2009 Revenue Rulings Give Seniors and Life Settlement Industry a Few Answers, But More Questions - Updated

Abstract

ISI RESEARCH BRIEF: Project: Taxation of Life Insurance Policies, 2009Status: Completion Expected Summer, 2009Lead Researcher: Professor Morgan Holcomb, State & Local Tax Law, University of Minnesota Law school; Brent Schreiber, University of Saint Thomas Law Student; Christopher Kampa, ISI Research AnalystISI Oversight: Paul Siegert, ISI President and CEO; Christopher Kampa, ISI Research AnalystProject Description: A life settlement is the sale of an insurance policy to a third party investor. Tax law provides specific regulations pertaining to taxation of gains on distributed cash surrender values, death benefits to beneficiaries and death benefits to parties that purchased life insurance policies, but such regulations are unclear when applied to gains on life settlements and premium financed policies. Previously, the IRS provided no formal guidance on the issue of taxation for either sellers or investors. On May 4th, 2009, the treasury department issued new tax guidance regarding life settlement transactions. The issuance of Revenue Ruling 2009-13 and 2009-14 has provided answers to some of these questions, but has given rise to new ones. Scope of Research/Methodology: In 2008, the Insurance Studies Institute published a white paper analyzing the tax ramifications of life insurance, policy lapses and surrenders, premium financed policies, and life settlements. The ISI 2008 paper will be updated based on the newly issued IRS revenue rulings. The paper will analyze the calculation of cost basis, adjusted tax basis, and differentiation between ordinary income and capital gains.Timeline: The project should require 80 to 120 hours to research and draft.Topics Covered:1. Taxation of Insured2. Taxation of Domestic Investors3. Taxation of Foreign Investors4. Effect of Taxation on Insurers5. Legality of IRS Revenue Rulings6. Economic Impact of TaxationAppendix, Data Sources:• Taxation of Life Insurance Policies in an Evolving Secondary Marketplace, ISI, 2008 • IRS Revenue Ruling 2009-13• IRS Revenue Ruling 2009-14• Daily Tax Report, BNA, Inc.• The Future will be Better Tomorrow: The Obama Tax Agenda is Released, Greenberg Traurig Tax Update• Tax Alert, Sadis & Goldberg, LLP• “New Tax Proposals Target Life Insurers” Wall Street Journal• Other technical resources as appropriate