The IRS, in Revenue Procedure 2011-38, significantly eased the restrictions regarding when a partial transfer between annuity contracts will be treated as a tax-free exchange under Internal Revenue Code ("IRC") § 1035. The original restrictions were imposed by Revenue Procedure 2008-24, which set forth the circumstances under which a direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract would be treated by the IRS as a tax-free exchange.
Under Rev. Proc. 2011-38:
- The period of time in which cash can be withdrawn from either contract after a partial transfer has been significantly shortened from 12 months beginning on the date of the transfer to 180 days.
- Annuity payments that satisfy the newly enacted partial annuitization rule of IRC § 72(a)(2) will not be treated as a distribution from either the old or new contract.
- The requirement that one of the enumerated exceptions in IRC § 72(q) (exceptions from the 10% premature withdrawal penalty tax) be met is eliminated.
- The automatic characterization of a transfer as a distribution taxable under IRC § 72(e) if it did not qualify as a tax-free exchange under IRC § 1035 is replaced with an analysis by the IRS, using general tax principles, to determine the substance, and thus the tax treatment of, the transaction.
Revenue Procedure 2011-38 is effective for transfers that are completed on or after October 24, 2011.