n-08-92.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

Insurance-Dedicated Money Market Funds -- Temporary Guarantee Program for
Money Market Funds -- Government Not the "Issuer" for Purposes of Testing
Diversification

Notice 2008-92

## SECTION 1. PURPOSE

This Notice relates to the Temporary Guarantee Program for Money
Market Funds (the "Program"), which is provided by the Treasury Department in
response to the credit market instability to make available certain funds from its
Exchange Stabilization Fund, upon prescribed terms and conditions, to money
market funds that are regulated under the Security and Exchange Commission's
Rule 2a-7, 17 C.F.R. 270.2a-7, under the Investment Company Act of 1940
("Rule 2a-7"). Some practitioners have expressed concern that participation in
the Program may raise certain potential tax issues for money market funds
whose beneficial interests are held exclusively by one or more segregated asset
accounts of one or more insurance companies (or other investors permitted
under § 1.817-5(f)(3) of the Income Tax Regulations) ("Insurance-Dedicated
Money Market Funds"). This Notice provides certainty with respect to those
issues, as described below.

## SECTION 2. BACKGROUND

.01 The Program. In general, under the Program, the Treasury

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Department is making available its Exchange Stabilization Fund on a temporary
basis to assist participating money market funds in repaying shareholders upon
liquidation of their shares. The Program is limited to assets in money market
funds as of the close of business on September 19, 2008, and to investors of
record as of that date. The Program is available to both Insurance-Dedicated
Money Market Funds and money market funds that are available to the general
public. Participating money market funds are required to make premium
payments to participate in the Program. Payments to a money market fund under
the Program are tied to the per share net asset value of the money market fund
itself. Payments to a money market fund under the Program are not tied to the
terms or performance of any particular assets held by the money market fund.
The general description of certain aspects of the Program herein is subject fully
to the specific terms, conditions, maximum size limitations, and other limitations
set forth in the operative legal documents for the Program.

.02 Diversification requirement for variable contracts. Section 817(h) of
the Internal Revenue Code provides that a variable life insurance or annuity
contract that is based on a segregated asset account is not treated as a life
insurance or annuity contract for any period (and any subsequent period) for
which the investments of the account are not adequately diversified. For
purposes of determining whether a segregated asset account is adequately
diversified, each United States government agency or instrumentality is treated
as a separate issuer. In addition, to the extent that a segregated asset account
with respect to a variable life insurance contract invests in securities issued by

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the United States Treasury, the investments made by the account are treated as
adequately diversified. The rule in the previous sentence does not apply with
respect to a variable annuity contract. Section 1.817-5(h)(1) defines
"government security" to mean any security that is issued, guaranteed or insured
by the United States or any instrumentality.

.03 Investor control. The holder of a variable contract may be treated as
an owner of the assets of a segregated asset account funding that contract if (1)
the holder exercises sufficient control over the assets to be deemed the owner;
or (2) the assets are not available exclusively through the purchase of a life
insurance or annuity contract. See Rev. Rul. 2003-92, 2003-2 C.B. 350; Rev.
Rul. 2003-91, 2003-2 C.B. 347; Rev. Rul. 81-225, 1981-2 C.B. 13; Rev. Rul.
80-274, 1980-2 C.B. 27; Rev. Rul. 77-85, 1977-1 C.B. 12.
SECTION 3. SCOPE AND APPLICATION

.01 No Violation of Diversification Requirements; No Assertion of Investor
Control. The Treasury Department and the Internal Revenue Service ("IRS") will
not assert that participation in the Program by an Insurance-Dedicated Money
Market Fund causes a violation of the diversification requirements of § 817(h) in
the case of a segregated asset account that invests in the Insurance-Dedicated
Money Market Fund. In addition, the Treasury Department and the IRS will not
assert that such a fund's participation in the Program causes the holder of a
variable contract supported by a segregated asset account that invests in the
fund to be treated as an owner of the fund.

.02 No Inferences on Law. This Notice provides administrative relief in

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furtherance of public policy to promote stability in the market for money market
funds. Except with respect to the administrative relief expressly provided in this
Notice, no inference should be drawn from this Notice regarding any other
Federal tax issues affecting variable contracts, money market funds, or any other
security. In addition, this Notice is not intended to address any other Federal tax
issue implicated in the described transactions under the Program.

## DRAFTING INFORMATION

The principal author of this notice is Sheryl B. Flum of the Office of
Associate Chief Counsel (Financial Institutions & Products). For further
information regarding this notice, contact Ms. Flum at (202) 622-3970 (not a toll-
free call).