The U.S. Tax Court today issued an opinion that sustained deficiencies determined by the IRS with respect to a taxpayer who purchased “private placement” variable life insurance policies and used the income and capital gains realized on the investments in the separate accounts to invest in startup companies.
The case is: Webber v. Commissioner, 144 T.C. No. 17 (June 30, 2015)
Read the 92-page opinion [PDF 303 KB]
The taxpayer, a venture-capital investor and private-equity fund manager, established a grantor trust that purchased “private placement” variable life insurance policies insuring the lives of two elderly relatives. The policies were purchased from a Cayman Islands insurance company, and the taxpayer and his family members were listed as the beneficiaries.
The premiums paid for each policy, after deduction of a mortality risk premium and an administrative charge, were placed in a separate account underlying the policy. The assets in these separate accounts, and all income earned on those accounts, were segregated from the general assets and reserves of the insurance company.
The separate accounts purchased investments in startup companies which, as the Tax Court noted, the taxpayer was intimately familiar with, and also in which he invested personally and through funds he managed.
As noted by the Tax Court, the taxpayer effectively dictated both the companies in which the separate accounts would invest and all actions taken with respect to these investments. The taxpayer expected the assets in the separate accounts to appreciate substantially (and the court found that they did).
The Tax Court explained that the taxpayer had planned to achieve two tax benefits through this structure:
“Investor control” determinations are very fact-specific. In this case, the Tax Court analyzed the relevant facts in great detail, and agreed with the IRS on these facts. The court applied Skidmore deference to the IRS’s “investor control” rulings, noting in particular that the IRS has enunciated consistent principles over a substantial time span—i.e., 38 years.
For those who have been wondering, this case shows that the “investor control” doctrine is still relevant to life and annuity product design.
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