Tax News

CCH (cch.taxgroup.com) reports:

The IRS has ruled that an individual taxpayer who holds a variable annuity or life insurance contract is not treated as the owner of an interest in a regulated investment company (RIC) that funds the variable contract solely because interests in the RIC are also available to investors described in Reg. §1.817-5(f)(3). The individual purchased the variable contract from a life insurance company. All assets funding the variable contract were held in a segregated asset account that invested in the RIC, and all the beneficial interests in the RIC were held by one or more segregated asset accounts of the life insurance company, or by investors described in Reg. §1.817-5(f)(3). In addition, public access to the RIC was available exclusively either through the purchase of a variable contract, or to investors described in Reg. §1.817-5(f)(3).
Generally, in applying the Code Sec. 817(h)(4) look-through rule to determine whether the variable contract segregated account diversification requirements are met, interests held by Reg. §1.817-5(f)(3) investors are ignored. In Rev. Rul. 2003-92, 2003-2 CB 350, the IRS held that a taxpayer who purchased a variable annuity contract was considered the owner for federal tax purposes of partnership interests held by sub-accounts into which the variable contract segregated asset account was divided. The interests in the partnerships were sold in private placement offerings to qualified purchasers, and were, therefore, available for purchase by the general public. The same analysis applied in the case of a variable life insurance contract. In addition, Rev. Rul. 81-225, 1981-2 CB 12, which was clarified and amplified by Rev. Rul. 2003-92, also concluded that a policyholder was considered the owner of mutual fund shares that funded a variable annuity contract in the case where those shares were also available directly or indirectly to the general public.
Because, under the facts of the present ruling, the investors described in Reg. §1.817-5(f)(3) are not members of the general public, interests in the RIC are not available to the general public, and the taxpayer, therefore, is not considered the owner of such an interest.
Rev. Rul. 81-225 and Rev. Rul. 2003-92 are clarified and amplified.
Rev. Rul. 2007-7, 2007FED ¶46,266
Other References:
Code Sec. 61
CCH Reference - 2007FED ¶5704.345
CCH Reference - 2007FED ¶5704.358
Code Sec. 72
CCH Reference - 2007FED ¶6114.48
Code Sec. 816
CCH Reference - 2007FED ¶26,003.798
CCH Reference - 2007FED ¶26,003.80
Code Sec. 817
CCH Reference - 2007FED ¶26,015.15
Tax Research Consultant
CCH Reference - TRC INDIV: 30,068
CCH Reference - TRC INDIV: 30,410
CCH Reference - TRC RETIRE: 66,054