In a Chief Counsel Advice (CCA) released in October 2008, the Insurance Branch of the IRS National Office adopted an overly broad conclusion with respect to a variable contract and ownership of the underlying assets. The CCA states that “[w]here a segregated asset account directly invests in assets available to the general public, the policyholder and not the … [company] is the owner of the assets in the segregated asset account.” This conclusion, as stated, is inconsistent with the paradigm for a segregated asset account, that is, a group of investment assets merely identified and segregated by the company. Also, the CCA’s position seems to be a departure from an often-cited 1994 private letter ruling (PLR).

In both the PLR and the CCA:

  • the company created a segregated asset account or non- RIC sub-account in which only a single policyholder would invest; in both, the assets in the account were publicly available;
  • the policyholder participated in developing the parameters of the investment strategy to be used for the account; and
  • the policyholder was prohibited from communicating with the investment manager or advisor for the account.

The PLR concluded that the company rather than policyholder was the owner of the assets held in the account. However, the CCA concluded that assets held directly by a segregated asset account that are available to the general public are owned by the policyholder for federal tax purposes.

Are there differences in the facts that might justify a different conclusion? Maybe. First, in the PLR, the investment manager was an employee of the company; in the CCA, there was a third-party investment advisor. Second, in the PLR, the policyholder helped develop broad investment strategies for the sub-account; in the CCA, the policyholder provided a detailed questionnaire re the nature of specific investments for the segregated asset account. Unfortunately, because the CCA lacks an analysis of how prior guidance applies with respect to the specific facts and only states the overly broad conclusion, we do not know what the CCA writers were really thinking.