Tuesday, October 9, 2012

IRS Rulles That Owners Not Presently Taxed On Auity's Indexed-Linked Investment Options

In PLR 201240018 the IRS has ruled that a life insurance company that offers nonqualified annuity contracts invested in indexed-linked options, and not the contract owners, owns the assets it held in support of its contractual obligations with respect to these options.

Taxpayer possesses the following ownership attributes in the assets it holds to support
the New Investment Options: 
(1) Legal Title - Taxpayer will hold legal title to all of the assets in its general
account and SA2. 
 (2) Rights of Possession – Only Taxpayer has the right to receive income
(such as dividends or interest) generated by the assets it holds..
(3) Taxes and Other Costs -- Assets in the Taxpayer's general account and
the SA2 may generate taxes or incur commissions or other costs. Taxpayer bears the full burden of such taxes and other costs.
(4) Risk of Loss – The formulas set forth in the contract and prospectus determine Taxpayer's contractual liabilities under New Investment Options. Taxpayer chooses the assets it purchases to support its liabilities and bears the full burden of any losses on these assets.
(5) Profits – For the same reasons Taxpayer is subject to risk of loss, it enjoys
all the opportunity for gain on its investments. If its investments perform better than the formula-based return guaranteed under New Investment Options, it keeps the excess.
(6) Accounting -- Taxpayer accounts for the assets and liabilities as its own.  
The Taxpayer, not the contract owner, enjoys the benefits and bears the burdens of owning the assets purchased to fund payments under New Investment Options and therefore should be treated as the owner for Federal income tax purposes.
Had the policyholders been treated as the owner of the investments, the income from the investments wouldn't be considered to be derived under an “annuity contract.” and the policyholders would be taxed on the interest (or dividends) in the year in which the amounts are earned.

Questions about Tax Deferral associated with Insurance Products,  contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

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