Last week, the Trump administration released its first Fiscal Year 2018 budget proposal, titled A New Foundation for American Greatness. Two priorities addressed in the 2018 budget that our readers may be most interested in are tax reform and financial regulatory reform.
The Trump budget assumes deficit-neutral tax reform and states that the Administration will work closely with the Congress to enact it. Related to business tax reform, the proposal identifies the following objectives:
Unlike the proposals released under the prior administration, the Fiscal Year 2018 proposal did not identify any specific insurance-related tax proposals.
Financial Regulatory Reform
The budget refers to Trump’s Executive Order on Core Principles for Regulating the U.S. Financial System, and suggests “rolling back” certain elements of the Dodd-Frank Act. It also proposes a restructuring of the Consumer Financial Protection Bureau.
We recently became aware of a proposed bill that would clarify the tax treatment of certain life insurance contract transactions (H.R. 1262). Provisions in the bill include:
The bill appears to be substantively the same as a Senate bill originally introduced January 31, 2012 (2012 S. 2048) and prior House bills, including one introduced by the same sponsor last year (H .R. 5973; 114th Congress (2015-2016)).
Certainly, it is unlikely that this proposal will receive serious consideration. Below is an overview of the primary provisions of the bill.
Information Reporting Requirements
The acquirer of an interest in a life insurance contract in a reportable policy sale shall report certain information, including: the name, address, and TIN of the recipient of payment(s); the date of such sale; the amounts paid; and the policy number and life insurance issuer.
The bill would further require the life insurance issuer to report the seller’s basis in the contract (as defined in section 72(e)(6)).
The bill would institute reporting requirements for reportable death benefits as well.
No Basis Adjustment
The bill would add an exemption to IRC § 1016(a) stating that no adjustment would apply: “for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract.”
This rule would specifically contradict the IRS position in Revenue Ruling 2009-13. As a brief reminder, the IRS took the position that the basis for a life insurance contract must be adjusted in either a policy sale or when recognizing a loss upon a surrender.
Transfer for Value Exception
The bill summary states that it “exempts the transfer of a life insurance contract, or any interest therein, in a reportable policy sale from the transfer for valuable consideration rule.” Based on this description, we suspect the motive behind this proposal would be to preserve the tax-free nature of death benefit proceeds under such a transaction. Obviously, this would be a favorable development for life settlement investors. Such a change could also impact the determination for COLI/BOLI policies that are acquired as part of an asset purchase merger or acquisition.
The proposed text appears to create a distinction for “direct” and “indirect” acquisitions of life insurance contracts and applies a computational test to determine if an indirect acquisition represents a “reportable policy sale.” It is not clear to us why this distinction is made and the language does not address the treatment of an acquisition that would be “indirect” but for it exceeding the computational limit.
Finally, we also observed that the proposed text in § 101(a)(3)(A) causes all reportable sales to be subject to the transfer for valuable consideration rule even if they are exempted under § 101(a)(2)(A) or (B). This arises because § 101(a)(3)(A) appears to have a fundamental reference error. It literally states that only the existing exemptions to the transfer for value rule would not apply to reportable sales (“the second sentence of” § 101(a)(2)); it does not exempt the transfer for value rule itself, which is put forth in the first sentence of § 101(a)(2).
On May 2, the House Financial Services Committee completed a mark-up session on the Financial CHOICE Act. Subsequently, the Act was agreed to along a party-line vote and has been formally identified as H.R. 10.
The Connecticut legislature has enacted a law (HB 7025), effective October 1, 2017, that authorizes domestic insurers to divide. The law sets forth a process by which a domestic insurance company (the “dividing insurer”) may divide into two or more insurance companies (the “resulting insurers”).
A publication by Debevois & Plimpton speculates that this law could be used to:
The process is subject to regulatory approval by the CT Insurance Department, which will look to ensure that the interest of any policyholder is adequately protected.