On May 1, 2009, the IRS issued two revenue rulings to clarify
the income tax treatment relating to the surrender, sale and
purchase of certain life insurance policies. They are in response
to a congressional request for guidance for life settlement
transactions in which such life insurance policies are sold to
unrelated third parties. However, the principles in the revenue
rulings may extend beyond such transactions. The IRS rulings
address a number of issues involving the taxation of proceeds on
surrender and death, the computation of gain on sale, tax basis and
the availability of capital gain treatment. They help to settle
certain issues, such as capital gain treatment on sale, but also
present concepts, such as the reduction of basis for current
insurance protection and the treatment of foreign purchasers, which
differ from the prior reporting of such transactions by many
taxpayers.
