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IRS Addresses Tax Treatment of Tax-Free Exchanges of Annuities - Emil Estafanous, CPA : Emil Estafanous, CPA

IRS Addresses Tax Treatment of Tax-Free Exchanges of Annuities

The IRS, in Rev. Proc. 2011-38, has given taxpayers superintendence on a taxation diagnosis of exchanges of payments contracts underneath Secs. 72 and 1035.

Under Sec. 1035(a)(3), taxpayers generally commend no benefit or detriment when they sell one payments agreement for another payments contract. Congress supposing this tax-free diagnosis so that people could sell “one word process for another improved matched to their needs” (H.R. Rep’t No. 1337, 83d Cong., 2d Sess. 81 (1954)).

Rev. Proc. 2008-24 describes a taxation diagnosis of a proceed sell by an word association of a apportionment of an existent payments agreement with an separate word association for a new payments agreement (a prejudiced exchange). Under a income procedure, an sell will be treated as a tax-free sell if there is no withdrawal or obey of possibly agreement during a 12 months commencement on a date a prejudiced sell was finished or a taxpayer demonstrates that one of Sec. 72(q)’s conditions or a identical life eventuality occurred between a prejudiced sell and a obey or distribution. The conditions in Sec. 72(q) embody a taxpayer’s attaining age 59½ or failing or apropos disabled.

Since 2008, taxpayers have told a IRS of several issues that make Rev. Proc. 2008-24 reduction effective. They have commented that it is misleading how a “occurred between” customary should be practical to several of a Sec. 72(q) conditions. Taxpayers have also forked out that it is misleading how an sell that does not validate as taxation giveaway should be characterized. They also have complained that a 12-month watchful duration is administratively formidable when an income taxation lapse has already been filed for a year a sell took place.

Because of these comments, Rev. Proc. 2011-38 justification Rev. Proc. 2008-24 to make a following changes:

  • The 12-month duration is reduced to 180 days;
  • The order requiring that one of a Sec. 72(q) conditions be met (or that a identical life eventuality occur) is eliminated;
  • Limitations on amounts cold from or perceived underneath an payments agreement concerned in a prejudiced sell do not request to amounts perceived as an payments for a duration of 10 years or some-more or during one or some-more lives; and
  • The involuntary characterization of a send as possibly a tax-free sell underneath Sec. 1035 or a placement taxable underneath Sec. 72(e) followed by a remuneration for a second agreement is eliminated.

The IRS says that underneath this approach, if a proceed send of a apportionment of a money obey value of an existent payments agreement for a second payments agreement does not accommodate a new 180-day test, a IRS will request “general taxation principles” to establish a transfer’s piece and taxation treatment.

The new manners are effective for exchanges that are finished on or after Oct 24, 2011.

About Emil Estafanous, CPA
Certified Public Accountant (CPA) Tax Professional committed in representing taxpayers and resolving their tax problems.

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