[Federal Register Volume 88, Number 90 (Wednesday, May 10, 2023)]
[Proposed Rules]
[Pages 30058-30068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09637]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 88, No. 90 / Wednesday, May 10, 2023 / 
Proposed Rules  

[[Page 30058]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-108054-21]
RIN 1545-BQ07


Information Reporting and Transfer for Valuable Consideration 
Rules for Section 1035 Exchanges of Life Insurance and Certain Other 
Life Insurance Contract Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations providing guidance 
on the application of the transfer for valuable consideration rules and 
associated information reporting requirements for reportable policy 
sales of interests in life insurance contracts to exchanges of life 
insurance contracts qualifying for nonrecognition of gain or loss, as 
well as to certain acquisitions of interests in life insurance 
contracts in transactions that qualify as corporate reorganizations. 
The proposed regulations affect parties involved in these life 
insurance contract transactions, including with respect to payments of 
reportable death benefits. This document also invites comments on these 
proposed regulations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 10, 2023. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-108054-
21) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comments submitted to 
the IRS's public docket. Send paper submissions to: CC:PA:LPD:PR (REG-
108054-21), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben 
Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Kathryn M. Sneade, (202) 317-6995 (not a toll-free number); concerning 
submissions of comments or requests for a public hearing, Vivian Hayes, 
(202) 317-6902 (not a toll-free number) or by email to 
[email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under sections 101 and 6050Y of the 
Internal Revenue Code (Code). The proposed regulations under sections 
101 and 6050Y (proposed regulations) would provide guidance on the 
application of the rules for determining the amount of death benefits 
excluded from gross income following reportable policy sales of 
interests in life insurance contracts under section 101 and the 
associated information reporting requirements for reportable policy 
sales under section 6050Y to the exchange of a life insurance contract 
for another life insurance contract qualifying for nonrecognition of 
gain or loss under section 1035 (section 1035 exchange), as well as to 
certain acquisitions of interests in life insurance contracts in 
transactions that qualify as reorganizations under section 368(a) 
(reorganizations). The proposed regulations would amend final 
regulations under sections 101 and 6050Y (T.D. 9879) published in the 
Federal Register (84 FR 58460) on October 31, 2019, as corrected (84 FR 
68042) on December 13, 2019 (final regulations). Following the 
publication of the final regulations in the Federal Register, the 
Treasury Department and the IRS received letters relating to the 
application of sections 101 and 6050Y to section 1035 exchanges and 
reorganizations. The proposed regulations would modify the final 
regulations to address the issues raised in these letters.

Development of the Final Regulations

    The Treasury Department and the IRS published the final regulations 
to implement legislative changes to the Code made by sections 13520 and 
13522 of Public Law 115-97, 131 Stat. 2054, 2148, 2151 (2017), commonly 
known as the Tax Cuts and Jobs Act (TCJA).
    Section 13522 of the TCJA amended section 101 by adding new section 
101(a)(3) to the Code, which 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.\1\ 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. For example, Sec.  1.101-
1(c)(1) of the final regulations defines ``reportable policy sale'' to 
mean, subject to certain exceptions, 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.
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    \1\ Generally, under section 101(a)(1), gross income does not 
include amounts received (whether in a single sum or otherwise) 
under a life insurance contract if such amounts are paid by reason 
of the death of the insured. However, the first sentence of section 
101(a)(2) (the transfer for value rule) provides that, in the case 
of a transfer for a valuable consideration, by assignment or 
otherwise, of a life insurance contract or any interest therein, the 
amount excluded from gross income by section 101(a)(1) cannot exceed 
an amount equal to the sum of the actual value of such consideration 
and the premiums and other amounts subsequently paid by the 
transferee. The second sentence of section 101(a)(2) provides that 
the transfer for value rule does not apply in the case of transfers 
described in section 101(a)(2)(A) or (B). Section 101(a)(2)(A) (the 
carryover basis exception) applies if the contract or interest 
therein has a basis for determining gain or loss in the hands of a 
transferee determined in whole or in part by reference to such basis 
of such contract or interest therein in the hands of the transferor. 
Section 101(a)(2)(B) applies if the transfer is to the insured, to a 
partner of the insured, to a partnership in which the insured is a 
partner, or to a corporation in which the insured is a shareholder 
or officer. However, section 101(a)(3)(A) provides that the 
exceptions in the second sentence of section 101(a)(2) do not apply 
in the case of a transfer of a life insurance contract, or any 
interest therein, that is a reportable policy sale.
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    Section 13520 of the TCJA added section 6050Y to chapter 61 
(Information and Returns) in subtitle F of the Code. Section 6050Y(a) 
requires

[[Page 30059]]

a person who acquires a life insurance contract or any interest in a 
life insurance contract in a reportable policy sale to report certain 
information about payments made in the sale. Section 6050Y(b) requires 
issuers of life insurance contracts to report certain information upon 
notice of a reportable policy sale or a transfer of a life insurance 
contract to a foreign person. Section 6050Y(c) requires a payor of 
reportable death benefits (defined by section 6050Y(d)(4) as amounts 
paid by reason of the death of the insured under a life insurance 
contract that has been transferred in a reportable policy sale) to 
report certain information about such payments. 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.'' \2\ 
The final regulations under section 6050Y implement section 6050Y by 
specifying the manner in which and time at which the information 
reporting obligations imposed by section 6050Y must be satisfied. The 
final regulations also provide definitions and rules that govern the 
application of the information reporting obligations.
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    \2\ Section 7701(a)(11)(B) provides that when used in the Code, 
the term ``Secretary'' means the Secretary of the Treasury or her 
delegate.
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    The final regulations were adopted after consideration of public 
comments received on proposed regulations under sections 101 and 6050Y 
(REG-103083-18) published in the Federal Register (84 FR 11009) on 
March 25, 2019 (2019 proposed regulations), and a public hearing held 
on June 5, 2019. Additionally, the Treasury Department and the IRS 
received comments in response to Notice 2018-41, 2018-20 I.R.B. 584, 
which described the regulations the Treasury Department and the IRS 
expected to propose under sections 101 and 6050Y, and considered these 
comments in developing the rules in the 2019 proposed regulations.

Development of the Section 1035 Exchange Provisions of the Final 
Regulations

    Prior to amendment in 2019, the regulations under section 101 did 
not explicitly address section 1035 exchanges. Comments received on 
Notice 2018-41 suggested that the person to whom a life insurance 
contract is issued (that is, the original policyholder) should not be 
considered an ``acquirer'' for purposes of section 6050Y(a), which 
imposes reporting obligations on any person who acquires a life 
insurance contract or any interest in a life insurance contract in a 
reportable policy sale. See 84 FR 11009, 11016. In response, Sec.  
1.101-1(e)(2) of the 2019 proposed regulations clarified 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 2019 proposed regulations requested comments on 
whether the regulations should include additional provisions regarding 
the treatment of section 1035 exchanges of life insurance contracts. 
See 84 FR 11009, 11019. As described in the preamble to the final 
regulations, one commenter on the 2019 proposed regulations recommended 
that no additional provisions be added to the regulations for this 
circumstance, stating that the acquirer of a life insurance contract in 
a reportable policy sale would be unlikely to meet the state law 
requirements for an insurable interest in the insured and, 
consequently, would not be able to make a section 1035 exchange. See 84 
FR 58460, 58465. Another commenter recommended that the statement in 
Sec.  1.101-1(e)(2) of the 2019 proposed regulations regarding section 
1035 exchanges be deleted or amended to eliminate any suggestion that 
such transactions, by themselves, can be reportable policy sales. The 
commenter acknowledged that in a section 1035 exchange, the new carrier 
acquires an interest in the old policy, but advocated against treating 
that acquisition as a reportable policy sale.
    As explained in the preamble to the final regulations, the 
reference in Sec.  1.101-1(e)(2) 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. See 84 FR 
58460, 58465. Rather, the concern prompting the reference 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).
    Section 1.101-1(e)(2) of the 2019 proposed regulations was adopted 
as proposed in the final regulations, but 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 is not a reportable policy sale. Additionally, Sec.  1.101-
1(c)(2)(v) of the final regulations provides that the acquisition of a 
life insurance contract by a policyholder in an exchange pursuant to 
section 1035 is not a reportable policy sale 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. Based on a comment received on the 2019 proposed 
regulations, a situation in which the policyholder making a section 
1035 exchange does not have a substantial family, business, or 
financial relationship with the insured should rarely arise due to 
state law insurable interest requirements. Should this situation arise, 
however, the final regulations provide certain exceptions to the 
reporting requirements that generally apply to reportable policy sales. 
See Sec.  1.6050Y-2(f)(3) of the final regulations (providing that, 
with respect to the issuance of a life insurance contract in a section 
1035 exchange, the acquirer is not required to file the information 
return required by section 6050Y(a)(1) and Sec.  1.6050Y-2(a) of the 
final regulations); Sec.  1.6050Y-3(f)(3) of the final regulations 
(providing that the issuer of a new life insurance contract in a 
section 1035 exchange is not required to file a return or furnish a 
statement to the seller under section 6050Y(b) and Sec.  1.6050Y-3 of 
the final regulations). Additionally, the final regulations provide 
certain rules applicable to section 1035 exchanges to clarify the 
reporting required with respect to section 1035 exchanges that are 
reportable policy sales. See Sec.  1.6050Y-1(a)(8)(ii) (providing that, 
in the case of the issuance of a life insurance contract to a 
policyholder in an exchange pursuant to section 1035, the issuer of the 
new contract is the 6050Y(a) issuer with respect to whom the acquirer 
has reporting obligations under section 6050Y(a) and Sec.  1.6050Y-2 of 
the final regulations).

Letters Received on the Section 1035 Exchange Provisions of the Final 
Regulations

    Following the publication of the final regulations in the Federal 
Register, the Treasury Department and the IRS received letters relating 
to the application of sections 101 and 6050Y to section 1035 exchanges 
under the final regulations.
    One letter indicated that, in at least some cases, the final 
regulations under section 101 regarding reportable policy sales appear 
to treat a section 1035 exchange as a transfer for value that can cause 
the death benefits to become taxable. The letter said that this 
treatment appears to arise even when neither the contract given in the

[[Page 30060]]

exchange nor any predecessor contract has been involved in a reportable 
policy sale. The author of the letter requested guidance that the 
issuance of a life insurance contract in a section 1035 exchange is not 
a transfer of an interest in the contract to the owner for purposes of 
the transfer for value rule and provided support for the position that 
treating a section 1035 exchange as a transfer for value is 
inconsistent with the relevant statutes, congressional intent, sound 
tax policy, and long-standing interpretations of the law.
    The author of another letter took a contrary position, stating that 
a section 1035 exchange has always (before the TCJA was enacted, as 
well as after) constituted a transfer of a life insurance contract for 
purposes of section 101(a)(2) that qualifies for the exception set 
forth in section 101(a)(2)(A) to the transfer for value rule for 
contracts held with a transferred basis, commonly referred to as the 
``carryover basis'' exception. This author advocated against guidance 
concluding that the issuance of a life insurance contract in a section 
1035 exchange is not a transfer of an interest in the contract to the 
owner for purposes of the transfer for value rule, suggesting that to 
do so would be to adopt a policy choice that was specifically rejected 
by Congress with the enactment of section 101(j).\3\ The author 
remarked that section 101(j) was enacted in response to concerns that 
despite state insurable interest rules, companies were acquiring 
insurance on persons whose relationship with the company was too 
attenuated and were doing so without the consent (or even knowledge) of 
such persons.
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    \3\ Section 101(j) generally provides that in the case of an 
employer-owned life insurance contract, the amount of death benefits 
excluded from gross income under section 101(a) is limited, unless 
certain notice and consent requirements are met and either an 
exception based on the insured's status applies (because the insured 
was an employee in the twelve months preceding death or the insured 
was, at the time the life insurance contract was issued, a director, 
highly compensated employee, or highly compensated individual) or an 
exception for amounts paid to the insured's heirs applies.
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Development of Exceptions Related to Ordinary Course Trade or Business 
Acquisitions in the Final Regulations

    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 2019 
proposed regulations included provisions that exclude certain of these 
transactions from the definition of reportable policy sales. Public 
comments remarked favorably on these provisions, which were adopted by 
the final regulations. See Sec.  1.101-1(d)(2) of the final regulations 
(defining the term ``substantial business relationship'' to include the 
relationship between an insured and an acquirer in certain 
circumstances involving the acquirer's acquisition of an active trade 
or business with respect to which the insured is an employee within the 
meaning of section 101(j)(5) \4\ or was a director, highly compensated 
employee, or highly compensated individual); Sec.  1.101-1(d)(4)(i) of 
the final regulations (providing a special rule for indirect 
acquisitions that deems the acquirer of an interest in a life insurance 
contract to have a substantial business or financial relationship with 
the insured if the direct holder of the interest in the life insurance 
contract has such a relationship); and Sec.  1.101-1(e)(3)(ii) of the 
final regulations (defining the term ``indirect acquisition of an 
interest in a life insurance contract'' to exclude an acquisition 
through ownership of stock in a C corporation provided that no more 
than 50 percent of the gross value of the assets of the C corporation 
consists of life insurance contracts).
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    \4\ Section 101(j)(5) defines the term ``employee'' to include 
an officer, director, and highly compensated employee (within the 
meaning of section 414(q)).
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    As described in the preamble to the final regulations, one 
commenter on the 2019 proposed regulations remarked that Sec.  1.101-
1(e)(3)(ii) results in the disparate treatment of policies transferred 
directly in asset reorganizations and indirectly in stock 
reorganizations. See 84 FR 58460, 58466-58468. That is, with respect to 
policies held by a C corporation, not more than 50 percent of the gross 
value of the assets of which consists of life insurance contracts, an 
indirect acquisition of the policies, such as through a stock 
reorganization under section 368(a)(1)(B), would not result in a 
reportable policy sale, but a direct acquisition of the policies, such 
as through an asset reorganization under section 368(a)(1)(A), could 
result in a reportable policy sale. The commenter asserted that this 
disparate treatment is inappropriate and not warranted as a matter of 
good tax policy and requested that the 2019 proposed regulations be 
revised to provide that any transfer of an interest in a life insurance 
contract as part of a reorganization of a C corporation 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 C corporation survives the 
reorganization transaction 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 acknowledged that the 2019 proposed regulations 
provide certain exceptions that could apply to mergers qualifying as 
reorganizations 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 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 serve the purpose of 
the change in the statute.
    The commenter's recommendation was not adopted in the final 
regulations for reasons further described in the preamble to the final 
regulations. Briefly, the final regulations preserve the different 
results for stock and asset reorganizations because the Treasury 
Department and the IRS concluded that significant differences between 
the two types of reorganization justify different treatment for 
purposes of sections 101 and 6050Y. For instance, 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. Further, the Treasury 
Department and the IRS had not identified any clear policy reason why 
the complete exclusion of death benefits from policies held by a 
corporation should carry over when ownership of the insurance policy is 
transferred but a substantial business or financial relationship does 
not exist between the acquirer and insured. Regarding the commenter's 
remark on the burden of a case-by-case review of policies in certain 
types of transactions, the preamble to the final regulations noted 
that, in asset reorganizations, 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.

Letter Received on Exceptions Related to Ordinary Course Trade or 
Business Acquisitions in the Final Regulations

    Following the publication of the final regulations in the Federal 
Register, the

[[Page 30061]]

Treasury Department and the IRS received a letter relating to the 
disparate treatment of different types of ordinary course trade or 
business acquisitions under the final regulations.
    The author noted that, since the issuance of the final regulations, 
the life insurance industry has seen a number of circumstances in which 
transactions that are wholly unrelated to the transfer of life 
insurance are nevertheless subject to negative outcomes under the 
reportable policy sale rules as a result of the transactions' legal 
form, even though transactions with identical or nearly identical 
economic substance but a different legal form would be treated more 
favorably. The author noted that the ordinary course acquisitive 
transactions of concern do not in any way turn on tax outcomes 
pertaining to the meagre amounts of life insurance that are commonly at 
issue, and asserted that there are a number of legal, economic, and 
business practice reasons why it is highly unlikely that these same 
transactions can simply be restructured to meet the form-driven rules 
of the final regulations. The author suggested the addition of an 
exception from the reportable policy sale rules for acquisitive 
transactions involving entities that own a de minimis amount of life 
insurance (for example, as a proportion of the total value of the 
transaction). More specifically, the author proposed that the Treasury 
Department and the IRS consider a further exception for transactions in 
which the amount of life insurance acquired as a result of the 
acquisitive transaction (and any related acquisitions) is five percent 
or less of the value of the stock, assets, or both acquired.

Explanation of Provisions

Section 1035 Exchanges

    As stated in the preamble to the final regulations, the concern 
prompting the references to section 1035 exchanges in the 2019 proposed 
regulations and the final regulations 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 the death benefits paid under the new policy might not be reported 
under section 6050Y(c). See 84 FR 58460, 58465. The section 1035 
exchange provisions were not intended to change the treatment under 
section 101 of the policyholder's new contract if the policyholder's 
old contract was never transferred in a reportable policy sale.
    However, the Treasury Department and the IRS have determined that 
such a change was inadvertently effected by the final regulations. 
Prior to the issuance of the final regulations, the transfer for value 
rule of section 101(a)(2) did not apply as the result of a section 1035 
exchange of a life insurance contract by the original policyholder of 
the contract. However, under Sec.  1.101-1(e)(2) of the final 
regulations, the issuance of a new policy in a section 1035 exchange is 
a transfer of an interest in a life insurance contract. Because the new 
policy is issued in exchange for an old policy, the exchange is a 
transfer for valuable consideration under Sec.  1.101-1(f)(5) of the 
final regulations. Therefore, the new policy is subject to the transfer 
for value rule of section 101(a)(2), unless one of the exceptions in 
section 101(a)(2)(A) and (B) applies. For either exception to apply, 
there must be a substantial business, family, or financial relationship 
between the insured and the acquirer of the new policy. The Treasury 
Department and the IRS have determined that the carryover basis 
exception of section 101(a)(2)(A) would not apply in this case.\5\ 
Therefore, the application of the transfer for value rule would 
generally limit the amount of death benefits excludable under section 
101(a)(1), even in the absence of a reportable policy sale, unless one 
of the section 101(a)(2)(B) exceptions applies (that is, the transfer 
is to the insured, to a partner of the insured, to a partnership in 
which the insured is a partner, or to a corporation in which the 
insured is a shareholder or officer). The Treasury Department and the 
IRS have determined that this result is inconsistent with the prior 
treatment of new policies issued in section 1035 exchanges.
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    \5\ The Code recognizes two categories of substituted basis 
property: transferred basis property and exchanged basis property. 
See section 7701(a)(42). Property has a ``transferred basis'' for 
Federal tax purposes when the same property is transferred from one 
person to another but keeps the same basis. See section 7701(a)(43). 
Property has an ``exchanged basis'' for Federal tax purposes when a 
person's basis in new property is determined by reference to other 
property held by that same person. See section 7701(a)(44). The 
section 101(a)(2) ``carryover basis'' exception applies to a 
transfer if the transferred life insurance contract or interest 
therein has a basis for determining gain or loss in the hands of a 
transferee determined in whole or in part by reference to such basis 
of such contract or interest therein in the hands of the transferor. 
That is, the exception applies if the contract is transferred basis 
property. However, the basis of a new policy issued in a section 
1035 exchange to the same taxpayer is the same as the basis of the 
old policy held by that taxpayer, decreased in the amount of any 
money received by the taxpayer and increased in the amount of gain 
or decreased in the amount of loss to the taxpayer that was 
recognized on such exchange. See sections 1035(d)(2) and 1031(d). 
The new policy is thus exchanged basis property, not transferred 
basis property. It is therefore ineligible for the carryover basis 
exception of section 101(a)(2)(A).
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    Accordingly, the proposed regulations are intended to correct the 
unintended change effected by the final regulations to the treatment 
under section 101 of a life insurance contract issued to a policyholder 
in a section 1035 exchange, while continuing to address the concern 
that the reporting of death benefits paid under section 6050Y(c) could 
be avoided by exchanging a policy transferred in a reportable policy 
sale for a new policy in a section 1035 exchange, as well as the 
concern that a policyholder could attempt to avoid the limitation on 
the excludability of death benefits resulting from the application of 
the transfer for value rule through a section 1035 exchange. The 
proposed regulations would accomplish these objectives by revising the 
final regulations in four ways.
1. Modify Definition of a Transfer of an Interest in a Life Insurance 
Contract
    First, proposed Sec.  1.101-1(e)(2) would revise the definition of 
a transfer of an interest in a life insurance contract in Sec.  1.101-
1(e)(2) of the final regulations to exclude the issuance of a life 
insurance contract to a policyholder, without qualification. As such, 
any issuance of a life insurance contract to a policyholder, including 
in a section 1035 exchange, is not a transfer of an interest in a life 
insurance contract and therefore cannot be a reportable policy sale 
under Sec.  1.101-1(c)(1) of the final regulations. The Treasury 
Department and the IRS do not view this position as inconsistent with 
the purpose of section 101(j). See Public Law 109-280, 863(d), 120 
Stat. 780, 1024 (2006) (providing that section 101(j) generally applies 
to life insurance contracts issued after August 17, 2006, ``except for 
a contract issued after such date pursuant to an exchange described in 
section 1035 . . . for a contract issued on or prior to that date''); 
Notice 2009-48, 2009-1 C.B. 1085 (providing that further notice and 
consent is not required by section 101(j) with regard to a contract 
received in a section 1035 exchange for an employer-owned life 
insurance contract issued after August 17, 2006, for which the notice 
and consent requirements were previously satisfied if either (1) the 
existing consent remains valid, or (2) the exchange does not result in 
a material change in the death benefit or other material change in the 
contract).
    The proposed regulations make conforming changes to remove the 
exception in Sec.  1.101-1(c)(2)(v) of the final regulations (providing 
that the

[[Page 30062]]

acquisition of a life insurance contract by a policyholder in a section 
1035 exchange is not a reportable policy sale 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); to remove Sec. Sec.  1.6050Y-2(f)(3) and 
1.6050Y-3(f)(3) of the final regulations (providing certain reporting 
requirement exceptions related to section 1035 exchanges that are no 
longer necessary); and to remove Sec.  1.6050Y-1(a)(8)(ii) of the final 
regulations (providing a definitional rule related to section 1035 
exchanges that is no longer necessary).
2. New Rule Addressing Section 1035 Exchanges
    Second, proposed Sec.  1.101-1(b)(2)(iv) provides a new rule that 
would apply to the exchange of an interest in a life insurance contract 
(old interest) in a section 1035 exchange for an interest in a newly 
issued life insurance contract (new interest) and provides guidance on 
how to determine the amount of the proceeds attributable to the new 
interest that is excludable from gross income under section 101(a), 
provided the new interest is not subsequently transferred or exchanged. 
If the new interest is subsequently transferred or exchanged, the 
amount excludable from gross income under section 101(a) would be 
determined under the rule in Sec.  1.101-1(b) applicable to the type of 
transfer or exchange involved. The limitation (or lack of any 
limitation) on the amount of the proceeds attributable to the old 
interest that is excludable from gross income applies under proposed 
Sec.  1.101-1(b)(2)(iv) to the new interest for which it is exchanged, 
just as the basis of the old interest applies to the new interest. See 
sections 1031(d) and 1035(d)(2) (providing that a contract acquired in 
a section 1035 exchange has the same basis as the contract for which it 
was exchanged). The IRS has previously treated certain attributes of 
contracts exchanged in section 1035 exchanges as applying to the new 
contracts acquired. See, e.g., Rev. Rul. 92-95, 1992-2 C.B. 43 (for 
purposes of section 72(q)(2)(I) and 72(u)(4), the ``date of purchase'' 
of an annuity contract acquired in a section 1035 exchange for another 
annuity contract is the date of purchase of the annuity contract that 
was exchanged for the new contract). See also section 7702A(a)(2) 
(defining a modified endowment contract to include any contract 
exchanged for a contract that is a modified endowment contract under 
section 7702A(a)(1)).
    Proposed Sec.  1.101-1(b)(2)(iv) ensures that the acquirer of an 
interest in a life insurance contract in a reportable policy sale 
cannot avoid any limit imposed by section 101(a)(2) and (a)(3) on the 
amount of the proceeds attributable to the interest that is excludable 
from gross income under section 101(a)(1) by simply exchanging the 
interest for a new life insurance contract. Under proposed Sec.  1.101-
1(b)(2)(iv)(A), if the entire amount of the proceeds attributable to 
the old interest would have been excludable from gross income under 
section 101(a) at the time of the section 1035 exchange, the entire 
amount of the proceeds attributable to the new interest is excludable 
from gross income. Under proposed Sec.  1.101-1(b)(2)(iv)(B), if less 
than the entire amount of the proceeds attributable to the old interest 
would have been excludable from gross income under section 101(a) at 
the time of the section 1035 exchange, the amount of the proceeds 
attributable to the new interest that is excludable from gross income 
is limited to the sum of the amount of the proceeds attributable to the 
old interest that would have been excludable at the time of the section 
1035 exchange, and the premiums and other amounts subsequently paid 
with respect to the new interest by the policyholder. Proposed Sec.  
1.101-1(b)(2)(iv)(B) also provides that, when determining the premiums 
and other amounts subsequently paid by the policyholder with respect to 
the new interest, the amounts paid by the policyholder are reduced, but 
not below zero, by amounts received by the policyholder under the new 
life insurance contract that are not received as an annuity, to the 
extent excludable from gross income under section 72(e). The proposed 
regulations also make conforming changes to Sec.  1.101-1(a)(1) of the 
final regulations and the headings of Sec.  1.101-1(b) and (b)(2) of 
the final regulations to reflect the addition of proposed Sec.  1.101-
1(b)(2)(iv). The proposed regulations also add two examples to 
illustrate the application of the rules set forth in proposed Sec.  
1.101-1(b)(2)(iv). See proposed Sec.  1.101-1(g)(17) and (18).
3. Modification to Definition of Reportable Policy Sale
    Third, the proposed regulations would modify the definition of 
``reportable policy sale'' to address section 1035 exchanges. 
Specifically, proposed Sec.  1.101-1(c)(3) addresses situations in 
which an old interest is exchanged in a section 1035 exchange for a new 
interest, and the old interest was previously transferred for valuable 
consideration in a reportable policy sale or is treated, under proposed 
Sec.  1.101-1(c)(3), as an interest in a life insurance contract that 
was previously transferred for valuable consideration in a reportable 
policy sale. In such cases, the new interest is treated, for purposes 
of Sec.  1.101-1, as an interest in a life insurance contract that was 
previously transferred for valuable consideration in a reportable 
policy sale.
    Under the proposed rule, the old interest's attribute of having 
been previously transferred for valuable consideration in a reportable 
policy sale applies to the new interest acquired in a section 1035 
exchange. Whether or not an interest in a life insurance policy was 
previously transferred in a reportable policy sale is relevant for the 
purpose of determining the applicability of certain provisions in the 
final regulations. See, e.g., Sec.  1.101-1(b)(1)(ii)(B)(1) of the 
final regulations (applies only if the interest was not previously 
transferred for valuable consideration in a reportable policy sale); 
Sec.  1.101-1(b)(1)(ii)(B)(2) and (3) of the final regulations (apply 
if the interest was previously transferred for valuable consideration 
in a reportable policy sale); Sec.  1.101-1(b)(2)(i) of the final 
regulations (includes a special rule for interests that have not 
previously been transferred for value in a reportable policy sale). The 
Treasury Department and the IRS have previously treated (and continue 
to treat) other attributes of contracts exchanged in section 1035 
exchanges as applying to the new contracts acquired, so the new 
contract is treated the same as the old contract. See, e.g., Rev. Rul. 
92-95. Similarly, the proposed rule ensures that the new interest is 
treated the same as the old interest when applying rules that consider 
whether an interest in a life insurance contract was previously 
transferred in a reportable policy sale. See proposed Sec.  1.101-
1(c)(3).
    Proposed Sec.  1.101-1(c)(3) also provides that, for purposes of 
Sec. Sec.  1.6050Y-3 and 1.6050Y-4, the section 1035 exchange is 
treated as the transfer of an interest in the life insurance contract 
in a reportable policy sale if the old interest previously was 
transferred for valuable consideration in a reportable policy sale (or 
is treated, under proposed Sec.  1.101-1(c)(3), as an interest in a 
life insurance contract that previously was transferred for valuable 
consideration in a reportable policy sale). Accordingly, the 
designation of death benefits as reportable death benefits is an 
attribute that transfers from the old interest to the new interest in a 
section 1035 exchange. See also proposed Sec.  1.6050Y-1(a)(12). The 
Treasury Department and the IRS previously have treated other 
attributes of contracts exchanged in section 1035 exchanges as 
transferring to the new contracts acquired. In this case, the

[[Page 30063]]

proposed rule ensures that death benefits under the new interest are 
treated the same as under the old interest for purposes of reporting 
under section 6050Y(c) and Sec.  1.6050Y-4. These rules are necessary 
to ensure that the acquirer of an interest in a life insurance contract 
in a reportable policy sale cannot avoid the designation of the death 
benefits as reportable death benefits and the associated reporting of 
the payment of the reportable death benefits by simply exchanging the 
interest for a new life insurance contract. The proposed regulations 
also make conforming changes to Sec.  1.101-1(c)(1) of the final 
regulations to reflect the addition of proposed Sec.  1.101-1(c)(3).
4. Conforming Modifications to Sec. Sec.  1.6050Y-1 Through 1.6050Y-4
    Finally, consistent with proposed Sec.  1.101-1(c)(3), the proposed 
regulations would modify several definitions in Sec.  1.6050Y-1 of the 
final regulations and modify the reporting rules under Sec. Sec.  
1.6050Y-3 and 1.6050Y-4 of the final regulations to ensure proper 
reporting of reportable death benefits paid under contracts issued in 
section 1035 exchanges. Notably, however, the section 1035 exchange 
rules of proposed Sec.  1.101-1(c)(3) do not apply for purposes of 
Sec.  1.6050Y-2 of the final regulations, and no reporting is required 
under Sec.  1.6050Y-2 of the final regulations at the time of a section 
1035 exchange, even if the new interest is exchanged for an old 
interest that was previously transferred for valuable consideration in 
a reportable policy sale.
    Proposed Sec.  1.6050Y-1(a)(14) provides that the term ``reportable 
policy sale'' has the meaning given to it in Sec.  1.101-1(c)(1), 
except as otherwise provided in Sec.  1.6050Y-1. Proposed Sec.  
1.6050Y-1(a)(12) provides that 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 described in Sec.  
1.101-1(c)(1) of the final regulations or proposed Sec.  1.101-1(c)(3). 
Accordingly, payors of such amounts are subject to the reporting 
requirements of section 6050Y(c) and Sec.  1.6050Y-4 of the final 
regulations. Proposed Sec.  1.6050Y-1(a)(1) and (2) modify the 
definitions of ``acquirer'' and ``buyer,'' respectively, to treat as a 
buyer for purposes of reporting under section 6050Y(c) and Sec.  
1.6050Y-4 a person to whom an interest in a life insurance contract is 
issued in a section 1035 exchange treated as the transfer of an 
interest in the life insurance contract in a reportable policy sale 
under proposed Sec.  1.101-1(c)(3). See Sec.  1.6050Y-4(a)(5) of the 
final regulations (requiring a payor of reportable death benefits to 
report 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).
    To ensure proper reporting of reportable death benefits paid under 
contracts issued in section 1035 exchanges, proposed Sec.  1.6050Y-3(a) 
requires reporting by each ``6050Y(b) issuer'' that is a ``section 1035 
issuer'' with respect to each ``seller'' at the time of the exchange. 
Proposed Sec.  1.6050Y-1(a)(8)(iii)(C) provides that the term 
``6050Y(b) issuer'' includes any person that is a section 1035 issuer 
or the designee of a section 1035 issuer. Proposed Sec.  1.6050Y-
1(a)(8)(v) defines the term ``section 1035 issuer'' to include the 
issuer of the old interest (old issuer) and the issuer of the new 
interest (new issuer) in a section 1035 exchange that is treated as the 
transfer of an interest in the life insurance contract in a reportable 
policy sale under proposed Sec.  1.101-1(c)(3). The old issuer is a 
section 1035 issuer described in proposed Sec.  1.6050Y-1(a)(8)(v)(A), 
and the new issuer is a section 1035 issuer described in proposed Sec.  
1.6050Y-1(a)(8)(v)(B). However, an issuer is not considered a section 
1035 issuer if it never received information indicating that the 
interest in a life insurance contract with respect to which it is an 
issuer was transferred in a reportable policy sale under Sec.  1.101-
1(c)(1) or (3). See proposed Sec.  1.6050Y-1(a)(8)(v)(A) and (B). 
Proposed Sec.  1.6050Y-1(a)(18) provides that, for purposes of 
reporting by both the old issuer and the new issuer, the term 
``seller'' includes any person that holds an interest in a life 
insurance contract that has been transferred in a reportable policy 
sale under Sec.  1.101-1(c)(1) or (3) and exchanges that interest for 
an interest in a new life insurance contract in an exchange pursuant to 
section 1035. The information to be provided by a section 1035 issuer 
includes the name, address, and taxpayer identification number of the 
seller, the investment in the contract with respect to the seller, and 
any other information that is required by the form or its instructions. 
It is anticipated that this reporting will be completed on Form 1099-
SB, ``Seller's Investment in Life Insurance Contract'', and the 
information to be provided will also include the policy number (old or 
new, as applicable) and identification of the transaction as a section 
1035 exchange. Under proposed Sec.  1.6050Y-3(a)(3), section 1035 
issuers are not required to report the amount the seller would have 
received if the seller had surrendered the life insurance contract.
    The proposed regulations make conforming changes to Sec.  1.6050Y-
3(c) of the final regulations to provide the time and place for filing 
returns required to be made by section 1035 issuers. See proposed Sec.  
1.6050Y-3(c) (section 1035 issuers file returns at the same time and 
place as other 6050Y(b) issuers). Proposed Sec.  1.6050Y-3(d)(1) 
provides that each section 1035 issuer must furnish a statement to each 
seller who makes a section 1035 exchange, just as other 6050Y(b) 
issuers are required to furnish a statement to sellers, and proposed 
Sec.  1.6050Y-3(d)(2) imposes the same deadline for doing so. 
Additionally, proposed Sec.  1.6050Y-3(d)(1) requires the old issuer to 
furnish a statement to the new issuer in a section 1035 exchange 
providing information about the interest being exchanged. This 
statement serves to provide notice to the new issuer that the old 
interest was transferred in a reportable policy sale and, therefore, 
that the new interest will be treated as an interest in a life 
insurance contract that has been transferred in a reportable policy 
sale and that death benefits paid under the new interest are reportable 
death benefits. Proposed Sec.  1.6050Y-3(d)(2) provides that this 
statement must be furnished within 30 days of the section 1035 
exchange.
    The proposed regulations also modify the exception to reporting set 
forth in Sec.  1.6050Y-4(e)(3) of the final regulations. Section 
1.6050Y-4(e)(3) of the final regulations provides an exception from 
reporting under Sec.  1.6050Y-4 of the final regulations if the payor 
never received, and has no knowledge of any issuer having received, a 
reportable policy sale statement (RPSS) with respect to the interest in 
a life insurance contract with respect to which the reportable death 
benefits are paid. However, death benefits paid with respect to the new 
interest may be reportable death benefits even though an RPSS was never 
furnished with respect to the new interest. Accordingly, the existing 
exception would apply too broadly in the context of section 1035 
exchanges. Proposed Sec.  1.6050Y-4(e)(3) therefore imposes an 
additional requirement if the reportable death benefits are paid with 
respect to an interest in a life insurance contract issued in a section 
1035 exchange. In that case, the exception applies only if the payor 
also never received, and has no knowledge

[[Page 30064]]

of any issuer having received, a statement described in Sec.  1.6050Y-
3(d)(1) from a section 1035 issuer or other information indicating that 
the issuance of the contract is treated as a transfer of an interest in 
the contract in a reportable policy sale under Sec.  1.101-1(c)(3).

Ordinary Course Trade or Business Acquisitions

    As noted in the preamble to the final regulations, 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 because a corporate level income tax 
applies to corporate earnings in addition to income tax on 
distributions at the shareholder level. See 84 FR 58460, 58467. After 
consideration of the comments and letter received on the 2019 proposed 
regulations and the final regulations, respectively, regarding ordinary 
course trade or business acquisitions, the Treasury Department and the 
IRS are proposing an exception for certain direct acquisitions of 
interests in life insurance contracts from a C corporation.
    Proposed Sec.  1.101-1(c)(2)(v) provides that the direct 
acquisition of an interest in a life insurance contract from a C 
corporation by a C corporation is not a reportable policy sale if (1) 
the acquisition results from a transaction that qualifies as a 
reorganization under section 368(a); (2) immediately before the 
acquisition, (i) the interest is held by a C corporation that conducts 
an active trade or business within the meaning of Sec.  1.367(a)-
2(d)(2) and (3), (ii) the C corporation does not engage in a trade or 
business of investing in interests in life insurance contracts, and 
(iii) no more than 5 percent of the gross value of the assets of the C 
corporation consists of life insurance contracts; and (3) immediately 
after the acquisition, (i) the acquiring C corporation does not engage 
in a trade or business of investing in interests in life insurance 
contracts, and (ii) not more than 5 percent of the gross value of the 
assets of the C corporation consists of life insurance contracts. This 
exception would provide relief from the reportable policy sale rules 
for acquisitions of interests in life insurance contracts through 
certain ordinary course trade or business acquisitions while preserving 
different treatment for direct and indirect acquisitions of interests 
in life insurance contracts in other cases. The proposed regulations 
modify Example 11 in Sec.  1.101-1(g)(11) of the final regulations to 
reflect the addition of the exception in proposed Sec.  1.101-
1(c)(2)(v). See proposed Sec.  1.101-1(g)(11).

Applicability Dates

    Proposed Sec. Sec.  1.101-1(b)(2)(iv) and (c)(3) are proposed to 
apply to section 1035 exchanges occurring on or after the date the 
Treasury decision adopting these regulations as final regulations is 
published in the Federal Register, and proposed Sec.  1.101-1(c)(2)(v) 
is proposed to apply to any acquisition of an interest in a life 
insurance contract occurring on or after the date the Treasury decision 
adopting these regulations as final regulations is published in the 
Federal Register. See proposed Sec.  1.101-6(c). However, it is 
proposed that a taxpayer may choose to apply Sec.  1.101-1(b)(2)(iv), 
(c)(2)(v), and (c)(3) of the regulations set forth in the Treasury 
decision adopting these regulations as final regulations to all section 
1035 exchanges and acquisitions occurring after December 31, 2017, and 
before the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register. See section 
7805(b)(7) of the Code. Alternatively, a taxpayer may rely on proposed 
Sec.  1.101-1(b)(2)(iv), (c)(2)(v), and (c)(3) for all section 1035 
exchanges and acquisitions occurring after December 31, 2017, and 
before the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register.
    The reporting obligations under proposed Sec.  1.6050Y-3 are 
proposed to apply to any section 1035 exchange treated as a reportable 
policy sale under proposed Sec.  1.101-1(c)(3) if the exchange occurs 
on or after the date the Treasury decision adopting these regulations 
as final regulations is published in the Federal Register. See proposed 
Sec.  1.6050Y-1(b)(2). The reporting obligations under proposed Sec.  
1.6050Y-4 are proposed to apply to reportable death benefits paid with 
respect to an interest in a life insurance contract issued in a section 
1035 exchange treated as a reportable policy sale under proposed Sec.  
1.101-1(c)(3) if the exchange occurs on or after the date the Treasury 
decision adopting these regulations as final regulations is published 
in the Federal Register. See proposed Sec.  1.6050Y-1(b)(2). Any person 
with a reporting obligation under proposed Sec.  1.6050Y-3 or proposed 
Sec.  1.6050Y-4 may, however, rely on the proposed regulations with 
respect to all section 1035 exchanges occurring after May 10, 2023, and 
before the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register.

Special Analyses

I. Regulatory Planning and Review

    The proposed regulations are not subject to review under section 
6(b) of Executive Order 12866, as amended 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.

II. Paperwork Reduction Act

    The additional collection of information relating to this notice of 
proposed rulemaking will be submitted to the Office of Management and 
Budget for review under OMB Control Number 1545-2281 in accordance with 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). In general, 
the additional collection of information is required under section 
6050Y. When an interest in a life insurance contract that was 
previously transferred in or is treated as having been previously 
transferred in a reportable policy sale (original contract) is 
exchanged by a policyholder under section 1035 for a new life insurance 
contract (new contract), proposed Sec.  1.6050Y-3(a) would require the 
issuer of the original contract (original issuer) to notify the issuer 
of the new contract (new issuer), the policyholder, and the IRS of the 
status of the original contract as a contract transferred in or treated 
as having been transferred in a reportable policy sale and to provide 
the investment in the contract for the original contract. Proposed 
Sec.  1.6050Y-3(a) would also require any new issuer receiving such 
notification with respect to a section 1035 exchange to provide the 
policyholder and the IRS with the policy number of the new contract and 
the investment in the contract. This information is necessary to carry 
out the purpose of section 6050Y(c), which requires a payor of 
reportable death benefits to report certain information about payments 
of reportable death benefits.
    The likely respondents to the collection of information are life 
insurance companies.
    The burden for the additional collection of information contained 
in proposed Sec.  1.6050Y-3 will be reflected in the burden on Form 
1099-SB, ``Seller's Investment in Life Insurance Contract'', when the 
burden is revised to reflect the additional collection of information 
in proposed Sec.  1.6050Y-3. The OMB Control Number for this form is 
1545-2281.

[[Page 30065]]

    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, SE:CAR:MP:T:T:SP, Washington, DC 
20224. Comments on the collection of information should be received by 
July 10, 2023.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    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.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies to ``prepare 
and make available for public comment an initial regulatory flexibility 
analysis,'' which will ``describe the impact of the proposed rule on 
small entities.'' 5 U.S.C. 603(a). Section 605(b) of the RFA allows an 
agency to certify a rule, in lieu of preparing an analysis, if the 
proposed rulemaking is not expected to have a significant economic 
impact on a substantial number of small entities.
    Pursuant to the RFA, it is hereby certified that the proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities, because any effect on small 
entities by the rules proposed in this document flows directly from 
section 13520 of the TCJA. In addition, it is anticipated that 
requirements in the proposed regulations, which implement the statutory 
requirements under section 13520 of the TCJA, will fall primarily on 
financial and insurance firms with annual receipts greater than $41.5 
million and, therefore, on no small entities. Therefore, the 
Commissioner of the IRS hereby certifies that the proposed regulations 
will not have a significant economic impact on a substantial number of 
small entities. The Treasury Department and the IRS request comments on 
the impacts of this proposed rule on small entities.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for the Office of 
Advocacy of the Small Business Administration for comment on its impact 
on small entities.

IV. 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. This proposed 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.

V. Executive Order 13132: Federalism

    Executive Order 13132 (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. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the final regulations are 
adopted as final regulations, consideration will be given to comments 
that are submitted timely to the IRS as prescribed in this preamble 
under the ADDRESSES heading. The Treasury Department and the IRS 
request comments on all aspects of the proposed regulations. Any 
electronic comments submitted, and to the extent practicable any paper 
comments submitted, will be made available at www.regulations.gov or 
upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register.

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 revenue rulings, notices, and other guidance cited in this 
document are published in the Internal Revenue Bulletin (or Cumulative 
Bulletin) and are 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.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section 1.101-1 is amended by:
0
1. Adding a heading for paragraph (a) introductory text.
0
2. In paragraph (a)(1), adding a sentence after the fourth sentence.
0
3. In paragraphs (b) introductory text and (b)(2), revising the 
headings.
0
4. Adding paragraph (b)(2)(iv).
0
5. Adding a sentence at the end of paragraph (c)(1).
0
6. Revising paragraph (c)(2)(v).
0
7. Adding paragraph (c)(3).
0
8. In paragraph (e)(2), removing ``, other than the issuance of a 
policy in an exchange pursuant to section 1035'' in the last sentence.
0
9. In paragraph (g)(11), adding two sentences after the fourth 
sentence.
0
10. Adding paragraphs (g)(17) through (g)(19).
    The additions and revisions read as follows:

[[Page 30066]]

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

    (a) Exclusion from gross income--(1) In general. * * * The extent 
to which this exclusion applies in cases where life insurance policies 
have been gratuitously transferred or issued in an exchange pursuant to 
section 1035 (section 1035 exchange) is stated in paragraph (b)(2) of 
this section. * * *
* * * * *
    (b) Transfers and exchanges of life insurance policies.
* * * * *
    (2) Other transfers and exchanges--* * *
* * * * *
    (iv) Section 1035 exchanges. When an interest in a life insurance 
contract (old interest) is exchanged in a section 1035 exchange for an 
interest in a newly issued life insurance contract (new interest), 
except as otherwise provided by this section with respect to any 
portion of the new interest that is transferred or exchanged subsequent 
to the section 1035 exchange, the amount of the proceeds attributable 
to the new interest that is excludable from gross income under section 
101(a) is determined as follows:
    (A) If, at the time of the exchange, the entire amount of the 
proceeds attributable to the old interest would have been excludable 
from gross income under section 101(a), the entire amount of the 
proceeds attributable to the new interest is excludable from gross 
income; and
    (B) If, at the time of the exchange, less than the entire amount of 
the proceeds attributable to the old interest would have been 
excludable from gross income under section 101(a), the amount of the 
proceeds attributable to the new interest that is excludable from gross 
income is limited to the sum of the amount of the proceeds attributable 
to the old interest that would have been excludable at the time of the 
exchange and the premiums and other amounts subsequently paid with 
respect to the new interest by the policyholder, reduced (but not below 
zero) by amounts received by the policyholder under the life insurance 
contract that are not received as an annuity, to the extent excludable 
from gross income under section 72(e).
* * * * *
    (c) * * *
    (1) * * * See paragraph (c)(3) of this section for special rules 
applicable to section 1035 exchanges.
    (2) * * *
    (v) The direct acquisition of an interest in a life insurance 
contract by a C corporation if:
    (A) Immediately before the acquisition, the interest is held by 
another C corporation (target C corporation) that actively conducts a 
trade or business within the meaning of Sec.  1.367(a)-2(d)(2) and (3);
    (B) Immediately before the acquisition, the target C corporation 
does not engage in a trade or business of investing in interests in 
life insurance contracts;
    (C) Immediately before the acquisition, no more than 5 percent of 
the gross value of the assets (as determined under paragraph (f)(4) of 
this section) of the target C corporation consists of life insurance 
contracts;
    (D) The acquisition results from a transaction that qualifies as a 
reorganization under section 368(a) with respect to which the target C 
corporation and the acquiring C corporation each is a party to the 
reorganization (within the meaning of section 368(b));
    (E) Immediately after the acquisition, the acquiring C corporation 
does not engage in a trade or business of investing in interests in 
life insurance contracts, and
    (F) Immediately after the acquisition, no more than 5 percent of 
the gross value of the assets (as determined under paragraph (f)(4) of 
this section) of the acquiring C corporation consists of life insurance 
contracts.
    (3) Section 1035 exchanges. This paragraph (c)(3) applies if an 
interest in a life insurance contract (old interest) is exchanged in a 
section 1035 exchange for an interest in a newly issued life insurance 
contract (new interest), and the old interest previously was 
transferred for valuable consideration in a reportable policy sale 
under paragraph (c)(1) of this section or is treated as an interest in 
a life insurance contract that previously was transferred for valuable 
consideration in a reportable policy sale under this paragraph (c)(3). 
For purposes of this section, the new interest is treated as an 
interest in a life insurance contract that previously was transferred 
for valuable consideration in a reportable policy sale. For purposes of 
Sec. Sec.  1.6050Y-3 and 1.6050Y-4, the section 1035 exchange is 
treated as the transfer of an interest in the life insurance contract 
in a reportable policy sale.
* * * * *
    (g) * * *
    (11) * * * Also, the exception in paragraph (c)(2)(v) of this 
section applies, provided Corporation X satisfies the requirements of 
paragraph (c)(2)(v)(A) through (C) of this section immediately before 
the acquisition by Corporation Y, and Corporation Y satisfies the 
requirements of paragraph (c)(2)(v)(E) and (F) of this section 
immediately after the acquisition. This would be the case even if A 
were no longer employed by Corporation X at the time of the transfer. * 
* *
* * * * *
    (17) Example 17. The facts are the same as in Example 4 in 
paragraph (g)(4) of this section except that, before A's death, C 
exchanges the policy on A's life for a new policy on A's life in a 
section 1035 exchange. The amount of the proceeds C may exclude from 
C's gross income under this section is limited under paragraph 
(b)(2)(iv)(B) of this section to $6,000 plus any premiums and other 
amounts paid by C with respect to the original policy subsequent to the 
transfer and any premiums and other amounts paid by C with respect to 
the new policy subsequent to the exchange.
    (18) Example 18. The facts are the same as in Example 17 in 
paragraph (g)(17) of this section except that, before A's death, C 
sells the new policy to A for fair market value. A's estate receives 
the proceeds of $100,000 on A's death. Under paragraph 
(b)(1)(ii)(B)(3)(i) of this section, the amount of the proceeds A's 
estate may exclude from gross income is not limited by paragraph (b) of 
this section.
    (19) Example 19. 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 at the time of the 
transfer. The transfer from A to C is a reportable policy sale. C also 
is the initial policyholder of a $200,000 insurance policy on A's life. 
Before A's death, C exchanges the two policies on A's life for a single 
new policy on A's life in a section 1035 exchange. C receives the 
proceeds from the new policy on A's death. The entire amount of the 
proceeds attributable to the interest in the new policy that was issued 
in exchange for the policy originally issued to C is excludable from 
gross income under paragraph (b)(2)(iv)(A) of this section. The amount 
of the proceeds attributable to the interest in the new policy that was 
issued in exchange for the policy originally issued to A that is 
excludable from gross income is limited under paragraph (b)(2)(iv)(B) 
of this section to $6,000 plus any premiums and other amounts paid by C 
with respect to the policy originally issued to A subsequent to the 
transfer and any premiums and other amounts paid by C with respect to

[[Page 30067]]

the interest in the new policy that was issued in exchange for the 
policy originally issued to A.
0
Par. 3. Section 1.101-6 is amended by adding paragraph (c) to read as 
follows:


Sec.  1.101-6   Effective date.

* * * * *
    (c) Notwithstanding paragraphs (a) and (b) of this section, Sec.  
1.101-1(b)(2)(iv) and (c)(3) apply to any interest in a life insurance 
contract issued in a section 1035 exchange occurring on or after the 
date these regulations are published as final regulations in the 
Federal Register, and Sec.  1.101-1(c)(2)(v) applies to any acquisition 
of an interest in a life insurance contract occurring on or after the 
date these regulations are published as final regulations in the 
Federal Register. However, under section 7805(b)(7), a taxpayer may 
choose to apply the rules in Sec.  1.101-1(b)(2)(iv), (c)(2)(v), and 
(c)(3) to all exchanges and acquisitions occurring after December 31, 
2017, and before the date these regulations are published as final 
regulations in the Federal Register.
0
Par. 4. Section 1.6050Y-1 is amended by:
0
1. In paragraph (a)(1), adding a sentence at the end of the paragraph.
0
2. In paragraph (a)(2), adding ``under Sec.  1.101-1(c)(1) or treated 
as such an interest under Sec.  1.101-1(c)(3)'' before the second 
comma.
0
3. In paragraph (a)(8)(ii), removing the last sentence.
0
4. In paragraph (a)(8)(iii)(A), removing ``or'' at the end.
0
5. In paragraph (a)(8)(iii)(B)(2), removing the period at the end of 
the paragraph and adding in its place ``; or''.
0
6. Adding paragraph (a)(8)(iii)(C).
0
7. Adding paragraph (a)(8)(v).
0
8. In paragraph (a)(12), adding ``under Sec.  1.101-1(c)(1) or (3)'' 
before the period at the end of the paragraph.
0
9. In paragraph (a)(14), removing ``Sec.  1.101-1(c)'' before the 
period at the end of the paragraph, and adding in its place ``Sec.  
1.101-1(c), except as otherwise provided in this section''.
0
10. In paragraph (a)(18)(i), removing ``or'' at the end of the 
paragraph.
0
11. In paragraph (a)(18)(ii), removing the period at the end of the 
paragraph and adding in its place ``; or''.
0
12. Adding paragraph (a)(18)(iii).
0
13. Redesignating paragraphs (b)(1) through (5) as paragraphs (b)(1)(i) 
through (v); redesignating paragraph (b) introductory text as paragraph 
(b)(1); adding a heading to paragraph (b) introductory text; revising 
the heading for the newly redesignated paragraph (b)(1); revising the 
first two sentences of newly redesignated paragraph (b)(1); and adding 
paragraph (b)(2).
    The additions and revisions 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) * * *
    (1) * * * For purposes of determining the buyer under paragraph 
(a)(2) of this section, the term acquirer also includes any person to 
whom an interest in a life insurance contract is issued in an exchange 
pursuant to section 1035 (section 1035 exchange) that is treated as the 
transfer of an interest in the life insurance contract in a reportable 
policy sale under Sec.  1.101-1(c)(3).
* * * * *
    (8) * * *
    (iii) * * *
    (C) Any person that is a section 1035 issuer or the designee of a 
section 1035 issuer.
* * * * *
    (v) Section 1035 issuer. A section 1035 issuer is any person that, 
on the date of a section 1035 exchange of an interest in an existing 
life insurance contract for an interest in a newly issued life 
insurance contract that is treated as the transfer of an interest in a 
life insurance contract in a reportable policy sale under Sec.  1.101-
1(c)(3), is:
    (A) An issuer with respect to the existing life insurance contract, 
provided the issuer received an RPSS, a statement required by Sec.  
1.6050Y-3(d)(1), or other information indicating that the existing life 
insurance contract or interest therein was transferred in a reportable 
policy sale under Sec.  1.101-1(c)(1) or (3); or
    (B) An issuer with respect to the newly issued life insurance 
contract, provided the issuer receives the statement required by Sec.  
1.6050Y-3(d)(1) or other information indicating that existing life 
insurance contract or interest therein was transferred in a reportable 
policy sale under Sec.  1.101-1(c)(1) or (3).
* * * * *
    (18) * * *
    (iii) For purposes of reporting under Sec.  1.6050Y-3 by both the 
section 1035 issuer described in paragraph (a)(8)(v)(A) of this section 
and the section 1035 issuer described in paragraph (a)(8)(v)(B) of this 
section, holds an interest in a life insurance contract that has been 
transferred in a reportable policy sale under Sec.  1.101-1(c)(1) or 
(3) and exchanges that interest for an interest in a new life insurance 
contract in a section 1035 exchange.
    (b) Applicability date--(1) In general. Except as otherwise 
provided in paragraph (b)(2) of this section, this section and 
Sec. Sec.  1.6050Y-2 through 1.6050Y-3 apply to reportable policy sales 
made after December 31, 2018. Except as otherwise provided in paragraph 
(b)(2) of this section, this section and Sec.  1.6050Y-4 apply to 
reportable death benefits paid after December 31, 2018. * * *
* * * * *
    (2) Section 1035 exchanges. Section 1.6050Y-3 applies to a section 
1035 exchange treated as a reportable policy sale under Sec.  1.101-
1(c)(3) if the exchange occurs on or after the date these regulations 
are published as final regulations in the Federal Register. Section 
1.6050Y-4 applies to reportable death benefits paid with respect to an 
interest in a life insurance contract issued in a section 1035 exchange 
treated as a reportable policy sale under Sec.  1.101-1(c)(3) if the 
exchange occurs on or after the date these regulations are published as 
final regulations in the Federal Register.


Sec.  1.6050Y-2   [Amended]

0
Par. 5. Section 1.6050Y-2 is amended by removing paragraph (f)(3).
0
Par. 6. Section 1.6050Y-3 is amended by:
0
1. In paragraph (a) introductory text, removing ``that receives an RPPS 
or any notice of a transfer to a foreign person'' in the first sentence 
and adding in its place ``that receives an RPSS, receives any notice of 
a transfer to a foreign person, or is a section 1035 issuer''.
0
2. In paragraph (a)(3), removing ``The'' at the beginning of the 
paragraph and adding in its place ``For 6050Y(b) issuers other than 
section 1035 issuers, the''.
0
3. In paragraph (c), removing ``reportable policy sale or the transfer 
to a foreign person occurred'' before the period at the end of the 
first sentence and adding in its place ``reportable policy sale, 
transfer to a foreign person, or section 1035 exchange occurred''.
0
4. In paragraph (d)(1), removing ``is a reportable policy sale payment 
recipient or makes a transfer to a foreign person'' in the first 
sentence and adding in its place ``is a reportable policy sale payment 
recipient, makes a transfer to a foreign person, or makes a section 
1035 exchange'', and adding a sentence at the end of the paragraph.
0
5. In paragraph (d)(2), removing ``reportable policy sale or transfer 
to a foreign person occurred'' before the period at the end of the 
first sentence and adding in its place ``reportable policy sale, 
transfer to a foreign person, or section 1035 exchange occurred'', and 
adding a sentence after the second sentence.

[[Page 30068]]

0
6. In paragraph (f), removing ``paragraph (f)(1), (2), or (3) of this 
section applies'' before the period at the end of the paragraph and 
adding in its place ``paragraph (f)(1) or (2) of this section 
applies''.
0
7. Removing paragraph (f)(3).
    The additions 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.

* * * * *
    (d) * * *
    (1) * * * In addition, every section 1035 issuer described in Sec.  
1.6050Y-1(a)(8)(v)(A) filing a return required by paragraph (a) of this 
section with respect to a section 1035 exchange must furnish to each 
section 1035 issuer described in Sec.  1.6050Y-1(a)(8)(v)(B) with 
respect to that exchange a written statement showing the information 
required by paragraph (a) of this section with respect to the seller in 
the exchange and the name, address, and phone number of the information 
contact of the person filing the return.
    (2) Time for furnishing statement. * * * Each statement required by 
paragraph (d)(1) of this section to be furnished to any section 1035 
issuer described in Sec.  1.6050Y-1(a)(8)(v)(B) must be furnished 
within 30 days of the date of the section 1035 exchange. * * *
* * * * *
0
Par. 7. Section 1.6050Y-4 is amended by adding a sentence at the end of 
paragraph (e)(3) to read as follows:


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

* * * * *
    (e) * * *
    (3) * * * Additionally, if the reportable death benefits are paid 
with respect to an interest in a life insurance contract issued in a 
section 1035 exchange, the payor never received, and has no knowledge 
of any issuer having received, a statement described in Sec.  1.6050Y-
3(d)(1) from a section 1035 issuer or other information indicating that 
the issuance of the contract is treated as a transfer of an interest in 
the contract in a reportable policy sale under Sec.  1.101-1(c)(3).
* * * * *

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-09637 Filed 5-9-23; 8:45 am]
BILLING CODE 4830-01-P