Thursday, June 17, 2004

Charlene Luke (Florida State) presents The Investor Control Doctrine: Constraining the Abuse of Variable Insurance Products today at Florida State. Here is the abstract:

The investor control doctrine was developed by the IRS in the late 1970s and early 1980s, and it is a specialized “substance-over-form” theory applicable only to variable insurance products. The doctrine contains both a more ambiguous, “facts and circumstances” test and a bright line rule. Violation of either test will cause an insurance contractholder to be deemed the owner of the assets underlying the variable product and so lose the tax preference on inside buildup. The “facts and circumstances” test is basically an application of assignment-of-income cases—such as Helvering v. Clifford—to the variable insurance context. The bright line rule prohibits variable contract accounts from directly investing in publicly available investments. Last year, Treasury invoked this doctrine to curb the practice of wrapping publicly available hedge funds inside variable insurance contracts. However, it seems likely that taxpayers will simply turn to indirect ways of investing in such hedge funds, such as through the establishment of clone funds. The paper will explore the development of the investor control doctrine and discuss possible reasons why it failed to constrain the recent direct investment in public hedge funds and why—even in its most recent incarnation—it will likely fail to stop the use of close substitutes. The paper will also look at ways in which the doctrine could be improved and whether the doctrine’s development could be used to evaluate the likely success of attempts to tax other financial products.