ANNUITY CONTRACTS CASHED IN TO PURCHASE MORE COMPETITIVE ANNUITY CONTRACTS QUALIFIES AS AN EXCHANGE.

Index Nos.: 1035.00-00

Refer Reply to: CC:C:C:3:3

July 29, 1983

You state that you were an employee of Company A which maintained a tax-qualified pension trust described in section 401(a) of the Code and exempt under section 501(a) of the Code. Upon your retirement, the trustee of the plan purchased group annuity contracts in your behalf from the Original Insurer. Under the contracts the Original Insurer will pay a monthly fixed annuity of $2,706.41 and a monthly variable annuity of $68.04 annuity units per month for the life of the annuitant, with a period certain of 180 months. The annuity payments will commence on the annuity commencement date on the first month after the annuitant reaches age 65, being March, 1984.

The annuity contracts are nonassignable in order to comply with the requirements of section 401(g) of the Code. That section provides that "annuity" does not include a contract which is transferable if any person other than the trustee of a trust described in section 401(a) is the owner. These contracts provide that the contractholder is Plan X, but the owner of the contract is the annuitant. Based upon this fact, the Original Insurer will only authorize a complete surrender of the annuity contracts for their cash values when the annuitant's desired objective is to convert these annuity contracts for other annuity contracts.

As the annuitant, you propose to exchange the original annuity contracts for similar annuity contracts with another insurance company under a binding contractual exchange agreement which will provide higher interest rate assumptions. The fair market value of the original annuity contracts will be exchanged for annuity contracts with the same fair market value, with no additional consideration given to the annuitant. To achieve this result, the annuitant proposes to surrender the original annuity contracts for their cash surrender values and immediately endorse the check to the new insurer as a single integrated transaction under a binding exchange agreement with the new insurer.

Section 402(a) of the Code provides that the employee shall include in gross income the amounts received under an annuity contract purchased by a tax-qualified pension trust described in section 401(a) and exempt under section 501(a) of the Code in the taxable year distributed or made available as provided in section 72 of the Code (relating to annuities).

Section 1035(a)(3) of the Code provides that no gain or loss shall be recognized on the exchange of an annuity contract for an annuity contract.

Section 1.1035 - 1(c) of the Income Tax Regulations provides that the exchange, without recognition of gain or loss, of an annuity contract for another annuity contract under section 1035(a)(3) is limited to cases where the same person or persons are the obligee or obligees under the contract received in exchange as under the original contract. There is no requirement in that regulation that the issuer of the contract received in exchange be the same as the issuer of the original contract.

Rev. Rul. 73-124, 1973 - 1 C.B. 200 holds that the proceeds of an individual annuity contract received by an employee and immediately surrendered to the employer for reinvestment in another annuity contract for the employee with a different insurer are not includible in the employee's gross income. The exchange was determined to be an exchange within the meaning of section 1035 of the Code, even though the restrictions of section 401(g) of the Code required that the employee first surrender the original annuity contract to an insurer. The exchange was permitted to be an exchange within section 1035 of the Code because the proceeds received upon surrender were applied immediately to the purchase of a second annuity contract for the same employee. The annuity contract in the ruling was governed by section 403(b) of the Code. Even though the present situation concerns annuity contracts governed by section 401(a) of the Code, the same section 1035 analysis applies.

Based solely on the information submitted and on the representations set forth above, it is held as follows:

(1) The transaction, if completed as proposed, will be treated as an exchange of one annuity contract for another annuity contract.

(2) The taxpayer will not be required to include in his gross income the surrender proceeds of the original annuity contract, provided that such proceeds are immediately applied to the purchase of a second annuity contract for the same annuitant.

(3) Amounts received under the second annuity contract will be includible in the taxpayer's income in accordance with the provisions of section 72 of the Code.

In order that the trust will continue to qualify under section 401(a) of the Code, the second annuity must be payable over a period allowable for distributions from plans qualified under section 401(a) of the Code.

No opinion is expressed as to the tax treatment of the transaction under the provisions of any of the other sections of the Code and Regulations which may also be applicable thereto or to the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction which are not specifically covered by the above rulings.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter should be attached to the federal income tax return of the taxpayer involved for the taxable year in which the transaction covered by this ruling is consummated.

Sincerely yours,