Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-59

1972-1 C.B. 117

Sec. 403

IRS Headnote

Where an incidental death benefit remains payable to the spouse under an annuity plan, a lump-sum distribution in the year of retirement does not constitute the "total amounts" and is not entitled to capital gains treatment under section 403 of the Code. Full Text

Rev. Rul. 72-59

Advice has been requested whether a lump-sum distribution to a participant in a qualified annuity plan under the circumstances described below will be entitled to the long-term capital gains treatment provided by section 403(a)(2)(A) of the Internal Revenue Code of 1954.

A participant under a qualified annuity plan retired in 1969. He elected to have his interest paid under an option that provided for (1) a lump-sum distribution, in the year of his retirement, equal to the commuted value of the monthly payments he would otherwise have received over his lifetime, and (2) an incidental death benefit for the participant's spouse in the event he should predecease her.

Section 403(a)(2)(A) of the Code provides that, where the total amounts payable under an annuity contract by reason of an employee's separation from the service are paid to the payee within one taxable year of the payee, then the amount of such payments, to the extent exceeding the amounts contributed by the employee, shall be considered a gain from the sale or exchange of a capital asset held for more than six months.

Section 403(a)(2)(B) of the Code states that the term "total amounts" means the balance to the credit of an employee that becomes payable to the payee by reason of the employee's death or other separation from service, or by reason of his death after separation from the service.

Although the lump-sum distribution received by the retired employee in this case was in full satisfaction of the insurance company's obligation to make payments to him, there remained a death benefit that was contingently payable to his beneficiary but not payable during the year of the lump-sum distribution. Thus the "total amounts" payable under the annuity contract with respect to the retiree consisted of two parts (1) the lump-sum distribution payable to the retiree and (2) the contingent death benefit payable to his spouse. Under the circumstances, the amounts paid or includible in gross income during the same taxable year did not represent the "total amounts" payable under the annuity contract. Accordingly, it is held that the lump-sum distribution is not entitled to the long-term capital gains treatment provided under section 403(a)(2)(A) of the Code.

However, the denial of long-term capital gains treatment to the foregoing distribution will not preclude capital gains treatment upon payment of the death benefit at some later date.