Rev. Rul. 80-274
Rev. Rul. 80-274 [FN1]
Internal Revenue Service
Revenue Ruling
GROSS INCOME; INTEREST; WRAPAROUND ANNUITY CONTRACTS
Published: October 20, 1980
SECTION 61.--GROSS INCOME DEFINED, 26 CFR 1.61-1: Gross income
(Also Section 72; 1.72-1.)
Gross income; interest; wraparound annuity contracts. Under an agreement
between a life insurance company and a federally insured savings and loan
association, depositors in the savings and loan association purchase group
single premium retirement annuity contracts from the insurer, and the
insurer invests the proceeds, less certain expenses, in separate accounts
with the savings and loan association until the annuity starting dates. The
policyholders, and not the insurer, are the owners of the accounts for
federal income tax purposes prior to the annuity starting dates, and the
interest earned on the accounts is includible in the policyholders' gross
incomes.
ISSUE
Is the life insurance company or the depositor the owner for federal
income tax purposes of the savings and loan accounts established in
accordance with the annuity plans described below?
FACTS
L, a life insurance company taxable under section 802 of the Internal
Revenue Code, has developed so-called group single premium retirement
annuity contracts ('annuity plans') that have been approved in several
states by their respective regulatory departments. The terms 'annuity' and
'policyholder' as used in this revenue ruling are for descriptive
convenience only and are not intended to have any substantive legal
significance.
L has entered into agreements with participating federally insured
savings and loan associations. Under each agreement, the participating
association is designated as the group contract-holder under an annuity
plan. L sells annuity contracts under the plan to existing depositors of
the participating association and others wishing to establish accounts with
the association ('depositors').
Under a plan, a depositor transfers cash, an existing passbook savings
and loan account, or certificate of deposit to L in exchange for an annuity
contract. The amount paid by the depositor to L is reduced by L from 2 to
5 percent for sales expenses, administrative expenses, and any premium tax
imposed on L. This reduced amount is segregated by L and deposited into a
separate account of the savings and loan association of the depositor. The
amounts deposited are invested in a certificate of deposit for a term
designated by the depositor. When the certificate of deposit expires, L is
required under the contract to reinvest the proceeds in a certificate of
deposit for the same duration unless an investment of the same duration
would extend beyond the annuity starting date. In that event, a
certificate of deposit with a maturity not extending beyond the annuity
starting date will be purchased. If no such certificate of deposit is
available, the funds will be invested in a passbook savings account.
At the option of the depositor (referred to in the contract as the
'policyholder') additional amounts may be transferred to L that become part
of the consideration for the contract.
Pursuant to the agreement between L and the participating savings and
loan association, L may not dispose of the deposit, or convert it into a
different asset, other than in accordance with the reinvestment provisions
described above. L may not use the deposit for any purpose other than to
benefit the particular policyholder. This arrangement is intended to
afford each policyholder's deposit the maximum federal insurance coverage
of $100,000 per account under federal regulations.
L does, however, retain the right to withdraw the deposits from a failing
savings and loan association or from an association that terminates the
plan. In the event of withdrawal, L must deposit the withdrawn amounts in
another federally-insured savings and loan association.
Interest earned on the investments is credited annually to each anuity
account by L after payment to L of an annual management fee of one percent
of the accumulated value of the account. L guarantees that the deposit
will earn interest at 4 percent per year compounded annually from the date
of deposit. The current yields for certificates of deposit offered by the
association range from 7% to 11% depending upon the term of the
certificate. The policyholders have no contractual relationship with the
association. Their rights are derived solely from their annuity contracts,
and L may satisfy its obligations to the policyholders under these
contracts using funds derived from sources other than the accounts held
pursuant to the plans.
A policyholder may withdraw all or a portion of the cash surrender value
of the contract at any time prior to the annuity starting date upon written
request to L. The cash surrender value of the contract is the amount
deposited plus interest credited
less a charge for withdrawal. The withdrawal charge is the early
withdrawal penalty charged by the savings and loan association plus any
premium tax resulting from the withdrawal. The association does not have
the right to distribute any assets from the savings and loan account
directly to any policyholder or to any beneficiary or assignee.
The annuity contract allows the policyholder to elect one of a variety of
settlement options including a lump-sum payment, a life income option,
installment options for a specified period, and installment payments for a
period certain and for life thereafter.
If a policyholder dies prior to the annuity starting date, a lump-sum is
payable to the beneficiary in an amount equal to the cash surrender value
on the date of death. The beneficiary, however, may instead elect to
receive either an annuity for a term certain or a lifetime annuity, subject
to a guaranteed minimum number of monthly installments.
LAW AND ANALYSIS
Section 61(a) of the Internal Revenue Code provides that gross income
means all income from whatever source derived, including interest.
To the extent that a policyholder under an annuity contract with a life
insurance company possesses substantial incidents of ownership in an
account established by the insurance company at the direction of the
policyholder, the policyholder may be considered the owner of the account
for federal income tax purposes. See Rev. Rul. 77-85, 1977-1 C.B. 12.
Under the annuity contract, the policyholder's position is substantially
identical to what the policyholder's position would have been had the
investment been directly maintained or established with the savings and
loan association. Prior to the annuity starting date, L is little more
than a conduit between the policyholder and the savings and loan
association.
HOLDING
Prior to the annuity starting date, the policyholder, and not L, is the
owner of the savings and loan account for federal income tax purposes and
the interest on the account is thus includible in the policyholder's gross
income under section 61(a) of the Code.
FN1. Also released as News Release IR-80-97, dated September 24, 1980.
Rev. Rul. 80-274, 1980-2 C.B. 27, 1980-42 I.R.B. 5.
