Rev. Rul. 80-274

ISSUE

Is the life insurance company or the depositor the owner for federal income tax purposes of the savings and loan accounts established in accordance with the annuity plans described below?

FACTS

L, a life insurance company taxable under section 802 of the Internal Revenue Code, has developed so-called group single premium retirement annuity contracts ("annuity plans") that have been approved in several states by their respective regulatory departments. The terms "annuity" and "policyholder" as used in this revenue ruling are for descriptive convenience only and are not intended to have any substantive legal significance.

L has entered into agreements with participating federally insured savings and loan associations. Under each agreement, the participating association is designated as the group contract-holder under an annuity plan. L sells annuity contracts under the plan to existing depositors of the participating association and others wishing to establish accounts with the association ("depositors").

Under a plan, a depositor transfers cash, an existing passbook savings and loan account, or certificate of deposit to L in exchange for an annuity contract. The amount paid by the depositor to L is reduced by L from 2 to 5 percent for sales expenses, administrative expenses, and any premium tax imposed on L. This reduced amount is segregated by L and deposited into a separate account of the savings and loan association of the depositor. The amounts deposited are invested in a certificate of deposit for a term designated by the depositor. When the certificate of deposit expires, L is required under the contract to reinvest the proceeds in a certificate of deposit for the same duration unless an investment of the same duration would extend beyond the annuity starting date. In that event, a certificate of deposit with a maturity not extending beyond the annuity starting date will be purchased. If no such certificate of deposit is available, the funds will be invested in a passbook savings account.

At the option of the depositor (referred to in the contract as the "policyholder") additional amounts may be transferred to L that become part of the consideration for the contract.

Pursuant to the agreement between L and the participating savings and loan association, L may not dispose of the deposit, or convert it into a different asset, other than in accordance with the reinvestment provisions described above. L may not use the deposit for any purpose other than to benefit the particular policyholder. This arrangement is intended to afford each policyholder's deposit the maximum federal insurance coverage of $100,000 per account under federal regulations.

L does, however, retain the right to withdraw the deposits from a failing savings and loan association or from an association that terminates the plan. In the event of withdrawal, L must deposit the withdrawn amounts in another federally-insured savings and loan association.

Interest earned on the investments is credited annually to each annuity account by L after payment to L of an annual management fee of one percent of the accumulated value of the account. L guarantees that the deposit will earn interest at 4 percent per year compounded annually from the date of deposit. The current yields for certificates of deposit offered by the association range from 7% to 11% depending upon the term of the certificate. The policyholders have no contractual relationship with the association. Their rights are derived solely from their annuity contracts, and L may satisfy its obligations to the policyholders under these contracts using funds derived from sources other than the accounts held pursuant to the plans.

A policyholder may withdraw all or a portion of the cash surrender value of the contract at any time prior to the annuity starting date upon written request to L. The cash surrender value of the contract is the amount deposited plus interest credited less a charge for withdrawal. The withdrawal charge is the early withdrawal penalty charged by the savings and loan association plus any premium tax resulting from the withdrawal. The association does not have the right to distribute any assets from the savings and loan account directly to any policyholder or to any beneficiary or assignee.

The annuity contract allows the policyholder to elect one of a variety of settlement options including a lump-sum payment, a life income option, installment options for a specified period, and installment payments for a period certain and for life thereafter.

If a policyholder dies prior to the annuity starting date, a lump-sum is payable to the beneficiary in an amount equal to the cash surrender value on the date of death. The beneficiary, however, may instead elect to receive either an annuity for a term certain or a lifetime annuity, subject to a guaranteed minimum number of monthly installments.

LAW AND ANALYSIS

Section 61(a) of the Internal Revenue Code provides that gross income means all income from whatever source derived, including interest.

To the extent that a policyholder under an annuity contract with a life insurance company possesses substantial incidents of ownership in an account established by the insurance company at the direction of the policyholder, the policyholder may be considered the owner of the account for federal income tax purposes. See Rev. Rul. 77-85, 1977-1 C.B. 12.

Under the annuity contract, the policyholder's position is substantially identical to what the policyholder's position would have been had the investment been directly maintained or established with the savings and loan association. Prior to the annuity starting date, L is little more than a conduit between the policyholder and the savings and loan association.

HOLDING

Prior to the annuity starting date, the policyholder, and not L, is the owner of the savings and loan account for federal income tax purposes and the interest on the account is thus includible in the policyholder's gross income under section 61(a) of the Code.

¹ Also released as News Release IR-80-97, dated September 24, 1980.