[15437]
December 9, 2002
TO: VARIABLE INSURANCE PRODUCTS ADVISORY COMMITTEE No. 4-02
RE: CONFERENCE CALL TO DISCUSS TAX ISSUES
The Variable Insurance Products Advisory Committee will hold a conference call on
Friday, December 13, at 2:00 p.m. (Eastern Time) to discuss two tax issues that have been
suggested as legislative issues that the Institute may wish to pursue; consideration of these
possible legislative proposals is at an early stage. Other tax issues that Committee members
would like to suggest can be considered, time permitting, after these two issues are discussed.
The first possible legislative proposal involves modifying the diversification safe harbor
in Section 817(h)(2) of the Internal Revenue Code to eliminate the requirement that a segregated
asset account have no more than 55 percent of its assets in cash, cash items, Government
securities and securities of other regulated investment companies (“RICs”); thus, under the
proposal, a segregated asset account would meet the safe harbor so long as the Code Section
851(b)(3) diversification test for RICs was satisfied. The most significant effect of this proposal
would be to provide comparable treatment for both variable life insurance contracts and
variable annuity contracts with respect to investing in US Treasury securities; under the
proposal, a segregated asset account of a variable annuity contract (like a variable life insurance
contract) could to be invested, directly or indirectly, exclusively in US Treasury obligations.
The second possible legislative proposal would permit variable annuities to invest in
publicly-available RICs. This proposal effectively would reverse the Internal Revenue Service
guidance (most notably in Revenue Ruling 81-225) prohibiting the mixing of retail and
insurance separate accounts within the same fund. Under the IRS guidance, the investment of
insurance contract assets in a publicly-available fund would provide the insurance contract
holder with “investor control” over the accounts’ underlying investments -- with the result that
the variable contract holder would be treated as the owner of the underlying assets for tax
purposes and, therefore, that the income from the investment would be taxed currently (rather
than deferred, as under a variable contract).
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To participate in the call, please contact the Institute’s Ezella Wynn at ewynn@ici.org or
202/218-3560. If you cannot participate in the call but would like to share your thoughts on
these possible proposals, and/or if you have additional issues that you would like to raise,
please contact the undersigned at 202/326-5832 or lawson@ici.org.
Keith Lawson
Senior Counsel