Annuities and pensions

Transcription

1 (See also: Employee plans; Self-employed plans) 26.1 Annuity distributed in lieu of monthly payments; estate. The purchase and distribution by an executor of a non-refundable annuity in lieu of life-long monthly payments is treated as a distribution of cash equal to the cost of the annuity and as though the beneficiary had purchased the annuity for cash. A deduction for the distribution is allowable to the estate under section 661(a) of the Code and beneficiary must include a like amount in his gross income (a) 2. (Sec. 661, 86 Rev. Rul , C.B Benefits paid by insurer. Benefits under an exempt employees trust paid directly by the insurer issuing the group annuity contract under which the benefits are funded may be considered to be distributed from the trust for purposes of sections 402(a)(2), 101(b), and 2039(c)(1) of the Code , 1.402(a)-1. (Secs. 101, 402; 86 Rev. Rul , C.B Civil service; annuity starting date; delay in filing claim for annuity. The annuity starting date for a Federal civil service survivor s annuity is the day following the date of death of the employee. Such date is not affected by a delay of the spouse in filing for her annuity. A similar result would follow in the case of a retired Federal employee who delayed filing a valid claim for his annuity until after retirement (Sec. 72, 86 Rev. Rul , C.B Civil service; disability; pre-1976 retirement. A Federal Civil Service employee retired before the mandatory retirement age on a regular annuity. After filing 1974 and 1975 income tax returns and excluding retirement payments as recovery of cost, the employee was certified as eligible for disability retirement. If the employee timely files Form 5401 (Agreement to Apply Sick Pay Exclusion to Retirement Annuity) electing to have the 1974 retirement payments treated in part as sick pay, the excess retirement payments over the sick pay exclusion will be a recovery of cost. The sick pay exclusion must also be claimed in an amended return for 1975 but the excess of the retirement payments for that year over the sick pay exclusion must be included in the employee s gross income , (Secs. 72, 105; 86 Rev. Rul , C.B Civil service; disability; survivor benefits; refund factor. The approximate method set forth in Rev. Rul may be used in determining the refund factor to be applied in computing the adjusted investment, under section 72(c)(2), for annuities payable to the spouse and child of a federal employee who died while in a disability retirement status before having elected to report annuity payments under section 72(b) or (d) and before otherwise having attained such employee s annuity starting date for purposes of section 72. Rev. Rul superseded (Sec. 72, 86 Rev. Rul , C.B Civil service; disability retirement payments. An individual who receives compensation from the Veterans Administration for injuries resulting from active service in the Armed Forces may not exclude under section 104(a) from gross income civil service payments received for a disability retirement occasioned by the same injuries (Sec. 104, 86 Rev. Rul , C.B Civil service; employee s voluntary deposits; sick pay. An additional annuity received under the Civil Service Retirement Act prior to retirement age that is composed exclusively of the annuitant s voluntary deposits and interest thereon does not qualify for exclusion as sick pay , (Secs. 72, 105; 86 Rev. Rul , C.B Civil service; exclusion ratio; election to take reduced survivor annuity. A Federal retiree who received periodic payments on a straight life annuity under which his cost was not recoverable within three years, and who married and elected to take a reduced survivor annuity at a time when his contributions not previously recovered and excluded from gross income under section 72(b) would be exceeded by the reduced annuity within the next three years, will have a new exclusion ratio computed as provided in reg (e) , 1.402(a)-1. (Secs. 72, 402; 86 Rev. Rul , C.B Civil service; exclusion ratio; monthly payment increased. The amount of each annuity payment excludable from gross income by a U.S. Civil Service Retirement System annuitant using the life expectancy method remains the same as that amount computed at the annuity starting date, even though subsequent to such date there has been an increase in the amount of the monthly payment. Rev. Rul superseded , 1.402(a)-1. (Secs. 72, 402; 86 Rev. Rul , C.B Civil Service; Government contributions; maximum tax. U.S. Civil Service annuity payments attributable to Government contributions to the retirement fund and received by a retiree after the end of the taxable year following the year the right to such payments became fully vested will be deferred compensation for purposes of section 1348 for taxable years beginning before Annuities and pensions January 1977, and will not qualify as earned income for purposes of the 50-percent maximum tax treatment (Sec. 1348, 86 Rev. Rul , C.B Civil service; interest on redeposits in retirement fund. Payments of so-called interest on amounts withdrawn but later redeposited in the U.S. Civil Service Retirement and Disability Fund by a reinstated employee are not deductible at the time of redeposit. However, the interest together with the redeposited amount become a part of the employee s total retirement account. These amounts represent a part of the consideration for his annuity. The total consideration for the annuity, including the interest is excludable from the gross income of the annuitant. I.T and Rev. Rul superseded , (Secs. 72, 163; 86 Rev. Rul , C.B Civil service; interest on voluntary contributions refunded. The portion of a distribution representing interest on voluntary contributions refunded by the U.S. Civil Service Retirement and Disability Fund to a retiring employee who elects an annuity with respect to his required contributions does not qualify for capital gains treatment (a)-1. (Sec. 402, 86 Rev. Rul , C.B Civil service; lump sum payment. That part of a lump sum payment from the U.S. Civil Service Retirement and Disability Fund representing the monthly benefits which accrued to a retired Civil Service employee between the date of his retirement and the time he filed a claim five years later, that exceeds his contribution to the fund, is includable in his gross income in the taxable year received. If the employee qualifies as an eligible individual, that portion of the payment that is includable in gross income is subject to income averaging. Further, amounts received as monthly installments benefits after receipt of the lump-sum payment are taxable under the three-year recovery rule , 1.402(a)-1, (Secs. 72, 402, 1301; 86 Rev. Rul , C.B Civil service; payments to widow. Monthly payments received from the Civil Service Retirement and Disability Fund under the authority of Pub. L by the widow of a deceased civil service employee, who died before February 29, 1948, do not constitute amounts received as an annuity (b)(1) 2, , (Sec. 22(b), 39 Code; Secs. 72, 101, 86 Rev. Rul , C.B Civil service; reemployed annuitant; reduced salary. The salary received by a reemployed civil service annuitant after an amount equal to the annuity allocable to the actual employment period was deducted as prescribed by law is includable in gross income and is wages for purposes of income tax withholding (Secs. 61, 3401; 86 Rev. Rul. 79-1, C.B Civil service; resignation after 4 years. That portion of a lump sum payment representing withheld salary distributed from the U.S. Civil Service Retirement and Disability Fund to an employee who resigns after 4 years of service is excludable from gross income; that portion representing interest on the withheld salary is long-term capital gain in the year distributed. O.D. 823 and I.T superseded (a)-1. (Sec. 402, 86 Rev. Rul , C.B Civil service; retiree reemployed; additional benefits. Supplemental retirement benefits a retired Federal employee received after terminating a period of Federal reemployment of three years and one month are treated as being received

2 under a separate annuity contract whether or not he makes a contribution to the U.S. Civil Service Retirement and Disability Fund to cover the reemployment period. Rev. Rul revoked , 1.402(a)-1. (Secs. 72, 402; 86 Rev. Rul , C.B Civil service; retiree reemployed; recomputed benefits. Recomputed retirement benefits a retired Federal employee received after terminating a period of Federal reemployment of five years, electing to have his annuity recomputed, and making the mandatory contribution to the U.S. Civil Service Retirement and Disability Fund required to cover the reemployment period, are treated as being received under a new annuity contract for purposes of applying section 72, His basis in the new contract is his contribution added to any unrecovered basis under the original contract , 1.402(a) 1. (Secs. 72, 401; 86 Rev. Rul , C.B Civil service; service in U.S. possession. The taxability of an annuity received under the Civil Service Retirement System for services performed partly within the U.S. and partly within a possession of the U.S. depends upon the place and date of payment of the consideration for the annuity as determined by the residence at, and date of, retirement of the annuitant (b)(2) 2, (a)-1, , (Secs. 22(b), 251, 39 Code; Secs. 72, 931, 86 Rev. Rul , C.B Civil service; servicemen. A retired serviceman who waives his Navy retired pay in favor of a civil service annuity has no retired pay excludable from gross income under the special rule of section 122(b). However, payments received by a surviving spouse under the Retired Serviceman s Family Protection Plan are excludable under section 72(o) of the Code. (Sec. 122, 86 Rev. Rul , C.B Civil service; surviving children; death benefit exclusion. Actuarial tables are set forth to determine the present value of temporary survivor annuities payable under the Civil Service Retirement System to eligible children of deceased employees based on 3 1/2 or 6 percent interest, as the case may be, for purposes of computing the death benefit exclusion (Sec. 101, 86 Rev. Proc. 71 6, C.B. 664; Rev. Proc. 71-7, C.B Civil service; surviving children; fulltime students. For purposes of computing the expected return to be realized from the U.S. Civil Service Disability and Retirement Fund by surviving children who are full-time students, the multiple factor from Table IV of reg should be applied for the period beginning at the child s annuity starting date and ending when he attains age , 1.402(a) 1. (Secs. 72, 402; 86 Rev. Rul , C.B Civil service; survivor benefits; widow s forfeiture. A widow who, by remarriage before age 60, forfeits her right to receive survivor annuity payments from the Civil Service Retirement and Disability Fund is not entitled to a loss deduction under section 165(c)(2) , , (Secs. 72, 101, 165; 86 Rev. Rul , C.B Civil service; survivors; cost-of-living increases. Future cost-of-living increases in survivors annuities payable by the U.S. Civil Service Disability and Retirement Fund are not taken into account in computing the expected return or in determining the aggregate amount receivable from such annuities. However, increases effective on or before the annuity are to be considered for such purposes. Increases effective after the annuities commence are includible in gross income as amounts not received as an annuity (Sec. 72, 86 Rev. Rul , C.B Civil service; survivors; death benefit exclusion. If no election is made by a disabled federal employee to treat disability retirement income as annuity income, the payments received by the spouse under a joint and survivor annuity upon the death of the employee before age 65 qualify for the death benefit exclusion. If the election is made, the payments received by the employee constitute annuity income and the amounts received by the spouse do not qualify for the death benefit exclusion. Rev. Rul superseded , , (Secs. 72, 101, 105; 86 Rev. Rul , C.B Cost basis; death of owner before payments start. A deferred variable annuity contract provides that if the owner dies prior to the first annuity payment the named beneficiary may elect to receive the accumulated value of the contract either in the form of a annuity or a lump-sum payment. For purposes of section 1014, the contract is an annuity described in section 72. If the beneficiary elects a lump-sum payment, the excess of the amount received over the amount of consideration paid is includable in the beneficiary s gross income. Rev. Rul revoked , , (Secs. 72, 1014, 7805; 86 Rev. Rul , C.B Cost basis; employer s contributions; foreign service prior to An employer s contribution in 1970 made under an employees pension plan provision existing on March 12, 1962, and attributable to services performed outside the U.S. prior to January 1, 1963, is considered the employee s contribution , (Secs. 72, 911; 86 Rev. Rul , C.B Cost basis; pre-1951 payments. Taxpayer surrendered shares of inherited stock to the corporation in exchange for annual payments for life, all of which were excluded from income and all of which the Commissioner contended were includible in income. Held, the annual payments constituted annuity payments portions of which represent nontaxable recovery of cost. (Secs. 22(a), 22(b), 39 Code; Secs. 61, 72, 86 Jane J. DeCanizares, 32 T.C. 345, Acq., C.B Cost basis; pre-1951 payments; foreign service. In determining the investment in an annuity as of January 1, 1954, payments received by resident citizens before 1951 for foreign service may be excluded from gross income under prior law to the extent such payments, in conformance with the principles of the Charles A. Crispin case, were treated as excludable as consideration paid by the recipient because of the earned income exemption; but, such payments will not be excludable if the recipient did not actually treat them as consideration paid for the annuity contract (b)(2)-5, , (Secs. 22(b), 116, 165, 39 Code; Secs. 72, 401, 402, 403, 911, 86 Rev. Rul , C.B Cost basis; refund factor; determination. Application of an approximate method in determining the refund factor to be applied in computing the adjusted investment in an annuity contract containing a refund feature where, in addition to a whole life annuity, there are one or more temporary life annuities on the lives of children (Sec. 72, 86 Rev. Rul , C.B Cost basis; residence exchanged for contract. A loss sustained on the exchange of a personal residence for an annuity with a fair market value less than the cost of the residence is not deductible. The basis of the annuity is its fair market value on the date acquired , , (Secs. 165, 1001, 1012; 86 Rev. Rul , C.B Cost basis; single premium nonrefund contract. A loss deduction is not allowable to the administrator of an estate upon the filing of the final tax return on behalf of the decedent for the excess of the cost of a nonrefund life annuity contract purchased by the decedent over the aggregate amount of payments received tax-free under the contract during his lifetime. I.T superseded; Rev. Rul distinguished , (Secs. 72, 165; 86 Rev. Rul , C.B Cost basis; single premium refund contract surrendered. In determining the amount of loss sustained on the surrender, by the original purchaser, of a single premium refund annuity contract for a cash consideration, the basis of the contract is its cost, less the amounts previously received under the contract which were properly excluded from the recipient s gross income. The excess of the basis over the amount received on surrender of the contract constitutes an ordinary loss. Distinguished by Rev. Rul , (Secs. 72, 165; 86 Rev. Rul , C.B Death benefit exclusion; employee s life insurance policy transferred to pension trust. The transfer of a participating employee s life insurance contract to a trust under a profit-sharing plan permitting the assignment of such a policy with a cash surrender value in lieu of voluntary cash contributions and providing that the cash surrender value would be payable to the employee upon retirement or earlier termination of employment and that the insurance proceeds continue to be payable to his beneficiary is not a transfer for valuable consideration , (Secs. 72, 101, 86 Rev. Rul , C.B Death benefit exclusion; proceeds of policy transferred to pension trust. An agreement between an employee, the employer, and a trust, provided for the employer s purchase of an existing insurance policy from the employee for its cash surrender value and transfer to the trustee as part of the employer s required contribution under a qualified pension plan providing incidental death benefits. The employee died and the insurance proceeds were paid to the trustee who turned them over to the insured s widow, the beneficiary. Held, the proceeds in excess of the cash value of the policy at the time of the employee s death is excludable from the widow s gross income under section 101(a) but that portion of the remaining amount in excess of premiums or other consideration deemed paid by the decedent is includable. Premiums paid by the trustee after transfer of the policy to the trust that represent the cost of life insurance protection and premiums paid by the employer before its transfer are includible in the employee s gross income under regs (a) and (d)(2)(ii)(a), respectively , , , 1.402(a)-1. (Secs , 101, 402; 86 Rev. Rul , C.B Death benefit exclusion; widow and child of retired employee. The limited death benefit exclusion does not apply to amounts received by a widow under a qualified pension plan of a retired employee who died after retirement but before receiving the first annuity payment. Such amounts were received by the widow as a surviving annuitant under a joint and survi-

3 vor s annuity contract after the annuity starting date. However, the exclusion applies to amounts received by the deceased employee s child since they were paid by or on behalf of the employer and by reason of the death of the employee , , 1.402(a)-1. (Secs. 72, 101, 402; 86 Rev. Rul , C.B Death of annuitant before payments start. A death benefit payment received by a beneficiary under the terms of a single premium deferred annuity contract where the annuitant, the owner, dies prior to the due date of the first annuity payment is not exempt as an amount received under a life insurance contract. Any excess of the cash surrender value over the amount of the consideration paid for the contract is taxable to the beneficiary in the year received. Such excess is not includable in the gross income of the annuitant (a)-1, 39.22(b)(1)-1. (Secs. 22(a), 22(b), 39 Code; Secs. 61, 101, 86 Rev. Rul , C.B Dividends; excess interest. Amounts credited by a mutual or stock life insurance company to the account of a policyholder of a single premium deferred annuity contract that are in excess of the assumed rate of interest used in computing the company s life insurance reserves (4 percent) are distributions similar to dividends under sections 811(a) and 809(d)(3). Rev. Ruls and modified; Rev. Rul supplemented , 1.403(b) 1, , , (Secs. 401, 403, 408, 457, 809, 811, 7805; 86 Rev. Rul , C.B Employees ; alien residents; annuitants under foreign plan. An alien residing in the U.S. may include as his investment in the annuity contract, under an employees trust established in a foreign country by a foreign employer, the amount of the employer s contribution on his behalf for services rendered in a foreign country. Where such annuity is a variable payment joint and survivor s annuity, the expected return multiple for one life and that for two lives are combined to determine the amounts excludible by the primary and secondary annuitants. If the services were rendered during a period of the married alien s domicile in a foreign community property country, the resident wife shall include in her gross income, her community property share in such payments, and where the wife is a U.S. citizen, she shall include such amounts in her gross income whether or not she is a resident in the U.S (Sec. 72, 86 Rev. Rul , C.B Employees ; annuity in lieu of lump sum. When a participant in a qualified employees profit sharing trust has the unrestricted right to immediate payment of his interest on termination of his employment but may also elect within 60 days after the lump sum first becomes payable to have the trustee purchase an annuity contract representing his interest, no part of such lump sum is includable in gross income at the time such sum first becomes payable if the employee elects to take the annuity (Sec. 72, 86 Rev. Rul , C.B Employees ; benefits based on cost-ofliving index. A pension plan may qualify for exemption even though its benefits vary with the market value of the assets from which paid or with a generally recognized cost-of-living index. Also similar amounts may be considered annuities under employee annuity plans (b)(2)-2, 29.22(b)(2) 5, 29.23(p) 9, (Secs. 22(b), 23(p), 165, 39 Code; Secs. 72, 401, 404, 86 Rev. Rul. 185, C.B Employees ; contributions after annuity starting date. Amounts received from an employees trust as a result of contributions made prior to an annuity starting date by an owner-employee, who continued working in the business and for whom contributions continued to be made after the annuity starting date, are taxable under section 72 as amounts received under one annuity contract. The contributions made in each year after the annuity starting date at age 70 1/2 are considered contributions made under a separate paid-up immediate annuity contract and the amounts received under such contract are includible in gross income , 1.402(a) 1. (Secs. 72, 402; 86 Rev. Rul , C.B Employees ; contributions transferred to new retirement fund. No taxable income is realized by an employee of a city who transfers to the city s new retirement system his accumulated contributions and interest thereon in the city s old retirement system, which was terminated in order that the employees could qualify for social security benefits. The aggregate of the contributions so transferred without regard to the interest credited thereon plus any contributions to the new retirement system subsequent to such transfer will constitute the aggregate premiums or consideration paid for the annuity (Sec. 42, 39 Code; Sec. 451, 86 Rev. Rul , C.B Employees ; death benefits paid in installments. In determining the annuity reportable under section 72, the exclusion under section 101(b) applies to installments payable to a deceased employee s beneficiary under a qualified, noncontributory pension plan that exceeds the employee s nonforfeitable interest. Rev. Rul superseded , , 1.402(a)-1. (Secs. 72, 101, 402; 86 Rev. Rul , C.B Employees ; distributed from variable annuity and fixed dollar funds. Benefits under a retirement plan, where the employee may transfer contributions made for him between a variable annuity fund and a fixed dollar fund, are considered received from a single program of interrelated contributions and benefits that constitutes a single contract for purposes of section , 1.402(a)-1. (Secs. 72, 402; 86 Rev. Rul , C.B Employees ; distributed in prior taxable years. Taxpayer received during a prior taxable year from a qualified employees trust, on account of his separation from the service of his employer, several annuity contracts representing the total amount standing to his credit in the trust. The taxpayer is not entitled to apply capital gains treatment to amounts received upon surrender of the contracts since the income was not realized in the year the annuity contracts were distributed by the trust. The amounts received in any year following the year of distribution from the trust are includible in the gross income of the taxpayer to the extent provided under section 72(e) , 1.402(a)-1. (Secs. 72, 402; 86 Rev. Rul , C.B Employees ; distributed in prior year; beneficiary. The capital gains treatment does not apply to a lump sum payment by an insurer to a deceased employee s beneficiary upon surrender of an annuity contract that had been distributed in a prior taxable year to the employee by the trustee of an exempt employees trust (a) 1. (Sec. 402, 86 Rev. Rul , C.B Employees ; estate tax deductions. The deduction allowed by section 126(c) is applicable to payments received by a beneficiary of a Annuities and pensions deceased participant under a qualified pension or profit-sharing plan, where such payments constitute income in respect of a decedent. An annuity payable to the survivor for life under a joint and survivor annuity is not income in respect of a decedent (c)-1. (Sec. 126(c), 59 Code; Sec. 691, 86 Rev. Rul , C.B Employees ; exclusion ratio. The full amount of the consideration paid or deemed to have been paid by an employee for an annuity contract should be taken into account in determining the appropriate method for excluding from gross income the consideration paid for the annuity, whether or not an amount is first received under the contract prior to (Sec. 72, 86 Rev. Rul , C.B Employees ; foreign tax credit; income source. A U.S. citizen received pension payments from an employer s qualified noncontributory pension plan for services performed in prior years both within and without the U.S. For purposes of computing the limitation on the foreign tax credit, only that portion of the payments received that is attributable to the employer s contributions to the pension plan with respect to wages earned abroad is income from sources without the U.S , , (Secs. 861, 901, 904; 86 Rev. Rul , C.B Employees ; insurance purchased by employer to insure pension. Where the employer is the sole beneficiary under an insurance contract purchased to insure the payment of pension obligations, the employee is not in receipt of income at the time the employer entered into the insurance contract since the transaction did not produce a present economic benefit to the employee. The amounts paid by the employer will be includible in the employee s gross income in the taxable year received or otherwise made available (Sec. 451, 86 Rev. Rul , C.B Employees ; lump-sum distributions; rollover to individual retirement account; life insurance contract and cash. Cash received in a lump sum distribution from a qualified plan may be rolled over into an individual retirement account. A life insurance contract received in the distribution may not be rolled over into an individual retirement account, and its value is taxable to the employee (a) 1, (Secs. 402, 408; 86 Rev. Rul , C.B Employees ; minimum vesting standards; conversion factors. Conversion factors are provided for the allocation of accrued benefits between employee and employer contributions when the normal retirement age under a defined benefit plan is not age 65 and the actuarial adjustment required, when the normal form of benefit is other than a single life annuity (without ancillary benefits), is set forth (c)-1. (Sec. 411, 86 Rev. Rul , C.B Employees ; noncontributory plan; installment payment of death benefits. Where survivor benefit payments are received over a period of years, pursuant to a noncontributory plan of an employer, the amount excludable is $5,000, and this amount is treated as consideration paid by the employee; the entire amount of each installment shall be excluded from gross income until there has been received and excluded an amount not in excess of $5,000, after which all amounts received are includible in gross income. Rev. Rul revoked , (Secs. 72, 101; 86 Rev. Rul , C.B. 43.

4 26.55 Employees ; nonresident alien. A nonresident alien received pension payments from a domestic employer s qualified noncontributory pension plan for services performed in prior years both within and without the U.S. The portion of each payment that is attributable to earnings of the pension plan and the portion attributable to the employer s contributions with respect to services rendered within the U.S. are income from sources within the U.S , , , (Secs. 861, 862, 871, 1441; 86 Rev. Rul , C.B Employees ; purchased with proceeds of pre-retirement insurance policy. The trustee of an exempt employees trust surrendered a life insurance contract and used the proceeds to purchase an annuity contract upon retirement of a participating employee. The employee s consideration for the contract does not encompass that portion of the premiums included in his gross income while the surrendered policy was outstanding because it was paid for life insurance protection under that policy (Sec. 72, 86 Rev. Rul , C.B Employees ; recovery of investment in contract; death benefit exclusion. Computation of the amounts to be excluded from income by a widow and children receiving different yearly payments under a pension plan as beneficiaries of a deceased employee whose cost will be recovered within three years , , 1.402(a)-1. (Secs. 72, 101, 402; 86 Rev. Rul , C.B Employees ; state or local retirement benefit payments. Bringing state or municipal employees under the Federal social security system will not change the tax status of any retirement benefits which continue to be paid under the state or local retirement plans; those benefits are taxed as annuities. (Sec. 72, 86 Rev. Rul , C.B Employees ; state retirement plan; annuity and pension. The retirement allowance received under a state employees retirement system, consisting of both an annuity derived from employees contributions, and a pension derived from employer contributions, is attributable to one separate program of interrelated contributions and benefits and is treated as received under a single contract for purposes of the three-year recovery role , 1.402(a) 1. (Secs. 72, 402; 86 Rev. Rul , C.B Employees ; state retirement plan; pre-1939 contributions. Amounts contributed prior to 1939 by a state, or political subdivision thereof, to employees tax-exempt funds may be added to the amounts contributed by the employees in computing the consideration paid for annuity contracts to arrive at the exclusion ratio, to the extent that the amounts represent compensation for personal services rendered in the exercise of an essential governmental function and were not contributed by the U.S. or an agency or instrumentality thereof. (Sec. 72, 86 Rev. Rul , C.B Employees ; state retirement plan; pre-1939 contributions; allocation. In determining the consideration paid for annuities by employees of states and their political subdivisions, the amounts of pre-1939 employer contributions to be included, where the contributions were used to purchase individual contracts for specified employees, or were allocated under a group contract or in a self-insured fund, are the amounts so allocated to each individual employee. Where such contributions were not allocated, an estimated allocation may be made (Sec. 72, 86 Rev. Rul , C.B Employees ; survivorship; basis. The basis of a survivorship annuity under an employees pension plan is determined by the treatment of her interest in the employee-decedent s gross estate. Where, prior to October 8, 1949, the decedent had exercised an option to provide a survivorship annuity, the value thereof is not includable in his gross estate; where such election was made after October 7, 1949, the value is includible (a)(5) 1. (Sec. 113(a), 39 Code; Sec. 1014, 86 Rev. Rul. 158, C.B Employees ; transfer of funds; city to state plan; excess contributions. Lump sum distributions of excess employee contributions received by retired city employees after their annuity starting date as a result of the transfer of funds and obligations from the city s pension trust to a separate trust forming part of the State s retirement program are fully includable in the gross income of the retirees , 1.402(a) 1. (Secs. 72, 402; 86 Rev. Rul , C.B Employees ; transfer of funds to trust. A corporation which maintained a nontrusteed retirement plan for its employees discontinued funding the plan by the purchase of individual annuity policies and immediately established a trust for the funding of benefits under the plan. The insurer issuing the contracts under the nontrusteed plan required, as a condition of transferring any accumulation, the cancellation of all policies issued to participants and the transfer of all accumulations thereunder. Held, the participants under the nontrusteed plan were not in receipt of income as a result of the transfer of the funds from the insurer to the trust. Distinguished by Rev. Rul (b)(2)-5. (Sec. 22(b), 39 Code; Sec. 72, 86 Rev. Rul , C.B Employees; union pension fund. A union member s contributions to a union pension fund that is not qualified under either section 401 or 408(c) are not deductible as business expenses under section 162 but are treated as the member s investment in the contract under section 72(c) , (Secs. 162, 262; 86 Rev. Rul. 83-2, C.B Employee s plans; disability retirement. An annuity contract distributed to an employee upon termination of employment because of disability and purchased with the employee s share of a qualified contributory saving and profit-sharing plan that made no provision for disability retirement is not part of an accident or health plan within the meaning of reg The periodic payments received under the annuity contract are not excludable from gross income under section 105(d) and are taxable under the rules provided in section , (Secs. 72, 105; 86 Rev. Rul , C.B Exempt organization. The amount paid a charitable organization by a taxpayer for an annuity to be paid him, his wife, and the survivor, is the purchase of an annuity resulting in neither a gain nor a loss to the taxpayers. The amount paid is regarded as consideration paid for it, since the present value of the annuity is in excess of the amount paid; therefor, no charitable deduction is allowed (b)(2) 2. (Sec. 22(b), 39 Code; Sec. 72, 86 Rev. Rul , C.B Exempt organization; cooperative hospital service; exclusion allowance. Contributions by a section 501(e) cooperative hospital service organization toward the purchase of an annuity contract for one of its employees qualifies for the exclusion allowance under section 403(b) if all other requirements of that section are met (b)-1. (Secs. 403, 501; 86 Rev. Rul , C.B Exempt organization; extended term life insurance option exercised. The accumulated policy reserve is taxable under section 72 in the year an employee, upon termination of his employment, elects an extended life insurance option available under a retirement income contract purchased for him by a section 501(c)(3) organization , 1.403(b) 1. (Secs. 72, 403; 86 Rev. Rul , C.B Exempt organization; insurance contract for employee s family. An insurance contract purchased by a section 501(c)(3) organization that provides life insurance protection for the employee-participant s immediate family as well as on his own life is not an annuity contract within the meaning of section 403(b) (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization; insurance contract for employee; incidental benefits. An employee s individual insurance contract with nonforfeitable rights purchased by his exempt organization employer and providing equal monthly payments for his life starting at age 65 or, if he so elects before reaching age 65, equal monthly payments starting at age 65 either (1) for his life followed by identical payments to his surviving spouse for life, or (2) for a total of 30 years paid first to him and if he dies to his designated beneficiary, is not prevented from being treated as an annuity contract (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization; modified endowment contract for employee; incidental benefits. A modified endowment policy with an annuity rider purchased by a section 501(c)(3) organization for one of its employees, providing a pre-retirement death benefit with an actuarially indicated value (based on comparative premiums of the policies) of less than that of a typical retirement income policy, meets the incidental death benefit limitation and may be treated as an annuity contract for purposes of section 403(b) of the Code (b)-1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization; qualification of plan; contributions. An organization qualifying for exemption under section 501(c)(3) established a pension plan for its employees. The organization designated as compensation to employees, the amounts it paid toward the purchase of non-forfeitable annuities under an arrangement referred to in section 403(b) of the Code. Contributions to the qualified plan are based on current compensation plus amounts deferred under the annuity purchase arrangement. The basis used in determining contributions does not disqualify the plan from coverage (Sec. 401, 86 Rev. Rul , C.B Exempt organization; salary reduction. Where annuities are purchased by an exempt educational organization for employees who have requested a salary reduction for the purchase of annuity contracts, such amounts must be included in the employees gross income in the year paid (b)(2)-5. (Sec. 22(b), 39 Code; Sec. 72, 86 Rev. Rul , C.B Exempt organization; transferability. Payments made by an exempt organization to purchase, for one of its employees, an individual annuity contract that does not contain an express

5 provision to make it nontransferable are not excludable from the employee s income even though the annuity purchase agreement provides that the employee would not transfer the annuity contract prior to his retirement age (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization; valuation table supplemented. Table I of section 1.403(b) 1(d)(4) of the regulations which shows annuity values to be used for determining the amounts of certain employer contributions where the actual amounts are not known is supplemented to include certain annuity valuations for retirement ages 55 through 70, inclusive, for both males and females (b)-1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; arrangement administered by credit union. Amounts contributed by an educational organization on behalf of its employees to a credit union that maintains separate nonforfeitable special share accounts for each employee does not constitute the purchase of an annuity contract for purposes of section 403(b) and are not excludable from the gross income of the employee. Rev. Ruls and revoked (b)-1, (Secs. 403, 7805; 86 Rev. Rul , C.B Exempt organization or public school; cash value. The cash value of an annuity contract is not considered made available to an employee merely because he can receive the cash value by surrendering the contract and forfeiting his rights thereunder (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; change of insurer. Purchasing an annuity from an insurance company other than the one initially specified in the salary reduction agreement between an employee and his employer (public school) does not result in a new agreement (b)-1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; employee contributions; salary reduction agreement. Contributions by a State college toward purchase of a retirement annuity pursuant to a salary reduction agreement with its employees where State statute requires employee contributions toward retirement and permits such contributions by salary reduction agreements or salary deduction are excludable from the employee s income (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; exclusion allowance; excess contributions. A computation illustrates the amount of a public school system employer s contribution which, when used to purchase an annuity contract, is excludable from an employees gross income. Rev. Rul superseded (b)-1, (Sec. 403, 415; 86 Rev. Rul , C.B Exempt organization or public school; existing contract. Where an employer, an organization described in section 501(c)(3) or a public school, establishes an annuity purchase program for employees, such employer may undertake, as part of such program and by means of an agreement with an employee, to pay the future premiums on an annuity contract which had originally been purchased either by the employee or by his former employer (b)-1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; existing contract; transferability. Where a taxexempt organization utilizes an annuity contract originally issued to an employee under a qualified trust maintained by his former employer, a new contract will be considered to have been purchased as of the date the first premium is paid by the new employer and the insurance company agrees to the arrangement. If this new contract is so purchased after 1962, it must be made nontransferable as required by section 401(g) (b)-1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; hospital department head. A physician who serves as director of a hospital s department of pathology is not an employee of the hospital and is not, therefore, eligible for a tax-deferred annuity where he receives for his services a percentage of the department s income, pays the remuneration of his associate or substitute, is permitted to engage in the private practice of medicine, and is not entitled to certain employee fringe benefits. Rev. Rul. 261 distinguished; Rev. Rul amplified (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; investment arrangement. An exempt organization entered into a contractual arrangement under which a bank custodian was designated to maintain individual investment accounts for employees of the organization. An insurance company issued a group contract to the employer organization under which the insurer is not obligated to provide annuity benefits until receipt of the premiums from the custodian at the direction of a particular employee. The insurer may not enforce the payment of premiums and the employee may direct the disposition of his custodial account in any manner. Under this arrangement the employer s payments to the bank custodian are not contributions to purchase an annuity contract for the employee (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; investment arrangement. An exempt organization entered into a custodial agreement with a bank authorizing the bank to transfer funds to an insurance company, set up individual accounts for covered employees, and make prescribed investments. The employer also entered into an agreement with an insurance company whereby the insurer is obligated to provide annuity benefits upon receipt of the initial premium, even if the custodian subsequently breaches its obligation under the custodial agreement. Under this arrangement the employer s payments to the bank custodian are contributions to purchase an annuity contract. The result would be the same if the employer makes payments directly to the insurance company, which places the premiums in a separate investment account (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; life insurance protection. Where a retirement income contract is purchased after December 31, 1962, by an employer referred to in section 403(b), the cost of incidental life insurance protection is includable in the gross income of the employee on whose behalf the contract is purchased. However, the cost of the life insurance protection will be deemed to be a part of the employee s basis in the contract. The amount specifically includable in the employee s gross income as the cost of life insurance protection is not a part of includible compensation, and therefore is not excludable from gross income under the exclusion allowance , 1.403(b) 1. (Secs. 72, 403; 86 Rev. Rul C.B Annuities and pensions Exempt organization or public school; loan on contract before starting date. The amounts received by an employee before the annuity starting date from an insurance company representing, in whole or in part, the loan value of the contract purchased by the employer are includible in gross income for the taxable year, under section 72, to the extent the amount received, when taken together with all previous payments received under the contract which were excludable from gross income, exceeds the employee s consideration paid for the contract. Rev. Rul superseded , 1.403(b)-1. (Secs. 72, 403; 86 Rev. Rul , C.B Exempt organization or public school; loan on contract before starting date; loan or income. Premiums on an employee annuity contract were paid by an employer and qualified for exclusion from the gross income of the employee under section 403(b). The employee borrowed on the policy at a low interest rate with no fixed obligation to repay, but eventually repaid the amount. The policy loan is not includible in the employee s gross income. (Secs. 61, 72, 403; 86 Robert W. Minnis, 71 T.C. 1049, Nonacq., C.B Exempt organization or public school; percentage contributions. An employer who purchases an annuity contract under section 403(b) pursuant to a salary reduction agreement with an employee may make contributions based on a prescribed percentage of the employee s annual compensation rather than on a fixed dollar amount, in order to take into account any increases or decreases in the employee s compensation during a taxable year. The mere change in the amount of contribution under such a percentage formula does not constitute the making of a new salary reduction agreement (b)-1. (Sec Rev. Rul , C.B Exempt organization or public school; retention of premiums. An employer purchasing an annuity contract for an employee performing services for a state educational institution, may retain amounts arising under a salary reduction agreement until the end of a contract year in order to obtain the benefit of a more favorable annual premium rate. The annuity contract purchase arrangement may coincide with the employee s contract year but he is not permitted to make more than one salary reduction agreement during any taxable year (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; retirement income endowment contract. A retirement income endowment contract purchased on a level premium basis providing for pre-retirement death benefits and for conversion to a reduced paid-up endowment insurance upon premium default with death benefits never to exceed 100 times the expected monthly annuity qualifies as an annuity contract (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; staff of teachers retirement system. Amounts contributed by a state teachers retirement system to purchase annuity contracts for the employees of the retirement system are not excludable from the employees gross income. Rev. Rul superseded (b) 1. (Sec. 403, 86 Rev. Rul , C.B Exempt organization or public school; State employee; department of education. Of the employees of a State s department of education appointed by the commissioner of education as required by State statute, the janitorial, custodial, and general clerical employees are not per-