Treasury Decision (TD) 10052, July 9, 2026

Treasury Decision (TD) 10052 has finalized highly anticipated regulations providing crucial guidance on the application of the transfer-for-value rules under Section 101 and the associated information reporting requirements under Section 6050Y. These regulations adopt, with significant practitioner-friendly modifications, the proposed regulations issued under REG-108054-21.

For CPAs and tax professionals managing life insurance transactions, corporate mergers, and client wealth transfers, this Treasury Decision represents a major victory. It successfully dismantles an "inadvertent" tax trap created by the 2019 final regulations that threatened to tax death benefits on ordinary Section 1035 exchanges, while also establishing a de minimis exception for corporate reorganizations.

1. Dismantling the 2019 "Inadvertent" Transfer-for-Value Trap in Section 1035 Exchanges

The Rationale and the Technical Trap

Under the general rule of Section 101(a)(1), death benefits paid under a life insurance contract are excluded from gross income. However, under the transfer-for-value rule of Section 101(a)(2), if a policy is transferred for valuable consideration, the exclusion is capped at the consideration paid plus subsequent premiums. The Tax Cuts and Jobs Act (TCJA) of 2017 further complicated this by introducing the reportable policy sale (RPS) rules under Section 101(a)(3), which strip away transfer-for-value exceptions for policies acquired by parties without a substantial family, business, or financial relationship with the insured.

To implement these TCJA provisions, the Treasury Department and the IRS issued final regulations in 2019 (TD 9879). However, these 2019 regulations introduced a severe technical trap for standard Section 1035 exchanges. Specifically, former Reg. § 1.101-1(e)(2) defined a "transfer of an interest in a life insurance contract" to include "the issuance of a policy in an exchange pursuant to section 1035".

Because a Section 1035 exchange involves surrendering an old policy for a new policy, the transaction constitutes a transfer for valuable consideration under Reg. § 1.101-1(f)(5). Under the 2019 regulations, this treatment triggered the transfer-for-value rule of Section 101(a)(2) for the newly issued contract.

To escape taxation, the transaction had to fit within one of the exceptions of Section 101(a)(2)—namely, the carryover basis exception under Section 101(a)(2)(A). However, tax practitioners quickly identified a structural mismatch:

The carryover basis exception applies if the transferee's basis is determined by reference to the transferor's basis (i.e., transferred basis property under Section 7701(a)(43)).
A policy received in a Section 1035 exchange has its basis determined by reference to the taxpayer's own basis in the surrendered policy (i.e., exchanged basis property under Sections 1031(d), 1035(d)(2), and 7701(a)(44)).

Consequently, the carryover basis exception was technically unavailable. Unless the policyholder met one of the narrow "transfers to certain persons" exceptions under Section 101(a)(2)(B) (e.g., transfers to the insured), any standard Section 1035 exchange of a policy—even one that had never been subject to a reportable policy sale—could result in the death benefits becoming taxable.

The IRS acknowledged in the preambles to both the proposed and final regulations that this tax trap was entirely unintended. The original intent of referencing Section 1035 exchanges in the 2019 regulations was solely to prevent taxpayers from avoiding reporting requirements or circumventing the transfer-for-value limitations on an already-tainted RPS policy by simply exchanging it for a new one.

2. The Solution for Section 1035 Exchanges: Reg. § 1.101-1(b)(2)(iv) and (c)(3)

To resolve this issue while maintaining anti-avoidance safeguards, the final regulations implement a coordinated four-part framework:

A. Unqualified Exclusion of Policy Issuance from the Definition of "Transfer"

The final regulations amend Reg. § 1.101-1(e)(2) by deleting the phrase ", other than the issuance of a policy in an exchange pursuant to section 1035". Consequently, the mere issuance of a life insurance contract to a policyholder—including in a Section 1035 exchange—is no longer a "transfer" for purposes of the transfer-for-value and reportable policy sale rules. This ensures that a standard Section 1035 exchange of an untainted policy does not trigger any tax liability or reporting obligations.

B. Determining Excludability Post-Exchange: Reg. § 1.101-1(b)(2)(iv)

Under the newly added Reg. § 1.101-1(b)(2)(iv), the tax attributes of the relinquished contract (the "old interest") carry over directly to the newly acquired contract (the "new interest"):

Untainted Old Interests: If the entire amount of the death benefits under the old policy would have been excludable under Section 101(a) at the time of the exchange, the entire amount of the proceeds from the new policy is fully excludable.
Tainted / Limited Old Interests: If the old policy was subject to a transfer-for-value limitation, the excludable amount of the new policy is limited to the sum of:
1. The amount that would have been excludable under the old policy at the time of the exchange; and
2. Any premiums and other amounts subsequently paid with respect to the new policy by the policyholder, reduced by any non-annuity distributions received under the new contract to the extent excluded from gross income under Section 72(e).

C. Carrying Over Reportable Policy Sale (RPS) Status: Reg. § 1.101-1(c)(3)

If the old contract was previously transferred in an RPS (or treated as such), Reg. § 1.101-1(c)(3) dictates that the new contract inherits this RPS attribute. The new interest is treated as an interest in a life insurance contract that was previously transferred for valuable consideration in a reportable policy sale.

This directly blocks the loophole where an acquirer of a policy in an RPS attempts to "wash" the policy's tax-tainted status through a Section 1035 exchange.

3. Key Revisions and Deviations in the Final Regulations (TD 10052)

While TD 10052 adopts the core structure of the 2023 proposed regulations, the IRS made several critical updates in response to practitioner comments to reduce compliance burdens and clarify basis adjustments:

A. Clarification on the Treatment of "Boot"

The IRS amended and clarified Reg. § 1.101-1(b)(2)(iv)(B) to account for cash or other property ("boot") received by a taxpayer in a Section 1035 exchange. Under the final regulations, if a taxpayer receives boot, the excludable amount carried over from the old interest is adjusted as follows:

Decreased by the amount of any money and the fair market value of any other property received tax-free by the policyholder in the exchange.
Increased by the amount of any gain recognized by the policyholder on the exchange.

This mechanism aligns the transfer-for-value excludability limits with standard exchanged basis adjustments required under Section 1031(d).

B. Complete Overhaul and Simplification of Reporting Requirements (Abandoning Form 1099-SB)

The most significant departure from the proposed regulations involves information reporting under Section 6050Y.

Under the 2023 proposed regulations, the IRS planned to expand the definition of "issuer" to include "Section 1035 issuers" and require both the old and new insurance companies to file information returns (Form 1099-SB) with the IRS and furnish statements to the policyholders at the time of a Section 1035 exchange.

Practitioners strongly objected to these provisions, noting that the insurance industry already routinely shares cost basis and other critical policy information informally without official IRS forms. The IRS agreed that the proposed administrative framework was unnecessarily duplicative.

Consequently, the final regulations implement the following taxpayer-friendly reporting changes:

Form 1099-SB Eliminated for 1035 Exchanges: The final regulations do not adopt the requirement to file information returns with the IRS (Form 1099-SB) or furnish statements to policyholders at the time of a Section 1035 exchange.
Direct Issuer-to-Issuer Notice Under Reg. § 1.6050Y-3(h): Instead of IRS filing, the IRS added Reg. § 1.6050Y-3(h). When an old policy with an RPS taint is exchanged for a new policy issued by a different carrier, the old issuer must provide the new issuer with the information necessary to ensure proper reporting when death benefits are eventually paid. This information includes:
- The policyholder's investment in the contract with respect to the old interest.
- A statement indicating whether the old issuer would have reported a payment of reportable death benefits under Reg. § 1.6050Y-4 had it paid death benefits on the date of the exchange.
Use of "Any Reasonable Method": The old issuer may transmit this information to the new issuer using any reasonable method (e.g., standard industry exchange-of-information practices).
Form 1099-R Box 7 Update: Rather than creating a new filing obligation, the IRS anticipates adding a new distribution code for Box 7 of Form 1099-R to identify the tax-free Section 1035 exchange of an RPS-tainted contract. This reporting will not be required until the IRS publishes the finalized Form 1099-R and its corresponding instructions.

4. De Minimis COLI Acquisitions in Corporate Reorganizations: Reg. § 1.101-1(c)(2)(v)

The life insurance industry frequently encountered negative tax outcomes under the 2019 reportable policy sale rules during ordinary corporate transactions. Under the 2019 rules, if corporate-owned life insurance (COLI) was acquired indirectly via a stock reorganization (e.g., under Section 368(a)(1)(B)), it was exempt from the RPS rules provided that life insurance made up 50% or less of the corporation’s gross assets. However, if the same COLI policies were acquired directly through an asset reorganization (e.g., a merger under Section 368(a)(1)(A)), the transaction was treated as a direct acquisition and did not benefit from the 50% threshold—potentially triggering a reportable policy sale.

The New De Minimis Exception

To eliminate this disparate treatment, Reg. § 1.101-1(c)(2)(v) provides a de minimis exception for direct acquisitions in corporate reorganizations. A direct acquisition of an interest in a life insurance contract from a C corporation by another C corporation is not a reportable policy sale if all of the following conditions are met:

Reorganization Form: The transfer results from a transaction qualifying as a reorganization under Section 368(a), where both the target and the acquirer are parties to the reorganization under Section 368(b).
Active Trade or Business: Immediately before the transaction, the interest is held by a C corporation that conducts an active trade or business under Reg. § 1.367(a)-2(d)(2) and (3).
No Investment Business: Neither the target C corporation (before) nor the acquiring C corporation (after) engages in a trade or business of investing in life insurance contracts.
5% Asset Limit: Life insurance contracts must make up no more than 5 percent of the gross value of the assets of the target C corporation immediately before the acquisition, and no more than 5 percent of the gross value of the assets of the acquiring C corporation immediately after the acquisition.

Preamble Discussion on Requested Expansions

During the comment period, practitioners urged the IRS to expand this de minimis exception to cover taxable asset transactions, transactions involving non-C-corporation targets (such as S corporations or partnerships), and to allow the active trade or business test to be met on an affiliated group level (since COLI is often held at the holding company level).

The Treasury Department and the IRS adopted the proposed de minimis exception without change in TD 10052. The preamble notes that while the government will continue to study a broader rule, it chose not to delay the immediate relief provided by these regulations. The IRS has formally invited additional public comments regarding the potential future expansion of the de minimis exception.

5. Effective Dates, Retroactivity, and Reliance

The final regulations carry highly favorable, taxpayer-friendly effective date provisions that offer retroactive relief:

Effective Date: The regulations are formally effective on July 9, 2026 (the date of publication of TD 10052 in the Federal Register).
Prospective Application: The substantive rules under Reg. § 1.101-1(b)(2)(iv) and (c)(3) apply to Section 1035 exchanges occurring on or after July 9, 2026. The corporate de minimis exception under Reg. § 1.101-1(c)(2)(v) applies to acquisitions occurring on or after July 9, 2026.
Reporting Requirements: The information exchange obligations under Reg. § 1.6050Y-3(h) and the reporting of reportable death benefits under Reg. § 1.6050Y-4 apply to Section 1035 exchanges occurring on or after July 9, 2026.
Retroactive Relief Election: Crucially, taxpayers may choose to apply Reg. § 1.101-1(b)(2)(iv), (c)(2)(v), and (c)(3) retroactively to all exchanges and acquisitions occurring after December 31, 2017. This fully protects clients who may have undertaken Section 1035 exchanges under the cloud of the 2019 regulations’ technical trap.

6. Table of Impacted Regulations and Key Structural Changes

To assist tax departments in updating their internal checklists and tax software, the following table maps the precise Treasury Regulation subsections amended or added by TD 10052:

Treasury Regulation Subsection	Status under TD 10052	Operational Impact & Content
Reg. § 1.101-1(a)(1)	Amended	Conforms general death benefit exclusion language to incorporate Section 1035 exchange limitations.
Reg. § 1.101-1(b)(2)(iv)	Added	Details excludability calculations for "new interests" acquired in Section 1035 exchanges.
Reg. § 1.101-1(b)(2)(iv)(B)	Added / Clarified	Integrates exchanged basis "boot" adjustments (reduces excludable proceeds by tax-free boot received, increases by recognized gain).
Reg. § 1.101-1(c)(2)(v)	Revised / Replaced	Establishes the 5% de minimis gross asset exception for direct COLI transfers in Section 368(a) corporate reorganizations.
Reg. § 1.101-1(c)(3)	Added	Directs that the "reportable policy sale" (RPS) attribute of a relinquished contract carries over to the new contract in a Section 1035 exchange.
Reg. § 1.101-1(e)(2)	Amended	Deletes the "other than..." clause to explicitly confirm that issuing a contract in a Section 1035 exchange is NOT a transfer.
Reg. § 1.101-1(g)	Amended	Modifies Example 11 to reflect the new de minimis reorganization rule, and adds Examples 17, 18, and 19 to illustrate Section 1035 exchange tax outcomes.
Reg. § 1.101-6(c)	Added	Establishes the July 9, 2026 applicability date and the retroactive election back to December 31, 2017.
Reg. § 1.6050Y-1(a)(1) & (2)	Amended	Expands the definitions of "acquirer" and "buyer" to incorporate Section 1035 exchanges of RPS-tainted contracts.
Reg. § 1.6050Y-1(b)	Republished	Updates applicability dates and preserves historical transition relief for Section 6050Y reporting.
Reg. § 1.6050Y-2(f)(3)	Removed	Deletes old 1035 reporting exceptions that are no longer necessary under the revised "transfer" definition.
Reg. § 1.6050Y-3(f)(3)	Removed	Deletes old 1035 reporting exceptions for contract issuers that are no longer necessary.
Reg. § 1.6050Y-3(h)	Added	Establishes simplified carrier-to-carrier reporting (using any reasonable method) for exchanges of RPS-tainted contracts.
Reg. § 1.6050Y-4(e)(3)	Amended	Clarifies that payors cannot use the "no knowledge of RPSS" exception to avoid reporting death benefits on Section 1035 exchanges if they received notice under § 1.6050Y-3(h).

Operational Action Steps for Practitioners

Identify Historical Exchanges: Review client files for any Section 1035 exchanges of life insurance policies executed after December 31, 2017. Ensure that any potential transfer-for-value exposure is closed out by choosing to apply these regulations retroactively.
Coordinate Corporate Reorganizations: In upcoming corporate asset acquisitions under Section 368(a), perform a quick asset calculation of the target C corporation to verify that COLI policies represent 5% or less of the gross asset value to qualify for the automatic RPS exception under Reg. § 1.101-1(c)(2)(v).
Update Carrier Onboarding Procedures: For insurance carriers, ensure that standard carrier-to-carrier exchange-of-information forms are updated to include a section for reporting the "RPS tax attribute" and the policyholder's cost basis as required by the new Reg. § 1.6050Y-3(h) rules.

Prepared with assistance from NotebookLM.