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Regulation and Compliance > Federal Regulation > IRS

IRS Proposes Annuity Exchange Regs

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The Internal Revenue Service has proposed regulations that would apply the same rules to taxpayers who trade either ordinary commercial annuities or “private” annuities for other property.

Private annuities are annuities issued by persons who are not normally in the business of issuing annuities.

Years ago, the IRS let taxpayers postpone paying taxes on private annuity exchanges because valuing the annuities was difficult. Now, that assumption is outmoded, and taxpayers are using the distinction to avoid paying taxes, officials say.

The proposed regulations would not apply to charitable annuities, but they would eliminate distinctions between secured and unsecured annuities, and between commercial annuities issued by insurers and private annuities.

Under the provisions of the proposed regulations, when taxpayers trade property for any affected annuity, the amount realized attributable to the annuity contract would be the fair market value of the annuity contract at the time of the exchange. The entire amount of the gain or loss, if any, would be recognized at the time of the exchange, regardless of the taxpayer’s method of accounting, officials say.

“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 IRS would postpone the compliance date for 6 months for some exchanges involving private, unsecured annuities issued by individuals.

The American Council of Life Insurers, Washington, is checking to see how the proposed regulations might affect estate planners and whether they might have unintentional effects on commercial annuity issuers, according to Ann Cammack, a senior vice president at the ACLI.


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