Rev. Rul. 82-54
See [FN1]
Internal Revenue Service
Revenue Ruling
GROSS INCOME; MUTUAL FUND; ANNUITY CONTRACTS
Published: April 5, 1982
26 CFR 1.61-1: Gross income
(Also Sections 72, 403, 408, 801; 1.72-1, 1.403(a)-1, 1.403(b)-1, 1.408-3,
1.801-8.)
Gross income; mutual fund; annuity contracts. An insurance company has
funded its annuity contracts through a variable annuity fund. The assets of
the fund are invested in three mutual funds the shares of which are not
sold to the general public. The policyholders may direct their annuity
purchase payments to be invested in shares of any or all of the three
mutual funds. The insurer, and not the policyholder, is the owner of the
mutual fund shares for federal income tax purposes.
ISSUE
Will the life insurance company or the policyholder be considered the
owner, for federal income tax purposes, of the mutual fund shares under the
circumstances described below?
FACTS
The terms 'variable payment deferred annuity', 'fixed payment deferred
annuity', and 'policyholder', as used in this revenue ruling, are for
descriptive convenience only and are not intended to have substantive legal
significance.
IC is a life insurance company taxable under section 802 of the Internal
Revenue Code. In states where it is authorized to do so, IC issues
contracts which it describes as variable payment deferred annuity contracts
and fixed payments deferred annuity contracts ('the Contracts').
Under the terms of the Contracts a policyholder will receive either
variable monthly annuity or fixed monthly annuity benefits as of a selected
maturity date. The policyholder may pay the purchase price of their of
these contracts by a single payment or through a series of periodic
payments.
The Contracts are funded through a variable annuity fund ('the Fund')
that is organized pursuant to state law as a separate (segregated asset)
account of IC and is registered as a 'unit investment trust' under the
Investment Company Act of 1940, as amended. IC performs all sales and
administrative functions relating to the Fund and to the Contracts.
IC has represented to policyholders that assets of the Fund will be
invested, as the policyholder directs, in shares of any or all of three
open-end diversified management investment companies ('Mutual Funds'). Each
of the Mutual Funds offers a different general investment strategy. One
Mutual Fund invests primarily in common stock, another in bonds, and the
third in money market instruments. A policyholder is free to allocate his
purchase payments among the three Mutual Funds. Allocations made with
respect to previous purchase payments may be changed by a policyholder at
any time prior to the contract's maturity date.
IC serves as investment manager for each of the Mutual Funds. Shares of
the Mutual Funds are not available to the general public but are available
only to the Fund and to other segregated asset accounts (except investment
plan accounts of the type described in Rev. Rul. 70-525, 1970-2 C.B. 144)
established by IC. However, IC has retained the right to substitute the
shares of any other mutual fund for the shares initially held.
LAW AND ANALYSIS
Section 61(a) of the Internal Revenue Code provides that gross income
means all income from whatever source derived, including interest and
dividends.
Rev. Rul. 77-85, 1977-1 C.B. 12, holds that the purchaser of an
'investment' annuity contract, by means of which the purchaser individually
selected and controlled one or more investments in a portfolio comprising a
separate account of the life insurance company issuing the contract, is
considered the owner of the underlying investments for federal income tax
purposes. Similarly, Rev. Rul. 80-274, 1980-2 C.B. 27, holds that the
purchaser of an annuity contract, by means of which the purchaser selected
and controlled specified certificates of deposit issued by a savings and
loan association, is considered the owner of the certificates for federal
income tax purposes. Under the facts of both rulings, the purchasers
possessed sufficient incidents of ownership with respect to the underlying
investments or certificates so that the interest, dividends, or other
income therefrom was held to be includible in gross income of the
purchasers under section 61(a) of the Code.
In Rev. Rul. 81-225, 1981-41 I.R.B. 5, the Service described four
situations in which investments in mutual funds, pursuant to annuity
contracts, are considered owned by the policyholder (and not the insurance
company) and one situation in which the insurance company is considered the
owner of the investments. In the four situations in which the policyholders
are considered the owners of the investment securities, the policyholders
had investment control over the mutual fund shares and possessed sufficient
other incidents of ownership to be considered the owners of the shares for
federal income tax purposes. In each of the four situations the mutual fund
shares were available for purchase not only by the prospective purchasers
of the annuity contracts, but also by other members of the general public.
The policyholders' position in each situation was substantially identical
to what it would have been had the mutual fund shares been purchased
directly by the policyholders. Conversely, in the situation in which the
mutual fund shares were not available to the public and investment
discretion did not rest with policyholders, the insurance company was
considered to be the owner for federal income tax purposes.
Under Rev. Rul. 81-225, in order for the insurance company to be
considered the owner of the mutual fund shares, control over individual
investment decisions must not be in the hands of the policyholders.
However, the ability to choose among broad, general investment strategies
such as stocks, bonds or money market instruments, either at the time of
the initial purchase or subsequent thereto, does not constitute sufficient
control over individual investment decisions so as to cause ownership of
the private mutual fund shares to be attributable to the policyholders.
HOLDING
IC, and not the policyholder, is the owner of the investment company
shares for federal income tax purposes.
FN1. Also released as News Release IR-82-38, dated March 18, 1982
Rev. Rul. 82-54, 1982-1 C.B. 11, 1982-14 I.R.B. 5.
