Rev. Rul. 58-497

Advice has been requested with respect to the applicability of section 72(d) of the Internal Revenue Code of 1954 where the date on which an amount is first received under the contract as an annuity is prior to January 1, 1954.

Section 72(d) provides that where part of the consideration for an annuity, endowment, or life insurance contract is contributed by the employer and during the three-year period beginning on the date (whether or not before January 1, 1954) on which an amount is first received under the contract as an annuity, the aggregate amount receivable by the employee under the terms of the contract is equal to or greater than the consideration for the contract contributed by the employee, than all amounts received as an annuity under the contract shall be excluded from gross income until there has been so excluded (under section 72(d) and prior income tax laws) an amount equal to the consideration for the contract contributed by the employee.

The applicability of section 72(d) of the Code is dependent upon whether part of the consideration for the contract is contributed by the employer and whether the aggregate amount receivable by the employee under the terms of the contract during the three-year period beginning on the date (whether or not before January 1, 1954) on which an amount is first received under the contract as an annuity is equal to or greater than the consideration for the contract contributed by the employee. As provided in section 1.72-13(a)(3) of the Income Tax Regulations, the `aggregate amount receivable' within the meaning of section 72(d)(1)(B) of the Code consists of the `total of all annuity payments anticipatable * * * under the contract as a whole' within the prescribed three-year period. Thus, subsequent increases in the rate of the annuity which were not specifically provided for under the contract at the time that an amount was first received as an annuity are not includable in determining the aggregate amount receivable during the prescribed three-year period.

The `consideration for the contract contributed by the employee' within the meaning of section 72(d)(1)(B) of the Code includes those amounts contributed or deemed contributed by the employee up to and as of the date (whether or not before January 1, 1954) on which an amount is first received under the contract as an annuity as if section 1.72-8 of the regulations and the section of the Code therein referred to has been enacted prior to that date, as reduced by tax-free recoveries of such consideration prior to that date. See section 1.72-8, section 1.72-13(a)(1)(ii) and (a)(2) of the regulations. Tax-free recoveries, between the date on which an amount is first received under the contract as an annuity and January 1, 1954, of consideration contributed by the employee are not relevant in determining the applicability of section 72(d) of the Code. See also Revenue Ruling 56-82, C.B. 1956-1, 59, which holds that for the purpose of arriving at the exclusion ratio used in computing amounts of annuities which may be excluded from gross income, annual amounts contributed by a state or political subdivision thereof to employees' tax-exempt pensions funds prior to January 1, 1939, are added to contributions of employees in computing the consideration paid for the annuity contracts to the extent that the amounts so contributed represent compensation for personal services rendered in the exercise of an essential governmental function, as distinguished from a proprietory function, and were not contributed directly or indirectly by the United States or an agency or instrumentality thereof.

If section 72(d) of the Code, is applicable, then all amounts received as an annuity under the contract during a taxable year to which the Code applies shall be excluded from gross income until the total of the amounts excluded under section 72(d) of the Code, plus all amounts excluded under prior income tax laws equals or exceeds the consideration contributed or deemed contributed by the employee. The excess, if any, and all amounts thereafter received under the contract shall be fully included in gross income. As provided in section 1.72-13(b) of the regulations, amounts which are not received as an annuity shall be included in the gross income of the recipient in accordance with the provisions of section 1.72-11 of the regulations.

Accordingly, it is held that, for purposes of determining whether section 72(d) of the Code is applicable to a contract where the date on which an amount is first received under the contract as an annuity is prior to January 1, 1954, the consideration for the contract contributed by the employee within the meaning of section 72(d)(1)(B) of the Code includes, in addition to amounts actually contributed by the employee, amounts which would have been treated as contributed by the employee as of that date under sections 72(f) and 101(b) of the Code and section 1.72-8 of the regulations as if these provisions were then in effect.