Rev. Rul. 82-54

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 either 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, 1981-2 C.B. 12, 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.

¹ Also released as News Release IR-82-38, dated March 18, 1982.