Tax treatment of private placement contracts

(a) In general Chapter 79 of the Internal Revenue Code of 1986 is amended by inserting after section 7702B the following new section: 7702C. Treatment of applicable private placement contracts (a) General rule Notwithstanding any other provision of this title, an applicable private placement contract shall not be treated as an insurance or annuity contract for purposes of this title. (b) Applicable private placement contract For purposes of this section— (1) In general The term applicable private placement contract means any private placement contract if the requirements of subsection (c) are not met with respect to any segregated asset account described in section 817(d) to which amounts received under such contract are allocated. (2) Private placement contract The term private placement contract means any contract— (A) which, without regard to this section, would be treated for purposes of this title as— (i) a life insurance contract under section 7702 or an annuity contract under section 72, and (ii) a variable contract (within the meaning of section 817(d)), and (B) with respect to which the holder of the contract is required, for purposes of obtaining a registration exemption under securities laws as in effect on the date of enactment of this section (including the Securities Exchange Act of 1934 and the Investment Advisors Act of 1940), to make a representation that such holder— (i) has a specified minimum amount of income or assets, (ii) has completed a specified minimum level of education, or (iii) holds a specific license or credential. (3) Special rules for foreign issued contracts In the case of a contract issued outside of the United States which is directly or indirectly held by a United States person, if, without regard to this section— (A) such contract is a life insurance or annuity contract under the laws under which it is issued (or, unless otherwise provided under regulations, would be such a contract if issued in the United States), and (B) (i) in the case of an annuity contract, or a contract providing insurance on retired lives (as described in section 807(c)(6)), the amounts paid into or out of such contract reflect the investment return and the market value of 1 or more assets (other than assets in the general accounts of the issuer or reinsurer), or (ii) in the case of a life insurance contract, the amount of the death benefit (or the period of coverage) is adjusted on the basis of the investment return and the market value of 1 or more assets described in clause (i), such contract shall (without regard to whether or not the requirements of subsection (c) are met with respect to such contract) be treated as an applicable private placement contract for purposes of this section (and, for such purposes, the assets described in subparagraph (B) with respect to such contract shall be treated as a segregated asset account with respect to such contract). (4) Permanent treatment A contract, once treated as an applicable private placement contract under this section, shall be so treated for all subsequent periods without regard to whether it continues to meet the requirements to be so treated. (c) Limitations for assets in segregated asset account (1) In general The requirements of this subsection are met with respect to a segregated asset account only if— (A) the assets in such account support at least 25 private placement contracts, and (B) in the case of each of the contracts supported by such account— (i) the value of such contract is supported by each of the assets in such account (and not by any asset not in such account), and (ii) the proportion of each such asset supporting such contract is the same as the proportion of each other such asset supporting such contract. (2) Aggregation of contracts held by persons For purposes of paragraph (1)— (A) In general All private placement contracts held directly or indirectly by the same person, or a related person to such person, shall be treated as 1 private placement contract. (B) Related person (i) In general A person shall be treated as related to another person if they bear a relationship to such other person described in section 267(b) or 707(b)(1). (ii) Members of family For purposes of clause (i), sections 267(b) and 707(b)(1) shall be applied as if section 267(c)(4) provided that the family of an individual consists of a husband and wife and members of a family described in section 1361(c)(1)(B), except that the applicable date for purposes of clause (ii) thereof shall be the date the segregated asset account is established. (iii) Members under common control For purposes of clause (i), a rule similar to section 108(e)(4)(C) shall apply. (d) Tax treatment of holders of contracts (1) Ownership of assets and income (A) In general In the case of an applicable private placement contract, the holder of such contract shall be treated as if the holder— (i) held its share of the assets in the segregated asset account supporting such contract, and (ii) received or accrued directly its share of any amount of net income, net loss, or credit earned or accrued with respect to such assets (without regard to whether any amount is actually distributed). (B) Net income or loss For purposes of subparagraph (A)(ii)— (i) Net income The term net income means, with respect to any assets supporting a contract— (I) the amount (if any) by which the aggregate amount of income (including interest, dividends, or gains) with respect to such assets is greater than (II) the deductions allowed under this title which are directly connected with the production of such income. (ii) Net loss The term net loss means, with respect to any assets supporting a contract, the amount (if any) by which the amount under clause (i)(II) exceeds the amount under clause(i)(I). (iii) Amounts not taken into account No deduction shall be taken into account under clause (i)(II) (including for reserves, fees, or mortality charges) which— (I) is taken into account by the insurer or reinsurer of the applicable private placement contract, or (II) would be so taken into account if such contract were treated as a life insurance or annuity contract. (C) Taxable year of cessation If a life insurance contract or annuity contract ceases to be such a contract by reason of this section in a taxable year after the taxable year in which issued, amounts described in subparagraph (A)(ii) for all preceding taxable years shall be treated as received or accrued during the taxable year in which such cessation occurs. (2) Distributions (A) In general Any excess distribution received by a taxpayer from an applicable private placement contract shall be included by the taxpayer in gross income as ordinary income. (B) Excess distribution For purposes of this paragraph, the term excess distribution means, with respect to any applicable private placement contract, any applicable distribution to a taxpayer to the extent that— (i) the amount of such applicable distribution, when added to the aggregate amount of applicable distributions made with respect to such contract (whether or not made to such taxpayer) for all periods preceding such applicable distribution, exceeds (ii) the applicable adjusted basis in such contract immediately before such applicable distribution. (C) Applicable adjusted basis For purposes of this paragraph, the term applicable adjusted basis means, with respect to any applicable private placement contract as of the date of any applicable distribution, the sum of the premiums and other amounts paid by any person with respect to such contract as of such date— (i) increased by the aggregate amount of net income includible in gross income under paragraph (1) with respect to such contract (whether or not includible by the taxpayer) for all periods preceding such date, and (ii) decreased by the aggregate amount of deductions for net losses allowable to any person under paragraph (1) with respect to such contract for all periods preceding such date. (D) Applicable distribution For purposes of this paragraph, the term applicable distribution means, with respect to any applicable private placement contract, any payment by reason of the death of the insured, any payment in the nature of an annuity payment, any withdrawal, the distribution of any loan proceeds, and any other similar distribution or payment. (E) Assignments, etc In the case of the transferee of a transfer for valuable consideration by assignment or otherwise of an applicable private placement contract (or an interest therein)— (i) the premiums and other amounts paid by the transferee with respect to such contract shall be the sum of the actual value of such consideration plus any premiums and other amounts subsequently paid by the transferee, and (ii) the amounts determined under subparagraph (C) with respect to such contract shall only include amounts included in gross income, and deductions of, the transferee. (e) Tax treatment of issuers and reinsurers (1) In general In the case of an issuer or reinsurer of an applicable private placement contract (including a reinsurer with respect to mortality risk for such contract)— (A) premiums and reserves with respect to such contract shall not be treated as life insurance premiums or reserves, and (B) notwithstanding section 446(a) or part I of subchapter L of chapter 1— (i) premiums, expenses, and fees with respect to such contract which, without regard to this section, would be taken into account in determining life insurance taxable income shall be so taken into account, but (ii) the amounts so taken into account shall be determined under the accrual method of accounting described in section 446(c)(2). (2) Contracts issued by foreign issuers Notwithstanding subsection (a), an applicable private placement contract issued by a foreign insurer or reinsurer and to which section 4371 applies (without regard to this section) shall continue to be treated as a contract to which such section applies. (f) Regulations The Secretary shall issue such regulations and other guidance as are necessary to carry out this section and section 6050AA, including regulations or other guidance— (1) preventing the avoidance of the application of this section through related parties, accommodation parties, passthrough entities, trusts, or the allocation of assets other than through segregated asset accounts, (2) providing that an asset account or set of assets not meeting the requirements of section 817(d) shall be treated as a segregated asset account meeting such requirements if such account or set of assets achieves substantially the same results as such a segregated asset account or if such treatment is otherwise necessary to prevent the avoidance of the purposes of this section, (3) preventing the taking into account of items more than once, (4) providing rules for determining whether 1 or more persons are indirect holders of applicable private placement contracts, and (5) providing rules for the application of this section in cases where there is more than 1 holder of an applicable private placement contract or where applicable distributions are made at the same time to 2 or more persons with respect to such a contract.. (b) Conforming amendment The table of sections for chapter 79 of the Internal Revenue Code of 1986 is amended by inserting after the item relating to section 7702B the following new item: Section 7702C. Treatment of applicable private placement contracts.. (c) Effective date (1) In general The amendments made by this section shall take effect on the date of the enactment of this Act and shall apply to contracts whether issued before, on, or after such date. (2) Transition rule The amendments made by this section shall not apply to a contract issued on or before the date of the enactment of this Act which (without regard to this paragraph) is an applicable private placement contract under section 7702C of the Internal Revenue Code of 1986 (as added by this section) if, before the end of the 180-day period beginning on such date of enactment, such contract— (A) is exchanged for, or converted to, a life insurance or annuity contract that is not such an applicable private placement contract, or (B) is cancelled or otherwise liquidated.