IRS revokes a 2014 annuity ruling but limits the revocation to future contracts

Plain-English summary

Back in 2014, an insurance company got a private letter ruling (PLR 201424014) that let it offer a new variable-payment annuity option and treat the owner as owing no income tax until amounts were actually paid out. The IRS has now changed its view and revoked that second ruling, because it no longer accords with the Service's current position. Normally a revoked ruling reaches back to every tax year still open under the statute of limitations. Here, though, the taxpayer asked the IRS to use its discretionary authority under Section 7805(b) to soften the blow, and the IRS agreed: the revocation applies only going forward, to contracts whose applications were signed after a specified date. Contracts already sold under the old ruling keep their prior treatment. The practical lesson is that the IRS can withdraw a favorable ruling when its thinking evolves, but it can also grant prospective-only relief so existing arrangements are not disturbed.

Ruling snapshot

• Question: Should the IRS revoke the 2014 ruling that deferred income inclusion under the annuity option, and if so, should the revocation be retroactive?
• Outcome: Revocation of the prior ruling, with Section 7805(b) relief limiting it to prospective effect
• Key authorities: IRC § 72; IRC § 7805(b); Rev. Proc. 2024-1, § 11.04, 2024-1 I.R.B. 1

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202426001
Third Party Communication: None
Release Date: 6/28/2024
Date of Communication: Not Applicable
Index Number: 72.00-00
Person To Contact:
[Taxpayer name and address redacted]
--------------, ID No. --------
Telephone Number:
--------------
Refer Reply To:
CC:FIP:B04
PLR-103975-24
Date:
April 3, 2024

Legend

Taxpayer = --------------
Date = --------------

Dear --------------:

This letter revokes a part of PLR 201424014 (PLR-138374-13) issued to Taxpayer on March 10, 2014.

In PLR 201424014, the Internal Revenue Service (the "Service") issued two rulings with respect to a new term certain annuity option with variable payments (the "New Annuity Option") that Taxpayer intended to offer with non-qualified deferred variable annuity contracts. This letter relates to the second ruling, that "[o]n and after the date an [o]wner elects the New Annuity Option, no amount will be includible in gross income before it is actually paid under the New Annuity Option."

In a letter dated January 12, 2021, the Service notified Taxpayer that it was considering revoking this ruling. This letter is to inform you that this ruling is revoked because it is not in accord with the current views of the Service. See section 11.04, Rev. Proc. 2024- 1, 2024-1 I.R.B. 1. Section 11.04 of Rev. Proc 2024-1 provides that if a letter ruling is revoked, the revocation applies to all years open under the statute of limitations on assessment, unless the Service uses its discretionary authority under section 7805(b) of the Internal Revenue Code to limit the retroactive effect of the revocation. In a letter dated January 24, 2024, Taxpayer requested that the Service exercise its discretionary

PLR-103975-24
2
authority under section 7805(b) to limit the retroactive effect of the revocation to contracts with applications signed on or before Date. In accordance with the Taxpayer's request, the Service has decided to grant relief under section 7805(b). Accordingly, the revocation will apply prospectively only to contracts with applications signed after Date.

In accordance with the power of attorney on file with this office, we are sending a copy of this letter to the Taxpayer's authorized representatives.

Sincerely,

Elizabeth M. Hill
Assistant to the Branch Chief, Branch 4
(Financial Institutions and Products)

Cc: [representatives redacted]