Rev. Rul. 64-215

Advice has been requested whether amounts credited to certificate reserves with respect to certain face-amount certificates are includible in the gross income of the certificate holder prior to the surrender, redemption, or maturity of the certificates under the circumstances described below.

The taxpayer, who uses the cash receipts and disbursements method of accounting, purchased an installment certificate issued by M , an investment company within the meaning of section 3(a)(2) of the Investment Company Act of 1940, 15 U.S.C. 80a-3. The certificate, which is a face-amount certificate as defined in section 2(a)(15) of the Act, 15 U.S.C. 80a-2(15), was issued after December 31, 1954, and will mature 20 years after the date of issuance.

The contract under which the certificate was issued states that, in consideration of the payment of a specified amount annually over a period of twenty years M will pay to the owner of the certificate upon the maturity date, the amount then due under the certificate. The certificate also contains several optional modes of payment, two of which were discussed in Revenue Ruling 56-77, C.B. 1956-1, 620, but none of which is the subject of this ruling.

The certificate may be surrendered prior to the maturity date for cash in an amount determined by reference to the table of cash surrender values shown on such certificate. However, the cash surrender value is not equal to the cumulative installments paid by the certificate holder until at least eight years after the issuance of the certificate.

The certificate provides that, during each calendar year, each certificate, upon which payments have been made for a certificate year, shall be credited at a specified rate per year, in addition, with such amount as shall have been determined by M's board of directors.

M is required to maintain a reserve with respect to all such credits. The reserve must be equal, at all times, to the amount which has been credited to the certificate as credits plus the accumulations, at a specified rate per year, on all amounts which have been standing to the credit of the certificate for not less than a certificate year. Upon the surrender or cancellation of a certificate, or upon an election to receive a paid-up certificate, the amount of the reserve is payable to the owner in cash.

The taxpayer also holds another face-amount certificate issued by M . This second certificate is of the same type as the first except that it was issued before January 1, 1955.

Section 72(1) of the Internal Revenue Code of 1954 provides, in pertinent part, that the term `endowment contract' includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940, issued after December 31, 1954.

Under the provisions of section 72(e)(2) of the Code, any amount received under an endowment contract on its surrender, redemption, or maturity is treated as an amount not received as an annuity, and the provisions of section 72(e)(1)(B) of the Code are applicable to such amount.

Section 72(e)(1)(B) of the Code provides, in part, that if an amount is received under an endowment contract, and if such amount is not received as an annuity, then such amount shall be includible in gross income, but only to the extent that it (when added to the amounts previously received under the contract which were excludable from gross income) exceeds the aggregate premiums or other consideration paid.

Revenue Ruling 56-77, which is applicable to face-amount certificates issued before January 1, 1955, holds that a taxpayer who, prior to the maturity date of a face-amount certificate, elects certain modes of optional payment does not constructively receive income in the year the certificate would have matured.

Accordingly, the taxpayer's face-amount certificate, which was issued after December 31, 1954, is treated as an endowment contract for purposes of section 72 of the Code, and no amounts credited in respect thereof will be includible in the gross income of the taxpayer until the surrender, redemption, or maturity of the certificate. Furthermore, in view of the holding in Revenue Ruling 56-77, amounts credited to certificate reserves, with respect to the face-amount certificate issued before January 1, 1955, are not includible in gross income prior to the surrender, redemption, or maturity of such certificate.

M is required to make information returns on Forms 1096 and 1099, Annual Information Return and Information Return For Calendar Year, respectively, in accordance with the provisions of section 6049 of the Code, for the calendar year in which the certificates mature, or are surrendered or redeemed.