October 01, 2018
Via: Federal eRulemaking Portal: www.regulations.gov (REG–107892–18)
The Honorable Steven Mnuchin Secretary of the Treasury
U.S. Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, D.C. 20220
The Honorable Charles Rettig Commissioner
Internal Revenue Service
1111 Constitution Avenue, N.W. Washington, D.C. 20224
Re: CC:PA:LPD:PR (REG-107892-18)/Proposed Section 199A Regulations (REG-107892-18) (“Proposed Section 199A Regulations”)
Dear Secretary Mnuchin and Commissioner Rettig:
The Association for Advanced Life Underwriting (“AALU”) is the leading organization of life insurance professionals who are a trusted voice on policy issues impacting Americans’ financial security and retirement savings. Our 2,200 members are primarily engaged in providing life insurance planning solutions for individuals, families, and businesses nationwide. Life insurance products offer essential benefits to 75 million American families and many businesses—providing protection, financial security, and peace-of-mind.
The policy choices adopted by the Treasury Department (“Treasury”) and Internal Revenue Service (“IRS”) with respect to the finalization of the Proposed Section 199A Regulations1 will have a direct impact on AALU members and their businesses. Many of AALU’s members belong to businesses structured as passthrough entities, and therefore “do not benefit from the income tax rate reduction afforded to C corporations under the [Tax Cuts and Jobs Act]”2 .
AALU recognizes the inherent challenge of balancing an array of considerations with respect to the finalization of the Proposed Section 199A Regulations. However, with respect to the issues identified below, AALU wants to ensure that section 199A’s deduction for “qualified business income” is available to the businesses it was intended to benefit.
As written, aspects of the Proposed Section 199A Regulations will make it needlessly difficult for life insurance professionals to benefit from the section 199A deduction— notwithstanding that the businesses such professionals engage in are of the type for whom Treasury and the IRS have already partially clarified in the proposed rule.
Specifically, AALU requests that the following aspects of the Proposed Section 199A Regulations be modified:
- Meaning of services performed in the field of financial services. The Proposed Section 199A Regulations currently provide a definition of services performed in the field of financial services that is both unnecessarily broad, and, at least with respect to life insurance professionals, challenging to apply in practice. Defining the field to include activities such as “advising clients with respect to finances,” for example, can inadvertently capture a number of activities that are not in substance related to providing financial services.For example, a life insurance professional may discuss household finances with a prospective client as part of determining the amount and type of insurance to purchase. However, the agent’s primary service to the client—and the one for which the agent is compensated—is identifying and designing appropriate life insurance coverage for the client, not advising the client as to his or her household finances. Read literally, the current rule could capture such tangential activity within the meaning of financial services.With respect to a related category of specified services, namely, consulting services, Treasury and the IRS have in the Proposed Section 199A Regulations provided a rule that excludes so-called “embedded in, or ancillary to” consulting services from being treated as consulting services so long as there is no separate payment for such embedded consulting services. AALU believes the Proposed Section 199A Regulations need to be modified to apply this sensible rule with respect to activities that are potentially considered financial services in the abstract and that are embedded in (and ancillary to) the act of selling life insurance.Just as with sales transactions that have embedded and ancillary consulting services, the sales transactions of life insurance may have embedded and ancillary financial services. The need for relief for such sales beyond the de minimis rule already provided in the Proposed Section 199A Regulations is no less than with consulting services. It could prove nearly impossible for a life insurance professional to establish what portion of his or her sale of a life insurance policy to a client was “attributable to” embedded and ancillary financial services, such as simply reviewing the client’s household finances and expected future financial needs (the law requires all advice with respect to how much insurance a client should purchase to be based on such a review). The de minimis exception would prove equally challenging for the IRS to administer in a fair, timely, and uniform matter.Treasury and the IRS have already identified other categorical exclusions from the meaning of financial services. For example, a justification cited by Treasury and the IRS for banking’s exclusion—i.e., that banking’s inclusion in section 1202(e)(3)(B) instead of section 1202(e)(3)(A) suggests that the term “financial services” is narrower than as to include banking3 —applies equally to “insurance,” which is likewise described in section 1202(e)(3)(B).
In either case, selling life insurance is not providing financial services, and AALU respectfully requests that Treasury and the IRS clarify this fact by extending the embedded or ancillary services rules to cover financial services.
- Meaning of the provision of services in investing and investment management. The Proposed Section 199A Regulations currently have a broad (and potentially sweeping) view of what constitutes the provision of services in investing and investment management, including, for example, the receipt of “fees” related to “providing advice with respect to buying and selling investments.” Treasury and the IRS have indicated that fees for this purpose includes flat fees, fees calculated as a percentage of assets under management, or even commissions. With respect to life insurance agents and brokers, we are concerned about the vagueness (and potential over- inclusiveness) of the term “investment,” and AALU believes that Treasury and the IRS should clarify and limit the scope of such term.Treasury and the IRS have indicated that the terms “investing and investment management” are used in their “ordinary meaning”4. However, there is no single definition of such items for all purposes of the Internal Revenue Code, as there is no single definition of the term “investment”5. The term “investment income,” for example, means very different things depending on the context6. At its limits, one could conceivably stretch the term investment to include life insurance, which like other more traditional “assets” provides financial protection and security for individuals and families.AALU does not believe the term “investment” or the terms “investing and investment management” to apply so broadly as to include life insurance products. To conclude otherwise would essentially read life insurance professionals completely out of section 199A. Further, allowing such a sweeping scope for these terms negates Treasury’s and the IRS’s decision to exclude insurance agents and brokers from being treated as engaged in services in the field of brokerage services (as many life insurance agents and brokers might be treated as engaged in providing investing or investment management services). AALU requests that Treasury and the IRS clarify that investing and investment management does not include the sale of life insurance products, and that life insurance products are not investments for purposes of section 199A.
- Meaning of services performed in the field of brokerage services. AALU and its members appreciate Treasury’s and the IRS’s clarification in the Proposed Section 199A Regulations that life insurance agents or brokers are not treated as being engaged in the performance of brokerage services. The way this exclusion is drafted, however, requires additional clarification.As the provision currently reads, it is not clear that the exclusion of “insurance agents and brokers” from being treated as being engaged in the performance of brokerage services is meant to negate the possibility of such professionals from being treated as arranging transactions between a buyer and a seller with respect to “securities.” AALU believes that the reference to the definition of “securities” in section 475(c)(2) should be understood in its particular context. Thus, notwithstanding the potentially broad definition of the term “securities,” AALU believes this term must be understood in its particular context. Thus, notwithstanding the potentially broad definition of the term “securities,” AALU believes this term must be understood in its narrow sense as used in section 475(c)(2) and the regulations thereunder. The Treasury Regulations promulgated under section 475 contain a specific carveout for insurance companies from becoming a securities broker merely because such companies sell life insurance products7. In effect, this exclusion recognizes that Congress did not intend for life insurance products to be considered “securities” for purposes of section 4758.AALU requests that Treasury and the IRS clarify that this same implicit exclusion applies in the case of the meaning of services performed in the field of brokerage services, either by clarifying that life insurance products are not “securities” for purposes of section 199A, or by clarifying that the exclusion in proposed Treasury Regulation section 1.199A-5(b)(2)(X) for life insurance agents and brokers means that such professionals engaged in services in their capacity as such are not considered to be brokers in “securities” within the meaning of section 1.199A-5.
AALU welcomes the opportunity to further discuss these comments with Treasury or the IRS. Please feel free to contact me at (703) 641-8133, or email@example.com; Chris Morton at (202) 772-2494, or firstname.lastname@example.org; or Armstrong Robinson at (202) 772-2493, or email@example.com.
Chief Executive Officer
- Qualified Business Income Deduction, 83 Fed. Reg. 40,884 (Aug. 16, 2018).
- 83 Fed. Reg. at 40,899.
- 83 Fed. Reg. at 40,898.
- See 83 Fed. Reg. at 40,900.
- Courts, for example, have in certain instances defined the term “investment” very broadly. See, e.g., Comm’r v. Estate of Murphy, 229 F.2d 569, 573 (6th Cir. 1956) (‘investment” includes certain assessments made with respect to corporate shares by the Comptroller of Currency), affi’g 22 T.C. 242 (1954).
- Compare, e.g., sec. 509(e) (term generally means income from interest, dividends, payments with respect to securities loans, rents, and royalties) with sec. 936(d) (regulations under prior section 936 more broadly defining the term “investment”).
- See Treas. Reg. sec. 1.475(c)-1(d).
- See Mark to Market for Dealers in Securities, 61 Fed. Reg. 67,715, 67,718 (Dec. 24, 1996).
View full Comment Letter here.