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INTERNAL REVENUE SERVICE — REVENUE RULING
REV. RUL. 81-225, 1981-2 C.B. 12
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SUBJECT: Investor Control & Public Availability of Sub-Accounts.

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ISSUE:
Under what circumstances will the owner of a variable annuity contract funded by 
mutual fund shares be treated as the owner of the mutual fund shares for federal 
income tax purposes?

FACTS & FIVE SCENARIOS ANALYZED:
- Situation 1: Insurer sets up separate account investing in shares of a mutual fund 
  that is directly available for purchase by the general public. (Policyholder = Tax Owner)
- Situation 2: Policyholder can choose among different publicly available mutual funds 
  managed by an independent adviser. (Policyholder = Tax Owner)
- Situation 3: Insurer establishes separate account investing in a mutual fund whose 
  shares are available ONLY to variable contract policyholders (non-public). (Insurer = Tax Owner)
- Situation 4: Same as Situation 3, but policyholder can reallocate among sub-accounts. 
  (Insurer = Tax Owner)
- Situation 5: Mutual fund shares are available to the public, but managed by insurance 
  company affiliate. (Policyholder = Tax Owner)

HOLDING & LEGAL ANALYSIS:
1. Public Availability Prong: Where sub-account mutual fund shares are available 
   for direct purchase by the general public outside an insurance contract, 
   policyholders who hold variable contracts tied to those shares possess 
   impermissible investor control.

2. Non-Public Requirement: To preserve tax deferral, sub-account investment 
   funds MUST be available exclusively through life insurance or annuity contracts 
   issued by insurance companies.

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SIGNIFICANCE TO PPLI:
Rev. Rul. 81-225 established the "Public Availability Principle"—the foundational 
rule requiring Insurance-Dedicated Funds (IDFs) to be restricted solely to insurance 
company separate accounts.
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