FROM THE OFFICE OF PUBLIC AFFAIRS

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Today the Treasury Department and the Internal Revenue Service proposed a regulation that would further limit the use of life insurance and annuity contracts as a way to avoid current taxation of investment earnings.  The regulation, together with Revenue Ruling 2003-92 issued on July 23, 2003, will prevent taxpayers from turning otherwise taxable investments in hedge funds and other entities into tax-deferred or tax-free investments merely by purchasing the investments through a life insurance or annuity contract.

“Life insurance and annuity contracts serve an important function – providing death benefit protection to the beneficiaries of an insured and providing lifetime retirement savings protection,” stated Treasury Assistant Secretary for Tax Policy Pam Olson. “Unfortunately some individuals have used the cover of insurance or annuities for the purpose of avoiding taxes on investment income. This regulation is another step in our ongoing efforts to stem tax avoidance transactions—we will continue to identify abusive transactions and take the steps necessary to prevent abuse.”

Life insurance and annuity contracts receive favorable tax treatment in recognition of the importance of protecting loved ones against the potentially devastating financial consequences of death or the risk of exhausting savings while in retirement.  Taxpayers should be able to purchase a life insurance or annuity contract secure in the knowledge that the contract complies with the tax laws.  The tax rules applicable to life insurance and annuity contracts have not, however, kept pace with the development of the financial markets over the past fifteen years. These rules must be updated so that life insurance and annuity contracts may evolve to continue to serve their important function and to prevent their use for purposes Congress did not intend.

The regulation proposed today, Revenue Ruling 2003-92 and Revenue Ruling 2003-91 are an important part of the effort to modernize the rules.  The proposed regulation requests taxpayer comments on how the rules governing the tax treatment of life insurance and annuity contracts should be updated to provide needed assurance to those who purchase these contracts for legitimate purposes, to prevent abuse, and to take account of the evolution of the financial markets.  

Related Documents:

• The text of the proposed regulation