495. When is a policy owner deemed to have exchanged one annuity contract for another?Stevenrcline212012-09-06T16:34:00Z2015-04-28T20:16:00Z2015-04-28T20:16:00Z23932244Summit Business Media185263214Site Map/Annuities/Nonqualified/Disposition/Policy Exchanges1035 exchange Q30 302005-01-24T00:00:00ZTaxFactsDefaultArticleEthics and 1035 Exchanges.pdfSite Map/Annuities/Quick Clicks/1035 ExchangeEthics and 1035 Exchanges.pdf10030-00-TF1.xml30.00;#1589;#1592;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1Does tax liability arise when a policyholder exchanges one annuity contract for another?
1285123600.000000000TaxFactsDefaultArticleSBMEDIA\cjump2010-06-04T10:54:51Z495. When is a policy owner deemed to have exchanged one annuity contract for another?Under IRC Section 1035, policy owners may exchange one nonqualified annuity contract for another on a tax-deferred basis (in the case of qualified annuities, the retirement account rollover rules control the transfer of account balances and their tax consequences).However, the distinction between an “exchange” and a surrender-and-purchase is not always clear. Where the contract is assignable, the IRS has required a direct transfer of funds between insurance companies..See Let. Rul. 8741052. Compare Let. Ruls. 8515063 and 8310033; Rev. Rul. 72-358, 1972-2 CB 473.., Given that most commercial nonqualified annuities in today’s marketplace are assignable, the direct-transfer-of-funds method is the standard for completing a 1035 exchange in most common situations.Nonetheless, the “exchange” of an annuity contract received as part of a distribution from a terminated profit-sharing plan for another annuity with similar restrictions as to transferability, spousal consent, minimum distribution, and the incidental benefit rule was granted IRC Section 1035 treatment..Let. Rul. 9233054. In addition, the IRS has ruled privately that the surrender of a non-assignable annuity contract distributed by a pension trust and immediate endorsement of the check by the annuitant to the new insurer in a single integrated transaction under a binding exchange agreement with the new insurer qualified as an exchange..Let. Ruls. 8526038, 8501012, 8344029, and 8343010.On the other hand, while the Tax Court did once allow an exchange where the taxpayer surrendered an annuity contract for cash and then purchased another annuity contract, the IRS acquiesced only in the result of that case..Greene v. Comm., 85 TC 1024 (1985), acq. 1986-2 CB 1. And the IRS has ruled that a taxpayer’s receipt of a check issued by an insurance company will be treated as a distribution (and, thus, not an exchange), even if the check is endorsed to a second insurance company for the purchase of a second annuity..Rev. Rul. 2007-24, 2007-21 IRB 1282.The IRS also has ruled privately that a valid exchange did not occur where the taxpayer surrendered one life insurance policy and then placed the funds in a second policy purchased one month earlier..Let. Rul. 8810010. In another instance, the IRS viewed several transactions as “steps” in one integrated exchange. The taxpayer purchased an annuity contract and later withdrew an amount equal to the taxpayer’s basis from the contract, placing the funds in a single premium life insurance policy. Next, the taxpayer exchanged the annuity for another annuity, treating this part of the transaction as a tax-free exchange under IRC Section 1035. The IRS disagreed, characterizing the events as a single exchange, with the value of the life insurance policy received as taxable boot..TAM 8905004. See also Let. Rul. 9141025.