A contingent deferred annuity linked to a customer's own brokerage account is treated as an annuity under section 72

Plain-English summary

A life insurance company designed a new "contingent deferred annuity," a guaranteed lifetime income product that attaches to a brokerage account the customer already owns rather than to money held by the insurer. The customer keeps and controls the account, invests it in insurer-approved diversified tiers, and pays periodic fees to the insurer. If the customer takes only the guaranteed minimum withdrawals and the account still runs to zero during the customer's lifetime, the insurer then makes guaranteed payments for life. The insurer asked the IRS to confirm the product's tax treatment. The IRS ruled: (1) the contract is an annuity under section 72; (2) the guaranteed payments are taxed as "amounts received as an annuity" under section 72(b), with part excluded as return of investment; (3) the separately owned brokerage account does not give the contract a "cash value" and is not part of the contract for tax purposes; and (4) the customer's "investment in the contract" equals the total fees paid to the insurer. This gives a green light to a newer style of annuity that wraps guaranteed income around a customer's existing investments.

Ruling snapshot

• Question: How is a contingent deferred annuity, linked to a customer's own brokerage account, taxed under section 72?
• Outcome: approved
• Key authorities: IRC § 72 (including 72(b), (c), (e)); Treas. Reg. §§ 1.72-1, 1.72-2, 1.72-4; Rev. Rul. 77-85

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202452004                                              Third Party Communication: None
 Release Date: 12/27/2024                                       Date of Communication: Not Applicable
 Index Number: 72.00-00
                                                                Person To Contact:
 ----------------                                               ---------------------, ID No. -----------------
 -------------------                                            Telephone Number:
 --------------------------------------------------------       --------------------
 ---------------------------------                              Refer Reply To:
 ------------------------------------------                     CC:FIP:B04
                                                                PLR-105677-24
                                                                Date:
                                                                September 20, 2024




LEGEND

 Taxpayer        =     -------------------------------------------------------------------------------------------
 Individual      =     -----------------------------------------------
 Parent          =     -------------------------------------------------------------------
 V               =     ---
 W               =     ---
 X               =     ---
 Y               =     ---
 Z               =     ---

Dear --------------:

Taxpayer has requested several rulings concerning the application of § 72 of the
Internal Revenue Code (the “Code”) to a contingent deferred annuity contract (the
“Contract”) that it plans to issue to, or for the benefit of, Individual. This letter ruling is
being issued electronically in accordance with section 7.02(2) of Rev. Proc. 2024-1,
2024-1 I.R.B. 1.

FACTS

Taxpayer and Individual represents that:

Taxpayer is a life insurance company within the meaning of § 816(a). Taxpayer files a
consolidated federal income tax return on behalf of itself and its subsidiary insurance
PLR-105677-24                                          2

companies. Parent is Taxpayer’s ultimate parent corporation and is not part of the
federal income tax returns Taxpayer files.

Individual is an individual who is V years old, which is typical of other anticipated
purchasers of the Contract. In that regard, Taxpayer plans to issue the Contract to
individuals between the ages W and X, with most falling between the ages of Y and Z.

Individual will own assets in a taxable brokerage or similar investment account (the
“Account”). The Account will be established and maintained by an unrelated entity that
Taxpayer approves for use with the Contract (“Financial Institution”). Taxpayer will have
no legal or equitable ownership in the Account or any of the assets in the Account, and
Taxpayer will not treat the Account or any of the assets in the Account as assets of
Taxpayer for any purpose.

Taxpayer will issue the Contract in consideration for the payment of periodic fees
(“Contract Fees”). Contract Fees will be paid with after-tax money, either by liquidating
assets in the Account and remitting the after-tax cash proceeds to Taxpayer, or by
Individual using another after-tax source of funds to pay the Contract Fees. Individual’s
investments within the Account must be made in asset tiers designated by Taxpayer.
Each asset tier will result in the Account holding assets representing multiple asset
classes (e.g. fixed income, equities, commodities, real estate, cash, and cash
equivalents) and/or in different investment categories within one or more asset cases
(e.g. domestic large-cap, mid-cap, and small-cap within the equity asset class).
Individual will be required to rebalance his allocations periodically in order to comply
with investment allocation requirements. Individual or Financial Institution must provide
Taxpayer with the information necessary to monitor the investments in the Account.

Taxpayer and Individual expect that the Account will hold assets that will be understood
to be “diversified” in the ordinary sense of the term. In that regard, the Account will not
consist solely of shares of stock of a single firm or enterprise.1 The investment
allocation requirements are intended to help maintain a consistent level of volatility in
the Account’s investment returns, thereby reducing Taxpayer’s risk that it will be
required to start making “Guarantee Payments” under the Contract, as defined and
discussed below.

When the Contract is linked to the Account, the Contract will be issued to Individual or
to a trust for Individual’s benefit.2 The Contract is designed to support Individual’s
retirement needs by guaranteeing Individual’s ability to receive a specified amount of
retirement income each year for Individual’s life. If Individual withdraws only the
guaranteed minimum amount defined in the Contract, or less, from his Account each
year, and the Account is reduced to zero in Individual’s lifetime for reasons other than

1 For this purpose, share or other interests in a regulated investment company or similar pooled

investment vehicle will not be considered a “single firm or enterprise.”
2 Taxpayer represents that, if issued to a trust, the Contract will be issued to the trust in a manner such

that § 72(u)(1) will not apply to the Contract.
PLR-105677-24                                3

an early or excess withdrawal, then a series of periodic payments in guaranteed
minimum amounts will be payable under the Contract each year for the remainder of
Individual’s life (the “Guarantee Payments”).

The amount of each Guarantee Payment will be based on the Contract’s “Coverage
Amount”. The Coverage Amount will initially be determined on the date Individual first
makes a withdrawal from the Account that is not considered an early withdrawal (the
“Lock-In Date”) and will be re-determined on each subsequent Contract anniversary.
The Coverage Amount will be determined by multiplying the Contract’s “Coverage
Base” by a ”Payment Percentage” multiplier. The Coverage Base will be based on the
Contract’s initial account value, certain contributions, and excess withdrawals. The
Contract will include a step-up basis feature that applies if the account value on the
Contract anniversary is higher than the Coverage Base on the immediately preceding
anniversary. In such case, the Coverage Base will be increased to equal the account
value, subject to a specified maximum. The Payment Percentage multiplier will be
based on the age of the covered life (or lives) on the date that Individual takes the first
withdrawal from the Account, whether a single life or joint life has been elected, the
years elapsed between the Contract’s issue date and the Lock-In Date, and which of the
“Coverage Plans” Individual has purchased.


There are three potential Coverage Plans. Two of the coverage plans (Plans A and B)
will use a level Payment Percentage while the Account is greater than $0 in order to
ensure that level Coverage Amounts are withdrawn from the Account each year, subject
only to potential upward adjustment for the step-up basis feature and potential
downward adjustment for excess withdrawals. The third plan, Plan C, will adjust the
Payment Percentage in the current Contract year, while the account is still greater than
$0, based on the ten-year Constant Maturity U.S. Treasury rate and a percentage
specified in a table set forth in the Contract (the “Treasury Rate”). Under Plan C, in
addition to a potential upward adjustment for the step-up basis and downward
adjustment for excess withdrawals, the Coverage Amount may fluctuate with the
Treasury Rate.

The Coverage Plans will be used to determine the dollar amount of the Guarantee
Payments. Plan A will multiply the Coverage Base as of the date the account value
reaches zero by the Payment Percentage that was determined on Lock-In Date,
reduced by 1%, in order to determine the Guarantee Payments amount. Plan B will
multiply the Coverage Base as of the date the account value reaches zero by the
Payment Percentage that was determined on the Lock-In Date without the 1% reduction
in order to determine the Guarantee Payments amount. Plan C will multiply the
Coverage Base as of the date the account value reaches zero by the Payment
Percentage that was determined on the Lock-In Date, as adjusted by any positive
Treasury Rate in effect at that time.
PLR-105677-24                                         4

Once the amount of the Guarantee Payments is initially determined, the payments will
continue in that amount for Individual’s life.

Upon Individual’s death, the Contract terminates unless the joint life benefit was
selected. If the joint life benefit was selected and Individual dies before Guarantee
Payments have commenced, then the Individual’s surviving spouse may continue the
Contract in accordance with the terms of the Contract and § 72(s)(3). If the joint life
benefit was selected and Individual dies after the Guarantee Payments commence,
such payments will continue for the remainder of the spouse’s life and will be made at
least as rapidly as they were being made when Individual died.

The Contract does not have a cash value. If Individual chooses to terminate the
Contract, no amount will be payable by Taxpayer. Individual will not be able to receive
a loan from Taxpayer or its affiliates by using the Contract as collateral. Further,
Individual may not assign or transfer any ownership rights under the Contract, including
with respect to the Guarantee Payments.

Taxpayer’s actuaries have analyzed the actuarial and economic characteristics of the
Guarantee Payment features of the Contract, reaching the following conclusions:

1. Like a traditional payout annuity, the cost of the Contract to Taxpayer and its value to
Individual increase as life expectancy increases.

2. From an actuarial pricing and annuity reserving perspective, the longevity risk
protection under the Contract is indistinguishable from that of a traditional variable
annuity contract with a life-contingent fixed annuity payout.

3. The Guarantee Payments protect primarily against longevity risk, rather than market
risk.

4. The effectiveness of the Guarantee Payments as a hedge against market
performance is limited for reasons that include the facts that (1) Individual is required to
invest the assets of the Account consistently with the diversified asset tiers3 set by
Taxpayer; (2) the Contract, not being liquid, will have its value realized, if at all, only
over a long period4; and (3) Guarantee Payments may be made under the Contract
even without market losses if Individual lives for a sufficiently long period of time.

Taxpayer will hold reserves for its liabilities under the Contract. It will report these
reserves on the National Association of Insurance Commissioners (“NAIC”) annual

3 For example, if there is a loss on some assets in the Account offset by gains in other assets in the

Account, the benefits under the Contract would provide no protection against the loss. Similarly, if the
Account in the aggregate experiences a loss and then recovers, the benefits under the contract would
provide no protection against the loss.
4 Taxpayer’s actuaries note that the Contract’s payment features cannot be sold to offset investment

losses, unlike a put option in the capital markets.
PLR-105677-24                                   5

statement that Taxpayer files with the insurance regulatory authorities in each of the
states and other jurisdictions in which Taxpayer conducts its insurance business.
Taxpayer will determine the reserves under the applicable requirements of state law
and regulation. The reserves will reflect the liabilities that Taxpayer has with respect to
Guarantee Payments. Such reserves will reflect the fact that Taxpayer does not own the
assets in the Account. If Taxpayer did own the assets in the Account, the aggregate
amount of reserves it would be required to maintain with respect to the Contract would
be substantially larger.

Taxpayer makes the following additional representations:

1. The Contract will comply with § 72(s).

2. The Contract will be treated as an annuity contract under state law in all states in
which it is offered.

3. Individual will have legal title in, and full control over, the assets held in the Account,
although the Contract may terminate if Individual does not invest those assets in
accordance with the prescribed investment tiers.

4. Taxpayer will account for the Contract on its books and records as an annuity
contract, and not as some other type of financial instrument.

5. Individual will purchase the assets in the Account in transactions entered into for
profit.

6. Individual will include income associated with the Account in gross income, including
income from any gain realized upon disposition of assets in the Account.

7. For purposes of Taxpayer’s federal income tax returns, annual regulatory statements
and filings to the NAIC, and state premium tax obligations, Taxpayer will treat Contract
Fees in the same manner as charges for guaranteed lifetime withdrawal benefits under
a traditional deferred annuity contract.

8. The marketing materials for the Contract will not include any explicit or implicit
representations that changes in the fair market value of the Account or any assets
therein are expected to approximate, directly or inversely, changes in the fair market
value of the Contract.

REQUESTED RULINGS

Taxpayer requests the following rulings:

1. The Contract will be treated as an annuity contract under § 72.
PLR-105677-24                                6

2. The Guarantee Payments will be taxable as “amounts received as an annuity” under
§ 72(b).

3. The Account will not cause the Contract to have a “cash value” or “cash surrender
value” for purposes of § 72, and will not otherwise be part of the Contract for federal tax
purposes.

4. For purposes of § 72(c)(1) and § 72(e)(6) (each defining “investment in the contract”),
the “aggregate amount of premiums or other consideration paid” for the Contract will
equal the sum of all Contract Fees paid to Taxpayer.

LAW AND ANALYSIS

Requested Ruling # 1

Section 72(a) provides that, except as otherwise provided, gross income includes any
amount received as an annuity (whether for a period certain or during one or more lives)
under an annuity, endowment, or life insurance contract.

Section 72(b)(1) provides that gross income does not include that part of any amount
received as an annuity under an annuity, endowment, or life insurance contract which
bears the same ratio to such amount as the investment in the contract (as of the annuity
starting date) bears to the expected return under the contract (as of such date).

Section 72(b)(2) provides that the portion of any amount received as an annuity which is
excluded from gross income under § 72(b)(1) shall not exceed the unrecovered
investment in the contract immediately before the receipt of such amount.

Section 1.72-2(a)(1) of the Income Tax Regulations provides that the contracts under
which amounts paid will be subject to the provisions of § 72 include contracts which are
considered to be life insurance, endowment, and annuity contracts in accordance with
the customary practice of life insurance companies. Under § 1.72-1(b) and (c), as a
general matter “amounts received as an annuity” are amounts which are payable at
regular intervals over a period of more than one full year from the date on which they
are deemed to begin, provided the total of the amounts so payable or the period for
which they are to be paid can be determined as of that date, a proportionate part of
which is considered to represent a return of premiums or other consideration paid.

Under § 1.72-2(b), amounts are considered as “amounts received as an annuity” only if
all of the following tests are met: 1) the amounts must be received on or after the
annuity starting date; 2) the amounts must be payable in periodic installments at regular
intervals over a period of more than one full year from the annuity starting date; and 3)
the amounts payable must be determinable either directly from the terms of the contract
or indirectly from the use of either mortality tables or compound interest computations,
PLR-105677-24                                   7

or both (if the contract is a variable contract, § 1.72-2(b)(3) provides an alternative
formulation of this requirement).

Under § 1.72-4(b)(1), the annuity starting date is the first day of the first period for which
an amount is received as an annuity. The first day of the first period for which an
amount is received as an annuity shall be the later of 1) the date upon which the
obligations under the contract became fixed or 2) the first day of the period which ends
on the date of the first annuity payment.

Explaining the imposition of an “income-out-first” rule under § 72(e) for withdrawals prior
to the annuity starting date, the Senate report described a commercial annuity as

       a promise by a life insurance company to pay the beneficiary a given sum
       for a specified period, which period may terminate at death. Annuity
       contracts permit the systematic liquidation of an amount consisting of
       principal (the policyholder's investment in the contract) and income . . . . An
       individual may purchase an annuity by payment of a single premium or by
       making periodic payments. A deferred annuity contract may, at the election
       of the individual, be surrendered before annuity payments begin, in
       exchange for the cash value of the contract . . . . The committee believes
       that the use of deferred annuity contracts to meet long-term investment
       goals, such as income security, is still a worthy ideal.

S. Rep. No. 97-494 at 349-50 (1982) (footnote omitted). The report also explains § 72's
utilization of an exclusion ratio regime: “[a] portion of each amount paid to a policyholder
as an annuity generally is taxed as ordinary income under an ‘exclusion ratio’ (§ 72(b))
computed to reflect the projected nontaxable return of investment in the contract and
the taxable growth on the investment.” Id. As described in Samuel v. Commissioner,
306 F.2d 682, 687 (1st Cir. 1962), aff’g Archibishop Samuel Trust v. Commissioner, 36
T.C. 641 (1961), acq., 1964-2 C.B. 3:

       Inherent in the concept of an annuity is a transfer of cash or property from
       one party to another in return for a promise to pay a specific periodic sum
       for a stipulated time interval . . . . Again, in the normal annuity situation, once
       the annuitant has transferred the cash or property to the obligor and has
       received his contractual right to periodic payments, he is unconcerned with
       the ultimate disposition of the property transferred once it is in the obligor's
       hands.

In Life Insurance, Black and Skipper state that “[i]n general financial terms, an annuity is
simply a series of periodic payments” and while “[l]ife insurance has as its principal
mission the creation of a fund[, t]he annuity, on the contrary, has as its basic function
the systematic liquidation of a fund.” Kenneth Black, Jr., Harold D. Skipper, and
Kenneth D. Black, III, Life Insurance, 144-45 (15th ed. 2015). Accordingly, “[e]ach
payment under a life annuity is a combination of principal and interest income and a
PLR-105677-24                                   8

survivorship element. Although not completely accurate, one can view the operation of
an annuity as follows: If a person dies precisely at his or her life expectancy, he or she
would have neither gained nor lost through utilizing a life annuity.” Life Insurance at 46.

Elsewhere an annuity has been described as “a right to receive fixed, periodic
payments, for a specified period of time” and an annuity contract as

       a contract under which, in exchange for payment of a premium or premiums,
       the recipient thereof is bound to make future payments, typically at regular
       intervals, in amounts, to payees, and on conditions specified in the parties’
       agreement. The determining characteristic of an annuity is that the
       annuitant has an interest only in the periodic payments and not in any
       principal fund or source from which they may be derived. Although an
       individual who purchases an annuity remains the technical owner of the
       asset, such individual does not retain total control over that asset and does
       not have unfettered access to the full amount of the individual’s own
       property.

4 Am. Jur. 2d Annuities, § 1 (2024). Moreover, “[t]he purchaser of an annuity surrenders
all rights to the money paid, and therefore installment payments of a debt, or payments
of interest on a debt, do not constitute an annuity.” Id., § 2.

Whether an annuity contract allows the owner to access the value of the contract
through other than periodic (“annuity”) payments is a product of the terms of the
contract. 8 New Appleman on Insurance Law Library Edition § 91.02[6][b] (2009).

Here, on balance, the Contract possesses the essential attributes of an annuity. It is
true that the Contract may not, “at the election of [Individual], be surrendered before
annuity payments begin, in exchange for the cash value of the contract,” S. Rep. No.
97-464 at 349. It is also true that because the annuity starting date for the Guarantee
Payments is contingent upon the value of the Account being exhausted while Individual
is alive, it is not the case that “if [Individual] exactly lives out his or her life expectancy,
he or she would have neither gained nor lost through utilizing the annuity contract,” Life
Insurance at 46. However, these conditions are not dispositive.

The Contract and the amounts paid under the Contract meet the requirements of
§§ 1.72-1(b) and (c), 1.72-2(a)(1) and (b)(3), and 1.72-4(b)(1) as an annuity contract
and annuity payments. Additionally, the Contract is purchased “by making periodic
payments” of premium for “a promise by a life insurance company to pay the beneficiary
a given sum for a specified period, which period may terminate at death,” and is “used
to provide long-term income security.” S. Rep. No. 97-464 at 349. Moreover, it has “the
determining characteristic . . . that the annuitant has an interest only in the periodic
payments and not in any principal fund or source from which they may be derived.” 4
Am. Jur. 2d Annuities, § 1 (2024). Individual will have “surrender[ed] all rights to the
PLR-105677-24                                  9

money paid,” thereby distinguishing the Contract from “installment payments of a debt,
or payments of interest on a debt,” which are not annuities. Id.

The Contract is not a contract to pay interest. See § 1.72-14(a).

Accordingly, the Contract will constitute an annuity contract for purposes of § 72.

Requested Ruling # 2

Section 72(a) provides that, except as otherwise provided, gross income includes any
amount received as an annuity (whether for a period certain or during one or more lives)
under an annuity, endowment, or life insurance contract.

Section 72(b)(1) provides that gross income does not include that part of any amount
received as an annuity under an annuity, endowment, or life insurance contract which
bears the same ratio to such amount as the investment in the contract (as of the annuity
starting date) bears to the expected return under the contract (as of such date).

Section 72(b)(2) provides that the portion of any amount received as an annuity which is
excluded from gross income under § 72(b)(1) shall not exceed the unrecovered
investment in the contract immediately before the receipt of such amount.

Section 72(c)(4) defines “annuity starting date” as the first day of the first period for
which an amount is received as an annuity under the contract.

Section 1.72-2(b)(2) defines “amounts received as an annuity” as only those amounts
that meet all of the following tests:

   (i) They must be received on or after the “annuity starting date” as that term is
   defined in § 1.72-4(b);

   (ii) They must be payable in periodic installments at regular intervals (whether
   annually, semiannually, quarterly, monthly, weekly, or otherwise) over a period of
   more than one full year from the annuity starting date; and

   (iii) Except as indicated in § 1.72-2(b)(3), the total of the amounts payable must be
   determinable at the annuity starting date either directly from the terms of the contract
   or indirectly by use of either mortality tables or compound interest computations, or
   both, in conjunction with such terms and in accordance with sound actuarial theory.

Section 1.72-4(b) defines “annuity starting date” as the first day of the first period for
which an amount is received as an annuity; the first day of the first period for which an
amount is received as an annuity shall be whichever of the following is the later:
PLR-105677-24                                       10

    (i) The date upon which the obligations under the contract became fixed, or

    (ii) The first day of the period (year, half-year, quarter, month, or otherwise,
    depending on whether payments are to be made annually, semiannually, quarterly,
    monthly, or otherwise) which ends on the date of the first annuity payment.

Here, with respect to the Guarantee Payments, when the Guarantee Payments become
payable the obligations under the Contract become fixed: no additional Contract Fees
are due, and Taxpayer is obligated to pay the Guarantee Payments until Individual’s
death (or, possibly, the death of Individual’s spouse). Hence, the Guarantee Payments
will be received on or after the annuity starting date.

Second, the Guarantee Payments will be paid periodically at regular intervals over a
period of more than one full year from the annuity starting date (unless death occurs).

Third, the total amount payable is determinable from the Contract using mortality tables
and sound actuarial theory.

Accordingly, the Guarantee Payments will be “amounts received as an annuity.”

The Guarantee Payments will be taxable under § 72(a) as amounts received as an
annuity, subject to the exclusion of the amount of each payment allocable to the
investment in the contract determined under § 72(b).

Requested Ruling # 3

Section 72 does not define the terms “cash value” or “cash surrender value” with regard
to an annuity contract. With regard to a life insurance contract, § 7702(f)(2)(A) defines
“cash surrender value” as “cash value determined without regard to any surrender
charge, policy loan, or reasonable termination dividend.” Section 1.7702-2(h)(2) of the
Proposed Income Tax Regulations defines “cash surrender value” of a life insurance
contract as generally equaling its “cash value,” which in turn is defined by proposed
§ 1.7702-2(b)(1) as the greater of “(i) [t]he maximum amount payable under the contract
(determined without regard to any surrender charge or policy loan); or (ii) [t]he
maximum amount that the policyholder can borrow under the contract.”5 See also H.R.
Rep. No. 98-432 at 1444.

The term “cash value” commonly connotes the amount available to a policyholder for
withdrawal or upon surrender of the contract. See, e.g., Life Insurance at 41-42; see
also John H. Magee, Life Insurance 599 (3d ed. 1958) (“The cash value represents the
amount available to the policyholder upon the surrender of the life insurance contract.”)



5 Cf. proposed § 1.7702-2(b)(2), which provides certain exclusions from cash value, none of which are

relevant to this discussion.
PLR-105677-24                                 11

Rev. Rul. 77-85, 1977-1 C.B. 12, addressed an arrangement involving an “investment
annuity policy” that has some features similar to Taxpayer’s proposed arrangement. In
the ruling, the policyholder could not receive any amount directly from the account and
could not receive a distribution of assets in kind. At any time prior to the annuity starting
date, however, the policyholder could make a full or partial surrender of the policy to the
insurance company. If such a surrender were made, the custodian was directed by the
agreement to sell all or part of the assets as appropriate and to pay over the necessary
proceeds to the insurance company. The insurance company in turn would make the full
or partial cash surrender payment to the policyholder in an amount equal to the
proceeds received by the insurance company from the account, less any cash
surrender charges.

The ruling does not address whether the underlying account created any “cash value” or
“cash surrender value” for the investment annuity policy. Nonetheless, the contrast in
the mechanics illustrates the loose connection between the Account and
the Contract. The Contract cannot be monetized at the discretion of Individual other
than through receipt of Guarantee Payments. It cannot be assigned, cannot be
surrendered in whole or part in exchange for cash, and cannot be used as collateral
against a loan from Taxpayer. The connection to the Account is unlike that in the ruling -
the Account’s value is used only to pay the Contract Fees. Individual can access the
Account’s value without operation of the Contract, though with consequences if, for
example, such access produces a withdrawal that exceeds the maximum withdrawal
amount (an excess withdrawal) or if the assets selected by Individual are not consistent
with the investment options approved by Taxpayer.

Although the Contract (1) has utility only in conjunction with an eligible Account, (2)
controls, to some extent, Individual’s activities with regard to that Account, and (3)
cannot be alienated or otherwise monetized, the Account is not so intertwined with the
Contract as to be effectively part of the Contract. Cf. Rev. Rul. 77-85; Rev. Rul. 2003-
97, 2003-2 C.B. 380.

Accordingly, the Account will not cause the Contract to have a “cash value” or “cash
surrender value” for purposes of § 72, and will not otherwise be part of the Contract for
federal income tax purposes.

Requested Ruling # 4

Section 72(c)(1) provides that, for purposes of the exclusion ratio under § 72(b), the
“investment in the contract” as of the annuity starting date is the aggregate amount of
premiums or other consideration paid for the contract, minus the aggregate amount
received under the contract before such date, to the extent that such amount was
excludable from gross income. Under § 72(c)(2), this amount is then reduced by the
value of the refund feature, if any.
PLR-105677-24                                 12

Section 72(e)(6) provides that for purposes of § 72(e), the “investment in the contract”
as of any date is the aggregate amount of premiums or other consideration paid for the
contract before such date, minus the aggregate amount received under the contract
before such date, to the extent that such amount was excludable from gross income.

As mentioned, Rev. Rul. 77-85 addressed an arrangement with some similar features.
That ruling held that the issuer should include in its premium income only the premiums
and charges paid each year.

Accordingly, with regard to Guarantee Payments, the Contract Fees should be taken
into account in the determination of Individual’s “investment in the contract” for the
Contract under § 72.

RULINGS

1. The Contract will be treated as an annuity contract under § 72.

2. The Guarantee Payments will be taxable as “amounts received as an annuity” under
§ 72(b).

3. The Account will not cause the Contract to have a “cash value” or “cash surrender
value” for purposes of § 72, and will not otherwise be part of the Contract for federal tax
purposes.

4. For purposes of § 72(c)(1) and § 72(e)(6) (each defining “investment in the contract”),
the “aggregate amount of premiums or other consideration paid” for the Contract will
equal the sum of all Contract Fees paid to Taxpayer.

CAVEATS

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by penalty of perjury statements executed by
appropriate parties. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including but not limited to issues under Subchapter D (§ 401 et seq.), the
computation of the exclusion ratio under § 72(b), the characterization of the reserve
under § 816(b), or the computation of the amount of any reserve.

This ruling letter is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

Taxpayer must attach a copy of this letter ruling to any tax return to which it is relevant.
PLR-105677-24                                            13


In accordance with a power of attorney on file in this office, a copy of this ruling is being
furnished to your authorized representatives.


                                                Sincerely,


                                                ___________________________
                                                John E. Glover
                                                Senior Counsel, Branch 4
                                                Office of Associate Chief Counsel
                                                (Financial Institutions & Products)




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