PLR 1038012: IRS approved a partial annuity-contract exchange under section 1035

Plain-English summary

A taxpayer transferred part of an annuity contract's cash surrender value to another insurer for a new annuity contract. The taxpayer later withdrew a separate amount from the original contract, and the original insurer stated that the withdrawal disqualified the transfer from partial-exchange treatment. The IRS ruled that the transfer qualified as a tax-free exchange under IRC § 1035(a) because the taxpayer had reached age 59½ before the transfer and the withdrawal. The ruling relied on the conditions in Rev. Proc. 2008-24 and the taxpayer's specific facts.

Ruling snapshot

• Question: Did the partial transfer of an annuity contract's cash surrender value qualify as a tax-free exchange under IRC § 1035(a)?
• Outcome: Approved
• Key authorities: IRC §§ 72(e), 72(q), and 1035(a); Rev. Proc. 2008-24

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201038012 Third Party Communication: None
Release Date: 9/24/2010 Date of Communication: Not Applicable
Index Number: 1035.03-00
Person To Contact:
---------------------- --------------------, ID No. -----------------
--------------------------- Telephone Number:
------------------------------------- ---------------------
Refer Reply To:
CC:FIP:B04
PLR-121010-10
Date:
June 22, 2010

Taxpayer ----------------------------------------------

Company 1 --------------------------------------------------

Contract 1 ---------------------------------------------------------------------------------
--------------

Company 2 --------------------------------------------------------

Date 1 ----------------------

Date 2 -----------------------

Date 3 -------------------------

Date 4 -------------------------

Date 5 -------------------------

Amount 1 -----------

Amount 2 ---------

Dear ------------:

This is in response to your request, as revised, seeking a ruling that your transaction of
Date 2 described below is a transaction described by § 1035(a) of the Internal Revenue
Code.

FACTS

Taxpayer represents as follows:

PLR-121010-10 2

Taxpayer owned Contract 1, which is an annuity contract issued by Company 1. Prior
to Date 1, Taxpayer attained the age of 59 ½ years. On or about Date 1, Taxpayer
requested Company 1 to transfer $ Amount 1 of the cash surrender value of Contract 1
to Company 2, to be allocated to an annuity contract issued by Company 2. This
transfer was done on Date 2. Taxpayer intended that this transfer qualify as a “partial
exchange” of Contract 1. See, § 2, Rev. Proc. 2008-24, 2008-13 I.R.B. 684.

Consistent with his practice of taking annual withdraws from various accounts for gifting
purposes, on or about Date 3, Taxpayer requested a withdrawal of $ Amount 2 from
Contract 1. Company 1 honored this request on Date 4.

On Date 5, Company 1 sent Taxpayer a letter stating that the withdrawal honored on
Date 4 disqualified the Date 2 transfer from qualifying as a “partial exchange” and that it
will report $ Amount 1, the Date 2 transfer, as being a distribution taxable under
§ 72(e).1

REQUESTED RULING

Taxpayer requests a ruling that the Date 2 transfer qualifies as an exchange described
by § 1035(a).

LAW AND ANALYSIS

As explained in Rev. Proc. 2008-24, § 1035(a) provides that no gain or loss shall be
recognized on the exchange of an annuity contract for another annuity contract.
Further, as held in Conway v. Commissioner, 111 T.C. 350 (1998), acq., 1999-2 C.B.
xvi, the direct exchange by an insurance company of a portion of an existing contract to
an unrelated insurance company for a new annuity contract was a tax-free exchange
under § 1035.

Rev. Proc. 2008-24 applies to the direct transfer of a portion of the cash surrender value
of an existing annuity contract for a second annuity contract, regardless whether the two
annuity contracts are issued by the same or different companies. Section 3.02, Rev.
Proc. 2008-24. The revenue procedure provides that such a transfer will be treated as
a tax-free exchange under § 1035 if either (a) no amounts are withdrawn from, or
received in surrender of, either of the contracts involved in the exchange during the 12
months beginning on the date on which amounts are treated as received as premiums
or other consideration paid for the contract received in the exchange (the date of the
transfer); or (b) the taxpayer demonstrates that one of the conditions described by
§ 72(q)(2)(A), (B), (C), (E), (F), (G), (H), or (J), or any similar life event (such as divorce
or loss of employment), occurred between (i) the date of the transfer, and (ii) the date of
the withdrawal or surrender. Section 4.01, Rev. Proc. 2008-24.

1
The letter does not address the Date 4 withdrawal.

PLR-121010-10 3

A transfer that is within the scope of Rev. Proc. 2008-24 but is not treated as a tax-free
exchange will be treated as a distribution, taxable under § 72(e), followed by a payment
for the second contract.

Because Taxpayer attained the age of 59 ½ years prior to Date 1, Taxpayer believes
the Date 2 transfer should qualify as a tax-free exchange under § 4.01(b) of Rev. Proc.
2008-24.

Section 4.01(b) of Rev. Proc. 2008-24 incorporates, inter alia, § 72(q)(2)(A), which
provides that the increased tax provided by § 72(q)(1) does not apply “to any distribution
– (a) made on or after the date on which the taxpayer attains age 59 ½”.

Here, Taxpayer has demonstrated that he met the condition described by § 72(q)(2)(A):
the Date 4 withdrawal was made on or after the date on which Taxpayer attained age
59 ½ years.

RULING

The Date 2 transfer qualifies as an exchange described by § 1035(a).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This letter is based upon information and representations submitted by Taxpayer and
accompanied by a penalty of perjury statement executed by an appropriate party. This
office has not verified any of the material so submitted and it is subject to verification on
examination.

This ruling is directed only to Taxpayer. Section 6110(k)(3) of the Code provides that it
may not be used or cited as precedent. In accordance with the Power of Attorney on
file with this office, a copy of this letter is being sent to your authorized representative.

                                   Sincerely,

                                     /S/

                                   Sheryl B. Flum
                                   Chief, Branch 4
                                   (Financial Institutions & Products)

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