TRANSFER OF FUNDS FROM ONE ANNUITY TO ANOTHER IS NOT TAXABLE.

UIL Number(s) 0401.26-00

                                             Date: July 2, 1992

In a letter dated April 22, 1991, as supplemented by letters dated October 12 and November 12, 1991, you requested a ruling concerning whether the transfer of funds from Annuity Y to Annuity Z results in a taxable event.

You have submitted the following facts and representations:

Taxpayer resides in City C of State A. Taxpayer is a former employee of Employer T and was employed by Employer T for approximately 33 years. During this employment, Taxpayer participated in Plan X, a profit-sharing plan provided by Employer T. Taxpayer terminated employment at age 57 under Employer T's early retirement provisions.

Upon separation from service, the trustee of Plan X caused to be transferred the full amount of the cash value of Taxpayer's account balance from Plan X to Annuity Y provided by Company E. Annuity Y is a nontransferable annuity contract. This transfer took place on June 3, 1981. Taxpayer was never in constructive receipt of any part of the account balance. Annuity Y is a "Single Premium Deferred Annuity Qualified Money" annuity. All contributions made to Taxpayer's account in Plan X were made by Employer T. Annuity Y's contract stipulated that the cash withdrawals in excess of 10 percent per year of fund value were not permitted before Taxpayer attained age 65.

On December 12, 1990, Taxpayer authorized Company P to request transfer of all funds in Annuity Y for the purchase of a like annuity with Company P. Annuity Z, a "Qualified Trustee Purchase Annuity" which satisfies the requirements of section 401(a) of the Internal Revenue Code was issued on January 11, 1991, when Company P received the funds from Annuity Y held by Company E. Taxpayer was never in constructive receipt of the funds and the transfer was completed within 60 days. The provisions of both Annuity Y and Annuity Z are similar and both are nontransferable.

Based on the foregoing facts and representations, you request a letter ruling that the transfer of funds from Annuity Y to Annuity Z does not create a taxable event.

Section 401(g) of the Code provides that for purposes of this section and sections 402, 403, and 404, the term "annuity" includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but does not include any contract or certificate issued after December 31, 1962, which is transferable, if any person other than the trustee of a trust described in section 401(a) which is exempt from tax under section 501(a) is the owner of such contract or certificate.

Section 1.401-9 of the Income Tax Regulations discusses and amplifies section 401(g) of the Code. Section 1.401-9(b)(1)(i) provides, generally, that under section 401(g) of the Code, in order for any face-amount certificate, or any other contract issued after December 31, 1962, to be subject to any provision under sections 401 through 404 which is applicable to annuity contracts, as compared to other forms of investment, such certificate or contract must be nontransferable at any time when it is held by any person other than the trustee of a trust described in section 401(a) and exempt under section 501(a).

In Revenue Ruling 90-24, 1990-1 C.B. 97, the issue presented is whether a transfer of all or part of the holder's interest in a Code section 403(b)(1) annuity contract or a section 403(b)(7) custodial account to another section 403(b)(1) annuity contract or section 403(b)(7) custodial account constitutes an actual distribution to the holder within the meaning of section 403(b)(1).

The revenue ruling holds that the transfer of all or part of the holder's interest in a Code section 403(b)(1) contract or a section 403(b)(7) custodial account to another section 403(b)(1) or section 403(b)(7) investment did not constitute an actual distribution under section 403(b)(1) as long as the transferee accounts/contracts had the same or more stringent distribution restrictions as the transferor accounts/contracts. The revenue ruling also holds that it is irrelevant whether the transferring individual is a current employee, a former employee or a beneficiary of a former employee.

The revenue ruling explains that because the annuity interest is retained throughout this transaction, the direct transfer between Code section 403(b) investments is a mere change in issuers that does not violate the nontransferability requirement of section 401(g) of the Code.

The conclusions of Revenue Ruling 90-24 are equally applicable to annuity contracts in and distributed from Code section 401(a) plans. The nontransferability restriction applicable to Code section 403(b) annuity contracts is contained in section 401(g) and is applied in the same manner to annuity contracts used to fund section 401(a) plans. Therefore, the nontransferability restriction of section 401(g) is not violated if the owner of an annuity contract that was distributed from a Code section 401(a) plan exchanges such contract for another similar contract from a different insurer.

In order to satisfy the requirements of Revenue Ruling 90-24, the annuity contract received by Taxpayer must be materially similar to the one exchanged, i.e., it must meet the applicable Code section 401 requirements, including the minimum distribution rules, the incidental death benefit rules, and the qualified joint and survivor annuity rules.

Taxpayer received Annuity Y purchased from Company E by the trustee of Plan X representing the balance to the credit of Taxpayer after separation from Employer T. Taxpayer subsequently authorized Company P to request from Company E transfer of all funds in Annuity Y in exchange for Annuity Z, a like annuity. Both Annuity Y and Annuity Z are nontransferable, materially similar, and Annuity Z was acquired within 60 days of the transfer of funds from Annuity Y as an annuity qualified under section 401 of the Code and Taxpayer was never in constructive receipt of the funds.

Although section 1035 of the Code provides that no gain or loss shall be recognized on the exchange of an annuity contract for another annuity contract, the exchange of a qualified plan contract for a materially different contract does not come within the ambit of this section. An annuity contract that is nontaxable when distributed from a qualified plan contains certain provisions in order to comply with section 401 of the Code and to protect participants and beneficiaries. Many of these provisions must remain in effect until the last payment is received under the annuity contract. If a section 401 annuity contract is exchanged for a materially different contract, the requirements and protections of section 401 would be lost.

Based on these facts and representations, we conclude that the nontransferability restriction of section 401(g) of the Code is not violated upon the transfer of funds from Annuity Y to Annuity Z. In addition, the exchange of Annuity Y for Annuity Z will not result in a taxable event to Taxpayer.

This ruling expresses no opinion with respect to whether Annuity Y or Annuity Z satisfies or continues to satisfy the requirements for qualification under section 401(a) of the Code.

                                   Sincerely yours,