[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.801-7]

[Page 599-600]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.801-7  Variable annuities.

    (a) In general. (1) Section 801(g)(1) provides that for purposes of 
part I, subchapter L, chapter 1 of the Code, an annuity contract 
includes a contract which provides for the payment of a variable annuity 
computed on the basis of recognized mortality tables and the investment 
experience of the company issuing such a contract. A variable annuity 
differs from the ordinary or fixed dollar annuity in that the annuity 
benefits payable under a variable annuity contract vary with the 
insurance company's investment experience with respect to such contracts 
while the annuity benefits paid under a fixed dollar annuity contract 
are guaranteed irrespective of the company's actual investment earnings.
    (2) The reserves held with respect to the annuity contracts 
described in section 801(g)(1) and subparagraph (1) of this paragraph 
shall qualify as life insurance reserves within the meaning of section 
801(b)(1) and paragraph (a) of Sec. 1.801-4 provided such reserves are 
required by law (as defined in paragraph (b) of Sec. 1.801-5) and are 
set aside to mature or liquidate, either by payment or reinsurance, 
future unaccrued claims arising from such contracts involving, at the 
time with respect to which the reserve is computed, life, health, or 
accident contingencies. Accordingly, a company issuing variable annuity 
contracts shall qualify as a life insurance company for Federal income 
tax purposes if it satisfies the requirements of section 801(a) 
(relating to the definition of a life insurance company) and paragraph 
(b) of Sec. 1.801-3.
    (b) Special rules for variable annuities--(1) Adjusted reserves 
rate; assumed rate. The adjusted reserves rate for any taxable year with 
respect to the annuity contracts described in section 801(g)(1) and 
paragraph (a)(1) of this section, and the rate of interest assumed by 
the taxpayer for any taxable year in calculating the reserve on any such 
contract, shall be a rate equal to the current earnings rate determined 
under section 801(g)(3) and subparagraph (2) of this paragraph. However, 
any change in the rate of interest assumed by the taxpayer in 
calculating the reserve on a variable annuity contract for any taxable 
year which is attributable to

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an increase or decrease in the current earnings rate, shall not be 
treated as a change of basis in computing reserves for purposes of 
section 806(b) (relating to certain changes in reserves) or section 810 
(d)(1) (relating to adjustment for change in computing reserves).
    (2) Current earnings rate. (i) The current earnings rate for any 
taxable year with respect to the annuity contracts described in section 
801(g)(1) and paragraph (a)(1) of this section shall be the current 
earnings rate determined under section 805(b)(2) and paragraph (a)(2) of 
Sec. 1.805-5 with respect to such contracts, reduced by the percentage 
obtained by dividing (a) the amount of the actuarial margin charge on 
all such variable annuity contracts issued by the taxpayer, by (b) the 
mean of the reserves for such contracts.
    (ii) For purposes of section 801(g)(3) and subdivision (i) of this 
subparagraph, the term actuarial margin charge means any amount retained 
by the company from gross investment income pursuant to the terms of the 
variable annuity contract in excess of any portion of the investment 
expenses which is attributable to such contract and which is deductible 
under section 804(c) and paragraph (b) of Sec. 1.804-4.
    (3) Increases and decreases in reserves. (i) Section 801(g)(4) 
provides that for purposes of section 810 (a) and (b) (relating to 
adjustments for increases or decreases in certain reserves), the sum of 
the items described in section 810(c) and paragraph (b) of Sec. 1.810-2 
taken into account as of the close of the taxable year shall be 
adjusted:
    (a) By subtracting therefrom the sum of any amounts added from time 
to time (for the taxable year) to the reserves for variable annuity 
contracts described in section 801(g)(1) and paragraph (a)(1) of this 
section by reason of realized or unrealized appreciation in the value of 
the assets held in relation thereto, and
    (b) By adding thereto the sum of any amounts subtracted from time to 
time (for the taxable year) from such reserves by reason of realized or 
unrealized depreciation in the value of such assets.
    (ii) The application of section 801(g)(4) and subdivision (i) of 
this subparagraph may be illustrated by the following example:

    Example. Company M, a life insurance company issuing only variable 
annuity contracts of the type described in section 801(g)(1) and 
paragraph (a)(1) of this section, increased its life insurance reserves 
held with respect to such contracts during the taxable year 1959 by 
$275,000. Of the total increase in the reserves, $100,000 was 
attributable to premium receipts, $50,000 to dividends and interest, 
$100,000 to unrealized appreciation in the value of the assets held in 
relation to such reserves, and $25,000 to realized capital gains on the 
sale of such assets. As of the close of the taxable year 1959, the 
reserves held by company M with respect to all variable annuity 
contracts amounted to $1,275,000. However, under section 801(g)(4) and 
subdivision (i) of this subparagraph, this amount must be reduced by the 
$100,000 unrealized asset value appreciation and the $25,000 of realized 
capital gains. Accordingly, for purposes of section 810 (a) and (b), the 
amount of these reserves which is to be taken into account as of the 
close of the taxable year 1959 under section 810(c) is $1,150,000 
($1,275,000 less $125,000).

    (c) Companies issuing variable annuities and other contracts. (1) In 
the case of a life insurance company which issues both annuity contracts 
described in section 801(g)(1) and paragraph (a)(1) of this section and 
other contracts, the policy and other contract liability requirements 
(as defined in section 805(a) and paragraph (b) of Sec. 1.805-4) of 
such a company for any taxable year shall be considered to be the sum 
of:
    (i) The policy and other contract liability requirements computed 
with respect to the items which relate to such variable annuity 
contracts, and
    (ii) The policy and other contract liability requirements computed 
by excluding the items taken into account under subdivision (i) of this 
subparagraph.
    (2) [Reserved for regulations to be issued under section 
801(g)(5)(B).]
    (d) Termination. Paragraphs (1), (2), (3), (4), and (5) of section 
801(g) and paragraphs (a), (b), (c), and (d) of this section shall not 
apply with respect to any taxable year beginning after December 31, 
1962.

[T.D. 6610, 27 FR 8717, Aug. 31, 1962]

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