Rev. Rul. 68-482

Rev. Rul. 68-482

Advice has been requested whether the cash value of an annuity contract purchased for an employee from an insurance company by an employer described in section 403(b) of the Internal Revenue Code of 1954 will be considered made available to the employee under the circumstances described below.

An employer described in section 403(b) of the Code purchased an annuity contract for an employee. The contract contains a provision permitting the employee to surrender the contract, at any time, and receive its cash value. The contract also contains a guaranteed schedule of premium and benefit rates.

Section 1.451-2 of the Income Tax Regulations sets forth the general rule with respect to the constructive receipt of income. This section provides that income is constructively received by a taxpayer in the taxable year in which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

Section 1.403(b)-1(c)(1) of the regulations relates the constructive receipt of income concept to the specific area of annuities by providing that any amounts received by or made available to an employee under an annuity contract referred to in section 403(b) of the Code shall be included in his gross income for the taxable year in which received or made available.

Revenue Ruling 67-388, C.B. 1967-2, 153, holds that a provision in an annuity contract which grants an employee the unrestricted right to withdraw the amounts standing to his credit will cause such amounts to be made available to the employee.

The present case is distinguishable from the case involved in Revenue Ruling 67-388 since the arrangement described in that Revenue Ruling gave the employee the unrestricted right to withdraw the amounts standing to his credit. The arrangement in the present case permits amounts to be withdrawn only upon surrender of the annuity contract. Except in very unusual cases, the employee will suffer a significant penalty if he surrenders his annuity contract for its cash value, and thus the employee's control of the receipt of this cash value will, except in such unusual cases, be subject to substantial limitations. One reason for this is that, primarily because of reincurred loading charges, the cash value of the surrendered annuity contract will not normally purchase a new annuity contract of comparable or greater value to the employee.

In view of the above, the cash value of the contract in this case will not be considered made available to the employee under section 1.403(b)-1(c)(1) of the regulations.