Life is much simpler for career agents and policy owners who only do business with one insurer because they only have to learn one company’s rules and how it interprets Internal Revenue Service rules. Life is much more difficult for independent agents and policy owners who do business with several insurers because they have to learn each company’s rules plus how each interprets IRS rules.
Anyone who thinks IRS rules are applied the same at all companies is dreaming. Insurers often have their own “rules to the game,” which may or may not agree with the rules at other companies.
For example, I recently contacted 71 insurers with some simple questions about how they treat partial tax-free transfers of nonqualified annuities to other companies after the IRS acquiesced in Conway v. Commissioner, 111 T.C. 350 (1998). A very brief summary of that court case follows:
The Tax Court held that partial exchanges of annuity contracts could qualify for non-recognition treatment under section 1035(a) of the Internal Revenue Code. The IRS has provided guidance on partial exchanges of annuity contracts in two documents:
o In Rev. Rul. 2003-76, the IRS took the position that when a partial exchange of one annuity contract for two annuity contracts occurs, the cost basis and gain in the contract should be allocated proportionally between the two contracts.
o In Notice 2003-51, the IRS announced it is considering issuing regulations providing that if a taxpayer effects a partial exchange of one annuity contract and then surrenders or takes a distribution from one of the resulting contracts within 24 months after the exchange, the exchange will be treated as a single integrated transaction.
(For more on Conway v. Commissioner, go to www.irs.gov and search for Rev. Rul. 2003-76 and Notice 2003-51.)
Of the 71 companies contacted, 19 never responded. One called to say it would not answer any questions unless pertaining to a specific policy with the company.
Of the 51 responding companies, 21 said they do not allow partial transfers of nonqualified annuities. A common response was their computer systems were not programmed to handle such transfers.