Citing to an article I published in 2003,* Judge Lauber of the US Tax Court in Webber v. Commissioner, 144 T.C. No. 17 (June 30, 2015) found that the taxpayer, the owner through a grantor trust of private placement life insurance policies, was taxable on all income earned by the policies because he exercised too much control over the investments owned within the policies.
While an important case given the rarity of guidance in this area, it is also a fairly obvious result. There are two types of investor control:
(1) one is the type of direct control over the investment assets and decisions exercised by Mr. Webber,
(2) the other derives from an interpretation of more oblique factors (such as whether the underlying investment funds are publicly available) that may or may not indicate investor control and, depending on who you believe, may be largely supplanted by section 817(h).
In finding that Mr. Webber made the investment decisions that should have been reserved to the investment manager employed by the insurance company--the first test recited above--the Court held that the taxpayer was clearly in violation of the investor control doctrine. Judge Lauber called this “the bedrock ‘investor control’ principles enunciated in Revenue Ruling 77-85.” No surprise there; the fact that the case was litigated is more surprising.
What was not at issue in this case and was not addressed, except in footnote 19, where my article was cited, was the second type of investor control and the type I have written about repeatedly. While neither adopting nor rejecting the rationale in the article, Judge Lauber’s dicta lends support to my conclusion by stating that “the section 817(h) diversification standards may supersede some aspects of the pre-1984 revenue rulings that discuss publicly available investments held by segregated asset accounts.”
Whether the IRS' rulings delineating the second type of investor control has survived enactment of section 817(h) still awaits a case addressing that issue.
*David S. Neufeld, "The 'Keyport Ruling' and the Investor Control Rule: Might Makes Right?," 98 Tax Notes 403, 405 (2003) available in the Articles page