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IRS Postpones Life Settlement Tax Reporting Requirement

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To see life settlement regulation idea cards, click on the arrow on the right side of the gallery box above.

The Internal Revenue Service is trying to ease life settlement market players’ panic about a new life insurance policy sale reporting law.

(Related: Life Settlement Players Struggle With Tax Form Void)

The IRS says it will put off enforcing the reporting law until it has written reporting regulations  — and has given the policy sellers and buyers additional time to meet the new reporting requirements.

IRS officials describe their plans for writing the new life policy reporting regulations today in IRS Notice 2018-41.

The big new federal tax law, the Tax Cuts and Jobs Act, added Section 6050Y to the Internal Revenue Code. IRC 6050Y requires the participants in life policy sales to report the transactions to the IRS.

The law took effect Dec. 31, 2017. If the IRS had not provided transitional relief, life policy sellers would already be subject to the reporting requirements, despite the lack of reporting procedures.

The new law does not use the term “life settlement.” Section 6050Y could end up applying to other types of transactions.

IRS officials write in the new notice that the Section 6050Y requirements will apply to life settlement transactions, or situations in which a policyholder sells a policy to an unrelated person.

IRS officials say they intend to propose formal Section 6050Y guidance that will give policy sellers and buyers advice about how to implement the notice.

IRS officials are asking members of the public for advice about how to write the guidance.

Terms: Officials are asking for ideas about how they should define terms such as policy “acquirer,” and “payment recipient.”

Special parties: Officials are asking what the reporting rules should be when two or more persons take possession of an insurance contract, or acquire a beneficial interest in a life insurance contract.

Officials are also asking whether any parties other than the policy owner might get payments, and how to handle transactions that involve multiple payment recipients.

Payments to life settlement brokers will be reportable payments, officials say.

Another question refers toreporting rules for policy sales that involve non-U.S. participants.

Tertiary market: Life settlement industry players describe a policy sale by the original insured individual to a life settlement provider as a “secondary market” sale.

Industry players use the term “tertiary market,” or third market, to describe transactions in which a life settlement provider sells a bundle of life policies to another life settlement provider, or to an investment manager.

IRS officials are asking what the reporting rules should be tertiary market sales.


Comments on the notice are due June 13.

The notice lists Kathryn Sneade of the Office of Associate Chief Counsel at the IRS as the principal author.

— Read How the New TCJA Tax Law Affects Life Settlements on ThinkAdvisor.

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