rr-07-07.pdf

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# Part I

Section 61 .- Gross Income Defined

26 CFR 1.61-1
(Also § 817; § 1.817-5)

REV. RUL. [2007-7]

ISSUE

Is the holder of a variable annuity or life insurance contract treated as the
owner, for federal income tax purposes, of an interest in a regulated investment
company that funds the variable contract solely because interests in the same
regulated investment company are also available to investors described in
§ 1.817-5(f)(3) of the Income Tax Regulations?
FACTS

A, an individual, purchases a variable contract (within the meaning of
§ 817(d) of the Internal Revenue Code) from IC, a life insurance company
subject to tax under Part 1 of Subchapter L. All assets funding the contract are
held in a segregated asset account that invests in RIC, a regulated investment
company. All the beneficial interests in RIC are held by one or more segregated
asset accounts of IC, or by investors described in § 1.817-5(f)(3). Public access
to RIC is available exclusively either through the purchase of a variable contract,
or to investors described in § 1.817-5(f)(3).

## LAW AND ANALYSIS

In Rev. Rul. 2003-92, 2003-2 C.B. 350, a taxpayer purchased a variable
"annuity" contract. The segregated asset account on which the contract was
based was divided into 10 sub-accounts, each of which invested in a partnership.
Interests in each partnership were sold in private placement offerings to qualified
purchasers. The ruling concludes that, because interests in the partnerships
were available for purchase by the general public, the taxpayer is considered the
owner for federal tax purposes of the interests in the partnerships held by the

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sub-accounts. The same analysis applies in the case of a variable life insurance
contract. Rev. Rul. 2003-92 clarified and amplified Rev. Rul. 81-225, 1981-2
C.B. 12, which concluded that the policyholder is considered the owner of mutual
fund shares that fund a variable "annuity" contract where those shares are also
available directly or indirectly to the general public.

Section 817(h) and § 1.817-5 set forth diversification requirements for
segregated asset accounts on which variable contracts are based. Section
817(h)(4) and § 1.817-5(f) provide a look-through rule for determining whether
those diversification requirements are met. The look-through rule applies to a
regulated investment company, partnership, or trust, but only if (A) all the
beneficial interests in the investment company, partnership, or trust are held by
one or more segregated asset accounts of one or more insurance companies,
and (B) public access to the investment company, partnership or trust is available
exclusively through the purchase of a variable contract. Under § 1.817-5(f)(3),
the following four categories of beneficial interest are ignored for purposes of
determining whether these two requirements are satisfied:

(1) Interests held by the general account of a life insurance company or a
corporation related to a life insurance company, but only if the return on such
interests is computed in the same manner as the return on an interest held by a
segregated asset account is computed, there is no intent to sell such interests to
the public, and a segregated asset account of such life insurance company also
holds or will hold a beneficial interest in the investment company, partnership, or
trust;

(2) Interests held by a manager, or a corporation related to the manager,
of the investment company, partnership or trust, but only if the holding of the
interests is in connection with the creation or management of the investment
company, partnership or trust, the return on such interest is computed in the
same manner as the return on an interest held by a segregated asset account is
computed, and there is no intent to sell such interests to the public;

(3) Interests held by the trustee of a qualified pension or retirement plan;
or

(4) Interests held by the public, or treated as owned by the policyholders
pursuant to Rev. Rul. 81-225, but only if (A) the investment company, partnership
or trust was closed to the public in accordance with Rev. Rul. 82-55, 1982-1 C.B.
12, or (B) all the assets of the segregated asset account are attributable to
premium payments made by policyholders before September 26, 1981, to
premium payments made in connection with a qualified pension or retirement
plan, or to any combination of such premium payments.

The investors described in § 1.817-5(f)(3) are not members of the "general
public" as that term is used in Rev. Rul. 2003-92 and Rev. Rul. 81-225. In the

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present case, all the beneficial interests in RIC are held by one or more
segregated asset accounts of IC, or by investors described in § 1.817-5(f)(3),
and public access to RIC is available exclusively either through the purchase of a
variable contract, or to investors described in § 1.817-5(f)(3). Accordingly,
interests in RIC are not available to the "general public" as that term is used in
Rev. Rul. 2003-92 and Rev. Rul. 81-225, and A is not treated as the owner of an
interest in a regulated investment company that funds the variable contract.

# HOLDING

The holder of a variable annuity or life insurance contract is not treated as
the owner of an interest in a regulated investment company that funds the
variable contract solely because interests in the same regulated investment
company are also available to investors described in § 1.817-5(f)(3).

# EFFECT ON OTHER REVENUE RULING(S)

Rev. Rul. 81-225, 1981-2 C.B. 12 and Rev. Rul. 2003-92, 2003-2 C.B. 350
are hereby clarified and amplified.

# DRAFTING INFORMATION

The principal author of this revenue ruling is Chris Lieu of the Office of
Chief Counsel (Financial Institutions & Products). For further information
regarding this revenue ruling, contact Chris Lieu at (202) 622-6274 (not a toll-free
call).