Financial professionals gathered at a recent life insurance conference expressed relief about two revenue rulings issued by the IRS this month.
On May 1, the IRS issued two revenue rulings on life insurance settlements, RR 2009-13, which provides guidance to policyholders who surrender or sell their life insurance contracts, and RR 2009-14, which provides guidance to investors who purchase life insurance contracts.
At the Life Insurance Settlement Associations annual spring conference in New York last week, Rep. Joseph Crowley, D-N.Y., told attendees that the guidance stemming from the May 1st revenue rulings is an issue that he will give close attention to when talking with Rep. John Lewis, D-Ga., chairman of the House Ways and Means Committee's Subcommittee on Oversight. He noted the concern of the associations members regarding both the tax implications and the vagueness of the rulings. Crowley (pictured) advised them that anyone who is concerned with the tax rulings should contact the members of the House Ways and Means Committee to share their views.
Association president David Hartman said that the IRS guidance was generally consistent with how tax professionals had been addressing those issues until now. However, he warned that the new rulings treatment would impose higher income tax rates that may have a harmful effect on life settlement investors and seniors. He also took note of a recent hearing by the Senate Special Committee on Aging on the dangers facing consumers and investors involved in the secondary market for life insurance, presided over by committee chair Sen. Herb Kohl, D-Wisc.
"[The U.S. Treasury ruling on the use of ordinary income tax rates] will make this less of an attractive after-tax yielding investment, which will lower the prices that seniors receive for policies," said Hartman. "Senator Kohl and his committee should be concerned about that. They should be fighting for capital gains treatment on this return for investors. If they fail to do that, seniors will get lower prices for their policies." Hartman added that the IRS ruling would also encourage more flipping of policies by investors seeking financial tax benefits as well as increased risks of consumer privacy leaks as those policies are passed along repeatedly.
A recent article by Peter Ritter and Luc Moritz of the law firm of O'Melveny & Meyers LLP noted that the two revenue rulings provide helpful, albeit incomplete guidance. Nevertheless, they noted, Uncertainty in this area had plagued taxpayers and tax practitioners for years. The guidance is therefore welcomed.
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