Rev. Rul. 72-438

Section 1. Purpose

The purpose of this Revenue Ruling is to update the rate tables contained in Revenue Ruling 62-216, C.B. 1962-2, 30, and to add tables to be used in the evaluation of certain types of deferred payment annuity contracts more fully described below.

Sec. 2. Background

.01 Revenue Ruling 62-137, C.B. 1962-2, 28, holds that for purposes of section 72 of the Internal Revenue Code of 1954, the aggregate amount of consideration paid (investment in the contract), in the case of life annuity contracts issued by an organization such as a corporation, trust, fund, or foundation (other than an insurance company) which from time to time enters into agreements to pay annuities of a specified amount to individuals or their designees in exchange for money or other property, is to be determined by reference to the cost of a comparable contract purchased from an insurance company, citing Anna L. Raymond v. Commissioner, 40 B.T.A. 244, affirmed 114 Fed. (2d) 140, certiorari denied, 311 U.S. 710.

.02 Revenue Ruling 62-137 was supplemented by Revenue Ruling 62-216, which contains expanded tables of annuity rates.

.03 Revenue Ruling 62-216 states that the annuity rates set forth therein are subject to change depending on market conditions, and that notice of change will be given by publication in the Internal Revenue Bulletin.

.04 Revenue Ruling 67-39, C.B. 1967-1, 18, holds that the rates set forth in Revenue Ruling 62-216 are to be used for estate and gift tax purposes and for income tax purposes as well as for purposes of section 72 of the Code, in valuing annuity contracts issued from time to time by an organization such as a corporation, trust, fund or foundation (other than an insurance company) in exchange for money or other property.

.05 Recently, many such organizations have begun issuing so-called deferred payment annuity contracts in exchange for money or other property, and have requested that tables be furnished that may be used to evaluate such contracts for the purposes referred to above. These contracts, which provide no guaranteed payments or refund feature, are further described in section 8.

Sec. 3. Rates to be Used

The annuity rates set forth in the following sections shall be used instead of the annuity rates of Revenue Ruling 62-216, above, in valuing any of the annuity contracts described in section 2 that are issued after September 18, 1972. The rates of Revenue Ruling 62-216 continue to apply to annuity contracts described in section 2 that were issued on or before such date, except that deferred payment annuity contracts require a special computation. In the case of an actual gift, the Commissioner will ordinarily supply the computation upon request. The request must be accompanied by a statement of the date of birth and sex of each annuitant and by copies of the relevant instruments.

Sec. 4. Unadjusted Rates. Semiannual Basis, Ages Nearest Birthday.

.01 The annuity rates of Tables A and C of section 14 are rates for annuities payable in equal semiannual installments, first installment 6 months from valuation date. The method of adjusting for other modes of payment is described in section 5.

.02 Rates for single life annuities are set forth in Table A. Rates for annuities payable during the joint lives of two male annuitants of equal age are set forth in Table C. The use of Table C is demonstrated in section 6.

.03 For purposes of the computations described in this Revenue Ruling, the age of a person is to be taken as the age of that person at his nearest birthday.

Sec. 5. Adjustment for Mode of Payment

.01 First annuity payment due at once. To obtain the rate for $1.00 per annum payable in equal installments at the beginning of each--

1 monthly period, add $0.310 to the unadjusted rate.

2 quarterly period, add $0.399 to the unadjusted rate.

3 semiannual period, add $0.532 to the unadjusted rate.

4 annual period, add $0.798 to the unadjusted rate.

.02 First annuity payment due at the end of 1, 3, 6, or 12 months. To obtain the rate for $1.00 per annum payable in equal installments at the end of each--

1 monthly period, add $0.222 to the unadjusted rate.

2 quarterly period, add $0.133 to the unadjusted rate.

3 semiannual period, use the unadjusted rate.

4 annual period, subtract $0.266 from the unadjusted rate.

Sec. 6. Joint Life Annuity (Two Lives)

.01 A necessary step in the computation of a joint and survivor annuity rate is to determine a joint life annuity rate. This step utilizes Table B and C of section 14 in the following manner:

1 If one or both of the annuitants is female, substitute for each female annuitant a male annuitant 4 years younger; that is, subtract 4 years from the age of each female annuitant. Tables B and C are then used with male ages only, either actual or substituted.

2 An "equivalent equal age" corresponding to any two male ages can be determined by means of Table B. This age will consist of a whole number and a decimal. Straight line interpolation between two adjacent premiums in Table C will then give a value, corresponding to the "equivalent equal age," which is the joint life annuity rate required. Example 1. The joint life annuity rate for a male annuitant aged 65 and a female annuitant aged 60 is $9.042, obtained as follows:

 Actual ages                             65M            60F

Sec. 7. Joint and Survivor Annuity (Two Lives)

.01 The rate for a joint and survivor annuity is determined as follows:

1. Find the sum of the two single life rates from Table A that are separately applicable to the annuitants.

2. Compute the joint life annuity rate for the two annuitants, using Tables B and C and the method described in section 6.

3. Subtract the second result from the first to obtain the required joint and survivor annuity rate.

Example 3. The rate for an annuity of $1.00 per annum payable during the joint lives and the life of the survivor of a male annuitant aged 65 and a female annuitant aged 60 is $13.452, obtained as follows:

 Single life rate, age 65M, Table A                     $10.104

Example 4. Because of the 4-year age differential discussed in section 6, the same joint and survivor rate applies in all of the following cases:

 Age and sex of the annuitants       Joint and survivor annuity rate

.01 An annuity agreement may provide a deferred payment annuity, that is, an annuity that commences more than one year from the date of purchase. The annuities discussed herein include a deferred payment single life annuity, where all obligation under the agreement ceases on the death of a designated annuitant; a deferred payment joint life annuity, where the obligation ceases on the first death among two designated annuitants; and a deferred payment joint and survivor annuity, where the obligation ceases on the last death among two designated annuitants.

.02 For the purpose of valuing deferred payment annuities, it is convenient to make use of a date called the "starting anniversary." The starting anniversary of a deferred payment annuity is the anniversary of the date of purchase that coincides with (or next precedes, if none coincides with) the due date of the first annuity payment.

Sec. 9. Deferred Payment Single Life Annuity. Discounting the Rate at the Starting Anniversary

.01 The rate at the starting anniversary for a deferred payment single life annuity is the rate from Table A based on the attained age of the annuitant at the starting anniversary and adjusted for mode of payment in accordance with section 5.

.02 The rate described in section 9.01 is then discounted by multiplying it by the quotient obtained by dividing (1) the D-factor opposite the attained age of the annuitant at the starting anniversary by (2) the D-factor opposite the age of the annuitant at the date of purchase. The discounted rate so obtained is the rate at date of purchase.

Example 5. A man at age 55 purchases a deferred payment life annuity on his own life that is to pay $1,200 per annum in equal semiannual installments, first installment payable 10 years hence. The rate for the annuity at date of purchase is $5.292, determined as follows:

      (1) Age of annuitant at starting anniversary           65M

Example 6. The facts are the same as in Example 5, except that the annuity of $1,200 per annum is payable in equal monthly installments, first installment payable 10 years and 1 month hence. The rate for the annuity at date of purchase is $5.138, determined as follows:

      (1) Age of annuitant at starting anniversary           65M

Sec. 10. Deferred Payment Joint Life Annuity (Two Lives). Discounting the Rate at the Starting Anniversary

.01 The rate at the starting anniversary for a deferred payment joint life annuity (two lives) is the joint life annuity rate (1) determined in accordance with section 6 on the basis of the attained ages of the annuitants at the starting anniversary, and (2) adjusted for mode of payment in accordance with section 5.

.02 The rate described in section 10.01 is then discounted by multiplying it by the product of two quotients. The first quotient is (1) the D-factor in Table D opposite the attained age of the first annuitant at the starting anniversary divided by (2) the D-factor opposite the age of such annuitant at the date of purchase. The second quotient is (1) the 1-factor in Table D opposite the attained age of the second annuitant at the starting anniversary divided by (2) the 1-factor opposite the age of such annuitant at the date of purchase. Either annuitant may be selected as the first annuitant; the product of the two quotients will not be affected. The discounted rate so obtained is the rate at date of purchase.

Example 7. Two annuitants, a man aged 55 and a woman aged 50, purchase a deferred payment joint life annuity that is to pay $1,200 per annum in equal semiannual installments while both of them are living, first installment payable 10 years hence. The rate for the annuity at date of purchase is $4.522, determined as follows:

      (1) Ages of annuitants at starting anniversary     65M:60F

Sec. 11. Deferred Payment Joint and Survivor Annuity (Two Lives)

The rate at date of purchase for a deferred payment joint and survivor annuity (two lives) is equal to--

(1) the rate at date of purchase for a deferred payment single life annuity on the life of the first annuitant

plus

(2) the rate at date of purchase for a deferred payment single life annuity on the life of the second annuitant

minus

(3) the rate at date of purchase for a deferred payment joint life annuity on the lives of both of the annuitants.

Rates (1) and (2) are determined by the method of section 9. Rate (3) is determined by the method of section 10.

Example 8. Two annuitants, a man aged 55 and a woman aged 50, purchase a deferred payment joint and survivor annuity that is to pay $1,200 per annum in equal semiannual installments while at least one of them is living, first installment payable 10 years hence. The rate for the annuity at date of purchase is $7.620, determined as follows: (1) Rate at date of purchase for deferred payment life annuity, one life, age 55M, semi- annual installments, 1st installment 10 years hence (from Example 5) $5.292

(2) Rate at date of purchase for deferred payment life annuity, one life, age 50F, semi- annual installments, 1st installment 10 years hence (computed by method of section 9) $6.850

(3) Rate at date of purchase for deferred payment joint life annuity, two lives, ages 55M and 50F, semiannual installments, 1st installment 10 years hence (from Example 7) $4.522

(4) Rate at date of purchase for deferred payment joint and survivor annuity: (1) plus (2) minus (3) $7.620

Based on the foregoing, the value of the given annuity at date of purchase is $1,200 X 7.620 or $9,144.00.

Sec. 12. Rates Subject to Change

Tables A, B, C, and D are subject to change depending upon market conditions. Notice of change will be given by publication in the Internal Revenue Bulletin.

Sec. 13. Effect on Other Documents

Revenue Ruling 62-137, Revenue Ruling 62-216, and Revenue Ruling 67-39 are amplified.

Sec. 14. Tables

                               Table A