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IRS updates life settlement rulings for tax reform changes

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March 2020


In Rev. Rul. 2020-5, the IRS updated two prior revenue rulings to take into account changes made by the 2017 tax reform act (the Act) to the calculation of basis in a life insurance contract. Specifically, Rev. Rul. 2009-13 had concluded that, for purposes of computing gain on sale, the adjusted basis of a life insurance contract must be reduced for the cost of insurance that already had been provided. Rev. Rul. 2009-14 had provided that no such reduction applies to contracts that are purchased solely with a view to profit, rather than for protection against economic loss upon the death of the insured individual. The Act amended the Internal Revenue Code retroactive to 2009 to provide that there is no basis adjustment for cost-of-insurance charges.

The takeaway

The conclusions in Rev. Rul. 2020-5 simply apply the Act’s amendments related to Section 1016 to the facts in the previously issued rulings. Updating Rev. Rul. 2009-13 and Rev. Rul. 2009-14 is helpful to sellers of life insurance contracts, as otherwise there may have been uncertainty resulting from the obsolete analysis in the rulings and the inconsistency between the rulings and Section 1016, as amended.

Because the Act’s amendment to Section 1016 and Rev. Rul. 2020-5 apply retroactively to 2009, sellers of life insurance contracts after August 25, 2009 through the present should review how they computed adjusted basis in the contracts for purposes of computing gain. Those sellers who computed basis in the manner set forth in Rev. Rul. 2009-13 should consider whether they can amend prior year returns to remove any adjustment for cost-of-insurance charges consistent with the Act and Rev. Rul. 2020-5. 

Observation: Even though the Internal Revenue Code was amended retroactive to 2009, the normal statute of limitations applies to claims for refund under the provision.

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Julie Goosman

Insurance Tax Leader, PwC US

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