This is a two part exchange with a member of this list who doesn't
agree with my views about whether a foreign variable life insurance
policy needs to be reported as a foreign financial account.

Vern

QUESTION: I found this on Jay Adkisson's web site (www.falc.com). I
assume this is not considered a "ruling", but an opinion, by a staff
member? If so, if you, or any other tax accountant disagreed, I would
assume the client could follow their tax expert's suggestions without
harsh penalties, if the below opinion was ever held valid by a court
decision? The below opinion seems to have several flaws and is a
typical conservative IRS approach.

-----------------------------------------------------

"The position of the Department of the Treasury is that
premium payments for insurance policies with cash surrender value or
other investment features constitute "deposits" within the meaning of
Form 90-22.1. Therefore, if a life insurance policy is a "whole life"
or other type of policy with investment value, then it is an "other
financial account" subject to reporting.

A U.S. person must file Form 90-22.1 for years where the aggregate
cash surrender value (not face amount) of any foreign life insurance
policy held by the U.S. person, together with any other foreign bank
accounts so held, exceeds $10,000.

It is a foreign account if the policy is located abroad. It is not the
nationality of the policy issuer that determines the location of the
account. It is the actual location of the account itself. Thus simply
because a foreign company issues a policy does not mean that it is
located in a foreign country".

Elizabeth B. Witzgall
SE:S:F/BSA:PO:P Senior Bank Secrecy Act Analyst National Headquarters
SBSE (202) 283-2227

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REPLY: I had quoted a portion of this memo in my "Guide to Reporting
Foreign Financial Accounts".

It does not appear to be a formal revenue ruling so it would be an
opinion by a "staff member" of the IRS. However, this "staff" person
works in the National Headquarters of the IRS and her title appears to
be "Senior Bank Secrecy Act Analyst".

There might be some tax preparers who would agree with you, if they
were not aware of the opinion you just quoted. But I doubt if a tax
preparer would agree with you if they were aware of this opinion. That
would leave you in the position of having to do your own return or
having to tell the tax preparer that you did not have any foreign
financial accounts.

Vern Jacobs

FOLLOW UP QUESTION: This is from the IRS website:

What is a financial account?
A financial account includes any bank, securities, securities
derivatives or other financial instruments accounts. The term
includes any savings, demand, checking, deposit, or any other
account maintained with a financial institution.

How does a typical foreign insurance company-- which only provides you
with typical insurance products --get lumped into this definition? If
one only has an insurance contract, why is that an account? And an
insurance company that only handles insurance products is not a
financial institution? Isn't that far reaching, subject to court
scrutiny? I still think a court would rule the IRS TDF 90-22.1 form
must include the term insurance- to be enforceable against the
taxpayer......or maybe I am naïve?

FOLLOW UP REPLY: I'm not trying to justify the IRS position on this
matter. I'm only passing on what their position appears to be. And the
matter is only subject to court scrutiny if someone challenges the IRS
position and is willing to pay the cost of a court case.

Anyone who disputes their interpretation can choose to not disclose a
foreign annuity or life insurance policy and take their chances on
being hit with a penalty and then having to dispute the penalty in Tax
Court -- which is generally favorably aligned with the IRS
interpretation of the law. Those who don't want to argue the matter
in the U.S. Tax Court will have to pay the tax or penalty first and
then file for a refund in one of the other courts that hear tax cases.

This form is not part of an income tax form and is not sent directly
to the IRS. It is sent to a different part of the Dept. of the
Treasury in Detroit. However, your tax preparer (assuming you don't
prepare your own return) will most likely ask you point blank if you
have any foreign financial accounts. If you are convinced that a
foreign variable life insurance policy is not a financial account and
that an insurance company is not a financial institution, you can say
"No" to your tax preparer – or you can prepare your own tax return.

However, before you embark on that course of action, consider the
possible reactions of any court in which you may choose to take this
dispute. We don't have a lot of judges in this country who have much
concern about the privacy of a citizen when the Government wants
information – no matter how far reaching and over-zealous that might
seem. The judge is likely to have a hard time trying to figure out
why you don't want to report the information. And the knee-jerk
reaction of nearly every government official would be that "You must
have something really serious to hide or why would you be spending so
much time and money just to avoid disclosing that you have a foreign
insurance policy."

There's a pretty good chance that some judges might even consider such
a dispute to be a frivolous use of the courts' time and would impose
an additional penalty for wasting the time of the court. But I'm not a
lawyer and I don't have any actual experience with such matters.

For more details about the requirement to disclose foreign financial
accounts, see my report, "2006 Guide to Reporting Foreign Financial
Accounts". Information about the report is at
http://www.offshorepress.com/fbar.htm

Vern Jacobs