Rev. Rul. 82-55

The Internal Revenue Service has been asked to clarify certain provisions of Rev. Rul. 81-225, 1981-2 C.B. 12, relating to the circumstances in which the policyholders of certain annuity contracts (commonly known as "wraparound annuities") will be treated for federal income tax purposes as the owners of the mutual fund shares held by the insurance company in connection with those annuities.

The following questions and answers will serve to clarify various aspects of Rev. Rul. 81-225.

Question 1. May a mutual fund which is currently available to annuity purchasers and to the public be closed to further purchase by the public and thus be treated under Rev. Rul. 81-225 as owned by the insurance company?

Answer. When a mutual fund is "closed" so that its shares are no longer available for purchase by the public, it is no longer possible for a prospective purchaser to place himself in essentially the same position through purchase of an annuity as that in which he would have been had he purchased the mutual fund shares directly. Therefore, purchasers of annuity contracts whose funds are invested in mutual funds which were closed to the public prior to the purchase will not be treated as the owners of those mutual fund shares.

Holders of annuity contracts whose funds were invested in a publicly available mutual fund prior to its being closed, and subsequent to December 31, 1980, will be considered the owners of the mutual fund shares.

A mutual fund will not be considered as having been "closed" if existing public shareholders can continue to invest in that fund in any way other than through dividend reinvestment or through the purchase of an annuity contract.

Question 2. For contracts described in Situations 1 through 4 of Rev. Rul. 81-225, what will be the effect of post-1980 withdrawals and dividend reinvestment?

Answer. Under Rev. Rul. 81-225, amounts paid into annuity contracts and invested in mutual fund shares on or before December 31, 1980 will continue to be treated as having been paid into a segregated asset account and thus the insurance company and not the policyholders will be treated as the owner of the mutual fund shares.

Where the insurance company is treated as the owner of the mutual fund shares, dividends paid with respect to those shares will be taxable under section 801(g) of the Internal Revenue Code and the reinvestment of those dividends will be treated as amounts paid into the contract on or before December 31, 1980.

Conversely, where the policyholder is treated as the owner of the mutual fund shares (shares attributable to post-1980 payments), dividends paid with respect to those shares must be included in the policyholder's gross income, and reinvestment of these dividends will be treated as amounts paid into the contract after December 31, 1980.

A policyholder may, depending on the terms of his contract, withdraw amounts previously paid into the contract, and such withdrawals will be treated as first reducing any post-1980 payments he has made. However, any dividends which are attributable to post-1980 payments are nonetheless dividends paid with respect to shares owned by the policyholder, notwithstanding the subsequent withdrawal of the post-1980 payments.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 81-225 is clarified.

¹ Also released as News Release IR-82-38, dated March 18, 1982. However, a typographical error in the last line of the answer to Question 2 has been corrected.