Diversification Requirements for Variable Annuity

Official source: Federal Register (GovInfo) (https://www.govinfo.gov/content/pkg/FR-2005-03-01/pdf/05-3825.pdf), retrieved 2026-10-03. U.S. Government work (17 U.S.C. § 105).

Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Rules and Regulations 9869

species by catcher/processors listed in paragraphs 208(e)(1) through (e)(20) and section 209 of the AFA in non-pollock target fisheries divided by the sum of the catch of that species in 1995 through 1997 multiplied by the TAC of that species available for harvest by catcher/ processors in the year in which the harvest limit will be in effect.

(ii) If the amount of a species calculated under paragraph (a)(4)(i) of this section is determined by the Regional Administrator to be insufficient to meet bycatch needs for AFA catcher/processors in other directed fisheries for groundfish, the Regional Administrator will prohibit directed fishing for that species by AFA catcher/processors and establish the sideboard amount equal to the amount of that species caught by AFA catcher/ processors incidental to directed fishing for other groundfish species.

- - - (b) Harvesting sideboards for AFA catcher vessels . The Regional Administrator will restrict the ability of AFA catcher vessels to engage in directed fishing for other groundfish species to protect participants in other groundfish fisheries from adverse effects resulting from the AFA and from fishery cooperatives in the BS subarea directed pollock fishery.
- - - (3) How will groundfish sideboard limits be calculated ? Except for Aleutian Islands pollock, the Regional Administrator will establish annual AFA catcher vessel harvest limits for each groundfish species or species group in which a TAC is specified for an area or subarea of the GOA and BSAI as follows:

I 19. In § 679.65, paragraphs (a) and (b) are revised to read as follows:

§ 679.65 Crab processing sideboard limits.

(a) What is the purpose of crab processing limits ? The purpose of crab processing sideboard limits is to protect processors not eligible to participate in the BS subarea directed pollock fishery from adverse effects as a result of the AFA and the formation of fishery cooperatives in the BS subarea directed pollock fishery.

(b) To whom do the crab processing sideboard limits apply ? The crab processing sideboard limits in this section apply to any AFA inshore or mothership entity that receives pollock harvested in the BS directed pollock

fishery by a fishery cooperative established under § 679.61 or § 679.62.

[FR Doc. 05–3788 Filed 2–24–05; 2:55 pm]

BILLING CODE 3510–22–S

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9185]

RIN 1545–BB77

Diversification Requirements for Variable Annuity, Endowment, and Life Insurance Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations removing provisions of the Income Tax Regulations that apply a look-through rule to assets of a nonregistered partnership for purposes of satisfying the diversification requirements of section 817(h) of the Internal Revenue Code.

DATES: Effective Date: These regulations are effective as of March 1, 2005. However, arrangements in existence on March 1, 2005, will be considered to be adequately diversified if: (i) Those arrangements were adequately diversified within the meaning of section 817(h) prior to March 1, 2005, and (ii) by December 31, 2005, the arrangements are brought into compliance with the final regulations.

Applicability Date: For dates of applicability, see § 1.817–5(i).

FOR FURTHER INFORMATION CONTACT: James Polfer, (202) 622–3970 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

Under section 817(h), a variable contract based on a segregated asset account is not treated as an annuity, endowment, or life insurance contract unless the segregated asset account is adequately diversified. For purposes of testing diversification, section 817(h)(4) and § 1.817–5(f) of the regulations provide a look-through rule for assets held through certain investment companies, partnerships, or trusts. Section 1.817–5(f)(2)(i) provides that look-through treatment is available with respect to any investment company, partnership, or trust only if all the beneficial interests in the investment company, partnership, or trust are held

by one or more segregated asset accounts of one or more insurance companies, and public access to such investment company, partnership, or trust is available exclusively (except as otherwise permitted by section 1.817– 5(f)(3)) through the purchase of a variable contract. Under § 1.817– 5(f)(2)(ii), the look-through rule applies to a partnership interest that is not registered under a Federal or state law regulating the offering or sale of securities. Unlike § 1.817–5(f)(2)(i), satisfaction of the nonregistered partnership look-through rule of § 1.817–5(f)(2)(ii) is not explicitly conditioned on limiting the ownership of interests in the partnership to certain specified holders.

On July 30, 2003, the Treasury Department and the IRS published a notice of proposed rulemaking (REG– 163974–02) under section 817 in the Federal Register (68 FR 44689). The proposed regulations would remove the rule that applies specifically to nonregistered partnerships for purposes of testing diversification. The proposed regulations also would remove an example that illustrates that rule.

The application of § 1.817–5(f)(2)(i) to interests in nonregistered partnerships will be unchanged by the removal of § 1.817–5(f)(2)(ii). Thus, look-through treatment will be available for interests in a nonregistered partnership if all the beneficial interests in the partnership are held by one or more segregated asset accounts of one or more insurance companies and public access to the partnership is available exclusively (except as otherwise permitted by § 1.817–5(f)(3)) through the purchase of a variable contract.

Written comments were received in response to the notice of proposed rulemaking. A public hearing on the notice of proposed rulemaking was held on April 1, 2004. After consideration of all the comments and the hearing testimony, the proposed regulations are adopted as amended by this Treasury decision.

Explanation and Summary of Comments

In addition to requesting comments on the clarity of the proposed rule and how the rule could be made easier to understand, the Treasury Department and the IRS specifically requested comments on: (1) Whether revocation of § 1.817–5(f)(2)(ii) necessitates other changes to the look-through rules of § 1.817–5(f), in particular whether the list of holders permitted by § 1.817– 5(f)(3) should be amended or expanded, and whether a non-pro-rata distribution of the investment returns of a segregated

VerDate jul<14>2003 14:21 Feb 28, 2005 Jkt 205001 PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1

9870 Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Rules and Regulations

manager of an investment company, partnership, or trust in a manner specified in section 707(b); certain investment professionals operating as service providers; or persons who receive interests in a partnership as a result of inadvertent transfers, such as by bankruptcy or death of the permitted investor. The sole speaker at the public hearing on the notice of proposed rulemaking testified that the list of investors permitted by § 1.817–5(f)(3) should be expanded to include ‘‘floor specialists’’ as that term is defined in section 1236(d)(2).

Other comments suggested guidance on non-pro-rata manager compensation. In order for the manager (or a corporation related in a manner specified in section 267(b) to the manager) of an investment company, partnership, or trust, to be a permitted investor under § 1.817–5(f)(3)(ii), (1) its interest must be held in connection with the creation or management of the investment company, partnership, or trust; (2) the return on such interest must be computed in the same manner as the return on an interest held by a segregated asset account is computed (determined without regard to expenses attributable to variable contracts); and (3) there must be no intent to sell such interest to the public. A number of commentators stated that the requirement that the return on a manager’s interest be computed in the same manner as the return on a segregated asset account’s interest— essentially a pro-rata distribution requirement—is inconsistent with prevailing market practices concerning manager bonuses, discourages the creation of insurance dedicated funds, and is not necessary to prevent abuse of the look-through rules contained in § 1.817–5(f).

Some comments stated there is a need to clarify the consequences to a variable contract and variable contract holder when the contract’s segregated asset account contains an asset in which beneficial interests are held by investors (such as qualified plans) that qualified as permitted investors in § 1.817–5(f)(2) or (3) at the time of initial investment, but subsequently lose their status. Similarly, one commentator urged that if an insurance company has a reasonable basis to believe that an investment company, partnership, or trust satisfies the requirements of § 1.817–5(f)(2), a variable contract of that insurance company should be permitted to look-through that entity for purposes of testing a segregated asset account on which that contract is based, even if the investment company, partnership, or trust has investors not

asset account should be permitted to take account of certain bonus payments to investment managers commonly referred to as incentive payments, (2) whether § 1.817–5 should be updated to take account of changes to variable contracts since the final regulations were published in 1986, and (3) whether regulations are needed to address when a holder of a variable contract will be treated as the owner of assets held in a segregated asset account and, therefore, required to include earnings on those assets in income.

1. Comments on the Proposed Regulations

Two comments on the proposed regulation concerned the definition of ‘‘security’’ in § 1.817–5(h)(6). Under § 1.817–5(b)(1)(ii)(A), all securities of the same issuer are treated as one investment for the purposes of satisfying the diversification requirements. Section 1.817–5(h)(6) provides that the term security includes ‘‘a cash item and any partnership interest registered under a Federal or state law regulating the offering or sale of securities,’’ but does not include ‘‘any other partnership interest.’’ The commentators stated that the definition of ‘‘security’’ that applies to § 1.817–5 should be amended to include an interest in a non-registered partnership. The Treasury Department and the IRS agree that, in light of the revocation of former § 1.817–5(f)(2)(ii), the definition of security should be modified to remove the distinction between registered and nonregistered partnership interests. The final regulations reflect this change.

A number of commentators also suggested that the regulation should be clarified by adding to or otherwise revising the examples contained in § 1.817–5(g). In response to these comments, the final regulations revise § 1.817–5(g) Example 1 to remove the reference to partnership P as a publicly registered partnership. The Treasury Department and the IRS believe that, with this change, the examples contained in § 1.817–5(g) adequately explain the application of § 1.817–5 to partnership interests. Any questions concerning the application of § 1.817–5 to more specific factual scenarios may be addressed by the letter ruling process or by subsequent published guidance.

Two commentators urged that existing arrangements either should be grandfathered in some fashion or should be given additional time to be brought into compliance with the final regulations. The notice of proposed rulemaking provided that arrangements in existence on the effective date of the

revocation of § 1.817–5(f)(2)(ii) will be considered to be adequately diversified if: (i) Those arrangements were adequately diversified within the meaning of section 817(h) prior to the revocation of § 1.817–5(f)(2)(ii), and (ii) by the end of the last day of the second calendar quarter ending after the effective date of the regulation, the arrangements are brought into compliance with the final regulations. The Treasury Department and the IRS do not believe it is appropriate to grandfather existing arrangements indefinitely. In response to these comments, however, the transition period for existing arrangements to be brought into compliance with the regulations is two calendar quarters longer than the period provided in the proposed regulations.

Finally, one commentator questioned the authority of the Treasury Department and the IRS to enact this final regulation because ‘‘the only substantive impetus for the regulation is a general statement in the legislative history.’’ Congress enacted the diversification requirements of section 817(h) to ‘‘discourage the use of taxpreferred variable annuity and variable life insurance primarily as investment vehicles,’’ H.R. Conf. Rep. No. 98–861, at 1055 (1984), and granted the Secretary broad regulatory authority to develop rules to carry out this intent. The Treasury Department and the IRS have determined that this final regulation and the rest of the regulations contained in § 1.817–5 were prescribed within the delegation of authority provided by Congress.

2. Comments on § 1.817–5 More Generally

Many comments concerned the list of permitted investors under § 1.817– 5(f)(3). Notwithstanding the limitations on public access to an investment company, partnership, or trust that is subject to look-through treatment under § 1.817–5(f), § 1.817–5(f)(3) permits look-through treatment if the beneficial interests of the investment company, partnership, or trust are held by certain other ‘‘permitted investors,’’ including the general account of a life insurance company (if certain requirements are met), the manager or a corporation related to the manager (if certain requirements are met), or the trustee of a qualified plan. Commentators suggested that the list of permitted investors be expanded to include, for example, qualified tuition programs described in section 529; segregated asset accounts of foreign insurance companies; foreign pension plans; persons or entities related to the

VerDate jul<14>2003 14:21 Feb 28, 2005 Jkt 205001 PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1

Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Rules and Regulations 9871

tax liability’’ limitation was intended to apply only to tax on unrelated business income. Finally, one commentator noted that, given the inherent factual nature of the determination whether a contract holder is treated as the owner of segregated account assets, the issue is better addressed by letter ruling or revenue ruling, rather than by regulations.

Although the comments on investor control are not adopted in this Treasury decision, they are responsive to the request for comments in the July 30, 2003, notice of proposed rulemaking and will receive careful attention in the event of further guidance on investor control.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is James Polfer, Office of the Associate Chief Counsel (Financial Institutions and Products), Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendment to the Regulations

I Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAX

I Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * - Section 1.817–5 also issued under 26 U.S.C. 817(h). * -

described in § 1.817–5(f)(2) or (3). The commentator suggested that this standard would be consistent with the standard of determination often used in the Federal securities laws.

Other comments included a request for clarification of the treatment of fundof-funds and master-feeder arrangements for purposes of testing diversification; the desirability of an updated correction procedure for failure to satisfy the diversification requirements of section 817(h) and § 1.817–5; guidance concerning the use of independent investment advisors; and extension of the special diversification rules for United States Treasury securities under section 817(h)(3) and § 1.817–5(b)(3) to variable annuity contracts. (The latter comment presumably would require a change to section 817(h)(3), as well as to the regulations.)

Although the comments on § 1.817–5 generally are not adopted in this Treasury decision, the Treasury Department and IRS will consider these comments in the event of future published guidance. For example, Rev. Rul. 2005–7 (2005–6 I.R.B.) ( see § 601.601 (d)(2)(ii)( b ) of this chapter) provides guidance on the application of the diversification look-through rule to tiered investment companies.

3. Comments on Investor Control Finally, some comments concerned the need for additional guidance addressing circumstances under which the holder of a variable contract will be treated as the owner of assets held by a segregated asset account by virtue of the control the contract holder has over those assets. Under Rev. Rul. 81–225, 1981–2 C.B. 12 ( see § 601.601(d)(2)(ii)(b) of this chapter), the owner of a variable annuity contract funded by publicly available mutual fund shares is treated as the owner of those shares. Rev. Rul. 2003–92, 2003–33 I.R.B. 350 ( see § 601.601(d)(2)(ii)( b ) of this chapter), clarified and amplified Rev. Rul. 81–225 by applying the same rule to variable life insurance contracts, and by treating as publicly available a nonregistered partnership, interests in which are sold only to qualified purchasers that are accredited investors or to no more than one hundred accredited investors. See also Rev. Rul. 2003–91, 2003–33 I.R.B. 347; Rev. Rul. 82–54, 1982–1 C.B. 11; Rev. Rul. 80–274, 1980–2 C.B. 27; Rev. Rul. 77–85, 1977–1 C.B. 12.; Christoffersen v. U.S., 749 F.2d 513 (8th Cir. 1984), rev’g 578 F. Supp. 398 (N.D. Iowa 1984). See § 601.601(d)(2)(ii)( b ) of this chapter.

One commentator urged that Rev. Rul. 2003–92 should not be applied

retroactively to treat certain investors as the ‘‘general public’’ as that term is used in Rev. Rul. 81–225. Specifically, the commentator requested relief for investments in real estate partnerships, interests in which are held directly by (1) organizations described in section 501(c)(3), and (2) such partnerships’ investment managers, if those managers are not described in § 1.817–5(f)(3)(ii) because of bonus payment arrangements. The commentator believed such relief is warranted because of uncertainty concerning the meaning of ‘‘general public’’ as that term is used in Rev. Rul. 81–225. Several other commentators suggested that regulations under section 817 should clarify that the permitted investors under § 1.817–5(f)(3) do not constitute the ‘‘general’’ public as that term is used in Rev. Rul. 2003–92 and Rev. Rul. 81–225. According to these commentators, it would be anomalous for ownership by a permitted investor under § 1.817–5(f)(3) to result in a variable contract holder being treated as the owner of an investment company, partnership, or trust, when the lookthrough rule itself appears to endorse ownership by that same investor for purposes of testing diversification. Still another commentator noted that when determining whether a contract holder is treated as the owner of segregated account assets, communications between investment advisors or officers and variable contract holders should be permitted if the communications are consistent with Federal securities and commodities laws.

One commentator suggested that the preamble to this Treasury decision should confirm the intended scope of Rev. Proc. 99–44, 1999–2 C.B. 598. Under Rev. Proc. 99–44, a contract is treated as an annuity contract described in sections 403(a), 403(b), or 408(b), notwithstanding that contract premiums are invested at the direction of the contract holder in publicly available securities, so long as certain requirements are met. Those requirements include a limitation that no additional Federal tax liability would have been incurred if the employer of the contract holder had instead paid amounts into a custodial account in an arrangement that satisfied the requirements of section 403(b)(7)(A) or no additional Federal tax liability would have been incurred if the consideration for the contract had instead been held as part of a trust that would satisfy the requirements of section 408(a), as applicable. The commentator urged that the preamble to this Treasury decision clarify that the ‘‘no additional Federal

VerDate jul<14>2003 14:21 Feb 28, 2005 Jkt 205001 PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1

9872 Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Rules and Regulations

I Par. 2. Section 1.817–5 is amended as follows:

I 1. Paragraphs (f)(2)(ii) and (g) Example 3 are removed.

I 2. Paragraph (f)(2)(iii) is redesignated as paragraph (f)(2)(ii).

I 3. The first sentence of paragraph (g) Example 1 is revised.

I 4. Paragraph (g) Example 4 is redesignated as paragraph (g) Example 3.

I 5. Paragraph (h)(6) is revised.

I 6. New paragraph (i)(2)(v) is added.

The revisions read as follows:

§ 1.817–5 Diversification requirements for variable annuity, endowment, and life insurance contracts.

- - - (g) * -

Example 1. (i) The assets underlying variable contracts issued by a life insurance company consist of two groups of assets: (a) a diversified portfolio of debt securities and (b) interests in P, a partnership. * -

- - - (h) * - (6) Security. The term security shall include a cash item and any partnership interest, whether or not registered under a Federal or State law regulating the offering or sale of securities. The term shall not include any interest in real property, or any interest in a commodity.
- - - (i) * - (2) * - (v) A segregated asset account in existence before March 1, 2005, will be considered to be adequately diversified if—

(A) As of March 1, 2005, the account was adequately diversified within the meaning of section 817(h) and this regulation as in effect prior to that date; and

(B) By December 31, 2005, the account is adequately diversified within the meaning of section 817(h) and this regulation.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

Approved: February 15, 2005. Eric Solomon, Acting Deputy Assistant Secretary of the Treasury.

[FR Doc. 05–3825 Filed 2–28–05; 8:45 am]

BILLING CODE 4830–01–P

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 62

[R01–OAR–2004–ME–0002a; A–1–FRL– 7876–8 ]

Approval and Promulgation of Air Quality Implementation Plans; Maine; Control of Total Reduced Sulfur From Kraft Pulp Mills

AGENCY: Environmental Protection Agency (EPA).

ACTION: Direct final rule.

SUMMARY: The EPA is approving a revision to Maine’s plan for controlling air pollution according to section 111(d) of the Clean Air Act ( i.e., a ‘‘111(d) plan’’). This revision changes state regulations controlling the emission of total reduced sulfur (‘‘TRS’’) from existing kraft paper mills by making April 17, 2007 the compliance date for brownstock washers. This action is being taken in accordance with section 111(d) of the Clean Air Act (‘‘CAA’’).

DATES: This direct final rule will be effective May 2, 2005, unless EPA receives adverse comments by March 31, 2005. If adverse comments are received, EPA will publish a timely withdrawal of the direct final rule in the Federal Register informing the public that the rule will not take effect.

ADDRESSES: Comments may be mailed to Lucy Edmondson, acting Unit Manager, Air Permits, Toxics and Indoor Program Unit, Office of Ecosystem Protection (mail code CAP), U.S. Environmental Protection Agency, EPA New England Regional Office, One Congress Street, Suite 1100, Boston, MA 02114–2023. Comments may also be submitted electronically, or through hand delivery/courier. Please follow the detailed instructions described in Part (I)(B)(1)(i) through (iii) of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Ian D. Cohen, Air Permits, Toxics, and Indoor Air Programs Unit, U.S. Environmental Protection Agency, EPA New England Regional Office, One Congress Street, Suite 1100 (CAP), Boston, MA 02114–2023, cohen.ian@epa.gov.

SUPPLEMENTARY INFORMATION:

I. General Information

A. How Can I Get Copies of This Document and Other Related Information?

The Regional Office has established an official public rulemaking file available for inspection at the Regional Office. EPA has established an official

public rulemaking file for this action under R01–OAR–2004–ME–0002. The official public file consists of the documents specifically referenced in this action, any public comments received, and other information related to this action. Although a part of the official docket, the public rulemaking file does not include Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. The official public rulemaking file is the collection of materials that is available for public viewing at the Office of Ecosystem Protection, U.S. Environmental Protection Agency, EPA New England Regional Office, One Congress Street, Suite 1100, Boston, MA. EPA requests that if at all possible, you contact the contact listed in the FOR FURTHER INFORMATION CONTACT section to schedule your inspection. The Regional Office’s official hours of business are Monday through Friday, 8:30 to 4:30 excluding Federal holidays.

Copies of the State submittal and EPA’s technical support document are also available for public inspection during normal business hours, by appointment at the State Air Agency. Department of Environmental Protection, First Floor of the Tyson Building, Augusta Mental Health Institute Complex, Augusta, ME 04333– 0017; Division of Air Quality Control.
Electronic Access. You may access this Federal Register document electronically through the Regulations.gov web site located at http://www.regulations.gov where you can find, review, and submit comments on Federal rules that have been published in the Federal Register, the Government’s legal newspaper, and are open for comment.

For public commenters, it is important to note that EPA’s policy is that public comments, whether submitted electronically or in paper, will be made available for public viewing at the EPA Regional Office, as EPA receives them and without change, unless the comment contains copyrighted material, CBI, or other information whose disclosure is restricted by statute. When EPA identifies a comment containing copyrighted material, EPA will provide a reference to that material in the version of the comment that is placed in the official public rulemaking file. The entire printed comment, including the copyrighted material, will be available at the Regional Office for public inspection.

VerDate jul<14>2003 14:21 Feb 28, 2005 Jkt 205001 PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 E:\FR\FM\01MRR1.SGM 01MRR1