IRS issues proposed regulations for tax treatment of annuity contracts
The Department of the Treasury and the Internal Revenue Service todayissued proposed regulations that would address the tax treatment of anexchange of property for an annuity contract. The proposed regulationswould apply the same rule to exchanges for both private annuities andcommercial annuities.
A decades-old IRS ruling generally postpones tax on the exchange ofappreciated property for a private annuity, a result inconsistent withthe tax treatment of exchanges for commercial annuities or other kindsof property. This ruling was originally based in part on the assumptionthat the value of a private annuity contract could not be determinedfor federal income tax purposes. This assumption is no longer correct.The ruling has its roots in authorities that applied the “opentransaction doctrine,” which has been eroded in recent years. Inaddition, the Treasury Department and the IRS have learned that theruling has been relied upon inappropriately in a number of transactionsthat are designed to avoid U.S. income tax. The guidance issued todayproposes to declare the ruling obsolete. Charitable gift annuitieswould not be affected by the proposed guidance.
If adopted, the guidance would be effective immediately fortransactions not completed before today. Recognizing, however, thatmany legitimate estate planning transactions may currently be inprocess, the effective date is postponed for six months for sometransactions that pose the least likelihood of abuse.
The regulations will be published in the Federal Register on Oct. 18.