Tax News

CCH (cch.taxgroup.com) reports:

The IRS has issued proposed regulations concerning the Code Sec. 817(h)
diversification requirements for variable annuity, endowment and life insurance contracts. The proposed regulations would expand the list of permitted investors underReg. §1.817-5(f)(3)
and would modify the rules for inadvertent nondiversification remedy. The proposed changes would affect insurance companies that issue variable contracts and policyholders who purchase these contracts, and would be effective on the date they are published as final.
Proposed Reg. §1.817-5(a)(2)
The proposed amendments would remove the sentence in Reg. §1.817-5(a)(2)
that provides that the payment required to remedy an inadvertent diversification failure must be based on the tax that would have been owed by the policyholders if they were treated as receiving the income on the contract (Proposed Reg. §1.817-5(a)(2)(iii)). Despite the proposed modification, the amount required to be paid to remedy an inadvertent failure to diversify remains the amount set forth in section 4.02 of Rev. Proc. 92-25, 1992-1 CB 741. The modification of Reg. §1.817-5(a)(2), however, will preserve the IRS's flexibility to modify this amount in response to any comments received on Notice 2007-15, 2007-7 I.R.B. 503.
Proposed Reg. §1.817-5(f)(3)
The proposed regulations would further expand the list of permitted investors in Reg. §1.817-5(f)(3) to include: (1) qualified tuition programs defined in Code Sec. 529; (2) trustees of pension or retirement plans established and maintained outside of the United States primarily for the benefit of individuals, substantially all of whom are nonresident aliens; and (3) accounts that, pursuant to Puerto Rican law or regulation, are segregated from the general asset accounts of the life insurance companies that own the accounts, provided the requirements of Code Secs. 817(d) and
(h) are satisfied (without regard to the requirement the accounts be segregated pursuant to state law or regulation).
The addition of the first two categories of holders, which were the subject of some of the comments received on 2003 proposed regulations under Code Sec. 817 (REG-163974-02), is consistent with the purpose and operation of Code Sec. 817(h). In addition, neither the qualified tuition programs nor the foreign pension plans described in the proposed regulations present the possibility of investment by the general public, as that term is used in Rev. Rul. 81-225, 1981-2 CB 12, and Rev. Rul. 2003-92, 2003-2 CB 350. The inclusion of qualified tuition programs in the list of permitted investors, however, will not relieve those programs of the need to satisfy all requirements of Code Sec. 529 and the regulations under that section.
The inclusion of the third category of holders in the list of permitted investors would ensure that a beneficial interest held by a Puerto Rican company in an investment company, partnership, or trust does not prevent look-through treatment for the other holders of an interest in the same investment, company, partnership, or trust under Reg. §1.817 5(f)(2). At the same time, this amendment would not implicate the interpretive question of what constitutes a "state" within the meaning of Code Secs. 817(d)
and 7701(a)(10).
Comments and Requests
Specific comments are requested on whether rules similar to those proposed to apply to accounts that are segregated pursuant to Puerto Rican law or regulation should apply to accounts that are segregated pursuant to the laws or regulations of other territories. All written and electronic comments and requests for a public hearing must be received by October 29, 2007.
Proposed Regulations, NPRM REG-118719-07, 2007FED ¶49,756
Other References:
Code Sec. 817
CCH Reference - 2007FED ¶26,011C
Tax Research Consultant
CCH Reference - TRC INDIV: 30,410
CCH Reference - TRC INDIV: 30,068