,,ii #aaith ,,congress #b;d ,session ,s4 #dbgi ,,in ,,the ,,senate ,,of ,,the ,,united ,,states ,april #ac1 #bjbf,mr4 ,wyden introduced the following bill2 which was read twice and referred to the ,committee on ,finance ,a ,,bill ,to amend the ,internal ,revenue ,code of #aihf to prevent the abuse of life insurance tax rules1 and for other purposes4 #a4 ,short title ,this ,act may be cited as the ,protecting ,proper ,life ,insurance from ,abuse ,act or the ,,ppli ,abuse ,act4 #b4 ,tax treatment of private placement contracts 7a7 ,in general ,chapter #gi of the ,internal ,revenue ,code of #aihf is amended by inserting after section #ggjb;,b the following new section3 #ggjb;,c4 ,treatment of applicable private placement contracts 7a7 ,general rule ,notwithstanding any other provision of this title1 an applicable private placement contract shall not be treated as an insurance or annuity contract for purposes of this title4 7b7 ,applicable private placement contract ,for purposes of this section-- 7#a7 ,in general ,the term applicable private placement contract means any private placement contract if the requirements of subsection 7c7 are not met with respect to any segregated asset account described in section #hag7;d7 to which amounts received under such contract are allocated4 7#b7 ,private placement contract ,the term private placement contract means any contract-- 7,a7 which1 without regard to this section1 would be treated for purposes of this title as-- 7i7 a life insurance contract under section #ggjb or an annuity contract under section #gb1 and 7ii7 a variable contract 7within the meaning of section #hag7;d771 and 7,b7 with respect to which the holder of the contract is required1 for purposes of obtaining a registration exemption under securities laws as in effect on the date of enactment of this section 7including the ,securities ,exchange ,act of #aicd and the ,investment ,advisors ,act of #aidj71 to make a representation that such holder-- 7i7 has a specified minimum amount of income or assets1 7ii7 has completed a specified minimum level of education1 or 7iii7 holds a specific license or credential4 7#c7 ,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 person1 if1 without regard to this section-- 7,a7 such contract is a life insurance or annuity contract under the laws under which it is issued 7or1 unless otherwise provided under regulations1 would be such a contract if issued in the ,united ,states71 and 7,b7 7i7 in the case of an annuity contract1 or a contract providing insurance on retired lives 7as described in section #hjg7;c77#f771 the amounts paid into or out of such contract reflect the investment return and the market value of #a or more assets 7other than assets in the general accounts of the issuer or reinsurer71 or 7ii7 in the case of a life insurance contract1 the amount of the death benefit 7or the period of coverage7 is adjusted on the basis of the investment return and the market value of #a or more assets described in clause 7i71 such contract shall 7without regard to whether or not the requirements of subsection 7c7 are met with respect to such contract7 be treated as an applicable private placement contract for purposes of this section 7and1 for such purposes1 the assets described in subparagraph 7,b7 with respect to such contract shall be treated as a segregated asset account with respect to such contract74 7#d7 ,permanent treatment ,a contract1 once treated as an applicable private placement contract under this section1 shall be so treated for all subsequent periods without regard to whether it continues to meet the requirements to be so treated4 7c7 ,limitations for assets in segregated asset account 7#a7 ,in general ,the requirements of this subsection are met with respect to a segregated asset account only if-- 7,a7 the assets in such account support at least #be private placement contracts1 and 7,b7 in the case of each of the contracts supported by such account-- 7i7 the value of such contract is supported by each of the assets in such account 7and not by any asset not in such account71 and 7ii7 the proportion of each such asset supporting such contract is the same as the proportion of each other such asset supporting such contract4 7#b7 ,aggregation of contracts held by persons ,for purposes of paragraph 7#a7-- 7,a7 ,in general ,all private placement contracts held directly or indirectly by the same person1 or a related person to such person1 shall be treated as #a private placement contract4 7,b7 ,related person 7i7 ,in general ,a person shall be treated as related to another person if they bear a relationship to such other person described in section #bfg7;b7 or #gjg7;b77#a74 7ii7 ,members of family ,for purposes of clause 7i71 sections #bfg7;b7 and #gjg7;b77#a7 shall be applied as if section #bfg7;c77#d7 provided that the family of an individual consists of a husband and wife and members of a family described in section #acfa7;c77#a77;,b71 except that the applicable date for purposes of clause 7ii7 thereof shall be the date the segregated asset account is established4 7iii7 ,members under common control ,for purposes of clause 7i71 a rule similar to section #ajh7;e77#d77;,c7 shall apply4 7d7 ,tax treatment of holders of contracts 7#a7 ,ownership of assets and income 7,a7 ,in general ,in the case of an applicable private placement contract1 the holder of such contract shall be treated as if the holder-- 7i7 held its share of the assets in the segregated asset account supporting such contract1 and 7ii7 received or accrued directly its share of any amount of net income1 net loss1 or credit earned or accrued with respect to such assets 7without regard to whether any amount is actually distributed74 7,b7 ,net income or loss ,for purposes of subparagraph 7,a77ii7-- 7i7 ,net income ,the term net income means1 with respect to any assets supporting a contract-- 7,i7 the amount 7if any7 by which the aggregate amount of income 7including interest1 dividends1 or gains7 with respect to such assets is greater than 7,,ii7 the deductions allowed under this title which are directly connected with the production of such income4 7ii7 ,net loss ,the term net loss means1 with respect to any assets supporting a contract1 the amount 7if any7 by which the amount under clause 7i77,,ii7 exceeds the amount under clause7i77,i74 7iii7 ,amounts not taken into account ,no deduction shall be taken into account under clause 7i77,,ii7 7including for reserves1 fees1 or mortality charges7 which-- 7,i7 is taken into account by the insurer or reinsurer of the applicable private placement contract1 or 7,,ii7 would be so taken into account if such contract were treated as a life insurance or annuity contract4 7,c7 ,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 issued1 amounts described in subparagraph 7,a77ii7 for all preceding taxable years shall be treated as received or accrued during the taxable year in which such cessation occurs4 7#b7 ,distributions 7,a7 ,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 income4 7,b7 ,excess distribution ,for purposes of this paragraph1 the term excess distribution means1 with respect to any applicable private placement contract1 any applicable distribution to a taxpayer to the extent that-- 7i7 the amount of such applicable distribution1 when added to the aggregate amount of applicable distributions made with respect to such contract 7whether or not made to such taxpayer7 for all periods preceding such applicable distribution1 exceeds 7ii7 the applicable adjusted basis in such contract immediately before such applicable distribution4 7,c7 ,applicable adjusted basis ,for purposes of this paragraph1 the term applicable adjusted basis means1 with respect to any applicable private placement contract as of the date of any applicable distribution1 the sum of the premiums and other amounts paid by any person with respect to such contract as of such date-- 7i7 increased by the aggregate amount of net income includible in gross income under paragraph 7#a7 with respect to such contract 7whether or not includible by the taxpayer7 for all periods preceding such date1 and 7ii7 decreased by the aggregate amount of deductions for net losses allowable to any person under paragraph 7#a7 with respect to such contract for all periods preceding such date4 7,d7 ,applicable distribution ,for purposes of this paragraph1 the term applicable distribution means1 with respect to any applicable private placement contract1 any payment by reason of the death of the insured1 any payment in the nature of an annuity payment1 any withdrawal1 the distribution of any loan proceeds1 and any other similar distribution or payment4 7,e7 ,assignments1 etc ,in the case of the transferee of a transfer for valuable consideration by assignment or otherwise of an applicable private placement contract 7or an interest therein7-- 7i7 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 transferee1 and 7ii7 the amounts determined under subparagraph 7,c7 with respect to such contract shall only include amounts included in gross income1 and deductions of1 the transferee4 7e7 ,tax treatment of issuers and reinsurers 7#a7 ,in general ,in the case of an issuer or reinsurer of an applicable private placement contract 7including a reinsurer with respect to mortality risk for such contract7-- 7,a7 premiums and reserves with respect to such contract shall not be treated as life insurance premiums or reserves1 and 7,b7 notwithstanding section #ddf7;a7 or part ,i of subchapter ,l of chapter #a-- 7i7 premiums1 expenses1 and fees with respect to such contract which1 without regard to this section1 would be taken into account in determining life insurance taxable income shall be so taken into account1 but 7ii7 the amounts so taken into account shall be determined under the accrual method of accounting described in section #ddf7;c77#b74 7#b7 ,contracts issued by foreign issuers ,notwithstanding subsection 7a71 an applicable private placement contract issued by a foreign insurer or reinsurer and to which section #dcga applies 7without regard to this section7 shall continue to be treated as a contract to which such section applies4 7f7 ,regulations ,the ,secretary shall issue such regulations and other guidance as are necessary to carry out this section and section #fjej;,,aa1 including regulations or other guidance-- 7#a7 preventing the avoidance of the application of this section through related parties1 accommodation parties1 passthrough entities1 trusts1 or the allocation of assets other than through segregated asset accounts1 7#b7 providing that an asset account or set of assets not meeting the requirements of section #hag7;d7 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 section1 7#c7 preventing the taking into account of items more than once1 7#d7 providing rules for determining whether #a or more persons are indirect holders of applicable private placement contracts1 and 7#e7 providing rules for the application of this section in cases where there is more than #a holder of an applicable private placement contract or where applicable distributions are made at the same time to #b or more persons with respect to such a contract4 4 7b7 ,conforming amendment ,the table of sections for chapter #gi of the ,internal ,revenue ,code of #aihf is amended by inserting after the item relating to section #ggjb;,b the following new item3 ,section #ggjb;,c4 ,treatment of applicable private placement contracts4 4 7c7 ,effective date 7#a7 ,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 before1 on1 or after such date4 7#b7 ,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 7without regard to this paragraph7 is an applicable private placement contract under section #ggjb;,c of the ,internal ,revenue ,code of #aihf 7as added by this section7 if1 before the end of the #ahj-;day period beginning on such date of enactment1 such contract-- 7,a7 is exchanged for1 or converted to1 a life insurance or annuity contract that is not such an applicable private placement contract1 or 7,b7 is cancelled or otherwise liquidated4 #c4 ,reporting requirements 7a7 ,in general 7#a7 ,return requirement 7,a7 ,in general ,subpart ,b of part ,,iii of subchapter ,a of chapter #fa of the ,internal ,revenue ,code of #aihf is amended by adding at the end the following new section3 #fjej;,,bb4 ,returns relating to applicable private placement contracts 7a7 ,initial report 7#a7 ,in general ,every reporting issuer1 shall1 not later than the applicable date1 make a return 7in such form as the ,secretary may prescribe7 with respect to each applicable private placement contract issued or reinsured by the issuer4 7#b7 ,information included ,such return shall set forth-- 7,a7 the name1 address1 and ,,tin of the reporting issuer1 7,b7 the name1 address1 and ,,tin of the holder of the contract1 7,c7 the applicable adjusted basis 7as defined in section #ggjb;,c7d77#b77 in the contract of such holder 7determined as if an applicable distribution were to be made as of the applicable date71 7,d7 any other contracts which are supported by the segregated asset account supporting such contract1 7,e7 the name1 address1 and ,,tin of the holder of any contract described in subparagraph 7,d7 who is related 7within the meaning of section #ggjb;,c7c77#b77;,b77 to the holder of such contract1 and 7,f7 such other information as the ,secretary may require4 7#c7 ,applicable date ,for purposes of this section1 the applicable date means1 with respect to any applicable private placement contract1 #cj days after the later of-- 7,a7 the date that is #ahj days after the date of the enactment of this section1 or 7,b7 the date the contract first became an applicable private placement contract4 7b7 ,annual reports 7#a7 ,in general ,every reporting issuer shall file an annual return with respect to each applicable private placement contract issued or reinsured by the issuer4 7#b7 ,time for filing return ,the return under paragraph 7#a7 shall be filed at such time and in such manner as the ,secretary shall prescribe4 7#c7 ,information included ,a return filed under paragraph 7#a7 shall set forth-- 7,a7 the name1 address1 and ,,tin of the reporting issuer1 7,b7 the name address1 and ,,tin of the holder of the applicable private placement contract1 7,c7 the name1 address1 and ,,tin of each person receiving an applicable distribution 7as defined in section #ggib;,c7d77#b77 under the contract if such person is not the holder of the contract1 7,d7 the amounts for the taxable year of-- 7i7 items of income1 loss1 deduction1 and credit for the year with respect to the assets of which the holder is treated as the owner by reason of section #ggjb;,c7d77#a71 7ii7 the amount of any applicable distribution 7as so defined7 under the applicable private placement contract and the portion of such distribution which is treated as an excess distribution 7as defined in section #ggjb;,c7d77#b771 7iii7 the holder's applicable adjusted basis 7as defined in section #ggjb;,c7d77#b77 in the contract as of the date of each applicable distribution made during the reporting period and as of the last day of the reporting period 7determined as if an applicable distribution were to be made on such day71 and 7iv7 in the case of a reporting issuer described in subsection 7d77#a77;,b71 premiums or other amounts paid or received by any person pursuant to any reinsurance or risk-shifting arrangement described in such subsection1 and 7,e7 such other information as the ,secretary may require4 7c7 ,statement ,to be furnished to taxpayers with respect to whom information is required 7#a7 ,in general ,every person that is required to make a return under subsection 7a7 or 7b7 shall furnish to each person whose identity is required to be set forth under subsection 7a77#b77;,b7 or subparagraph 7,b7 or 7,c7 of subsection 7b77#c7 a written statement showing-- 7,a7 the name1 address1 and phone number of the information contact of the person required to make such return1 and 7,b7 the information required to be shown on such return with respect to the person to whom such statement is required to be furnished4 7#b7 ,furnishing of information ,the written statement required under paragraph 7#a7 with respect to any return shall be furnished to the person on or before ,january #ca of the year following the calendar year for which the return is required to be made4 7d7 ,definitions ,for purposes of this section-- 7#a7 ,reporting issuer ,the term reporting issuer means any person who-- 7,a7 issues a life insurance contract or annuity contract which is treated as an applicable private placement contract1 or 7,b7 reinsures1 or shifts risks with respect to any portion of1 an applicable private placement contract4 7#b7 ,applicable private placement contract ,the term applicable private placement contract has the meaning given such term under section #ggjb;,c4 4 7#b7 ,penalties 7,a7 ,failure to provide initial return ,part ,i of subchapter ,b of chapter #fh of the ,internal ,revenue ,code of #aihf is amended by adding at the end the following new section3 #fgbj;,d4 ,penalty for failure to report applicable private placement contracts 7a7 ,imposition of penalty 7#a7 ,in general ,any person required to make a return under section #fjej;,,bb7a7 who fails to file such return with the ,secretary before the applicable date shall pay a penalty equal to the amount determined under paragraph 7#b74 7#b7 ,amount of penalty 7,a7 ,in general ,the amount of the penalty determined under this paragraph is the sum of-- 7i7 #a1jjj1jjj1 plus 7ii7 an additional #a1jjj1jjj for each penalty period ending before the date on which the failure described in subsection 7a7 has been corrected4 7,b7 ,penalty period ,for purposes of this subsection1 the term penalty period means each period of #cj days beginning after the first #cj-;day period beginning with the applicable date4 7#c7 ,applicable date ,for purposes of this subsection1 the term applicable date has the meaning given such term under section #fjej;,,bb7a77#c74 7b7 ,special rules 7#a7 ,persons subject to insurance regulation ,in the case of a person-- 7,a7 which is regulated by an agency or entity under foreign1 ,state1 or local law1 and 7,b7 which is required to pay a penalty under this section1 the requirement to pay such penalty shall be disclosed to such agency or entity4 ,failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which this section applies4 7#b7 ,persons subject to ,securities ,exchange ,act of #aicb ,in the case of a person-- 7,a7 which is required to file periodic reports under section #ac or #ae7;d7 of the ,securities ,exchange ,act of #aicd or is required to be consolidated with another person for purposes of such reports1 and 7,b7 which is required to pay a penalty under this section1 the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the ,secretary shall specify4 ,failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which this section applies4 4 7,b7 ,failure to make annual returns or payee statements 7i7 ,returns ,section #fgbd7;d77#a77;,b7 of the ,internal ,revenue ,code of #aihf is amended by striking or at the end of clause 7xxviii71 by inserting or at the end of clause 7xxix71 and by inserting after clause 7xxix7 the following new clause3 7xxx7 section #fjej;,,bb7b71 4 7ii7 ,statements ,section #fgbd7;d77#b7 of such ,code is amended-- 7,i7 by redesignating subparagraphs 7,,nn7 and 7,,oo7 as subparagraphs 7,,oo7 and 7,,pp71 respectively1 and 7,,ii7 by inserting after subparagraph 7,,mm7 the following new subparagraph3 7,,nn7 section #fjej;,,bb7c74 4 7#c7 ,clerical amendments 7,a7 ,the table of sections for subpart ,b of part ,,iii of subchapter ,a of chapter #fa of the ,internal ,revenue ,code of #aihf is amended by inserting after the item relating to section #fjej;,,aa the following new item3 ,sec4 #fjej;,,bb4 ,returns relating to applicable private placement contracts4 4 7,b7 ,the table of sections for part ,i of subchapter ,b of chapter #fh of the ,internal ,revenue ,code of #aihf is amended by adding at the end the following new item3 ,sec4 #fgbj;,d4 ,penalty for failure to report applicable private placement contracts4 4 7b7 ,rules relating to foreign account tax compliance 7#a7 ,insurance companies treated as financial institutions 7,a7 ,in general ,section #adga7;d77#e7 of the ,internal ,revenue ,code of #aihf is amended by striking or at the end of subparagraph 7,b71 by striking the period at the end of subparagraph 7,c7 and inserting 1 or1 and by adding at the end the following new subparagraph3 7,d7 except as otherwise provided by the ,secretary1 holds itself out as a life insurance company4 4 7,b7 ,treatment of certain corporations as foreign financial institutions ,section #adga7;d77#d7 of such ,code is amended by inserting 7determined without regard to any election made under section #iec7;d77 after foreign entity4 7,c7 ,limitation on authority to exclude ,section #adga7;f77#d7 of such ,code is amended by inserting 7other than an entity described in subsection 7d77#e77;,d77 before the period at the end4 7#b7 ,private placement contracts treated as financial accounts ,section #adga7;d77#b7 of the ,internal ,revenue ,code of #aihf is amended by striking and at the end of subparagraph 7,b71 by striking the period at the end of subparagraph 7,c7 and inserting 1 and1 and by inserting after subparagraph 7,c7 the following new subparagraph3 7,d7 any contract which is described in section #ggjb;,c7b77#c7 and any separate segregated asset account that holds assets supporting such a contract4 4 7#c7 ,additional limitation on exceptions ,section #adgb7;c77#b7 of the of the ,internal ,revenue ,code of #aihf is amended by inserting 7other than payments to an entity described in section #adga7;d77#e77;,d77 before the period at the end4 7#d7 ,effective date ,the amendments made by this subsection shall apply to payments made after the date that is #a year after the date of the enactment of this ,act4