The owner of a variable annuity or variable life insurance contract does not necessarily have to be taxed as an owner of an interest in a regulated investment company that the contract invests in, as long as the other owners are the right sorts of owners.
Chris Lieu, an official in the Internal Revenue Service chief counsel’s office, has given that interpretation in Revenue Ruling 2007-7.
Lieu sorts out the variable contract ownership question by using Section 1.817-5(f)(3) of the Income Tax Regulations, which describes 4 classes of investors who do not count as members of the “general public” for purposes of analyzing variable contract diversification.
Historically, the IRS treated variable contract holders as owners of the underlying funds if the underlying funds were available to members of the general public.
In 2003, an IRS official ruled in Revenue Ruling 2003-92 that it would think of a “regulated investment company” as being open to the general public even if a regulated investment company simply sold interests to wealthy individuals through private placements as well as to variable life and variable annuity contracts.
But, in Section 1.817-5(f)(3), the IRS has defined the following classes of investors who do not count as members of the general public:
- Life insurance companies.
- The manager of the investment company partnership itself.
- Trustees of a qualified pension or retirement plan.
- Some members of the public and policyholders who were grandfathered in back in the early 1980s.
The new revenue ruling deals with a variable contract designed in such a way that all interests in the regulated investment company are held by variable contract asset accounts or by the 4 classes of non-general-public investors described in Section 1.817-5(f)(3).
“Accordingly, interests in [regulated investment company] are not available to the ‘general public’ … and A is not treated as the owner of an interest in a regulated investment company that funds the variable contract,” Lieu writes.
“The holder of a variable annuity or life insurance contract is not treated as the owner of an interest in a regulated investment company that funds the variable contract solely because interests in the same regulated investment company are also available to investors described in ? 1.817-5(f)(3),” Lieu writes.
A copy of the revenue ruling is on the Web at Document Link