REVENUE RULE 92-43

1992-1 C.B. 288, 1992-24 I.R.B. 85.

Internal Revenue Service
Revenue Ruling

ANNUITIES AND LIFE INSURANCE CONTRACTS; CERTAIN TAX-FREE EXCHANGES

Published: May 29, 1992

Section 1035.  Certain Exchanges of Insurance Policies, 26 CFR 1.1035-1: Certain exchanges of insurance policies.

Annuities and life insurance contracts; certain tax-free exchanges. An exchange of an annuity or life insurance contract issued by a life insurance company subject to a rehabilitation, conservatorship, or similar state proceeding qualifies under section 1035 of the Code if the new contract is serially funded.

ISSUES

Does a taxpayer's exchange of an annuity contract issued by a life insurance company that has become subject to a rehabilitation, conservatorship, or similar state proceeding, for an annuity contract issued by another life insurance company qualify as tax-free under section 1035 of the Internal Revenue Code if the new contract is funded by a series of two or more payments from the old annuity contract? Would the same treatment apply in the case of serial funding of a new life insurance contract?

FACTS

L1 is a life insurance company within the meaning of section 816(a) of the Code. L1 is domiciled in state O. A owns an annuity contract (Old Contract) issued by L1.  L1 is subject to a O rehabilitation, conservatorship, or similar state proceeding under the jurisdiction and control of the O insurance commissioner and a O court. Under the terms imposed by any O authorities pursuant to the proceeding, L1 is permitted to distribute no more than X percent of the full cash value of the annuity contract. A wishes to terminate all of A's rights in Old Contract and acquire a new annuity contract (New Contract) from L2. L2 is a life insurance company within the meaning of section 816(a) of the Code.

A assigns Old Contract to L2 in exchange for a New Contract. Pursuant to the assignment, L1 pays cash to L2 in an amount that represents X percent of the cash value of Old Contract, and is required to pay L2 an amount equal to any residual value of Old Contract when it is permitted to do so by the O authorities. L2 must credit to New Contract all amounts received from L1.

LAW AND ANALYSIS

Section 1035(a)(3) of the Code provides that no gain or loss is recognized on the exchange of one annuity contract solely for another annuity contract. Neither the statute nor the regulations contain a time limit for completion of the exchange. In addition, nonrecognition treatment under section 1035 is not expressly conditioned upon the relative policy values of the contracts exchanged, so long as no other property or cash is distributed as part of the exchange.

Under the facts described, A has effected an exchange of annuity contracts. Because section 1035(a)(3) of the Code does not require that an exchange be completed concurrently where the issuer is precluded from distributing the full cash value of the contract, the transaction is a nontaxable exchange of an annuity contract for an annuity contract under that section.

HOLDING

Under section 1035 of the Code, A does not recognize gain or loss on the exchange of Old Contract for New Contract even though New Contract will be funded through a series of payments from L1 that may extend over a period of time. The same holding applies in the case of serial funding of an exchange of a life insurance contract for a life insurance, endowment, or annuity contract.

DRAFTING INFORMATION

The principal author of this revenue ruling is Ann H. Logan of the Office of Assistant Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling contact Ms. Logan on (202) 566-3478 (not a toll-free call).

Rev. Rul. 92-43, 1992-1 C.B. 288, 1992-24 I.R.B. 85.