PLR 200915006: Public-fund investments did not make variable-contract holders owners of fund shares

Plain-English summary

A registered investment trust offered existing funds, and planned a new fund, as investment vehicles for insurance-company variable contracts. The funds could invest substantial amounts in regulated investment companies and exchange-traded funds that were available to the general public, but contract holders could choose only among broad subaccounts and could not direct the funds' specific investments. The IRS ruled that investing in those public funds would not cause the variable-contract holders to be treated as owners of the fund shares for federal income tax purposes. The ruling relied on the limits on each holder's control, the advisers' independent investment discretion, and the holders' lack of direct or indirect interests in fund assets. The conclusion rested on the taxpayer's representations, including compliance with section 817(h) diversification requirements and a 30 percent limit on normal investment in any single public fund.

Ruling snapshot

• Question: Would the funds' investments in publicly available regulated investment companies and ETFs make variable-contract holders tax owners of the funds' shares?
• Outcome: Approved: the public-fund investments did not attribute ownership of the fund shares to the contract holders.
• Key authorities: IRC §§ 61, 817, 851, and 4982; Rev. Rul. 77-85; Rev. Rul. 81-225; Rev. Rul. 82-54; Rev. Rul. 2003-91.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200915006
Third Party Communication: None
Release Date: 4/10/2009
Date of Communication: Not Applicable
Index Number: 61.00-00, 817.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:FIP:B04
PLR-129719-08
Date:
December 23, 2008

Legend

State 1: ---------------------------------------------

State 2: -----------------------------

Date 1: ------------------------

Date 2: ----------------------

Address: ------------------------------------------------------------------------------------------
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Fund: -----------------------------------------------------------------------------------------
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New Fund
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Existing Funds
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Trust
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Adviser
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Adviser Parent
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Dear -----------------:

This is in response to the letter submitted by your authorized representative dated June 30, 2008, requesting rulings concerning the tax ownership of Fund shares. Additional information was submitted on October 9 and December 10, 2008.

Facts:

The Trust is a business trust formed under the laws of the State 1 on Date 1 (the “Trust”). The Trust’s and each Fund’s address is Address.

The New Fund is a newly formed series of the Trust that has not yet commenced operations. The Existing Funds commenced operations on Date 2. Each Existing Fund’s annual accounting period is, and the New Fund’s annual accounting period will be, the year ended December 31. Each Existing Fund uses, and the New Fund intends on using, the accrual method of accounting for maintaining its accounting books and filing federal income tax returns. The Existing Funds and the New Fund together constitute the Funds.

The Trust is registered with the Securities and Exchange Commission (the “SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust may issue an unlimited number of shares of beneficial interest, no par value, in each Fund. The shares of beneficial interest of each Existing Fund are, and the shares of beneficial interest of the New Fund will be, registered under the Securities Act of 1933, as amended. Shares of the Existing Funds are, and shares of the New Fund will be, offered to insurance company segregated asset accounts to serve as an investment vehicle for variable life insurance policies and variable annuity contracts (collectively, “Variable Contracts”) and to other regulated investment companies advised by the Adviser or an affiliate of the Adviser that are offered to insurance company segregated asset accounts to serve as an investment vehicle for Variable Contracts (each, a “Related Variable Fund” and collectively, the “Related Variable Funds”). Except as otherwise permitted by § 1.817- 5(f)(3) of the Treasury Regulations and except for shares held by a Related Variable Fund, all of the shares of the Existing Funds and Related Variable Funds are, and all shares of the New Fund will be, held by one or more segregated asset accounts of one or more insurance companies and public access to each Existing Fund and each Related Variable Fund is, and public access to the New Fund will be, available exclusively through the purchase of a variable contract within the meaning of § 817(d) of the Internal Revenue Code of 1986, as amended (the “Code”).

Although the terms of each Variable Contract may vary, the insurance company will generally hold the premiums paid by the Variable Contract holder, net of any fees or commissions, and any income earned on the net premiums in a segregated asset account. The Variable Contract holder generally will be able to allocate amounts held in

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the segregated asset account among several different investment options or subaccounts. At least one subaccount will correspond to an investment in a particular Fund.

Each Existing Fund has elected to be taxed as a regulated investment company under Part I of Subchapter M of the Code, and has qualified and intends to continue to qualify for the tax treatment afforded regulated investment companies under the Code for each of its taxable years. The New Fund intends to elect to be taxed as a regulated investment company under Part I of Subchapter M of the Code, and intends to qualify for each of its taxable years for the tax treatment afforded regulated investment companies under the Code. Pursuant to § 851(g)(1) of the Code, each Existing Fund is, and the New Fund will be, treated for federal income tax purposes as a separate corporation.

Each Existing Fund has entered into, and the New Fund intends on entering into, an investment advisory agreement with the Adviser. The Adviser is a corporation organized under the laws of State 2 and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. Pursuant to the investment advisory agreements, the Adviser is, or will be, responsible for managing the investment and reinvestment of the assets of each Fund in accordance with the Fund’s investment objectives, policies and restrictions, which are set forth in the Fund’s prospectus and statement of additional information, and administering the Fund’s affairs to the extent requested by and subject to the supervision of the Trust’s Board of Trustees.

The Adviser may enter into an investment subadvisory agreement with another investment adviser (a “Subadviser”) under which the Subadviser will make investment decisions, buy and sell securities and conduct research that leads to those purchase and sale decisions for all or a portion of the New Fund’s portfolio.

Existing Funds

Each Existing Fund seeks to achieve its investment objective by investing across a range of asset classes, utilizing a wide variety of securities and investment styles. In order to gain exposure to these asset classes, each Existing Fund invests a certain percentage of its assets in other regulated investment companies and ETFs that invest primarily in fixed income securities of all credit qualities and maturities and a certain percentage in other regulated investment companies and ETFs that invest in equity securities of all capitalization levels (“Underlying Funds”). Other than assets invested in money market instruments and cash management investment vehicles advised by the Adviser, the assets of the Existing Funds are currently invested under normal market conditions in Underlying Funds. In the future, each Existing Fund may invest in other securities or derivative instruments.

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The Underlying Funds in which the Existing Funds invest are primarily Related Variable Funds (all of the shareholders of which, except as otherwise permitted by § 1.817- 5(f)(3) of the Treasury Regulations, are one or more segregated asset accounts of one or more insurance companies and other Related Variable Funds). There are currently, however, only a limited number of Related Variable Funds that provide exposure to the asset classes that the Existing Funds desire. In order to obtain exposure to specific asset classes for which Related Variable Funds are not available and in order to more effectively execute the Existing Funds’ investment strategies, each Existing Fund may invest in regulated investment companies and ETFs that are available to investors other than through the purchase of a Variable Contract (“Public Funds”). Some of the Public Funds in which the Existing Funds may invest are advised by investment advisers other than the Adviser or an affiliate of the Adviser.

It is possible that at times up to one hundred percent (100%) of an Existing Fund’s total assets may be invested in Public Funds. Each Existing Fund, however, will not invest under normal market conditions more than thirty percent (30%) of its total assets in any single Public Fund. If fluctuations in the market values of an Existing Fund’s assets cause the Existing Fund’s investment in any Public Fund to exceed the thirty percent (30%) limit as of the last day of any fiscal quarter, the Existing Fund’s investments will be reallocated to comply with this limit within thirty (30) days of the end of such quarter. The portfolio managers of each Existing Fund regularly review the Existing Fund’s investments (including investments in Underlying Funds) and adjust the Existing Fund’s investments in seeking to take advantage of current or expected market conditions or to manage risk. In making their investment decisions, the portfolio managers use a proprietary mix of qualitative and quantitative inputs to arrive at a view for the securities markets and segments of those markets. Based on the desired exposure to a particular investment and a thorough risk analysis, the portfolio managers then decide which funds to use as Underlying Funds and what proportion of an Existing Fund’s assets should be allocated to each Underlying Fund. The portion of each Existing Fund’s assets allocated to an Underlying Fund changes over time and there can be no expectation that current or past positions in an Underlying Fund will be maintained in the future.

Other than a Variable Contract holder’s ability to allocate premiums and transfer amounts in the insurance company segregated asset account to and from the insurance company subaccount corresponding to an Existing Fund, all investment decisions concerning an Existing Fund are made by the Adviser and the Trust’s Board of Trustees in their sole and absolute discretion. A Variable Contract holder is not able to direct an Existing Fund’s investments in any particular asset or recommend a particular investment or investment strategy, and there is no agreement or plan between the Adviser and a Variable Contract holder regarding a particular investment. A Variable Contract holder has no current knowledge of an Existing Fund’s specific assets. The Existing Funds’ portfolio holdings, however, will be available on a delayed basis on the Funds’ website and in quarterly filings with the SEC, including annual and semi-annual

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reports to shareholders. A Variable Contract holder has no legal, equitable, direct or indirect interest in any of the assets of an Existing Fund. Rather, a Variable Contract holder has only a contractual claim against the insurance company offering the Variable Contract to receive cash from the insurance company pursuant to the terms of the specific Variable Contract.

In addition to satisfying its self-imposed limitation of investing no more than thirty percent (30%) of its assets in any single Public Fund, each Existing Fund will comply with the diversification requirements of § 817(h) and, in accordance with these requirements, must treat each Public Fund as a single investment. Pursuant to such requirements, no more than fifty-five percent (55%) of the value of each Existing Fund’s total assets will be represented by any one investment, no more than seventy percent (70%) of the value of each Existing Fund’s total assets will be represented by any two investments, no more than eighty percent (80%) of the value of each Existing Fund’s total assets will be represented by any three investments and no more than ninety percent (90%) of the value of each Existing Fund’s total assets will be represented by any four investments.

New Fund

The New Fund’s investment objective is capital appreciation. The New Fund currently expects to seek to achieve its investment objective by investing its assets in several strategies and/or asset categories. In order to gain exposure to these strategies and/or asset categories the New Fund may invest in other regulated investment companies, including regulated investment companies advised by the Adviser or an affiliate of the Adviser, and ETFs (whether or not such ETFs qualify as regulated investment companies) that emphasize these strategies and/or asset categories. Some of the regulated investment companies and ETFs in which the New Fund will invest may be advised by investment advisers other than the Adviser or an affiliate of the Adviser. Because there are currently no Related Variable Funds that provide the exposure to the strategies and/or asset categories that the New Fund desires, it is anticipated that the New Fund will invest in Public Funds, other securities and derivative instruments. However, it is anticipated that the New Fund will, at least initially, primarily invest in Public Funds and it is possible that at times up to one hundred percent (100%) of the New Fund’s total assets may be invested in Public Funds. The New Fund, however, will not invest under normal market conditions more than thirty percent (30%) of its total assets in any single Public Fund. If fluctuations in the market values of the New Fund’s assets cause the New Fund’s investment in any Public Fund to exceed the thirty percent (30%) limit as of the last day of any fiscal quarter, the New Fund’s investments will be reallocated to comply with this limit within thirty (30) days of the end of such quarter.

The initial strategies and/or asset categories in which the New Fund may invest will be approved by the Trust’s Board of Trustees. Over time, the New Fund’s portfolio

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managers will evaluate the possibility of adding new strategies and/or asset categories. The addition of a new strategy and/or asset category will be subject to the approval of the Trust’s Board of Trustees.

The New Fund’s portfolio managers will determine the percentage of the New Fund’s assets allocated to each strategy and/or asset category and how the assets allocated to each strategy and/or category will be invested, including what percentage of the New Fund’s assets will be invested in each Public Fund. The specific assets held by the New Fund will be subject to change at any time, but a specific asset may be held over a long period of time if the Adviser or a Subadviser believes doing so will further the New Fund’s investment objective.

Other than a Variable Contract holder’s ability to allocate premiums and transfer amounts in the insurance company segregated asset account to and from the insurance company subaccount corresponding to the New Fund, all investment decisions concerning the New Fund will be made by the Adviser, the Subadvisers and the Trust’s Board of Trustees in their sole and absolute discretion. A Variable Contract holder will not be able to direct the New Fund’s investments in any particular asset or recommend a particular investment or investment strategy, and there will be no agreement or plan between the Adviser and a Variable Contract holder regarding a particular investment. A Variable Contract holder will have no current knowledge of the New Fund’s specific assets. The New Fund’s portfolio holdings, however, will be available on a delayed basis on the Funds’ website and in quarterly filings with the SEC, including annual and semi-annual reports to shareholders. A Variable Contract holder will have no legal, equitable, direct or indirect interest in any of the assets of the New Fund. Rather, a Variable Contract holder will have only a contractual claim against the insurance company offering the Variable Contract to receive cash from the insurance company pursuant to the terms of the specific Variable Contract.

In addition to satisfying its self-imposed limitation of investing no more than thirty percent (30%) of its assets in any single Public Fund, the New Fund will comply with the diversification requirements of § 817(h) and, in accordance with these requirements, must treat each Public Fund as a single investment. Pursuant to such requirements, no more than fifty-five percent (55%) of the value of the New Fund’s total assets will be represented by any one investment, no more than seventy percent (70%) of the value of the New Fund’s total assets will be represented by any two investments, no more than eighty percent (80%) of the value of the New Fund’s total assets will be represented by any three investments and no more than ninety percent (90%) of the value of the New Fund’s total assets will be represented by any four investments.

The Funds are concerned that the excise tax under § 4982 will apply if the investor control doctrine attributes the ownership of the Fund shares to the policy holders.

Representations

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In addition to the facts presented above, theTrust has also made the following representations:

(a) The Trust is registered under the 1940 Act as an open-end management investment company.
(b) Each Fund is a separate series of the Trust, is a “fund” as such term is used in § 851(g)(2) of the Code, and is treated as a separate corporation for federal income tax purposes pursuant to § 851(g)(1) of the Code.
(c) Each Existing Fund has elected to be taxed as a regulated investment company under Part I of Subchapter M of the Code, and has qualified and intends to continue to qualify for the tax treatment afforded regulated investment companies under the Code for each of its taxable years.
(d) The New Fund will elect to be taxed as a regulated investment company under Part I of Subchapter M of the Code, and intends to qualify for the tax treatment afforded regulated investment companies under the Code for each of its taxable years.
(e) Except as otherwise permitted by § 1.817-5(f)(3) of the Treasury Regulations, all of the beneficial interests in the Existing Funds are held directly or indirectly by one or more segregated asset accounts of one or more insurance companies and public access to the Existing Funds is available exclusively through the purchase of a variable contract within the meaning of § 817(d).
(f) Except as otherwise permitted by § 1.817-5(f)(3) of the Treasury Regulations, all of the beneficial interests in the New Fund will be held directly or indirectly by one or more segregated asset accounts of one or more insurance companies and public access to the New Fund will be available exclusively through the purchase of a variable contract within the meaning of § 817(d).
(g) Except as otherwise permitted by § 1.817-5(f)(3) of the Treasury Regulations, all of the beneficial interests in the Related Variable Funds are held directly or indirectly by one or more segregated asset accounts of one or more insurance companies and public access to the Related Variable Funds is available exclusively through the purchase of a variable contract within the meaning of § 817(d).
(h) The life insurance companies whose segregated asset accounts hold shares of the Existing Funds or shares of the Related Variable Funds are life insurance companies within the meaning of § 816(a).
(i) The life insurance companies whose segregated asset accounts will hold shares of the New Fund will be life insurance companies within the meaning of § 816(a).
(j) Each segregated asset account that holds shares of the Existing Funds or shares of the Related Variable Funds is a separate account registered with the SEC as a unit investment trust under the 1940 Act.
(k) Each segregated asset account that will hold shares of the New Fund will be a separate account registered with the SEC as a unit investment trust under the 1940 Act.

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(l) Each Fund will satisfy the diversification requirements of § 817(h) and § 1.817- 5(b) of the Treasury Regulations.
(m)No more than thirty percent (30%) of a Fund’s total assets will be invested under normal market conditions in any single Public Fund. If fluctuations in the market values of a Fund’s assets cause the Fund’s investment in any Public Fund to exceed the thirty percent (30%) limit as of the last day of any fiscal quarter, the Fund’s investments will be reallocated to comply with this limit within thirty (30) days of the end of such quarter.
(n) There is not, and there will not be, any arrangement, plan, contract or agreement between the Adviser or a Subadviser and a Variable Contract holder regarding the availability of a Fund as a subaccount under the Variable Contract, or the specific assets to be held by a Fund or an Underlying Fund.
(o) Other than a Variable Contract holder’s ability to allocate Variable Contract premiums and transfer amounts in the insurance company segregated asset account to and from the insurance company subaccount corresponding to a particular Fund, all investment decisions concerning each Fund are, and will be, made by the Adviser, the Subadvisers and the Trust’s Board of Trustees in their sole and absolute discretion. The percentage of a Fund’s assets invested in a particular Public Fund will not be fixed in advance of any Variable Contract holder’s investment and will be subject to change by the Adviser or a Subadviser at any time.
(p) A Variable Contract holder cannot, and will not be able to, direct a Fund’s investment in any particular asset or recommend a particular investment or investment strategy, and there is not, and will not be, any agreement or plan between the Adviser or a Subadviser and a Variable Contract holder regarding a particular investment of any Fund.
(q) No Variable Contract holder can, or will be able to, communicate directly or indirectly with the Adviser or a Subadviser concerning the selection, quality or rate of return on any specific investment or group of investments held by a Fund.
(r) A Variable Contract holder does not have, and will not have, any current knowledge of a Fund’s specific assets. A Variable Contract holder does not have, and will not have, any legal, equitable, direct or indirect ownership interest in any of the assets of a Fund. A Variable Contract holder only has, and only will have, a contractual claim against the insurance company offering the Variable Contract to receive cash from the insurance company under the terms of his or her Variable Contract.
(s) All of the shares of each Existing Fund and the New Fund will be held directly or indirectly by segregated asset accounts of life insurance companies that are held in connection with variable contracts, as defined in Code § 817(d), and each Existing Fund and New Fund therefore will qualify for the exception from federal excise tax provided by Code §4982(f), unless a variable contract holder is treated as a shareholder of the relevant fund pursuant to the investor control requirements of Revenue Ruling 81-225, 1981-2 C.B. 12, and Revenue Ruling 82-54, 1982-1 C.B. 11.

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Ruling Requested:

Each Fund respectfully requests a ruling that the Fund’s investment in Public Funds will not cause the Variable Contract holders to be treated as the owners of the Fund’s shares for federal income tax purposes.

Law and Analysis:

Section 61(a) provides that the term "gross income" means all income from whatever source derived, including gains derived from dealings in property, interest and dividends.

A long standing doctrine of taxation provides that “taxation is not so much concerned with the refinement of title as it is with actual command over the property taxed – the actual benefit for which the tax is paid.” Corliss v. Bowers, 281 U.S. 376 (1930). The incidence of taxation attributable to ownership of property is not shifted if the transferor continues to retain significant control over the property transferred, Frank Lyon Company v. United States, 435 U.S. 561 (1978); Commissioner v. Sunnen, 333 U.S. 591 (1948); Helvering v. Clifford, 309 U.S. 331 (1940), without regard to whether such control is exercised through specific retention of legal title, the creation of a new equitable but controlled interest, or the maintenance of effective benefit through the interposition of a subservient agency. Christoffersen v. U.S., 749 F.2d 513 (8th Cir. 1984).

Revenue Ruling 77-85, 1977-1 C.B. 12, considers a situation in which the individual purchaser of a variable annuity contract retained the right to direct the custodian of the account supporting that variable annuity to sell, purchase and exchange securities or other assets held in the custodial account. The purchaser also was able to exercise an owner’s right to vote account securities either through the custodian or individually. The Internal Revenue Service (the “Service”) concluded that the purchaser possessed “significant incidents of ownership” over the assets held in the custodial account. The Service reasoned that if a purchaser of an “investment annuity” contract may select and control the investment assets in the separate account of the life insurance company issuing the contract, then the purchaser is treated as the owner of those assets for federal income tax purposes. Thus, any interest, dividends or other income derived from the investment assets are included in the purchaser’s gross income.

In Revenue Ruling 80-274, 1980-2 C.B. 27, the Service, applying Revenue Ruling 77- 85, concluded that, if a purchaser of an annuity contract may select and control the certificates of deposit supporting the contract, then the purchaser is considered the owner of the certificates of deposit for federal income tax purposes. Similarly, Revenue Ruling 81-225, 1981-2 C.B. 12, concludes that investments in mutual fund shares to fund annuity contracts are considered to be owned by the purchaser of the annuity

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contract if the mutual fund shares are available for purchase by the general public. Revenue Ruling 81-225 also concludes that, if the mutual fund shares are available only through the purchase of an annuity contract, then the sole function of the fund is to provide an investment vehicle that allows the issuing insurance company to meet its obligations under its annuity contracts and the mutual fund shares are considered to be owned by the insurance company. Finally, in Revenue Ruling 82-54, 1982-1 C.B. 11, the purchaser of certain annuity contracts could allocate premium payments among three funds and had an unlimited right to reallocate contract value among the funds prior to the maturity date of the annuity contract. Interests in the funds were not available for purchase by the general public, but were instead only available through the purchase of an annuity contract. The Service concludes that the purchaser’s ability to choose among general investment strategies (for example, between stock, bonds or money market instruments) either at the time of the initial purchase or subsequent thereto, did not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual fund shares.

In Christoffersen v. U.S., supra, the Eighth Circuit considered the federal income tax consequences of the ownership of the assets supporting a segregated asset account. The taxpayers in Christoffersen purchased a variable annuity contract that reflected the investment return and market value of assets held in an account that was segregated from the general asset account of the issuing insurance company. The taxpayers had the right to direct that their premium payments be invested in any one of six publicly traded mutual funds. The taxpayers could reallocate their investment among the funds at any time. The taxpayers also had the right upon seven days notice to withdraw funds, surrender the contract, or apply the accumulated value under the contract to provide annuity payments.

The Eighth Circuit held that, for federal income tax purposes, the taxpayers, not the issuing insurance company, owned the mutual fund shares that funded the variable annuity. The court concluded that the taxpayers surrendered few of the rights of ownership or control over the assets of the subaccount that supported the annuity contract. According to the court, “the payment of annuity premiums, management fees and the limitation of withdrawals to cash [did] not reflect a lack of ownership or control as the same requirements could be placed on traditional brokerage or management accounts.” Thus, the taxpayers were required to include in gross income any gains, dividends or other income derived from the mutual fund shares.

Section 817, which was enacted by Congress as part of the Deficit Reduction Act of 1984 (Pub. L. No. 98-369) (the “1984 Act”), provides rules regarding the federal income tax treatment of variable life insurance and annuity contracts. Section 817(d) of the Code defines a “variable contract” as a contract that provides for the allocation of all or part of the amounts received under the contract to an account that, pursuant to state law or regulation, is segregated from the general asset accounts of the company and that provides for the payment of annuities, or is a life insurance contract. In the

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legislative history of the 1984 Act, Congress expressed its intent to deny life insurance treatment to any variable contract if the assets supporting the contract include funds publicly available to investors:

The conference agreement allows any diversified fund to be used as the basis of variable contracts so long as all shares of the funds are owned by one or more segregated asset accounts of insurance companies, but only if access to the fund is available exclusively through the purchase of a variable contract from an insurance company. . . . In authorizing Treasury to prescribe diversification standards, the conferees intend that the standards be designed to deny annuity or life insurance treatment for investments that are publicly available to investors. . . .

H.R. Conf. Rep. No. 98-861, at 1055 (1984).

Section 817(h)(1) of the Code provides that a variable contract based on a segregated asset account shall not be treated as an annuity, endowment, or life insurance contract unless the segregated asset account is adequately diversified in accordance with regulations prescribed by the Secretary of the Treasury. If a segregated asset account is not adequately diversified, income earned by that segregated asset account is treated as ordinary income received or accrued by the policyholders.

Approximately two years after the enactment of § 817(h), the Treasury Department issued proposed and temporary regulations prescribing the minimum level of diversification that must be met for an annuity or life insurance contract to be treated as a variable contract within the meaning of § 817(d). The preamble to the temporary regulations stated as follows:

The temporary regulations… do not provide guidance concerning the circumstances in which investor control of the investments of a segregated asset account may cause the investor, rather than the insurance company, to be treated as the owner of the assets in the account. For example, the temporary regulations provide that in appropriate cases a segregated asset account may include multiple sub-accounts, but do not specify the extent to which policyholders may direct their investments to particular sub-accounts without being treated as owners of the underlying assets. Guidance on this and other issues will be provided in regulations or revenue rulings under § 817(d), relating to the definition of variable contracts.

51 Fed. Reg. 32633 (Sept. 15, 1986).

The final regulations adopted, with certain revisions not relevant here, the text of the temporary regulations.

In Revenue Ruling 2003-91, 2003-33 I.R.B. 347, a variable contract holder did not have control over segregated account assets sufficient for the Service to deem the variable

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contract holder the owner of the assets. The variable contracts at issue were funded by a separate account that was divided into twelve (12) subaccounts. The issuing insurance company could increase or decrease the number of subaccounts at any time, but there would never be more than twenty (20) subaccounts available under the contracts. Each subaccount offered a different investment strategy. Interests in the subaccounts were available solely through the purchase of a variable life or variable annuity contract that qualified as a variable contract under § 817(d). The investment activities of each subaccount were managed by an independent investment adviser. There was no arrangement, plan, contract, or agreement between the contract holder and the issuing insurance company or between the contract holder and the independent investment adviser regarding the availability of a particular subaccount, the investment strategy of any subaccount, or the assets to be held by a particular subaccount. Other than a contract holder’s right to allocate premiums and transfer funds among the available subaccounts, all investment decisions concerning the subaccounts were made by the issuing insurance company or the independent investment adviser in their sole and absolute discretion. A contract holder had no legal, equitable, direct or indirect interest in any of the assets held by a subaccount but had only a contractual claim against the issuing insurance company to collect cash in the form of death benefits or cash surrender values under the contract. The Service concluded that, based on all the facts and circumstances, the contract holder did not have direct or indirect control over the separate account or any subaccount asset, and therefore the contract holder did not possess sufficient incidents of ownership over the assets supporting the variable contracts to be deemed the owner of the assets for federal income tax purposes.

ANALYSIS

In the revenue rulings discussed above, the Service 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 Service stated in Revenue Ruling 2003-91 that 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.

In the instant case, the fact that the Funds may invest in Public Funds does not cause the Variable Contract holders to be treated as the owners of the Funds’ shares for federal income tax purposes. In Revenue Ruling 82-54, the amounts held in the segregated asset account underlying a variable contract were invested as the contract holder directed in shares of any or all of three open-end investment companies (“mutual funds”). Each mutual fund represented a different broad, general investment strategy. Shares of the mutual funds were available only to insurance company segregated asset

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accounts. While the mutual funds themselves were not available to the general public, the mutual funds held common stocks, bonds and money market instruments, all of which were available for purchase by members of the general public. The public availability of the assets held by the mutual funds did not lead to the conclusion that the issuing insurance company was simply a conduit between the contract holders and their mutual funds or the underlying assets of the mutual funds. Revenue Ruling 82-54 held that the insurance company, not the contract holders, was the owner of the mutual fund shares.

Similar to the mutual funds in Revenue Ruling 82-54, the Funds are, or will be, available only to insurance company segregated asset accounts and will invest in assets that are available to the general public. In the current case, instead of investing in common stocks, bonds and money market instruments that are available to the general public, the Funds will invest in regulated investment companies and ETFs that are available to the general public. Based on the representations and facts presented by the taxpayer, the Variable Contract holder in this case does not appear to have any more control over the assets held under their contract than was the case in Revenue Ruling 82-54. Based on the representations presented by the taxpayer, the Funds are not an indirect means of allowing a Variable Contract holder to invest in a Public Fund.

Conclusion:

Based on the authority cited above and the representations and facts presented by the taxpayer, each Fund’s investment in Public Funds will not cause the Variable Contract holders to be treated as the owners of the Fund’s shares for federal income tax purposes.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, this ruling will be modified or revoked by the adoption of temporary or final regulations, to the extent the regulations are inconsistent with any conclusion in the letter ruling. See § 11.04 of Rev. Proc. 2008-1, 2008-1 I.R.B. 1, 50. However, when the criteria in § 11.06 of Rev. Proc. 2008-1, 2008-1 I.R.B. 1, 51 are satisfied, a ruling is not revoked or modified retroactively except in rare or unusual circumstances.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative.

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The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

/S/

Donald J. Drees
Senior Technician Reviewer, Branch 4
(Financial Institutions & Products)