Frequently Asked Questions
Who is eligible for the Variable Contract Basis Adjustment?
Applies to life insurance companies issuing variable contracts (annuities or life insurance) with segregated asset accounts.
How does the Variable Contract Basis Adjustment work?
Provides for the automatic increase in basis of assets held in segregated accounts for variable contracts to the extent appreciation is reflected in reserves, preventing double taxation of investment growth.
What law authorizes the Variable Contract Basis Adjustment?
The Variable Contract Basis Adjustment is authorized under IRC §817 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §817
Source: Internal Revenue Code, Title 26, United States Code
§ 817. Treatment of variable contracts(a) Increases and decreases in reservesFor purposes of subsections (a) and (b) of section 807, the sum of the items described in section 807(c) taken into account as of the close of the taxable year with respect to any variable contract shall, under regulations prescribed by the Secretary, be adjusted—(1) by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the reserves separately accounted for in accordance with subsection (c) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and
(2) by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the taxable year) from such reserves by reason of depreciation in value of assets (whether or not the assets have been disposed of).
The deduction allowable for items described in paragraphs (1) and (6) of section 805(a) with respect to variable contracts shall be reduced to the extent that the amount of such items is increased for the taxable year by appreciation (or increased to the extent that the amount of such items is decreased for the taxable year by depreciation) not reflected in adjustments under the preceding sentence.
(b) Adjustment to basis of assets held in segregated asset accountIn the case of variable contracts, the basis of each asset in a segregated asset account shall (in addition to all other adjustments to basis) be—(1) increased by the amount of any appreciation in value, and
(2) decreased by the amount of any depreciation in value,
to the extent such appreciation and depreciation are from time to time reflected in the increases and decreases in reserves or other items referred to in subsection (a) with respect to such contracts.
(c) Separate accountingFor purposes of this part, a life insurance company which issues variable contracts shall separately account for the various income, exclusion, deduction, asset, reserve, and other liability items properly attributable to such variable contracts. For such items as are not accounted for directly, separate accounting shall be made—(1) in accordance with the method regularly employed by such company, if such method is reasonable, and
(2) in all other cases, in accordance with regulations prescribed by the Secretary.
(d) Variable contract definedFor purposes of this part, the term “variable contract” means a contract—(1) which provides for the allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general asset accounts of the company,
(2) which—(A) provides for the payment of annuities,
(B) is a life insurance contract, or
(C) provides for funding of insurance on retired lives as described in section 807(c)(6), and
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