Grassley Introduces Bill to Target Abuse of Life Insurance Contracts by Exempt Orgs


Senate Finance Committee Chair Chuck Grassley, R-Iowa, and ranking minority member Max Baucus, D-Mont., have introduced legislation that would apply an excise tax to amounts received under certain life insurance policies involving exempt organizations.

Date: May 1, 2005

Full Text Published by Tax AnalystsTM


109TH CONGRESS
1ST SESSION
S. __________


To amend the Internal Revenue Code of 1986 to impose an excise tax on amounts received under certain insurance policies in which certain exempt organizations hold an interest.


IN THE SENATE OF THE UNITED STATES


Mr. GRASSLEY (for himself and Mr. BAUCUS) introduced the following bill; which was read twice and referred to the Committee on


A BILL


To amend the Internal Revenue Code of 1986 to impose an excise tax on amounts received under certain insurance policies in which certain exempt organizations hold an interest.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. EXCISE TAX ON CERTAIN ACQUISITIONS OF INTERESTS IN INSURANCE CONTRACTS IN WHICH CERTAIN EXEMPT ORGANIZATIONS HOLD AN INTEREST.

(a) IMPOSITION OF TAX. --

(1) IN GENERAL. -- Chapter 42 of the Internal Revenue Code of 1986 (relating to excise taxes involving private foundations and certain other tax-exempt organizations) is amended by adding at the end the following new subchapter:


"Subchapter F -- Insurance Contracts in Which Certain
Exempt Organizations Hold Interests


"Sec. 4965. Excise tax on acquisition of interests in insurance contracts in which certain exempt organizations hold an interest.

"SEC. 4965. EXCISE TAX ON ACQUISITION OF INTERESTS IN INSURANCE CONTRACTS IN WHICH CERTAIN EXEMPT ORGANIZATIONS HOLD AN INTEREST.

"(a) IMPOSITION OF TAX. -- If there is a taxable acquisition of any interest in an applicable insurance contract, there is hereby imposed on the person acquiring the interest a tax equal to 100 percent of the acquisition costs of the interest.

"(b) TAXABLE ACQUISITION. -- For purposes of this section --

"(1) IN GENERAL. -- The term 'taxable acquisition' means the acquisition of any direct or indirect interest in an applicable insurance contract by --

"(A) an applicable exempt organization, or

"(B) a person other than an applicable exempt organization if such interest in the hands of such person is not an interest described in clause (i), (ii), or (iii) of paragraph (2)(B).

"(2) APPLICABLE INSURANCE CONTRACT. --

"(A) IN GENERAL. -- The term 'applicable insurance contract' means any life insurance, annuity, or endowment contract with respect to which both an applicable exempt organization and a person other than an applicable exempt organization have directly or indirectly held an interest in the contract (whether or not at the same time).

"(B) EXCEPTIONS. -- Such term shall not include a life insurance, annuity, or endowment contract if --

"(i) all persons directly or indirectly holding any interest in the contract (other than applicable exempt organizations) have an insurable interest in the insured under the contract independent of any interest of an applicable exempt organization in the contract,

"(ii) the sole interest in the contract of each person other than an applicable exempt organization is as a named beneficiary, or

"(iii) the sole interest in the contract of each person other than an applicable exempt organization is --

"(I) as a beneficiary of a trust holding an interest in the contract, but only if the person's designation as such beneficiary was made without consideration and solely on a purely gratuitous basis, or

"(II) as a trustee who holds an interest in the contract in a fiduciary capacity solely for the benefit of applicable exempt organizations or persons otherwise described in clauses (i) and (ii) or subclause (I) of this clause.

"(3) DEFINITION AND RULE RELATING TO ACQUISITION COSTS. --

"(A) ACQUISITION COSTS DEFINED. -- The term 'acquisition costs' means the direct or indirect costs of acquiring an interest in an applicable insurance contract. Such term shall include any fees, commissions, charges, or other amounts paid in connection with the acquisition, whether or not paid to the issuer of the contract.

"(B) TIMING OF PAYMENTS. -- Except as provided in regulations, if acquisition costs of any acquisition are paid or incurred in more than 1 calendar year, the tax imposed by subsection (a) with respect to the acquisition shall be imposed each time the costs are so paid or incurred.

"(4) RULES RELATING TO INTERESTS. --

"(A) IN GENERAL. -- An interest in the contract includes any right with respect to the contract, whether as an owner, beneficiary, or otherwise.

"(B) INDIRECT INTEREST. -- An indirect interest in a contract includes an interest in an entity which directly or indirectly holds an interest in the contract.

"(C) EXCHANGED CONTRACTS. -- In the case of an exchange of an applicable insurance contract on which no gain or loss is recognized under section 1035, any interest in any of the contracts involved in the exchange shall be treated as an interest in all such contracts.

"(5) INCREASE IN INTEREST. -- If a person increases an interest in an applicable insurance contract, the increase shall be treated as a separate acquisition for purposes of this section.

"(6) PRIOR ACQUISITIONS. -- Except as provided in regulations, if a person acquires an interest in a contract before the contract is treated as an applicable insurance contract, the acquisition shall be treated as a taxable acquisition of an interest in an applicable insurance contract as of the date the contract becomes an applicable insurance contract.

"(c) APPLICABLE EXEMPT ORGANIZATION. -- For purposes of this section, the term 'applicable exempt organization' means --

"(1) an organization described in section 170(c),

"(2) an organization described in section 168(h)(2)(A)(iv), or

"(3) an organization not described in paragraph (1) or (2) which is described in section 2055(a) or section 2522(a).

"(d) TAX NOT TREATED AS INVESTMENT IN THE CONTRACT. -- For purposes of section 72, the tax imposed by this section shall not be included in investment in the contract.

"(e) REGULATIONS. -- The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section. Such regulations may include regulations which --

"(1) exempt certain contracts from treatment as applicable insurance contracts based on specific factors, including whether the transaction is at arms length, the relative economic benefits to applicable exempt organizations as compared to other persons, and the likelihood of abuse,

"(2) provide, for purposes of subsection (b)(6), appropriate rules for the application of this section in any case where an interest is acquired before a contract becomes an applicable insurance contract,

"(3) prevent, in cases the Secretary determines appropriate, the imposition of more than one tax under this section if the same interest is acquired more than once, and

"(4) are designed to prevent avoidance of the purposes of this section, including through the use of intermediaries.".

(2) CONFORMING AMENDMENT. -- The table of subchapters for chapter 42 of such Code is amended by adding at the end the following new item:


"Subchapter F. Insurance contracts in which certain exempt
organizations hold interests.".


(b) REPORTING REQUIREMENTS. --

(1) IN GENERAL. -- Subpart B of part III of subchapter A of chapter 61 of the Internal Revenue Code of 1986 (relating to information concerning transactions with other persons) is amended by adding at the end the following new section:

"SEC. 6050U. RETURNS RELATING TO APPLICABLE INSURANCE CONTRACTS IN WHICH CERTAIN EXEMPT ORGANIZATIONS HOLD INTERESTS.

"(a) REQUIREMENTS OF REPORTING. --

"(1) EXEMPT ORGANIZATIONS. -- Each --

"(A) applicable exempt organization which acquires (within the meaning of section 4965) an interest in any applicable insurance contract, and

"(B) other person which so acquires such an interest which, in the hands of such person, is taxable under section 4965, shall make the return described in subsection (c).

"(2) TRANSFERS. -- If a person (including an applicable exempt organization) acquires an interest in an applicable insurance contract in an acquisition which is taxable under section 4965 and then transfers such interest to 1 or more other persons, each person acquiring all or a portion of such interest shall make the return described in subsection (c).

"(b) TIME FOR MAKING RETURN. -- Any organization or person required to make a return under subsection (a) shall file such return at such time as may be established by the Secretary with respect to --

"(1) in the case of an organization described in subsection (a)(1), the calendar year in which the acquisition occurs, any calendar year in which acquisition costs are paid or incurred, and any other calendar years specified by the Secretary, and

"(2) in the case of a person described in subsection (a)(2), the calendar year in which the transfer occurs.

"(c) FORM AND MANNER OF RETURNS. -- A return is described in this subsection if such return --

"(1) is in such form as the Secretary prescribes,

"(2) in the case of --

"(A) a return required under subsection (a)(1)(A), contains the name, address, and taxpayer identification number of the applicable exempt organization, the issuer of the applicable insurance contract, and any person acquiring an interest in the contract which may be taxable under section 4965,

"(B) a return required under subsection (a)(1)(B), contains the name, address, and taxpayer identification number of the person acquiring an interest in the applicable insurance contract which is taxable under section 4965, any applicable exempt organization holding an interest in the contract, and the issuer of the contract, and

"(C) a return required under subsection (a)(2), contains the name, address, and taxpayer identification number of the transferor and transferee, and

"(3) contains such other information as the Secretary may prescribe.

"(d) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO WHOM INFORMATION IS REQUIRED. -- Every person required to make a return under subsection (a) shall furnish to each person whose taxpayer identification information is required to be included in such return under subsection (c) a written statement showing --

"(1) the name and address of the person required to make such return and the telephone number of the information contact for such person, and

"(2) the taxpayer identity and other information required to be shown on the return with respect to such person.

The written statement required under the preceding sentence shall be furnished on or before the date specified by the Secretary.

"(e) DEFINITIONS. -- For purposes of this section, any term used in this section which is also used in section 4965 shall have the meaning given such term by section 4965.".

(2) PENALTIES. --

(A) IN GENERAL. -- Section 6724(d) of such Code is amended --

(i) in paragraph (1)(B), by redesignating clauses (xiii) through (xviii) as clauses (xiv) through (xix) and by inserting after clause (xii) the following new clause:

"(xiii) section 6050U (relating to returns relating to applicable insurance contracts in which certain exempt organizations hold interests),", and

(ii) in paragraph (3), by striking "and" at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting ", and", and by adding at the end the following new subparagraph:

"(E) the statement required by subsection (d) of section 6050U (relating to returns relating to applicable insurance contracts in which certain exempt organizations hold interests).".

(B) INTENTIONAL DISREGARD. -- Section 6721(e)(2) of such Code is amended by striking "or" at the end of subparagraph (B), by striking "and" at the end of subparagraph (C) and inserting "or", and by adding at the end the following new subparagraph:

"(D) in the case of a return required to be filed under section 6050U, the amount of tax imposed under section 4965 which has not been paid with respect to items required to be included on the return, and".

(3) CONFORMING AMENDMENT. -- The table of sections for subpart B of part III of subchapter A of chapter 61 of such Code is amended by adding at the end the following new item:

"Sec. 6050U. Returns relating to applicable insurance contracts in which certain exempt organizations hold interests.".

(c) EFFECTIVE DATE. --

(1) IN GENERAL. -- The amendments made by this section shall apply to contracts issued after May 3, 2005.

(2) REPORTING OF EXISTING CONTRACTS. -- In the case of any life insurance, annuity, or endowment contract --

(A) which was issued on or before May 3, 2005,

(B) with respect to which an applicable exempt organization (as defined in section 4965 of the Internal Revenue Code of 1986, as added by this section) holds an interest on May 3, 2005, and

(C) which would be treated as an applicable insurance contract (as so defined) if issued after May 3, 2005,

such organization shall, not later than the date which is 1 year after the date of the enactment of this Act, report to the Secretary of the Treasury with respect to such contract. Such report shall be in such form and manner, and contain such information, as the Secretary may prescribe. The Secretary shall submit such reports, along with any recommendations for legislation as the Secretary considers appropriate, to the Committee on Ways and Means of the House of Representatives and to the Committee on Finance of the Senate within 6 months of the date such reports are required to be filed.

 



Tax Analysts Information

Code Section: Section 501 -- Tax-Exempt Organizations; Section 2042 -- Life Insurance
Geographic Identifier: United States
Subject Area: Charitable giving
Excise taxation
Exempt organizations
Author: Grassley, Sen. Chuck
Institutional Author: Senate; Finance Committee
Tax Analysts Document Number: Doc 2005-9363 [PDF]
Tax Analysts Electronic Citation: 2005 TNT 85-21
Cross Reference: For related coverage, see Doc 2005-9361 Database 'Tax Notes Today', View '(Number'[PDF].