1985 U.S. Tax Ct. LEXIS 4">*4
P surrendered an annuity policy with company A, and used the proceeds to purchase an equivalent policy with company B. There were no restrictions placed on the use of the funds which P received from company A.
85 T.C. 1024">*1024 Respondent determined a deficiency in the petitioners' income tax for the calendar year 1980 in the amount of $ 16,007.50, together with an addition to tax under section 6653(a) 1 in the amount of $ 800.37. After concessions, the only issue for us to decide in this case is whether petitioner June A. Greene's surrender of an annuity contract which she had with one insurance company, and the immediate reinvestment of the proceeds thereof in a comparable annuity contract with1985 U.S. Tax Ct. LEXIS 4">*6 another company, gave rise to taxable income in 1980, the year of the transaction.
The facts herein were largely stipulated, and such stipulation of facts, together with joint exhibits, are incorporated herein by this reference.
FINDINGS OF FACT
Petitioners, husband and wife, were residents of Livingston, New Jersey, at the time their petition herein was filed. They timely filed a joint Federal income tax return for the year 1980 with respondent's service center at Holtsville, New York.
During the period September 1966 through March 1985, petitioner June Greene (hereinafter petitioner) 2 was a schoolteacher employed by the Livingston, N.J., Board of Education, 85 T.C. 1024">*1025 and was so employed at the time of trial herein. In the period September 1975 through October of 1980, the Livingston Board of Education made1985 U.S. Tax Ct. LEXIS 4">*7 payments, pursuant to a salary reduction agreement, to an annuity plan qualifying under section 403(b), for petitioner's benefit. The annuity contract was issued by the Variable Annuity Life Insurance Co. (VALIC). Petitioner's policy with VALIC was a fixed interest annuity account. Pursuant to the salary reduction agreement between petitioner and the Board of Education, as amended from time to time, the Board of Education paid designated amounts to VALIC in certain of petitioner's pay periods for the purpose of funding petitioner's annuity contract.
On October 24, 1980, petitioner signed a form with VALIC, under which she surrendered her annuity contract with that company and demanded the payment of the proceeds of the account to her. It was her intention to take these proceeds and use them to fund a new annuity account, qualifying under section 403(b), which1985 U.S. Tax Ct. LEXIS 4">*8 she would purchase from the Charter Security Life Insurance Co. (Charter).
VALIC would not surrender the funds in petitioner's annuity account with it directly to Charter, but would surrender the funds directly to petitioner. On October 28, 1980, VALIC issued its check in the amount of $ 35,337.14 to petitioner, representing the credit balance in petitioner's VALIC annuity contract. Petitioner received this check shortly thereafter, and, on November 5, 1980, she filled out an appropriate application form from Charter for the purpose of opening a section 403(b) annuity account with Charter. To this application she attached the check which she had received from VALIC, which she had endorsed in favor of Charter.
Petitioner's application to Charter, together with her endorsed check from VALIC, was received by Charter on November 10, 1980, and Charter issued its new policy in her favor on the following day. Said policy, with a later minor modification with respect to the effective interest rate, was then continued in effect thereafter.
No binding agreement or any other contracts were signed between petitioner and Charter which would have required her to endorse or pay over the VALIC1985 U.S. Tax Ct. LEXIS 4">*9 check to Charter, once received by her. Petitioner was free to use the check from VALIC in any way she wished and was in no way obligated to 85 T.C. 1024">*1026 use such funds to purchase the new annuity contract with Charter.
OPINION
On the basis of the above set of simple and uncontradicted facts, petitioner contends that her surrender of her VALIC annuity, and the prompt use of the proceeds thereof to purchase a new and comparable annuity from Charter, constituted a nontaxable exchange within the meaning of
1985 U.S. Tax Ct. LEXIS 4">*10 Section 72(e) provides, in general, that (a) if an amount is received under an annuity contract, but (b) is not received as an annuity, and (c) if no other provision of the income tax laws applies, then such amount shall be taxable to the recipient, as therein provided. 4
1985 U.S. Tax Ct. LEXIS 4">*11 85 T.C. 1024">*1027 It is clear from the facts in this case, and the parties do not dispute, that the proceeds received by petitioner from VALIC were "received under an annuity contract" within the meaning of section 72(e), and were likewise not "received as an annuity," within the meaning of such section. There is likewise no disagreement between the parties that both the VALIC contract which petitioner surrendered, as well as the Charter contract which petitioner purchased, were annuity contracts within the meaning of section 403(b). Unless some other Code provision applies, therefore, the VALIC proceeds would appear to be taxable to petitioner.
(a) General Rules. -- No gain or loss shall be recognized on the exchange of --
* * * * (3) an annuity contract for an annuity contract.
(b) Definitions. -- For the purpose of this section --
* * * * (2) Annuity contract. -- An annuity contract is a contract to which paragraph (1) applies but which may be payable during the life of the annuitant only in installments.
Respondent's regulations, in turn, provide in pertinent1985 U.S. Tax Ct. LEXIS 4">*12 part:
Under the provisions of
* * * *
(c) An annuity contract for another annuity contract (
85 T.C. 1024">*1028 Assuming, then, that what took place here was an "exchange" within the meaning of
It must be admitted that in the conventional and ordinarily accepted meaning of the word, what took place here did not strictly constitute an exchange. In normal parlance, "exchange" would connote the transfer of property by A to B, in return for which B would transfer1985 U.S. Tax Ct. LEXIS 4">*13 property to A. 5 We are satisfied, however, that Congress intended the use of the word in the broader sense, as where the taxpayer gives up an insurance contract with one company, in order to procure the same or a comparable contract from another company. Viewed from the standpoint of the insured taxpayer, he has simply "exchanged" one policy for another just like it, albeit with two different companies. Our interpretation is fortified by the applicable regulation interpreting
Respondent has previously recognized the validity1985 U.S. Tax Ct. LEXIS 4">*14 of the above propositions. In a fact situation not materially different from that presented in the instant case, respondent, in
In a single integrated transaction, the employee then surrendered his entire interest in the first contract to the insurer in exchange for a check which he immediately endorsed and paid over to the employer for use in providing benefits under the second contract.
* * * *
In this case, the same employee is the obligee under the contract received as under the contract surrendered. The fact that the employee must first surrender the original annuity contract to an insurer because of the restrictions required by section 401(g) of the Code does not prevent the total transaction from being an exchange within the meaning of
In this case, however, respondent seeks to impose an additional requirement upon petitioner, in order to block the application of
It is respondent's position that employer intervention is not essential to achieving nonrecognition of gain under the provisions of the statute. Therefore the fact that VALIC would pay the surrender proceeds only to the petitioner did not preclude the petitioner from invoking the provisions of
We seek in vain to find any authority to support respondent's position here. Neither the statute nor the regulations contain any such requirement, either expressly or by any necessary implication. The parties have not cited to us, and our research has not uncovered any case dealing with the question. The case thus appears to be one of first impression.
Nor do we find respondent's position supported by logic. What kind of "binding obligation" would respondent require petitioner to enter into with Charter in a situation such as this? 6 Charter would clearly not issue a new annuity policy to petitioner unless it was paid, and petitioner clearly could not demand the issuance of a new policy until she paid for it. Any "agreement" entered into between petitioner and Charter 85 T.C. 1024">*1030 thus would clearly be executory on both sides, with performance by one side contingent upon performance by the other side. If petitioner failed to use the proceeds of her VALIC policy, or equivalent funds, to pay for the issuance of a new annuity policy by Charter, then Charter would clearly not issue it. In the circumstances of this case, we fail to see how any1985 U.S. Tax Ct. LEXIS 4">*17 meaningful "binding obligation" could have been entered into between petitioner and Charter which would have any controlling effect in the premises.
So far as respondent's reliance on
Finding no warrant for respondent's position herein, and finding that petitioner acted within the clear terms of
1. All statutory references are to the Internal Revenue Code of 1954 as in effect in the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩
2. Petitioner Martin I. Greene is involved herein only by having filed a joint return with petitioner June A. Greene, and will not be referred to hereinafter.↩
3. The parties are in agreement that the provisions of sec. 403(b)(8) (concerning "rollover amounts") do not apply in the instant case. Although the Court is not bound by the stipulation of the parties as to matters of law, see
4. Sec. 72(e) provided as follows:
SEC. 72(e). Amounts Not Received as Annuities. -- (1) General Rule. -- If any amount is received under an annuity, endowment, or life insurance contract, if such amount is not received as an annuity, and if no other provision of this subtitle applies, then such amount -- (A) if received on or after the annuity starting date, shall be included in gross income; or (B) if subparagraph (A) does not apply, shall be included in gross income, but only to the extent that it (when added to amounts previously received under the contract which were excludable from gross income under this subtitle or prior income tax laws) exceeds the aggregate premiums or other consideration paid. For purposes of this section, any amount received which is in the nature of a dividend or similar distribution shall be treated as an amount not received as an annuity. (2) Special Rules for application of paragraph (1). -- For purposes of paragraph (1), the following shall be treated as amounts not received as an annuity: (A) any amount received, whether in a single sum or otherwise, under a contract in full discharge of the obligation under the contract which is in the nature of a refund of the consideration paid for the contract; and (B) any amount received under a contract on its surrender, redemption, or maturity. In the case of any amount to which the preceding sentence applies, the rule of paragraph (1)(B) shall apply (and the rule of paragraph (1)(A) shall not apply).↩
5. "Exchange of goods is a commutation, transmutation, or transfer of goods for other goods, as distinguished from
6. Note that respondent is not arguing that petitioner had to enter into any form of "binding obligation" with VALIC, the first company in which she had her annuity, and the company which paid her the money.↩
