PPLI Abuse Act

This bill amends the Internal Revenue Code to prevent abuse of life insurance tax rules by changing the tax treatment of certain private placement life insurance and annuity contracts, and by adding reporting requirements and penalties for noncompliance.

Sec. 2, Tax treatment of private placement contracts: This section adds a new Internal Revenue Code section 7702C. It generally provides that an "applicable private placement contract" will not be treated as an insurance or annuity contract for tax purposes. An applicable private placement contract is defined as a private placement contract (a variable life insurance or annuity contract that requires the holder to meet certain income, education, or credential requirements for a securities law exemption) that does not meet specific limitations for assets in a segregated asset account. Those limitations require the account to support at least 25 private placement contracts, with each contract supported proportionally by all assets in the account. Contracts held by the same or related persons are treated as one contract. The section also includes special rules for foreign-issued contracts held by U.S. persons, permanent treatment once a contract is classified as applicable, tax treatment for holders (who are treated as owning their share of the underlying assets and income), tax treatment for issuers and reinsurers, and a grant of regulatory authority to the Treasury Secretary. The amendments apply to contracts issued before, on, or after the enactment date, with a transition rule allowing certain existing contracts to be exchanged, converted, cancelled, or liquidated within 180 days to avoid application.

Sec. 3, Reporting requirements: This section adds a new Internal Revenue Code section 6050BB requiring reporting issuers (those who issue or reinsure applicable private placement contracts) to file initial and annual returns with the IRS. The initial return must include information such as the names and TINs of the issuer and holder, the holder's adjusted basis, and related contracts. Annual returns must include similar information plus details on distributions, income, loss, and basis. Issuers must also furnish written statements to affected taxpayers by January 31 of the following year. The section also adds a new penalty section 6720D imposing a $1 million penalty for failure to file the initial return, plus an additional $1 million for each 30-day period after the first 30 days that the failure continues, with special disclosure rules for regulated entities and SEC filers. It also amends existing penalty provisions for failures to file annual returns or furnish payee statements. Additionally, it amends the Foreign Account Tax Compliance Act (FATCA) to treat life insurance companies as financial institutions, treat certain private placement contracts as financial accounts, and limit exceptions for payments to such entities. These FATCA amendments apply to payments made after one year after enactment.