SERVICE CLASSIFIES AN EXCHANGE OF ANNUITY CONTRACTS.

Index Nos.: 1035.02-00, 1035.03-00

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

September 18, 1984

Taxpayer was employed by Company for a number of years terminating that employment in late 197 * * * or early 197 * * *. Upon Taxpayer's retirement Taxpayer received one annuity contract as a distribution from Company's pension trust and another contract virtually identical to the first as a distribution from Company's profit sharing plan. The pension trust and profit sharing trust are qualified trusts as defined by section 401(a) of the Internal Revenue Code.

Pursuant to the provisions of section 401(g) of the Code, the annuity contracts are specifically nontransferable with the result that their distribution to the taxpayer did not result in the recognition of any income to Taxpayer. Both annuity contracts which were issued in January 197 * * * by Insurance Company X had an annuity starting date of January 198 * * *. Taxpayer will be age 70 at the time of the annuity starting date.

The annuity contracts are variable annuity contracts in that the rate of growth and the value of the annuity from time to time is determined by reference to the performance of the general account of Insurance Company X. Because of the relatively better performance available from fixed annuities with their very high current interest rate assumptions, Taxpayer desires to divest himself of the variable annuity contracts and substitute fixed annuity contracts.

In order to achieve this objective, Taxpayer proposes to exchange the present variable annuity contracts for fixed annuity contracts to be issued by Insurance Company Y. The Insurance Company Y fixed annuity contracts would contain provisions rendering them nontransferable as are the Insurance Company X variable annuity contracts currently owned by Taxpayer. The new Insurance Company Y annuity contracts will provide for an annuity starting date at the same time as Taxpayer's currently owned contract (i.e., the annuity starting date would be January 198 * * * when Taxpayer would be 70 years of age). It is stated that in all respects the new Insurance Company Y contracts would be annuity contracts that could have qualified under section 401(g) of the Code without recognition of income had they originally been distributed from the Company pension trust or the Company profit sharing trust, respectively.

Because of the nontransferable nature of the annuities the exchange will be effectuated by the proceeds of the annuity contracts issued by Insurance Company X being distributed in checks by Insurance Company X to Taxpayer, as payee, these surrender proceeds will then be immediately endorsed over to Insurance Company Y as consideration for the new annuities while such checks are still in the hands of an insurance broker who will handle the transaction.

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 trust described in section 401(a) in the taxable year distributed or made available as provided in section 72 (related 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 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 facts as stated above, provided Taxpayer will have (at the time of the issuance of the surrender checks by Insurance Company X) signed a binding agreement with Insurance Company Y to use all of the proceeds to purchase the fixed annuity contracts from Insurance Company Y, provided no additional consideration is given to Taxpayer and provided that in order that the trusts will continue to qualify under section 401(a) the Insurance Company Y annuities must be payable over the period allowable for distributions from plans qualified under section 401(a), it is held as follows:

(1) The transaction, if completed as described above, will be treated as exchanges of annuity contracts for other annuity contracts.

(2) Taxpayer will not be required to include in gross income the surrender proceeds of the Insurance Company X annuity contracts, provided that such proceeds are immediately applied to the purchase of the Insurance Company Y annuity contracts for Taxpayer.

(3) Amounts received under the Insurance Company Y annuities will be includible in Taxpayer's income in accordance with the provisions of section 72 of the Code.

No opinion is expressed about the tax treatment of any conditions existing at the time of, or effects resulting from the transaction that is not specifically covered by the rulings contained in this letter.

This ruling letter 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 for the taxable year in which the exchanges occur.

Pursuant to the power of attorney on file in this office a copy of this letter is being sent to your authorized representative.

Sincerely yours,