People who own annuities know they can put off paying federal income taxes on their investment gains until they begin receiving annuity payments — but that could change.
Bryan Keene and Mark Griffin, Davis & Harman attorneys who are counsel to the Committee of Annuity Insurers, talk about the possibility in a letter they sent in May to the Internal Revenue Service.
The IRS asked for thoughts from the public about its "priority guidance plan," or official to-do list. One item on the list is creating guidance, or a semiformal batch of advice, about "the application of the doctrine of constructive receipt to annuity contracts."
The Committee of Annuity Insurers — a coalition of 32 large U.S. life insurers that write annuities — wants the IRS to take that item off its to-do list.
If the IRS tinkered with the rules for determining when annuity contract owners have received annuity value, that "would create widespread uncertainty for the IRS, annuity issuers, policyholders and beneficiaries about when amounts under deferred and payout annuities are taxable," Keene and Griffin write.
What it means: One of the pillars of the annuity universe — the idea that annuity owners can defer paying taxes on investment earnings — might be wobbly.
The constructive receipt doctrine: For the IRS, the "constructive receipt doctrine" is the idea that a taxpayer who has an "unrestricted right to receive income" might be treated as if the taxpayer had actually received the income, according to a summary by Jason Freeman, a lawyer who is also a tax accountant.
When the IRS applies the doctrine, taxpayers might have to pay taxes on income they have not received.
But life insurers have believed for more than 40 years that Section 72 of the Internal Revenue Code — the section of the tax laws that applies to life insurance — keeps the "constructive receipt doctrine from applying to the inside buildup of an annuity contract," Keene and Davis write.
Any IRS move to change the interpretation would thwart the will of Congress, the attorneys argue.
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