Reconsideration of G.C.M. 36039 and G.C.M. 38733

In Rev. Rul. 73-124, 1973-1 C.B. 200, considered by this office in In re: * * *, G.C.M. 34969, I-4424 (Aug. 1, 1972), an employer, described in section 403(b)(1)(A), entered into an agreement with one of its employees pursuant to which the employer purchased a noncontributory individual annuity contract under an agreement that met the requirements of section 403(b). In a subsequent year the employee entered into a binding agreement with his employer whereby the employer discontinued making contributions under that annuity contract on behalf of the employee, and at the same time, began making like contributions under a new individual annuity contract with a different insurer. In order to transfer his interest in the first contract to the new annuity contract, the employee further agreed to pay the employer an amount equal to any amount received under the first contract and the employer, in turn, agreed to apply such amount to provide benefits for the employee under the new contract. In a single integrated transaction, the employee then surrendered his entire interest in the first contract to the insurer in exchange for a check which he immediately endorsed and provided to the employer for use in providing benefits under the second contract.

Rev. Rul. 73-124 held that the transaction qualified as a tax free exchange of annuity contracts under section 1035 because the same person was the obligee under the new contract as under the old one and the proceeds received were applied immediately to the purchase of a second annuity contract for the same employee. In that ruling, the Service reasoned that the fact that the employee must first surrender the original annuity contract to an insurer because of the restrictions required by section 401(g) does not prevent the total transaction from being an exchange within the meaning of section 1035.

In * * *, G.C.M. 36039, I-214-74 (October 7, 1974), we determined that the transaction described in Rev. Rul. 73-124 did not qualify as an exchange of annuity contracts within the meaning of section 1035(a)(3) because rather than being an exchange of one annuity contract for another, the transaction constituted a surrender of one annuity contract and the purchase of another. Consequently, we determined in * * * that the rationale of Rev. Rul. 73-124 should be modified. We concluded that the result in Rev. Rul. 73-174 should be achieved instead via the use of the "conduit theory" of Rev. Rul. 55-368, 1955-1 C.B. 40, because the employee was obligated to reinvest the funds received upon a distribution from one plan that satisfies the requirements of section 403(b) in another such plan prior to the time of the actual distribution.

Upon reconsideration, we believe that our position in * * * was in error. We believe our original position in * * *, reflected in Rev. Rul. 73-124 is correct. Consequently * * *, G.C.M. 36039, I-214- 74 (Oct. 7, 1974) is hereby revoked.

We also hereby revoke * * *, G.C.M. 38733, EE-34-81 (May 26, 1981). Employer involvement is not required to effect the tax free exchange of section 403(b) annuity contracts described in Rev. Rul. 73-124. Although Rev. Rul. 73-124 requires the employee, prior to surrendering the original contract, to enter into a legally binding agreement under which the employee agrees to immediately reinvest the proceeds of the original section 403(b) annuity contract into a new section 403(b) annuity contract in order for the transaction to be considered a tax free exchange under section 1035, the agreement need not be with the employer.