IRS Rules That Policyholder Owns Mutual Fund Shares Under Nonqualified Deferred Annuity Contract

The IRS ruled in Private Letter Ruling 201519001 on the tax treatment of a nonqualified deferred annuity contract issued by a life insurance company, finding that public mutual fund shares under the contract will be treated as owned by the policyholder and not the company and that, except for those amounts, the contract will constitute an annuity contract taxable under Section 72 of the Internal Revenue Code (the Code). The contract permits the policyholder to allocate and reallocate the separate account value among the mutual funds within the separate account, subject to certain “investment guidelines.” Each sub-account corresponds to a mutual fund that is identified in the prospectus or other materials accompanying the contract. The life insurance company holds legal title to the mutual funds in each subaccount of the separate account. However, shares of the mutual funds are available for direct purchase by the general public, including the policyholder, without having to purchase a contract. Accordingly, for federal income tax purposes, the policyholder, and not the life insurance company, is treated as owning the mutual fund shares that comprise the separate account value under the contract.

Charter School Is Not State Instrumentality for FICA Exemption Purposes

The IRS found, in Chief Counsel Advice 201519027, that a charter school did not qualify as a state instrumentality for purposes of determining its liability for FICA taxes on payments made to its employees. FICA imposes two taxes on employers, employees and self-employed workers: one for Old Age, Survivors and Disability Insurance (i.e., the Social Security tax), and the other for Hospital Insurance (i.e., the Medicare tax). Services performed in the employ of a state, a political subdivision of a state, or a wholly owned instrumentality of a state or political subdivision of a state are not employment for FICA tax purposes. The exception does not apply, however, if the employee is not a qualified participant in a retirement system of the state, political subdivision or instrumentality. The IRS found that the charter school did not qualify as a wholly owned instrumentality of a state or of a political subdivision, in part, because although the charter school was publicly funded and performed the governmental function of providing public education in the state, it did not perform the function on behalf of the state because the state exercised no meaningful control over either its day-to-day operations or its budget. 

Nonprofit’s List of Contributors Subject to Disclosure to Attorney General – No Federal Tax Law Preemption Applies

The Ninth Circuit Court of Appeals in Center for Competitive Politics v. Harris affirmed a district court decision and ruled that the Code’s provisions that limit disclosure of the names of persons who contribute to tax-exempt organizations do not prohibit a state from requiring that an organization that operates in a state file reports containing those names with the state’s attorney general. The Code requires organizations to make available their annual Form 990 return to the public, but under an exception to that requirement, public disclosure of the name or address of any contributor to the organization is not required. The taxpayer, citing the exemptions from disclosure, argued that federal law pre-empted the attorney general’s request for a copy of its unredacted Schedule B (schedule of contributors) to its Form 990. The court found that the Code prohibits the IRS from providing the requested Schedule B to state agencies, but does not address whether a state official can request such information directly from an organization. Also, the court found that the Code was not directed toward preventing actions by others, such as a state attorney general, but instead meant to control the distribution of information the IRS receives directly from a taxpayer.

Congressional Research Service Issues Report on Profit Shifting

The Congressional Research Service released a report finding that the use of tax planning strategies to avoid, delay or reduce U.S. tax on income earned overseas may be significant. The report notes that U.S. companies may be engaged in profit shifting with increasing frequency. The U.S. Bureau of Economic Analysis reported that U.S. companies reported earning profits of just over $1.2 trillion abroad in 2012. The most popular places to report profits were responsible for approximately 65 percent of such profits. Out of the $1.2 trillion in foreign profits, $600 billion was attributed to these seven tax-preferred countries: Bermuda, Ireland, Luxembourg, the Netherlands, Singapore, Switzerland and the U.K. Caribbean Islands. The report is intended to assist Congress as it considers possible actions to curb profit shifting.

Indiana to Establish Tax Amnesty Program

Indiana Gov. Mike Pence signed the state’s budget bill on May 7, which requires the Department of Revenue to establish a tax amnesty program. Effective July 1, the department is required to establish a tax amnesty program for taxpayers having an unpaid tax liability that was due and payable for a tax period ending before Jan. 1, 2013. The Indiana tax amnesty program is limited to an eight-week period, to be determined by the Indiana Department of Revenue, ending no later than Jan. 1, 2017.

IRS Updates List of FAQs on IDES

The IRS updated a list of FAQs on the International Data Exchange Services System (IDES) and on the international compliance management model system that are used for FATCA data. A new section was added on IDES use for entities not required to obtain a global intermediary identification number and new questions were added to existing sections.