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
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
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:
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 
[PDF].