David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: insurance investigators.

The Tax Notes investigations team recently published a series of articles on private placement life insurance, a type of life insurance that is only available to wealthy investors. The three-part series, which you'll find linked to in the show notes, highlights how PPLI policies can help avoid U.S. income taxes and sidestep IRS scrutiny.

Here to talk more about this are three members of the team: investigations editor Lauren Loricchio, legal reporter Chandra Wallace, and reporter Sarah Paez. Lauren, Chandra, Sarah, welcome back to the podcast.

Lauren Loricchio: Thanks for having me.

Chandra Wallace: Good to be here.

Sarah Paez: Great to be back.

David D. Stewart: So Lauren, private placement life insurance is something not many of us have heard of. So why this topic and why now?

Lauren Loricchio: Well, it's been in the crosshairs of the Senate Finance Committee's Democratic staff for almost two years now. Senate Finance Committee Chair Ron Wyden [D-Ore.] has expressed concern that the vehicles are being used "Without a genuine insurance purpose to invest in hedge funds and other investments while avoiding billions of dollars in federal taxes." And here's Wyden discussing his concerns.

Senator Ron Wyden: There's no getting around the fact that the expiration of much of Trump's 2017 law represents a big hurdle. And beyond that, there are new challenges to address. Certainly the cost of housing and raising a family are at the top of the list, and I'd submit that every member of this committee is hearing about those issues. The reality is there is no way to address all of these issues, housing and family expenses, without ensuring that those at the very top pay a fair share. We've also been looking, here at the committee, at other tax-dodging schemes, schemes that people at the very top are using. One example is private placement life insurance, a tax shelter that really has nothing to do with life insurance at all.

Lauren Loricchio: Wyden is concerned that this type of life insurance enables the wealthy to avoid paying their fair share of taxes, like other "buy, borrow, die" tax strategies, where investors can limit their tax liability, grow their wealth, and pass it on tax-free. His staff says he's working on legislation to address this loophole, but it's unlikely to go anywhere now with Republicans controlling Congress and the White House.

David D. Stewart: So let's back up just a little bit. Chandra, what exactly is private placement life insurance?

Chandra Wallace: It's a special type of life insurance policy for wealthy individuals and families. It works kind of like a tax-free bucket. Investors can put assets into the life insurance policy bucket, and when the assets appreciate in value or are sold at a gain, that gain is tax-free. It takes advantage of the general tax rules for life insurance policies that are available to regular folks, but it supercharges them for high-net-worth people. The investment portfolios inside the policies can grow by millions of dollars over the years without those gains being taxed. During that time, the investor can borrow from the policy value, effectively getting to use the money even while it's tied up in the policy. And when the insured person dies, all of the policy value goes to the beneficiaries tax-free.

Lauren Loricchio: Here's Dick Weber of WSLV LLC discussing why investors use this type of insurance.

Dick Weber: Someone who is a qualified investor, presumably with experience and expertise, presumably with high risk tolerance and resources, might be drawn to an investment in a hedge fund. The problem is the hedge fund typically generates lots of taxable events that are not necessarily immediate income or asset value to the customer. So private placement variable life insurance is almost always — the primary use of it is to be able to put those kinds of tax-inefficient, meaning it throws off taxable income that you have to declare each year by putting it in a life insurance policy. Life insurance increases in value are tax deferred, and potentially, if the policy turns into a death benefit, the death benefit itself is tax-free. So in essence, all those deferrals get forgiven at the time of death.

David D. Stewart: So what did you find in your investigation?

Lauren Loricchio: We learned that IRS auditors haven't been enforcing rules for this type of life insurance as aggressively as they could be, which allows some investors to obtain the full tax benefits of this type of life insurance even if they aren't following the rules. We also learned how offshore insurance wrappers can be used with shell companies and other tax strategies to help business owners minimize their U.S. tax liability. Sarah can tell us what happened next.

Sarah Paez: So after reviewing unsealed court records, we realized that some IRS employees might not be aware of issues related to this type of life insurance. So we filed several Freedom of Information Act requests with the IRS looking for training materials, meeting notes, and other documents related to PPLI, and more broadly, offshore abusive arrangements. And what we received, combined with our interviews with current and former government officials and court records, helped us see that PPLI policies have been under-audited and were generally unfamiliar to many revenue agents, especially in their most complex forms.

David D. Stewart: Now, I understand there's a bit of a story behind the story. Could you tell us how this all began?

Chandra Wallace: Senate Finance Committee Chair Ron Wyden started an investigation into PPLI policies in 2022, sending out investigation letters to big players in this area. That included PPLI-specific companies like Lombard International, which rebranded itself to Excellus Financial at the beginning of this year, and Crown Global, and also to global insurance giants like Zurich and Prudential. We covered the investigation but also used publicly available information to learn more about what policies were out there. That research gave us an idea of the size of this market and of the policies' investment portfolios, the commissions being paid, and U.S. states like South Dakota and Alaska where a lot of the domestic policies were being written.

We also looked at marketing materials from the insurers and from trust companies that worked with them to promote and arrange these policies. Many of them emphasized the tax advantages of PPLI, but also that it could be used to protect assets from creditors, hide assets from foreign governments, and avoid some U.S. tax reporting like Form K-1s. Our team thought this was worth a deeper look.

Lauren Loricchio: So we began our investigation by reaching out to sources to see if there was in fact any abuse going on related to this type of life insurance. What we heard was that yes, there was abuse going on. These types of life insurance policies are available from both domestic and offshore insurance carriers, and we heard that the offshore ones were being used by owners of closely held businesses to avoid taxes on the sale of their business. Here's part of an interview with Brandon Avergon of Rampart Consulting Group, where he talks about transferring a closely held business into a PPLI policy.

Brandon Avergon: That's part of a practice referred to as in-kind premium. It is something that we see carriers do offshore. It is not something that we advise our clients to do. It is what we would consider a little too close to the line of the investor control rule, and it's just not something that we recommend to our clients.

David D. Stewart: So what exactly is the investor control rule?

Sarah Paez: So the rules for this type of life insurance are limited, but some informal rules have been developed through IRS revenue rulings and court cases. One of the main ones is known as the investor control doctrine. So under that rule, if a policyholder exercises too much control over the assets in a policy, the assets in the policy lose their tax benefits. The rule was described and defined specifically for private placement life insurance policies in the 2015 Tax Court case, Weber v. Commissioner.

Lauren Loricchio: We published a story on how owners of closely held businesses were pushing the boundaries of the investor control doctrine in August of last year, but something was missing: a paper trail.

David D. Stewart: How did you end up getting a closer look at these transactions?

Chandra Wallace: We wanted to see who was buying these policies offshore and what kind of assets were being held in them. Were there transactions happening in the Cayman Islands or Belize or elsewhere that wouldn't pass muster in the U.S.? Many PPLI policies are held through intermediary trusts and shell companies. Looking at the documents that established the trusts could tell us who the ultimate beneficial owners of the policies and the assets were and maybe help us find them. To see all of that, we needed to see policy documents, trust agreements, correspondence with the insurance companies and people that arranged and facilitated the policies and firms that manage the policy investments.

Lauren Loricchio: The three of us attended a conference last September in Gothenburg, Sweden, hosted by the Global Investigative Journalism Network, along with our colleague Kiarra Strocko, who was working on this investigation with us. The information we learned there was key to moving our investigation forward.

Chandra Wallace: One speaker at the conference was Karrie Kehoe from the International Consortium of Investigative Journalists. I had been a fan of ICIJ for a while, particularly their investigations into the ways that high-net-worth individuals move money and assets offshore, and the tax and finance professionals that help them do it. ICIJ maintains a fantastic offshore leaks database compiled from several international document leaks, including the Pandora Papers. The leaked documents include files from lawyers, accountants, and trust companies that facilitate offshore transactions. You can search individual names, company names, and addresses in the database to find connections, but you can't see the underlying documents. Those aren't available to the public. We knew from our sources that PPLI policies and annuities were often set up offshore, and thought there was a good chance they would show up in the leaked documents if we could get access to them.

Lauren Loricchio: We submitted a proposal to ICIJ, but we didn't get an immediate response. So when we learned that their data editor would be speaking at a conference in Baltimore, we saw it as an opportunity to make our case in person.

Chandra Wallace: After her presentation, we approached her with a paper copy of our updated pitch, our business cards, and a lot of hope. She set up a meeting with ICIJ's managing editor, and we were able to work out a partnership that allowed us to access and work with the confidential leaked documents and with ICIJ's journalists and data team.

David D. Stewart: So now that you had access to these leaked documents, what did you learn about these life insurance vehicles?

Chandra Wallace: From the leaked documents, we could see that high-net-worth individuals were using offshore life insurance vehicles to minimize their U.S. tax liability, and we could trace some of the companies and other assets that went into the policies. In some cases, businesses were put into the policies through shell companies formed specifically for the PPLI transaction. The shell companies were formed in jurisdictions like the British Virgin Islands or Panama or Belize, countries that aren't very transparent about who really owns the companies formed there. So it's tough to find that out. The leaked documents allowed us to see the people behind the companies.

David D. Stewart: Do you have any plans to follow up on your September series?

Lauren Loricchio: We do. We're working on a story about individuals with life insurance products who appear to have used them to avoid paying criminal restitution, to remove assets from a marital estate to avoid having to divide them in a divorce, or to protect their homes from creditors using offshore mortgages. Be on the lookout for that early next year.

David D. Stewart: Well, I'm definitely looking forward to seeing your follow-ups on this. If any of our listeners have information that might be useful to you, is there a good way to reach you?

Lauren Loricchio: Yeah. If you have a tip for us, you can reach us at tips.investigations@taxnotes.com, or through the Signal app at 347-731-3183.

David D. Stewart: All right, well this has been great. Lauren, Chandra, Sarah, thank you so much for being here.

Lauren Loricchio: Thank you.

Chandra Wallace: Thanks Dave.

Sarah Paez: Thanks for having us.

David D. Stewart: And now coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?

Paige Jones: Thanks, Dave. Instead of coming attractions this week, we have a special announcement. The submissions period for the Tax Notes Student Writing Competition is now open. This annual award recognizes superior student writing on unsettled questions in tax law or policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the academic year. Visit taxnotes.com/students for more details.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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