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INTERNAL REVENUE SERVICE — REVENUE RULING
REV. RUL. 77-85, 1977-1 C.B. 12
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SUBJECT: Investor Control Doctrine — Investment Annuity Contracts.

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ISSUE:
Whether the purchaser of an "investment annuity contract" is the owner of the 
assets held in a custodial account for federal income tax purposes.

FACTS:
An individual enters into an investment annuity contract with a life insurance 
company. Premiums paid by the policyholder are deposited into a custodial account 
with a custodian bank. The policyholder retains the right to direct the custodian 
as to the initial investment of the assets and to reallocate or substitute 
investments among a wide variety of publicly available securities, including 
stocks, bonds, and mutual fund shares. The insurer nominal titleholder retains 
custody of the account assets, but cannot alter the policyholder's trade directions 
except to ensure compliance with insurance laws.

HOLDING & LEGAL ANALYSIS:
1. Ownership Test: The IRS held that the policyholder retains substantial 
   "incidents of ownership" over the custodial account assets, including the 
   power to select, retain, or substitute specific investments, and the right 
   to vote the underlying securities.

2. Insurer as Passive Conduit: The insurance company is merely a passive conduit 
   or pledgee holding title for security purposes. The insurer does not assume 
   investment risk or possess discretionary management over the underlying assets.

3. Tax Treatment: The policyholder—not the insurance company—is the tax owner 
   of the custodial assets under IRC §61. All interest, dividends, and capital 
   gains generated by the assets are currently taxable to the policyholder in 
   the year earned.

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SIGNIFICANCE TO PPLI:
Rev. Rul. 77-85 is the foundational ruling establishing the Investor Control 
Doctrine, cited heavily in Webber v. Commissioner, 144 T.C. 324 (2015).
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