On June 30, the Tax Court released Webber v. Commissioner, 144 T.C. No.17, in which the court upheld and applied the principles set forth in the Internal Revenue Service’s (IRS) “investor control” rulings, concluding that for federal tax purposes, the taxpayer in question was the owner of assets supporting a variable life insurance contract. The investor control rulings generally maintain that if a policyholder retains too much control over the assets supporting a variable life insurance or annuity contract, the policyholder will be treated as the owner of the assets for federal tax purposes. See, e.g., Rev. Rul. 77-85, 1977-1 C.B. 12; Rev. Rul. 80-274, 1980-2 C.B. 27; Rev. Rul. 81-225, 1981-2 C.B. 13; Rev. Rul. 2003-91, 2003-2 C.B. 347; Rev. Rul. 2003-92, 2003-2 C.B. 350.

Webber involved a private placement variable life insurance contract issued by a Cayman Islands insurance company. The underlying assets were held by a separate account of the insurance company in various special purpose vehicles nominally owned by the insurance company. The taxpayer was a private equity manager, as well as the ultimate owner of the variable life insurance contract for tax purposes. Although the terms of the contract gave nominal responsibility for investment decisions to an investment manager appointed by the insurance company, the taxpayer was allowed to “recommend” investments, and the insurance company routinely followed his recommendations, which in many instances paralleled his private equity investments. The taxpayer’s exercise of control over the separate account investments was evidenced by more than 70,000 e-mail messages, in which, among other bits of evidence, one of the special purpose vehicles holding the underlying assets was referred to as the taxpayer’s “wallet.”

In the nearly four decades since Rev. Rul. 77-85, only one other judicial decision on the investor control rulings stands, namely, Christoffersen v. United States, 749 F.2d 513 (8th Cir. 1984). Christoffersen, like the Tax Court in Webber, upheld the investor control rulings. In contrast, Investment Annuity, Inc. v. Blumenthal, 442 F. Supp. 681 (D.D.C. 1977), rev’d on procedural grounds, 609 F.2d 1 (D.C. Cir. 1979), cert. denied, 446 U.S. 981 (1980), rejected Rev. Rul. 77-85, but that decision was reversed on appeal for want of jurisdiction and is therefore of no precedential value.

In Webber, the Tax Court, among other things:

  • Found the investor control rulings rooted in long-standing, “bedrock” law on the ownership of property for tax purposes, as enunciated in such seminal cases as Corliss v. Bowers, 281 U.S. 376 (1930); Poe v. Seaborn, 282 U.S. 101 (1930); Blair v. Commissioner, 300 U.S. 5 (1937); Griffiths v. Helvering, 308 U.S. 355 (1939); and Helvering v. Clifford, 309 U.S. 331 (1940).
  • Not only held that “38 years of consistent rulings” on the investor control issue by the IRS were entitled to deference under Skidmore v. Swift & Co., 323 U.S. 134 (1944), but also went on to emphasize that given the rulings’ consistency with prior case law, it would adopt the Service’s position “regardless of deference.”
  • Squarely rejected the argument advanced by the taxpayer that the investor control rulings had been superseded by the enactment of the diversification requirements of section 817(h), and
  • Rejected the argument that the investor control doctrine applies only to variable annuities, not to variable life insurance, confirming the IRS’s position on this point, as stated in Rev. Rul. 2003-91.

Finally, the Tax Court declined to impose accuracy-related penalties on the taxpayer under section 6662, on the grounds that the taxpayer had reasonably relied on the advice of his tax adviser.