PPLI Briefing: 1035 Swap Rules, IRS Insurer Filings, WSJ Fallout

Three items surfaced this week that matter to PPLI policyholders and their advisers, none large enough to carry a story alone but each worth tracking. A government attorney confirmed that tax-free exchanges of life insurance contracts carry forward their tax history. The IRS said it is still working on rules for how insurance groups file consolidated returns. And legal commentary continued to circulate reacting to the Wall Street Journal's recent PPLI coverage.

1035 exchanges: tax history travels with the contract

A government attorney was reported this week confirming a point that matters whenever a PPLI holder moves a policy from one carrier to another: a tax-free exchange under Internal Revenue Code Section 1035 does not reset the contract's tax history. Law360 reported the comments on October 9.

This is settled ground in practice but it is worth restating because so much PPLI planning depends on it. Under Section 1035(d), basis carries over from the surrendered contract to the new one. For modified endowment contract testing, Section 7702A(c)(3) treats the replacement policy as a continuation of the original for seven-pay purposes, meaning an exchange does not give a family a second bite at MEC status if the original contract had already failed the test, nor does it strip out favorable history if the original contract had passed. For families who hold PPLI and are weighing a move to a new carrier, often after a rating downgrade, a platform shutdown, or simply better separate-account terms, this is the mechanic that lets the switch happen without triggering gain recognition or resetting the loan and withdrawal rules that depend on MEC status. We covered the mechanics of carrier moves in PPLI Section 1035 Exchange: Changing Insurance Carriers, and the seven-pay test itself in PPLI MEC Rules: The Seven-Pay Test and Lifetime Access.

IRS still rewriting consolidated return rules for insurance groups

Separately, the IRS confirmed it has not finished reworking the regulations that govern how consolidated groups containing both life and nonlife insurance companies file their tax returns. Bailey Anne Timmons, an attorney in the IRS associate chief counsel's corporate office, said the agency is "actively working" on revising the rules under Section 1502, though she gave no timeline, according to Bloomberg Tax's report on October 5. The project traces back to the 2017 tax act and governs how losses move between life and nonlife members of an insurance group when they calculate taxable income together.

This does not touch policyholders' tax treatment directly. It touches the carriers that issue PPLI contracts, many of which sit inside larger insurance groups with both life and property lines. How those groups allocate losses for tax purposes affects their own earnings and, over time, their capital position and ratings. For families doing carrier due diligence, this is a reminder that the holding company's tax posture is part of the picture alongside statutory surplus and reinsurance arrangements. See PPLI Carrier Due Diligence: How to Compare Insurers for the broader checklist.

The WSJ's PPLI coverage keeps generating commentary

The National Law Review published a piece responding to the Wall Street Journal's earlier PPLI commentary, titled bluntly "The Journal Got a Few Things Right." The piece ran on October 5. The exact claims under discussion are not fully laid out in what we could verify this week, so we are not restating specifics here, but the existence of continued legal-press commentary six months after mainstream coverage of PPLI first spiked is itself a signal. It means advisers and compliance teams are still being asked by clients to explain what the Journal got right and what it oversimplified. Families who have not had that conversation with counsel recently may want to. Our background piece on the investor control doctrine and on PPLI tax strategy remain the right starting points for that discussion.

What this means for policyholders this week

• If a carrier switch is under consideration, the 1035 mechanics are confirmed and stable: basis and MEC history travel with the policy, so the switch itself should not be the tax event.
• Carrier financial-strength diligence should include how the parent insurance group handles consolidated tax filing, not only statutory capital, since the Section 1502 rules are in flux at the regulatory level even if nothing changes for policyholders yet.
• Clients who read the Journal's PPLI coverage and asked questions should get a written answer from counsel this quarter rather than an informal one, given that the commentary cycle has not closed.

Previously on PPLI.com: IRS Scrutiny of PPLI in 2026: Audit Risk and Records and The 2026 Senate PPLI Proposal: Rules, Risks and Status cover the wider regulatory backdrop these items sit inside.

Sources and authorities

• Law360, "Tax-Free Insurance Swaps Keep Tax History, Gov't Atty Says," October 9, 2026
• Bloomberg Tax, "IRS Working on Life, Nonlife Insurance Group Tax Filing Rules," October 5, 2026
• The National Law Review, "WSJ PPLI Commentary: The Journal Got a Few Things Right," October 5, 2026

This briefing was checked against the primary sources listed above and reflects PPLI.com's editorial standards. It is information, not advice; readers should confirm any application to a specific policy or estate plan with qualified tax and insurance counsel.

Questions readers ask

Does a 1035 exchange reset a PPLI policy's MEC status?

No. Under IRC 7702A(c)(3), a tax-free exchange carries forward the seven-pay test history of the original contract, so moving to a new carrier does not reset modified endowment contract status.

Does the IRS's work on Section 1502 insurance rules change PPLI policyholder taxation?

Not directly. The rules govern how insurance groups file consolidated corporate tax returns and affect carriers at the entity level, not the tax treatment of individual PPLI contracts.