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.
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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.