11 December 2017 Updated: House and Senate tax reform proposals include numerous changes affecting the insurance industry Early on December 2, 2017, the Senate approved the Tax Cuts and Jobs Act (Senate Bill)1 by a 51-49 vote, with Senator Bob Corker (R-TN) being the only Republican to vote against the bill. Several weeks earlier, the House, on November 16, 2017, passed the Tax Cuts and Jobs Act (House Bill),2 by a mostly party-line vote of 227-205. While both bills have the same general framework, key differences exist, particularly for the insurance industry, and the House and Senate must now agree to the same version of the bill in a House-Senate conference. This Alert identifies key proposals in the House and Senate tax reform bills that are relevant to the insurance industry. As tax reform may now be imminent, companies should study these proposals, assess their impact and be prepared to record and disclose the financial reporting effects if tax reform is enacted. The draft bill released on November 2nd by House Ways and Means Committee Chairman Kevin Brady (R-TX) included three significant changes to the taxation of life insurance companies under Subchapter L. One proposal provided that deductible life insurance tax reserves would generally equal statutory reserves, with some notable exclusions, subject to a cap of 76.5% and an elimination of the net surrender value floor. The tax deferred acquisition costs (Tax DAC) proposal would have changed the categories of specified contracts from three to two, group and non-group. Group contracts would have been subject to Tax DAC at 4% and non-group would have been subject to Tax DAC at 11%. Finally, the proration rules of Section 812 would have been eliminated and replaced by a flat company share of 40% and a policyholder share of 60% for both separate and general accounts. After intense lobbying by the life insurance industry, these three proposals were eliminated and a "placeholder" provision that imposes a surtax of 8% of LICTI was added. The 8% surtax on LICTI was designed to raise the same amount of revenue as the three eliminated provisions, approximately $23 billion over 10 years. The inclusion of the placeholder provision in the House Bill represented an accommodation by House Republican leaders that they and the industry would work together to make changes to Subchapter L regarding life insurance taxation designed to raise approximately $23 billion over 10 years. Those discussions culminated in new life insurance provisions (discussed next) that were proposed by Senator Tim Scott (R-SC) and included in the manager's amendment incorporated in the Senate Bill that passed on December 2. In general, the proposal would amend the method of computing reserves under Section 807(d) so that the amount of the life insurance reserve for any contract would be the greater of the net surrender value of the contract or 92.87% of the tax reserve method applicable to the contract. For variable insurance contracts, the tax reserve would be the greater of: (i) the net surrender value, or (ii) the portion of the reserve that is separately accounted for under Section 817, plus 92.87% of the excess (if any) of the tax reserve method, over the net surrender value. The proposal calls for a recalculation of reserves held on contracts issued before the effective date using the new reserve computation method. The difference between the reserves computed using the old method and the new method would then be taken into account over the subsequent eight years. As life insurance products have evolved, insurance regulators have been changing how life insurance companies must calculate and maintain reserves, specifically moving toward a principle-based approach to the calculation of reserves. There is a lack of clarity around how current law accommodates these new reserving methodologies. It appears the legislative intent of the Senate Bill proposal is for the "tax reserve method" in Section 807(d)(3) to equal the National Association of Insurance Commissioners (NAIC) annual statement reserve, although it is not entirely clear. Specifically, Section 807(d)(3) states that the term "tax reserve method" means: (i) the Commissioners Reserve Valuation Method (CRVM) for life insurance contracts; (ii) the Commissioners Annuity Reserve Valuation Method (CARVM) for annuity contracts; (iii) a two-year full preliminary term method for any non-cancellable accident and health contract (other than a qualified long-term care insurance contract, as defined in Section 7702B(b)); and (iv) the reserve method prescribed by the NAIC that covers such contract or, if no reserve method has been prescribed by the NAIC, a reserve method that is consistent with the reserve method under (i), (ii) or (iii). Interestingly, the Section 807(d)(3)(B) definitions of CRVM, CARVM and other reserve methods prescribed by the NAIC have been amended to apply "as of the date the reserve is determined." This is a change from current law definitions, which apply "on the date of issuance." This revision appears to be building elasticity into the computation of tax-deductible reserves to accommodate new reserving methodologies, such as principle-based reserves; future changes to reserve methodologies, however, will also need to meet this new definition. Companies will need to carefully review the "tax reserve method" to ensure it provides the same reserve computed for NAIC annual statement purposes. To the extent there are differences, the tax reserve may need to be separately calculated. As companies consider the new reserve approach of tax basically equal to the statutory reserve, less the haircut, consideration needs to be given to the treatment of deficiency reserves. Nothing in the new rules seems to allow the deduction of deficiency reserves, as the current law exclusion of those reserves continues under Section 807(d)(3)(C). To the extent that a stochastic or deterministic reserve computed under principles-based reserve methodologies includes any deficiency element, companies need to determine whether the reserve needs to be adjusted to account for the disallowance of the deduction deficiency reserves. Also, the proposal would remove Section 807(e)(2), which specifies the issuance date of group contracts as the date the master plan is issued. This change arguably would cause a reliance on NAIC annual statement accounting for reserves for group contracts. According to the JCT, the provision would increase revenues by $15.2 billion over 2018-2027. While this represents a significant reduction in the reserve deduction, it could have been much worse. The original proposal in the House Ways & Means bill released on November 2 provided that deductible tax reserves would generally equal statutory reserves, with some notable exclusions, subject to a 23.5% haircut, and it eliminated the cash value floor. The JCT staff scored the original proposal as only increasing revenues by $14.9 billion over 10 years. The life insurance industry demonstrated that the proposal raised multiples of this original score and the significant tax expense increase would have caused severe adverse economic consequences. The revised JCT score, based in large part on data supplied by the industry, on the updated haircut proposal in the Senate Bill validates industry concerns that the revenue impact of the original estimate was significantly understated. In general, the proposal modifies Section 848 such that it increases the period specified policy acquisition expenses are amortized from 120-months to 180-months, retains the three categories of specified insurance contracts as in current law, and increases the Tax DAC percentages by 20% each. Thus, the increased Tax DAC percentages in the proposal are as follows: for annuity contracts, 2.1%; for group life insurance contracts, 2.46%; and for all other specified insurance contracts, 9.24%. The provision would be effective for tax years beginning after 2017 and according to JCT, the provision would increase revenues by $7.2 billion over 2018-2027. The original proposal in the Senate Finance Committee bill would have retained the three categories of specified contracts as in current law, significantly increased the Tax DAC percentages and dramatically increased the amortization period to 50 years. This provision also would have raised approximately $23 billion over 10 years. Although this original proposal was a "placeholder" provision, initial JCT scoring uncertainties over Tim Scott's amendments threatened to keep the original proposal in the Senate Bill. The new provision is a substantial improvement over the proposal in the tax reform discussion draft released by Chairman Camp in 2014 and the placeholder provision in the Senate Finance Committee bill. Camp's proposal was scored to increase revenues $11.7 billion over 10 years according to the JCT. Although it is another significant tax increase on the life insurance industry, many will view the Senate Bill provision as an acceptable compromise compared to prior proposals. The proposal would amend and significantly simplify Section 812 so that, for purposes of the life insurance company proration rules, for both the separate and general accounts, the company's share is 70% and the policyholder's share is 30%. The provision would be effective for tax years beginning after 2017. Given the complexity of current law, a change to a flat company and policyholder percentage introduces substantial simplification to the Code. This provision is an improvement over the proposal in the tax reform discussion draft released by Chairman Camp in February 2014 and the original proposal that was included in the House Ways & Means Committee bill issued on November 2. A one-size-fits-all approach, however, may disadvantage certain insurance companies based on their mix of business and investment approach. According to JCT, the provision would increase revenues by $0.6 billion over 2018-2027. Both the House and Senate bills would repeal the operations loss deduction for life insurance companies and allow the net operating loss (NOL) deduction under Section 172 (as adjusted under both proposals). This would provide the same treatment for losses of life insurance companies as for other corporations. Other changes to Section 172 in both bills include the following similarities: — Allowing NOLs to be carried forward indefinitely with an inflation adjustment but repealing NOL carrybacks — Determining a life insurance company's NOL deduction by treating the NOL for any tax year generally as the excess of the life insurance deductions for the tax year over the life insurance gross income for the tax year The changes would be effective for losses arising in tax years beginning after 2017. In terms of differences between the two bills, the Senate Bill would change the NOL carryforward deduction limitation to 80% (as opposed to 90% in the House Bill) of taxable income for tax years after December 31, 2022. Unlike the House Bill, the Senate Bill also preserves present law treatment for P&C insurance company NOLs. Thus, under the Senate Bill, NOLs of P&C insurance companies could be carried back two years and carried over 20 years to offset 100% of taxable income in such years. To the extent Section 172 is modified to preclude NOL carrybacks, the first component of the admissibility test (SSAP No. 101 paragraph 11.a.) will be largely irrelevant (note that capital loss carrybacks continue to be permitted under both bills). Because SSAP No. 101 paragraph 11.a. links the hypothetical loss carryback to the IRC carryback proposals, a tax law change to those proposals will directly affect the first component of the admissibility test. To the extent paragraph 11.a. is largely irrelevant, paragraph 11.b. in the admissibility test would take on greater importance for determining an insurance company's net admitted DTA. The proposal would amend Section 807(f) so that a change in the basis for life reserves would be taken into account under Section 481 and subject to the accounting method change rules. The proposal would be effective for tax years beginning after 2017. The Senate Bill proposal on the computation of life insurance tax reserves raises several questions regarding the application of Section 807(f). First, current law Section 807(f) is self-executing, while Section 481 is not. Query whether this current law treatment would continue to apply to Section 807(f) changes in basis. Second, will any change in the statutory reserve computations be a Section 807(f) change in basis? If not, would the current law rules, such as those set forth in Revenue Procedure 94-74, still apply in determining when a change in statutory reserve computations constitutes a change in basis? The proposal would repeal the special deduction that allows insurance companies with assets below $500 million to deduct 60% of their first $3 million in income related to life insurance. The repeal would be effective for tax years beginning after 2017. Repeal of special rule for distributions to shareholders from pre-1984 policyholders surplus account (PSA) The proposal would repeal the rules for policyholders' surplus accounts under Section 815, imposing a tax on the balance of the PSA as of December 31, 2017. Life insurance company losses would not be allowed to offset the amount of the PSA subject to tax. The proposal would be effective for tax years beginning after 2017. The balance of the PSA as of December 31, 2017, would be subject to tax, payable in eight annual installments. Key proposals in the House Bill and/or Senate Bill of interest to property and casualty (P&C) insurance companies In general, the House Bill would change the loss reserve discounting rules applicable to P&C insurers by modifying the prescribed interest rate, extending the periods applicable under the loss payment pattern, and repealing the election to use a taxpayer's historical loss payment pattern. Specifically, the House Bill would require P&C insurance companies to use the corporate bond yield curve, as defined in Section 430(h)(2)(D)(i) and determined by the Secretary, to discount the amount of unpaid losses and loss adjustment expenses. Also, the special rule extending the loss payment patterns period for long-tail business would be applied to all types of business (short-tail and long-tail), but a 15-year limitation would replace the five-year limitation. The House Bill would be effective for tax years beginning after 2017 and would include a transition rule that would spread the adjustment for pre-effective date unpaid losses and loss adjustment over the 2018 tax year and succeeding seven tax years. P&C insurers would experience a deeper discount on their tax loss reserves as a result of the House Bill subjecting all lines of business to a higher interest rate and extended payment patterns. The House Bill, however, would affect insurance companies with long-tail business (i.e., workers' compensation, medical professional liability, etc.) more significantly than those with short-tail product lines (i.e. auto physical damage, health insurance, etc.). Also, insurance companies that have historically paid claims faster than the industry average and elected the use of company-specific payment patterns would be affected. The proposal would replace the 15% reduction under Section 832(b)(5)(B) with a 26.25% reduction. The proposal would be effective for tax years beginning after 2017 under the House Bill and effective for tax years beginning after 2018 under the Senate Bill. In a slight modification from the House Bill, the proposal in the Senate Bill calls for the rate to be adjusted in future years so that the product of proration and the top corporate rate is always 5.25%. This slight modification in the Senate Bill prevents unintended consequences should corporate rate reduction be delayed, phased in or increased during the House-Senate conference. The tax policy rationale for the proration rule reflects the notion that deductible reserves are generally funded in part from tax-exempt interest, deductible dividends and other untaxed amounts. The explanations to both bills state that the proposal would keep the reduction in the reserve deduction consistent with current law by adjusting the rate proportionately to the decrease in the corporate tax rate; they do not consider that deductible reserves would be more deeply discounted than under current law. When coupled with the loss reserve discounting proposals, P&C insurance companies, particularly those with a significant tax-exempt bond portfolio, will experience a noticeable decrease in their loss reserve deduction. This proposal would, however, eliminate the significant complexity contained in a similar proposal in the tax reform discussion draft released by Chairman Camp in February 2014. The proposal would repeal the Section 847 elective deduction and related special estimated tax payment rules. The proposal would be effective for tax years beginning after 2017. The proposal would reduce the corporate income tax to a flat 20% rate. The proposal would be effective for tax years beginning after 2017 under the House Bill and effective for tax years beginning after 2018 under the Senate Bill. The lower corporate tax rate generally may result in a lower effective tax rate for the insurance industry. The Subchapter L base-broadeners, however, will often reduce or negate the benefits received by insurers of a lower corporate tax rate from a current tax expense perspective. In many cases, depending on an insurance company's facts, current tax expense under these proposals may be higher than under current law. Also, under the Senate Bill, the lower corporate tax rate would not be effective until 2019; several base-broadeners, however, would be effective in 2018, notwithstanding the transition rules, which could result in a significant increase in current tax expense in 2018. Insurance companies would also be required to adjust the value of deferred taxes upon enactment, both under ASC 740 and SSAP No. 101. The delayed effective date of the corporate rate reduction under the Senate Bill would create additional complexity in determining the value of deferred taxes upon enactment due to the need to schedule the future reversals of deferred tax items to determine whether the existing rate of 35% would still be the appropriate rate, or whether the new proposed rate is appropriate. The House Bill would repeal the corporate AMT for tax years beginning after 2017 and provides that taxpayers could claim a refund of 50% of their remaining credits (to the extent the credits exceed regular tax for the year) in tax years beginning in 2019, 2020 and 2021. Taxpayers would be able to claim a refund of all remaining credits in the tax year beginning in 2022. The Senate Bill, in a last minute adjustment, preserved the corporate AMT, which raises $40.3 billion over 10 years to pay for other priorities. With a corporate tax rate of 20% (after 2018) and an AMT corporate rate of 20%, a number of unintended consequences result, including the possibility of insurance companies being in AMT perpetually, reducing the deduction related to tax exempt income, and effectively eliminating the research tax credit. It appears the inclusion of the corporate AMT was necessary to fill a revenue gap in the Senate bill as the Senate was moving quickly to a final vote. There is considerable opposition to inclusion of the AMT, and several senior House Republicans have said publically that they support removing the provision in conference. The proposal would repeal current Section 163(j) and would limit the deduction for business interest to the sum of business interest income plus 30% of the adjusted taxable income of the taxpayer for the tax year. By including business interest income in the limitation, the rule would operate to limit the deduction for net interest expense to 30% of adjusted taxable income. That is, a deduction for business interest would be permitted to the full extent of business interest income. To the extent that business interest exceeds business interest income, the deduction for the net interest expense would be limited to 30% of adjusted taxable income. Under the House Bill, adjusted taxable income would be defined as a business's taxable income calculated without taking into account business interest expense, business interest income and NOLs, as well as depreciation, amortization and depletion. Adjusted taxable income, as defined in the Senate Bill, would not allow for the exclusion of depreciation, amortization and depletion, resulting in a lower amount by which to measure the 30% threshold. Business interest would mean any interest paid or accrued on indebtedness properly allocable to a trade or business. Any amount treated as interest for purposes of the IRC is interest for purposes of the proposal. Business interest income would mean the amount of interest includible in the taxpayer's gross income for the tax year that is properly allocable to a trade or business. Business interest would not include investment interest, and business interest income would not include investment income, within the meaning of Section 163(d). The limitation would apply at the taxpayer level and, for a group of affiliated corporations that file a consolidated return, would apply at the consolidated tax return filing level. Under the House Bill, the proposal would allow businesses to carry forward interest amounts disallowed under the proposal to the succeeding five tax years and those interest amounts would be attributable to the business. Under the Senate Bill, the amount of any interest not allowed as a deduction for any tax year may be carried forward indefinitely. Under both the House Bill and the Senate Bill, the proposal would be effective for tax years beginning after December 31, 2017. Whether this proposal will affect insurance companies is unclear. Under the proposal, business interest would not include investment interest, and business interest income would not include investment income, within the meaning of Section 163(d). Section 163(d) defines investment income as gross income from property held for investment. Insurance companies generate significant investment income as an integral part of their business model, which supports the ability to pay claims. Despite an insurance company's investment income being directly connected to the core operations of the business, there is concern in the industry that such investment income may fall within the definition in Section 163(d) and, the interest expense limitation could possibly apply, even though insurance companies generally have net interest income. Limitation on deduction of interest by domestic corporations that are members of an international financial reporting group Both the House Bill and the Senate Bill would enact a worldwide limitation on interest deductibility. The House Bill would add new Section 163(n) to limit the deduction for interest paid by a domestic corporation that is a member of an international financial reporting group (IFRG), which means any group of entities that: (1) includes at least one foreign corporation engaged in a US trade or business, or at least one domestic corporation and one foreign corporation; (2) prepares consolidated financial statements; and (3) has average annual global gross receipts of more than $100 million for a specified reporting period. Under the House Bill, the domestic corporation's deduction for interest expense paid or accrued during the tax year could not exceed the sum of the domestic corporation's "allowable percentage" of 110% of its net interest expense, plus any interest income of the domestic corporation for that tax year. A domestic corporation's allowable percentage for a tax year is the ratio of its allocable share of the IFRG's net interest expense for the reporting year over its reported net interest expense for such reporting year of the IFRG. A domestic corporation's allocable share of an IFRG's net interest expense for any reporting year is the portion of the expense that bears the same ratio as the domestic corporation's EBITDA bears to the IFRG's EBITDA. Conversely, the Senate Bill would enact a new provision to limit the deduction for net interest expense of a domestic corporation that is a member of a "worldwide affiliated group." A worldwide affiliated group is a group of corporations that would qualify as an affiliated group under Section 1504, except that an ownership threshold of 50% (rather than 80%) would apply, and foreign corporations would be considered as part of the affiliated group. The new limitation would reduce the domestic corporation's interest expense deduction by the product of the domestic corporation's net interest expense, multiplied by the "debt-to-equity differential percentage" of the worldwide affiliated group. The debt-to-equity differential percentage of the worldwide affiliated group would be the "excess domestic indebtedness" of the group, divided by the total indebtedness of the domestic corporate members of the group. All US members of the worldwide affiliated group would be treated as one member for this purpose. Excess domestic indebtedness would be the amount by which the total indebtedness of the US members exceeds 110% of the total indebtedness that the US members would hold if their "total indebtedness to total equity" ratio were the same as that of the worldwide group. When both the Section 163(j) and worldwide interest limitations apply, the one that results in the lower limitation on interest deductions — and, therefore, the greatest amount of interest to be carried forward — will take precedence. Under the House Bill, any disallowed interest would be carried forward to the succeeding five tax years. Under the Senate Bill, any disallowed interest would be carried forward indefinitely. Under both the House Bill and the Senate Bill, the proposal would be effective for tax years beginning after December 31, 2017. Both the House Bill and the Senate Bill proposed sweeping changes that could affect both US headquartered and non-US headquartered insurance companies. The major proposals for the international system include: (1) implementing a territorial tax system; (2) imposing a transition tax on accumulated foreign earnings; and (3) imposing anti-base erosion rules. For a more detailed analysis on the international tax proposals, see Tax Alerts 2017-1845 and 2017-1917. Both the House and Senate Bills would modify the current worldwide taxation system to exempt from US tax dividends from foreign subsidiaries paid from foreign earnings. In addition, both bills would tax on a current basis potentially significant amounts of foreign income under anti-base erosion provisions and modifications to subpart F. These so-called anti-base erosion provisions are notably different in the two bills. In addition, both bills would include a transition rule to the new territorial system that would subject foreign earnings held in assets that are deemed to be cash or cash-equivalents to a higher tax rate than illiquid assets. The House Bill would impose a one-time 14% tax on accumulated foreign earnings, reduced to 7% for illiquid assets. The Senate Bill would apply rates of 14.5% (for liquid-type assets) and 7.5% (for illiquid assets). At the election of the US shareholder, the tax liability would be payable over a period of up to eight years. For purposes of the transition tax, neither bill appears to address the treatment of foreign reserves as illiquid assets, nor the application of the lower rate to E&P connected to such reserves. Accordingly, foreign insurance subsidiaries may be subject to a higher rate of tax on un-repatriated earnings to the extent the earnings are held in cash or securities used to support insurance reserves. Under the House Bill, a US parent of one or more foreign subsidiaries would be subject to current US tax on 50% of the US parent's foreign earnings that are treated as having "high returns." Foreign high returns would be measured as the excess of the US parent's foreign subsidiaries' aggregate net income over a routine return (7%, plus the federal short-term rate) on the foreign subsidiaries' aggregate adjusted bases in depreciable tangible property, adjusted downward for interest expense. Foreign high returns would not include (among other items) income effectively connected with a US trade or business or subpart F income (i.e., insurance and financing income that meets the requirements for the active finance exemption (AFE) from subpart F income under current law). Similarly, the Senate Bill would tax a US shareholder's aggregate net controlled foreign corporation (CFC) income at a rate that, presumably, would be similar to the rate on the incentives for US companies (i.e., less than or equal to 12.5%). This would apply to global intangible low-taxed income (GILTI), which is very generally the CFC's income (with some modifications), less the net deemed tangible income return. Similar to the House Bill, the Senate Bill focuses on the return from tangible property. The carve-outs for net CFC income under the Senate Bill are similar, but not identical, to the House Bill. Most notably the carve-outs do not include AFE-qualifying income or commodities income. Under the transition rule, many foreign insurance company CFCs would hold very small amounts of tangible assets. Accordingly, under the Senate Bill, many insurance company CFCs that meet the AFE rules could still be subject to the Senate Bill proposal because it does not carve out AFE-qualifying income. Both bills contain anti-base erosion provisions. Under Section 4303 of the House Bill, payments (other than interest) made by a US corporation to a related foreign corporation that are deductible would be subject to a 20% excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a US trade or business (ECI election). The provision would apply only to international financial reporting groups with payments from US corporations to their foreign affiliates totaling at least $100 million annually based on a formula described in Section 4303 of the House Bill. Similarly, the Senate Bill would create a new base erosion minimum tax. The tax would apply to corporations (other than RICs, REITs or S-corporations) subject to US net income tax with average annual gross receipts of at least $500 million and that have made related-party deductible payments totaling 4% or more of the corporation's total deductions for the year. A corporation subject to the tax would generally determine the amount of tax owed under the provision (if any) by adding back to its adjusted taxable income for the year all deductible payments made to a foreign affiliate for the year (the modified taxable income). The excess of 10% (for any tax year beginning after December 31, 2025, the rate is 12.5%) of the corporation's modified taxable income over its regular tax liability for the year (net of an adjusted amount of tax credits allowed) is the base erosion minimum tax amount that is owed. The proposal in the Senate Bill does not include an ECI election. These anti-base erosion provisions, as currently written, could affect related-party cross-border insurance transactions. The proposal would amend the PFIC exception for insurance companies, which would apply only if the foreign corporation would be taxed as an insurance company if it were a US corporation and if the applicable insurance liabilities constitute: (1) more than 25% of the foreign company's assets or (2) at least 10% of the entity's assets if the dip below 25% is due to temporary circumstances. For the purpose of the proposal's exception from passive income, applicable insurance liabilities would mean, with respect to any P&C or life insurance business: (1) loss and loss adjustment expenses and (2) reserves (other than deficiency, contingency, or unearned premium reserves) for life and health insurance risks and life and health insurance claims for contracts providing coverage for mortality or morbidity risks. The JCT descriptions of both bills state, "[U]nearned premium reserves with respect to any type of risk are not treated as applicable insurance liabilities for purposes of the proposal." The statutory text, which is identical in both bills, excludes unearned premiums from the ratio, which would adversely affect many P&C insurers. Increase in credit against estate, gift, and generation-skipping transfer tax; repeal of estate and generation-skipping transfer taxes With regard to the estate tax, the House Bill would: (1) double the basic exclusion amount to $10 million, indexed for inflation; (2) repeal, beginning after 2023, the estate and generation skipping taxes; and (3) retain the stepped-up basis for estate property. With regard to gift tax, the proposal would: (1) lower the gift tax to a top rate of 35%; (2) retain the $10-million basic exclusion; and (3) retain the $14,000 annual exclusion. Both exclusion amounts will be indexed for inflation. The proposal would be effective for tax years beginning after 2017 and would repeal the estate tax after 2023. The proposal would double the estate and gift tax exemption amount. This would be accomplished by increasing the basic exclusion amount provided in Section 2010(c)(3) from $5 million to $10 million. The $10-million amount would be indexed for inflation occurring after 2011. The proposal would be effective for estates of decedents dying, generation-skipping transfers, and gifts made after December 31, 2017. Tax reporting for life settlement transactions, clarification of tax basis of life insurance contracts, and exception to transfer for valuable consideration rules The Senate Bill would include certain rules related specifically to life insurance contracts. First, this proposal would impose a reporting requirement on both the acquirer of an interest in an existing life insurance contract and the payor of death benefits. This proposal would be effective for tax years after 2017. Second, the proposal would reverse the position the IRS took in Revenue Ruling 2009-13 such that no adjustment would be made for the "cost of insurance" (i.e., mortality, expense, or other reasonable charges incurred under the contract) in determining the basis of a life insurance or annuity contract. This proposal would be effective for transactions entered after August 25, 2009. Finally, the proposal would provide that the exceptions to the transfer for value rules under Section 101(a) would not apply to a reportable policy sale, which means that some or all of the death benefits could be includible in taxable income. This proposal would be effective for tax years after 2017. The legislative progress around US tax reform has moved forward at a record pace, from release of the House Ways & Means bill on November 2nd to Senate passage of its bill on December 2nd. The next step is to reconcile the two bills through the conference committee process. Once a conference bill is completed, the House and Senate will vote again and, if it passes in both chambers, it will be sent to the White House for the President's signature. There is a strong possibility that tax reform could be enacted by the end of year and companies may have limited time to determine its effects. Companies must begin developing a formal plan across their finance and tax departments to respond to the significant changes in tax law. 2 For an overview of the entire House Bill, see Tax Alert 2017-1831. Document ID: 2017-2094 |
