Article

Reporting of gains from life insurance

Authored by Timothy Kramer

On Oct. 25 2019, the Internal Revenue Service (IRS) published final regulations under Internal Revenue Code (“IRC”) section 6050Y, which provide guidance on new information reporting obligations 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, and are effective Oct. 31, 2019.

Background

The Tax Cuts and Jobs Act (TCJA) added new filing requirements for certain life insurance contracts under the newly created IRC section 6050Y. Section 6050Y imposes information reporting requirements on both the acquirer and issuer, in the case of an acquisition of an existing life insurance contract in a reportable policy sale and on each person who makes a payment of reportable death benefits.

The TCJA also amended section 101 to define a reportable policy sale as well as provide rules to determine the amount of death benefits to be excluded from gross income following a reportable policy sale. The IRS previously issued proposed regulations under section 6050Y on March 25, 2019 and solicited commentary to be taken into consideration in issuing final regulations. Transitional relief was provided, which did not require any reporting with respect to reporting requirements until the final regulations were issued.

The new reporting requirements generally apply to reportable death benefits made after Dec. 31, 2018. Transitional relief set forth in the proposed regulations was also modified to apply to reportable policy sales and reportable death benefits paid after Dec. 31, 2018 and on or before Oct. 31, 2019. Additionally, issuers will have 120 days from the date the final regulations are published to file returns and furnish statements under 6050Y(b) and (c) in order to provide ample time to develop and implement reporting systems.

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