Tax Terrorism: Nasty Truths About Investor Control Theory and the Accommodation of Social Security Privatization

Abstract

The privatization of Social Security could have promised profound challenges to the investor control doctrine (given the level of investor discretion anticipated). Revenue Ruling 2003-91 handily eliminates the apparently imminent conflict between longstanding, IRS-asserted doctrine and the demands of the political arena. One could argue that the pronouncement reflects little more than doctrinal evolution, but such evolution is a giant leap away from the twenty-two-year-old notion that investor discretion should be minimal and appears to be a doctrinal accommodation of potential Social Security privatization. This Article argues that the investor control doctrine should be dismissed. I further propose that investor discretion should be allowed with respect to the investment of contract assets, subject to (1) investment professional guidance or risk assessment, (2) age-sensitive adjustments with respect to the percentage of contract assets subject to investor discretion, and (3) limits with respect to the aggregate amount a taxpayer may invest in variable life insurance or variable annuity contracts.

Keywords: Investor Control, Social Security Privatization, Annuity, Variable Annuity, Privatization, Rev. Rul. 2003-91, Vertical Equity