The Internal Revenue Service has come out with a holding that could affect efforts to shift assets from one annuity to another without triggering income tax problems.
A taxpayer cannot shift assets from one annuity contract to another through a tax-free Section 1035 exchange by endorsing a check from one insurance company over to a second insurance company, according to Josephine Firehock, a financial institutions and products specialist at the Internal Revenue Service.
If a taxpayer tries to shift assets from one annuity contract to another by endorsing an insurance company check that is issued to the taxpayer, the transaction “does not qualify as a tax-free exchange under Section 1035(a)(3),” Firehock writes in IRS Revenue Ruling 2007-24. “Instead, the amount received is taxable.”
The revenue ruling deals with the case of a taxpayer who held an annuity outside of a retirement plan or other account that qualified for special tax breaks.
The taxpayer tried to persuade the insurance company that sold the original annuity to transfer the annuity assets to the manufacturer of a second annuity by sending a check directly to the second company.
The first company refused. Instead, it issued a check that named the taxpayer as the payee.
The taxpayer tried to shift assets into a second annuity by endorsing the check over to the second insurer.