Insurance company is owner of trust fund and underlying assets

Insurance company is owner of trust fund

The IRS issued a private letter ruling* concluding that a life insurance company, not the variable contract holder, is the owner of a state business trust fund and its underlying assets because the contract holder doesn't have any control over the fund's investments. PLR 201651012 (released December 16, 2016, and dated September 14, 2016)

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Read PLR 201651012 [PDF 60 KB]

 

*Private letter rulings are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. It is important to note that, pursuant to section 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, such rulings can provide useful information about how the IRS may view certain issues.

Background

X is the parent of a consolidated group that includes Z and other subsidiaries. Z is a life insurance company within the meaning of Code section 816(a).  Fund is a State A business trust, and Portfolio is a newly formed series of Fund. This letter was in response Z's request for a ruling that Z, rather than the variable contract holder, is the owner of Portfolio.

IRS ruling

The IRS explained the investor control rules. If the separate account assets underlying the variable contract are considered the assets of the life insurance company that issues the contract, and not the property of the contract holder, then section 817 governs the tax treatment of the contract. If the separate account assets underlying the contract are considered the assets of the contract holder, the contract holder is taxed on the income derived from the investment assets under section 61.

In general, the holder of legal title is the owner of the property and is taxed on the income derived from the property. However, if a person other than the holder of legal title possesses the "benefits and burdens" of ownership, that person is attributed ownership of property for tax purposes.

The IRS applied these general tax ownership principles in a series of "investor control" rulings—Rev. Rul. 77-85, Rev. Rul. 80-274, Rev. Rul. 81-225, Rev. Rul. 82-54, Rev. Rul. 2003-91, and Rev. Rul. 2003-92. The revenue rulings stand for the proposition that contract holders possessing control over the investment of the separate account assets (in addition to the other benefits and burdens of contract ownership) are the owners of separate account assets for federal income tax purposes, even if the insurance company retains possession of and legal title to those assets.

In the revenue rulings listed above, the IRS took the position that if the holder of a variable life insurance policy or variable annuity contract possesses sufficient incidents of ownership over the assets supporting the policy or contract, the contract holder is viewed for federal income tax purposes as the owner of the underlying assets and, as a result, is currently taxed on any income and gains attributable to the underlying assets. The determination of whether the holder of a variable life insurance policy or variable annuity contract possesses sufficient incidents of ownership over the assets of the separate account underlying the variable life insurance contract or variable annuity contract depends on all the relevant facts and circumstances. See Rev. Rul. 2003-91. 

In the present situation, the variable contract holders do not have any control over Portfolio's investments, including Portfolio's investments in the Funds. The investment decisions of Portfolio are made by Adviser in its sole and absolute discretion and are subject to change without notice to or approval by the variable contract holders. Portfolio is not an indirect means of allowing a variable contract holder to invest in an Underlying Fund.

IRS conclusion

Based on the representations and facts presented, for federal income tax purposes, Z, rather than the variable contract holder, is the owner of Portfolio and its underlying investment assets.

KPMG observation

This is an example of another insurance dedicated fund approved based on investor control rules.  

 

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Sheryl Flum | +1 (202) 533-3394 | sflum@kpmg.com

Fred Campbell-Mohn | +1 (212) 954-8316 | fcampbellmohn@kpmg.com

Liz Petrie | +1 (202) 533-3125 | epetrie@kpmg.com

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