[lmi] Federal-tax treatment of partial-surrender fees

[Greg Chicares]

Nontaxable UL withdrawals (partial surrenders) reduce tax basis,
§7702 premiums paid, and §7702A amounts paid. Often, a fee on the
order of $25 is charged for processing a withdrawal; typically,
this fee is part of the withdrawal [0] according to the contract,
so it's treated accordingly for tax purposes.

For example, if a withdrawal is to net $10,000 in cash:
   10,000 amount written on the disbursement check
 +     25 charge
 = 10,025 amount of the withdrawal
Basis etc. is reduced by $10,025, including the fee.

Some contracts may charge the fee separately against AV [1]:
   10,000 amount written on the disbursement check
 = 10,000 amount of the withdrawal
       25 charge deducted separately from AV
In that case, basis etc. is reduced by $10,000 only. Either way,
the effect on AV is the same.

Including the fee in the withdrawal
 - increases the withdrawal, which
 - decreases amounts paid, which
 - increases the §7702A premium limit (guideline limit likewise)
and that may sound like a good thing, although it's hard to see
why anyone would pay the full seven-pay premium after taking a
withdrawal. On the other hand, eroding the basis ordinarily would
be seen as a bad thing. But the fee is small, so it doesn't seem
to matter much either way; disclosure and consistency are more
important.

If the fee is part of the withdrawal--the only approach that lmi
purposes to support at this time--then §7702A cumulative amounts
paid doesn't equal the sum of illustration-reg "outlay". That's
easily explicable, because "outlay" is an out-of-pocket amount.
As long as DB=SA, the fee is noticeable in the DB column anyway.

It's important to make sure illustrations are consistent with tax
reporting. If the insurer reports $10,025 to the IRS, but the
owner reports only $10,000, then the tax return won't balance.

At the moment, lmi understates the §7702A premium limit, because
it should decrement amounts paid by 'GrossWD' here:

        Irc7702A_->UpdatePmt7702A
            (Dcv
            ,-NetWD
            ...

We'll fix that so that the fee increases allowable payments.
Similarly, this line needs to be changed in the obvious way:

    TaxBasis    -= NetWD;

but at the same time the withdrawal-to-basis code needs to be
changed in a way that's less trivial. GPT code will also need
to be changed, but I don't immediately see where.

---------

[0] "typically, this fee is part of the withdrawal"

For example:

http://www.variablecontract.com/Portals/0/Products/Insurance/Jackson%20National/Perspective%20Investor/PDFs/JNPI%20Surrender%20Chrg.pdf
| If you take a partial surrender, we will deduct a portion of the
| then current surrender charge and the partial surrender fee from
| your partial surrender

[1] "Some contracts may charge the fee separately against AV"

Here are two withdrawal forms that apparently offer the option of
taking the partial-surrender fee either from the withdrawal or
from the remaining cash value:

http://www.americanrepublic.com/PDFs/AmericanRepublic/L404.pdf
http://www.nationwidefinancial.com/media/shared/pdfs/PDFForms/pvsc_l-3040-f.pdf