proceeds of the 
sale. See Sec.  1.1441-1(c)(6)(ii) for the definition of beneficial 
owner that applies for purposes of this paragraph (f)(1). Additionally, 
for certifying its status as a foreign beneficial owner (as applicable) 
for purposes of this paragraph (f)(1), a seller that is required to 
report any of the income from the sale as effectively connected with 
the conduct of a trade or business in the United States under section 
864(b) is required to provide to the 6050Y(b) issuer a Form W-8ECI, 
Certificate of Foreign Person's Claim that Income is Effectively 
Connected with the Conduct of a Trade or Business in the United States. 
If a 6050Y(b) issuer obtains a Form W-8ECI from a seller with respect 
to the sale or has reason to know that income from the sale is 
effectively connected with the conduct of a trade or business in the 
United States under section 864(b), the exception to reporting 
described in this paragraph (f)(1) does not apply.
    (2) The 6050Y(b) issuer receives notice of a transfer to a foreign 
person, but does not receive an RPSS with respect to the transfer, 
provided that, at the time the notice is received--
    (i) The 6050Y(b) issuer is not a United States person;
    (ii) The life insurance contract (or interest therein) transferred 
is not on the life of a United States person; and
    (iii) The 6050Y(b) issuer has not classified the seller as a United 
States person in its books and records.
    (3) The RPSS received by the 6050Y(b) issuer is with respect to the 
6050Y(b) issuer's issuance of a life insurance contract to a 
policyholder in an exchange pursuant to section 1035.
    (g) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. For provisions relating to the penalty 
provided for failure to file timely a correct information return 
required under section 6050Y(b)(1) and this section, see section 6721 
and Sec.  301.6721-1 of this chapter. See section 6724(a) and Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure 
is due to reasonable cause and is not due to willful neglect.
    (2) Failure to furnish correct statement. For provisions relating 
to the penalty provided for failure to furnish timely a correct 
statement to identified persons under section 6050Y(b)(2) and this 
section, see section 6722 and Sec.  301.6722-1 of this chapter. See 
section 6724(a) and Sec.  301.6724-1 of this chapter for the waiver of 
a penalty if the failure is due to reasonable cause and is not due to 
willful neglect.

0
Par. 7. Section 1.6050Y-4 is added to read as follows:


Sec.  1.6050Y-4  Information reporting by payors for reportable death 
benefits.

    (a) Requirement of reporting. Except as provided in paragraph (e) 
of this section, every person that is a payor of reportable death 
benefits during any calendar year must file a separate information 
return for such calendar year with the Internal Revenue Service (IRS) 
for each reportable death benefits payment recipient in the form and 
manner prescribed by the IRS. The return must include the following 
information with respect to the reportable death benefits payment 
recipient to which the return relates:
    (1) The name, address, and taxpayer identification number (TIN) of 
the payor;
    (2) The name, address, and TIN of the reportable death benefits 
payment recipient;
    (3) The date of the payment;
    (4) The gross amount of reportable death benefits paid to the 
reportable death benefits payment recipient during the taxable year;
    (5) The payor's estimate of investment in the contract with respect 
to the buyer, limited to the payor's estimate of the buyer's investment 
in the contract with respect to the interest for which the reportable 
death benefits payment recipient was paid; and
    (6) Any other information that is required by the form or its 
instructions.
    (b) Time and place for filing. Returns required to be made under 
this section must be filed with the Internal Revenue Service Center 
designated in the instructions for the form on or before February 28 
(March 31 if filed electronically) of the year following the calendar 
year in which the payment of reportable death benefits was made. 
However, see Sec.  1.6050Y-1(b)(5) for transition rules.
    (c) Requirement of and time for furnishing statements--(1) 
Requirement of furnishing statement. Every person required to file an 
information return under paragraph (a) of this section must furnish to 
each reportable death benefits payment recipient whose name is required 
to be set forth in that return a written statement showing the 
information required by paragraph (a) of

[[Page 58489]]

this section with respect to that reportable death benefits payment 
recipient and the name, address, and phone number of the information 
contact of the payor. This contact information must provide direct 
access to a person that can answer questions about the statement.
    (2) Time for furnishing statement. Each statement required by 
paragraph (c)(1) of this section to be furnished to any reportable 
death benefits payment recipient must be furnished on or before January 
31 of the year following the calendar year in which the payment of 
reportable death benefits was made. However, see Sec.  1.6050Y-1(b)(4) 
for transition rules.
    (d) Notice of rescission of a reportable policy sale. Any person 
that has filed a return required by section 6050Y(c) and this section 
with respect to a payment of reportable death benefits must file a 
corrected return within 15 calendar days of recovering any portion of 
the reportable death benefits payment from the reportable death 
benefits payment recipient as a result of the rescission of the 
reportable policy sale. Any person that has furnished a written 
statement under section 6050Y(c)(2) and this section with respect to a 
payment of reportable death benefits must furnish the recipient of that 
statement with a corrected statement within 15 calendar days of 
recovering any portion of the reportable death benefits payment from 
the reportable death benefits payment recipient as a result of the 
rescission of the reportable policy sale.
    (e) Exceptions to requirement to file. A payor is not required to 
file an information return under paragraph (a) of this section with 
respect to a payment of reportable death benefits if paragraph (e)(1), 
(2), or (3) of this section applies.
    (1) Except as provided in this paragraph (e)(1), the payor obtains 
documentation in accordance with Sec.  1.1441-1(e)(1)(ii) upon which it 
may rely to treat the reportable death benefits payment recipient as a 
foreign beneficial owner of the reportable death benefits, applying in 
such case the provisions of Sec.  1.1441-1 by substituting the term 
``payor'' for the term ``withholding agent'' and without regard to the 
fact that the provisions apply only to amounts subject to withholding 
under chapter 3 of subtitle A of the Internal Revenue Code. A payor may 
also obtain from a partnership or trust that is a reportable death 
benefits recipient, in addition to documentation establishing the 
entity's foreign status, a written certification from the entity that 
no beneficial owner of any portion of the reportable death benefits 
payment is a United States person. In such a case, a payor may rely 
upon the written certification to treat the partnership or trust as a 
foreign beneficial owner for purposes of this paragraph (e)(1) provided 
that the payor does not have actual knowledge that a United States 
person is the beneficial owner of all or a portion of the reportable 
death benefits payment. See Sec.  1.1441-1(c)(6)(ii) for the definition 
of beneficial owner that applies for purposes of this paragraph (e)(1). 
Other due diligence or reporting requirements may, however, apply to a 
payor that relies on the exception set forth in this paragraph (e)(1). 
See Sec.  1.1441-5(c) and (e) (determination of payees of foreign 
partnerships and certain foreign trusts for amounts subject to 
withholding under Sec.  1.1441-2(a)) and Sec.  1.1461-1(b) and (c) 
(amounts subject to reporting for chapter 3 purposes).
    (2) The buyer obtained the life insurance contract (or interest 
therein) under which reportable death benefits are paid in a reportable 
policy sale to which the exception to reporting described in Sec.  
1.6050Y-3(f)(2) applies.
    (3) The payor never received, and has no knowledge of any issuer 
having received, an RPSS with respect to the interest in a life 
insurance contract with respect to which the reportable death benefits 
are paid.
    (f) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. For provisions relating to the penalty 
provided for failure to file timely a correct information return 
required under section 6050Y(c)(1) and this section, see section 6721 
and Sec.  301.6721-1 of this chapter. See section 6724(a) and Sec.  
301.6724-1 of this chapter for the waiver of a penalty if the failure 
is due to reasonable cause and is not due to willful neglect.
    (2) Failure to furnish correct statement. For provisions relating 
to the penalty provided for failure to furnish timely a correct 
statement to identified persons under section 6050Y(c)(2) and this 
section, see section 6722 and Sec.  301.6722-1 of this chapter. See 
section 6724(a) and Sec.  301.6724-1 of this chapter for the waiver of 
a penalty if the failure is due to reasonable cause and is not due to 
willful neglect.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: October 15, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-23559 Filed 10-25-19; 4:15 pm]
BILLING CODE 4830-01-P