Under Code section 101(a)(1), death benefits paid under a life insurance contract are excluded from gross income, subject to the transfer-for-value rule of section 101(a)(2). The 2017 Tax Cuts and Jobs Act added a new subsection 101(a)(3), which determines the amount of death benefits excluded from gross income following a “reportable policy sale," and section 6050Y, which imposes reporting requirements for reportable policy sales and payments of reportable death benefits.  A “reportable policy sale” generally means the direct or indirect acquisition of an interest in a life insurance contract if the acquirer has, at the time of acquisition, no substantial family, business, or financial relationship with the insured apart from the acquirer's interest in the contract. 

Regulations issued in 2019 clarified that issuance of a life insurance contract to a policyholder, other than in a section 1035 exchange, is not a transfer of an interest in a life insurance contract. 84 Fed. Reg. 58460  (Oct. 31, 2019). Some commenters believed the 1035 exchange reference would alter the long-standing tax treatment of section 1035 exchanges. In response, the IRS and Treasury issued proposed regulations in 2023, which clarified that a standard section 1035 exchange is not treated as a transfer for valuable consideration under section 101(a)(2).

On July 9, 2026, IRS and Treasury finalized the 2023 regulations, while clarifying certain remaining issues. TD 10052, 91 Fed Reg 42345 (July 9, 2026). Fortunately, the Preamble makes it clear that the new rules do not affect the application or interpretation of sections 1035 or 7702. The Preamble confirms that the new rules do not affect whether a contract qualifies as a "life insurance contract under applicable law” or raise issues under section 101(j) or Rev. Rul. 2011-9.  See 91 Fed. Reg. at p. 42347.  

Having put these substantive issues to rest, the new IRS reporting rules provide helpful clarity on the Code section 6050Y reporting requirements. The reporting rules will apply in those cases where section 1035 exchanges do involve “reportable policy sales,” and are generally effective for transactions after July 9, 2026. Interested persons are directed to the preamble and final rules, which include several new examples.