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Regulation and Compliance > Federal Regulation > IRS

IRS Proposes Annuity Exchange Regs

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The Internal Revenue Service wants to change the tax treatment of trades of property for annuities.

The proposed regulations, “Exchanges of Property for an Annuity,” apply the same rule to exchanges for both private annuities and commercial annuities.

“A decades-old IRS ruling generally postpones tax on the exchange of appreciated property for a private annuity, a result inconsistent with the tax treatment of exchanges for commercial annuities or other kinds of property,” IRS officials say in an announcement of the proposed regulations.

Officials at the IRS and the U.S. Treasury Department, the parent of the IRS, believe the ruling is based on outmoded doctrines and assumptions, including an assumption that the value of a private annuity contract could not be determined for federal income tax purposes, officials say.

Moreover, “the Treasury Department and the IRS have learned that the ruling has been relied upon inappropriately in a number of transactions that are designed to avoid U.S. income tax,” officials say.

The proposed regulations will not affect charitable gift annuities or transactions completed before Oct. 18, and the effective date will be postponed to April 18, 2007, for “some transactions that pose the least likelihood of abuse,” officials say.

Under the provisions of the proposed regulations, “if an annuity contract is received in exchange for property (other than money):

1. The amount realized attributable to the annuity contract is the fair market value of the annuity contract at the time of the exchange.

2. The entire amount of the gain or loss, if any, is recognized at the time of the exchange, regardless of the taxpayer’s method of accounting.

3. For purposes of determining the initial investment in the annuity contract for this purpose, the aggregate amount of premiums or other consideration paid for the annuity contract equals the amount realized attributable to the annuity contract–the fair market value of the annuity contract.

“In situations where the fair market value of the property exchanged equals the fair market value of the annuity contract received, the investment in the annuity contract equals the fair market value of the property exchanged for the annuity contract,” IRS officials write in a preamble to the proposed regulations.

The proposed regulations do not distinguish between secured and unsecured annuity contracts, between new annuity contracts or existing annuity contracts, or between contracts issued by insurers or by other taxpayers, officials write.

The IRS does not want to block use of annuity exchanges for estate planning or business succession planning reasons, but it wants taxpayers to account for transaction income in the appropriate periods, officials write.

Exchanges eligible for the 6-month compliance date postponement must involve annuities with unsecured obligations that are owned by individuals. The eligible property owners must be exchanging the property for annuity contracts that will not be disposed during a 2-year period following the exchange, according to the text of the proposed regulations.

A copy of the proposed regulations is on the Web at Document Link


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