Tax Treatment of Certain Tax-Free Exchanges of Annuity Contracts Addressed (Rev. Proc. 2011-38)

Guidance has been released addressing the treatment under Code Secs. 1035 and 72 of the partial exchange of an annuity contract. The direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract will be treated as a tax-free exchange under Code Sec. 1035 if no amount, other than an amount received as an annuity for a period of 10 years or more or during one or more lives, is received during the 180 days beginning on the date of the transfer. A subsequent direct transfer is not taken into account. Other transactions will be characterized consistent with their substance.

This guidance is effective for transfers that are completed on or after October 24, 2011. For transfers completed before this date, Rev. Proc. 2008-24 will be applied with a clarification: the requirement that one of the prescribed conditions in Code Sec. 72(q)(2) must have “occurred between” the date of the transfer and the date of the withdrawal or surrender will be treated as satisfied if the condition was satisfied as of the date of the withdrawal or surrender. Rev. Proc. 2008-24, 2008-1 CB 684, is modified and superseded.

Rev. Proc. 2011-38, 2011FED ¶46,407

Other References:

Code Sec. 72

CCH Reference – 2011FED ¶6114.67

Code Sec. 1035

CCH Reference – 2011FED ¶29,682.108

Tax Research Consultant

CCH Reference – TRC INDIV: 30,050

CCH Reference – TRC INDIV: 30,502


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